Tip 11 Know when to sell

Selling a stock is a 3 step process.

  1. When a stock changes from On Sale to Watch or Overpriced. This tells us the financials are getting weaker.
  2. When a stock has a 4M score of 59 or lower. A low score will lower our overall confidence in the stock.
  3. When you make a profit. In other words, you only sell when you make a positive return.

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. “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 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 buy price. I decided to follow Rule #1 investing and wait for the market to lift the share price 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 buy price. I decided to follow Rule #1 investing and wait for the market to lift the share price up. In this case, I waited about 9 months. At that time, I sold for a profit.

Note: This is not financial advice. Make sure you sell stocks that no longer align with your own personal investment goals.