Every now and then I get an email from a reader asking whether they should sell a particular stock. This request typically comes in the form of an errant position that is not shaping up like the rest of the market.
For instance, maybe you own 15 or 20 holdings that are all positive on the year. But that one persistently red security just doesn’t want to behave like everything else.
It is worth holding onto for a comeback or should you just cut bait and look for fresh opportunities?
The easy answer is that every situation is different and no one knows what is going to happen from this point forward. There is no perfect resolution because future returns are unknown.
Nevertheless, there is one common sense question you can apply to this analysis that will provide additional perspective on the difficult decision.
Does your thesis for owning the stock still hold true?
Always start by asking yourself why you bought the stock to begin with.
- Is it a leader in its category?
- Is it a contrarian play?
- Does it apply to a broader macro theme like commodity prices or interest rates?
- Is it an undiscovered gem with attractive fundamentals?
- Was it based on a technical attribute like trend, price, pattern recognition, or momentum?
- Or did you just overhear your buddy talking about it near the water cooler at work?
If your thesis is still sound and you believe in the long-term fundamentals of the company, then it is likely a position that you can hold onto with greater conviction. Sometimes the market can overlook a single company or sector for quite a while until the same factors that you initially identified become a more prominent theme.
Conversely, if the macro environment, business execution, or technical landscape aren’t conducive to the original investment thesis – then it may be time to move on.
Successful traders will tell you that it’s easy to cut and run on a position that is going against them. They preach a certain level of professional detachment and indifference. However, those investors who have worked hard to identify a unique opportunity, may find it more difficult to let go of that thesis.
No one wants to be wrong, but it happens to the best of us. Allowing conviction to overrule discipline or spinning a new narrative to fit the current environment will only lead to further loss of control.
Furthermore, if it’s just something you bought on a whim in the hope you would strike it rich, then maybe you shouldn’t be in the position to begin with. Taking stock tips without completing at least a moderate level of personal due diligence is a recipe for disaster.
Make sure you do your own homework or consider moving to a more diversified strategy through the likes of exchange-traded funds. That way you are able to participate in the overarching trend of the market without the single business risks that are inherent with stock picking.
Looking for new ETF ideas? Check out our library of free special reports on growth and income investing.
The post Ask Yourself This Question Before You Resolve To Sell A Stock appeared first on FMD Capital Management.
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