Stock Smarts – When to sell
It’s one of the toughest decisions investors have to make. Gordon Pape offers some advice on when to say good-bye to a security
A few weeks ago, I was the guest speaker at an investment club meeting. When it came time for the question period, one lady raised the issue that has bedeviled investors since trading began: “When is the right time to sell?”
The simplistic, and completely useless, answer is when a stock is at a price it is unlikely to ever exceed. Absent a time machine, that’s impossible to know except after the fact.
Given that the fortunes of the markets in general and specific stocks in particular are impossible to predict, here are some general rules you can apply in deciding whether to sell part or all of a position.
Sell when a stock loses half its value. No one likes to take a loss, especially a big one. But losing half your stake is better than losing all of it, which does happen (again, remember Nortel). If the market has knocked down your stock by 50%, there’s a good reason for it. After a drubbing like that, it’s unlikely to turn around and your best move is to take the capital loss and exit. There’s one exception to this rule, however, see below.
There are times when you may be tempted to sell but should not. These include the following situations.
A market correction or crash. This is the exception to the sell-when-a-stock-loses-half-its-value rule. The crash of 2008-09 saw many great companies shed 50 per cent of their stock value. Bank of Montreal shares fell so low they were yielding 11.5% at one point. When something this dramatic happens, you need to assess the quality of the securities you hold. Ask yourself whether the companies are likely to survive the downturn and become prosperous again when the economy turns back up. If the answer is yes, then hold on and ride out the storm.
Temporary problems within a quality company. Over the years, many companies have run into major problems that have severely hurt the price of their shares. A recent example is British Petroleum’s massive 200 million barrel oil spill in the Gulf of Mexico in 2010. In April of that year, just prior to the oil platform explosion and the subsequent spill, BP depository receipts were trading on the New York Stock Exchange at around $60. By late June they had fallen to $27, losing more than half their value. The shares still aren’t back to their pre-spill highs but they are trading at over $50 today. Selling at the bottom would have been precisely the wrong move.