Selling a stock is a 3-step process.
- When a Summary changes from On Sale to Watch or Overpriced. This tells us the financials are getting weaker.
- When a 4M score drops close to 59 or lower. This tells us the overall company is getting weaker.
- When you make a profit. In other words, you only sell when you make a profit.
As taught by Warren Buffett:
- Rule #1, don’t lose money.
- Rule #2, don’t forget Rule #1.
What this means is, only sell stocks when the share price is higher than your cost basis (average buy price). In other words, only sell for a profit.
Stocks go up and down like waves in the ocean. There are times when you may be in the negative. In this case, don’t freak out. As quoted on Motley Fool Money podcast, “A rising tide lifts all ships.” What this means is that, eventually, the stock market will lift your stock above your cost basis. You may have to wait a few months, and in some cases a few years, but this way, you don’t lose money.
More importantly, this trains a good habit of only selling for a profit. A lot of investors can train a bad habit of selling, taking a loss, and then trying to make up for the losses. They do this over and over and then realize they’ve lost a lot of money in the stock market. Don’t train a bad habit.
Here are two quick case studies on how I did this.
Back in 2015, I bought Rollins (ROL) while it was On Sale. It changed to Overpriced and my share price was lower than my cost basis. I decided to follow Rule #1 investing and wait for the market to lift the share price back up. In this case, I waited about 6 months. At that time, I sold for a profit.
Back in 2016, I bought Callaway (MODG) while it was On Sale. It changed to Overpriced and my share price was lower than my cost basis. I decided to follow Rule #1 investing and wait for the market to lift the share price back up. In this case, I waited about 9 months. At that time, I sold for a profit.
Follow those three steps above, especially step 3. Always remember Rule #1.
Note: This is not financial advice. Make sure you sell stocks that no longer align with your own personal investment goals.