The Prudent Investor


Thoughts On Selling, Part 1
May 15, 2007, 2:51 pm
Filed under: Uncategorized

I remember reading a “rule” quite some time ago that when one has a loss of 10% then it is time to sell.  As far as I was concerned, this fell into the same category as other “rules,” such as to set a stop at 10% below the purchase price and never to buy high P/E stocks.  It hadn’t taken too long in my time investing before I realized that the latter two made little sense, after all, stocks quickly fall and recover, leaving one with a sale at a low point, and stock’s P/E should always be seen in comparison to its industry.

I don’t remember where I read the 10% rule, but I made a rule myself to reexamine a stock if it fell more than 5%.  The reason for not invoking an automatic sale as determined by an arbitrary round number is obvious.  More often than not, emotion drives the market, and it is commonplace for a stock to move too quickly in either direction as the response to an event.  If one wishes to engage in short term purchases, then finding these events can be the seed for ideas of companies to buy and short.  My investing philosophy is more long term, so I leave the short term scenarios to others.  Usually.

Watching short term emotion can be a tricky thing.  I’ve recounted the story on numerous occasions of Intel’s drop a number of years ago.  When I was a writer for The Motley Fool, Intel dove drastically one particular Friday.  I asked the readers of the forum what their plans were for Intel, and the vast majority said that they were going to dive in on Monday and make a big purchase – only one respondent said that they felt that Intel was going to drop further.  That one respondent was correct, as the stock fell, and fell, and fell.  We had seen emotion drive the price, but just about everyone underestimated that emotion.

So why did I say “Usually,” as far as eschewing short term purchases is concerned?  When my plan is to make multiple purchases over a long period of time, I use a strategy called InvestMete (http://dripinvesting.org/investmete/investmete.htm).  This was something that I developed about ten years ago that assumes that one is going to purchase a quality company and take advantage of a current dip in price.  I am not going to go into the full explanation at this point, I’ll do so early next month, but it is a means of adding some risk back into a scenario where a great deal of risk has been removed.

My next post will explore how the above thoughts have shaped my feelings on SJW Corp., which is currently showing a loss in the portfolio.

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