Base sale of stocks on facts, not feelings

By DAVID MOON, Moon Capital Management
February 1, 2004

Years ago, I was in an investment committee meeting of a bank trust department. We were discussing whether or not to sell a particular stock. We had owned the stock for years; it had more than tripled since our first purchase. "This stock has been so good to us," one committee member argued. "We just can't sell it."

Demonstrating a fine command of the relationship between my stomach and my brain, I successfully fought the urge to throw up.

Stocks do not have feelings, opinions or intentions. They aren't "good" or "bad." Stocks don't have memories, nor do they know what price you paid for them. And since no stock ever had feelings about an investor, it serves no good purpose for any investor to have feelings for a stock.

Sadly, too many investors rely on their feelings - not facts - when deciding about purchasing a particular stock. But this "feeling phenomenon" occurs more often when people are trying to make sell decisions about stocks they own. Should you automatically sell a stock if it declines ten percent? What about twenty percent? What if it goes up twenty percent?

To answer these types of questions, we must first back up a bit, back to your original decision to purchase the stock.

Deciding what to do with a stock is a lot like most things in life: to make a good decision about today, it helps to understand where you've been and how you got there. To know how or when to sell a stock, you must first fully understand why you bought it. As soon as the conditions that prompted you to buy a stock are no longer present, you ought to sell it. For example, if you buy a stock because your cousin Jim says you ought to, you have automatically ceded to Jim the power to decide when to sell it. How could you base your sell decision on anything else?

If the source of your stock tip is a TV commentator, you better be sure and monitor everything that commentator says and does - just in case he gives you permission to sell.

Ideally, your purchase decisions are based on factors that are a bit more logical. Then your sell decisions are simply the absence of those logical reasons to purchase.

Here's a good question to pose when you are re-evaluating a stock you already own: If you didn't own the stock, would you buy it today at this price? If not, why would you continue to own it?

If you will determine your own estimate of the value of a company before you buy it, the selling decision then becomes easy. Buy a stock when it is worth significantly more than its price. Sell a stock when its price and value are equal.

Too many people don't really understand why they buy a stock, so their sell decisions are so difficult.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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