Tuesday, January 13, 2009

Principles on When to Sell Stocks and Which Stocks. Achieve Investment/trading success with thoughtful analysis of investment advice.

5 Principles that guide you to decide Which Stocks to Sell, and When to Sell

Principle #1: Always force yourself to move toward discomfort! Dare to be Contrarian.
Investment/trading success cannot come from actions that make you comfortable. Buying or holding when stocks are high (following the crowd because you cannot abide ‘missing the action’) is a comfort-seeking decision. Likewise, fearful selling in a collapsing and low market is moving toward the comfort of cash - again at just the wrong time. Good decisions involve thoughtful analysis including pro-and-con lists. When leaping in/out rapidly, you've thought of only one side and are moving to what is apparently obvious. The crowd, a few million in size, doing the same thing thus collectively is creating temporary maximum pressure and so a predictable price-reversal point. Hold and/or buy when it is scariest and sell when the majority celebrate their brilliant conquests. Right, contrarian actions are always lonely and very uncomfortable.

Principle #2: Avoid the losers' game of owning favorite stocks for the long term.
Rapid and relentless change (technology, regulation, internationalization, competitors' ascendancy) makes the odds of extended corporate dominance extremely
low. In the five highly prosperous years 1996-2000, of more than 8,000 U.S. stocks, only 20(!) managed to avoid a single down quarter in earnings - a 99.8% failure rate. Companies rarely control the top of the hill for long; those situated there are priced very dearly. Holding them exposes your capital to sudden devastating loss at any sign of faltering momentum.
A tiny number of mutual fund managers compiles consistent above-average records. Their shares are worth holding while individual stocks of current corporate winners are at extreme statistical risk of obeying gravity. Xerox, Polaroid, Memorex, Digital Equipment, Sears, and AT&T are a few examples of the article-of-faith names of a generation ago. In the long term, there is no ‘business as usual’.

Principle #3: Never buy a stock without simultaneously placing a sell order at your target.
Failing to have a target reveals fuzzy thinking. Your target should include all three of these: a price objective, driven by a scenario, in a specific time frame.
If your price is reached, or if the scenario does not play in the anticipated time, you must sell rather than rationalize. Don't buy stocks merely because you like the industry, respect management, or agree with their social goals. Require a driver that will push the stock higher - not those other nebulous ‘reasons’. The object is profit, not good feelings!

Principle #4: Believe deeply in the ‘cockroach theory’ and act on it.
Like those lowly bugs, bad news for a company seldom appears solo; a first disappointment is very likely followed by others. With thousands of stocks available, why remain loyal to under-performers? Stocks are not insulted by your selling them! Move on to what is working rather than sticking with the sleeping dogs or bad ones.
Especially, stocks heavily owned by institutions take long periods to regain money managers' trust and to overcome overhanging stock held by those wishing they'd sold before bad news hit. The widely heralded ‘dead-cat bounce’ after a terrible fall is small and brief.

Principle #5: Untie that second hand from behind your back: become able to sell short!
Undoubtedly you've noticed that stocks both rise and fall. Then why be biased and seek profit in only one of two available directions? Shorting is not unpatriotic, morally wrong, or foolish - just an underutilized tool. Stocks get overpriced (fundamentally) and overbought (technically) exactly as many times as they're cheap and oversold - because prices move in waves, whose tops and bottoms are equal in number. Don't cut your opportunity to half the distance prices move. Would you fervently eschew a raincoat or umbrella because the weather is fair more days than not? Discard this self-imposed limitation!

On my next post, I will share 5 Tactics you can use for deciding Which Stocks to Sell, and When to Sell

Stock Trading, Shares Investment Guide
Fundamental Investing Rules, Investment Strategy that Win, Discover Stocks Trading Secrets from a Insider



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