Advice on strategy for when to sell

Question

I started trading one year ago. I read Jim Cramer book and saved my 10K before investing. Then I invested on companies that I liked based on what I learned. It has been a fun year, what I have learn is that no one can predict the future, but you can almost predict that solid companies will give you “safe” results.

Now, one year later I still have not figured out my selling strategy. I don’t want to fail on the rule “Bulls make money, bears make money, pigs get slaughtered.” Here is my scorecard:

What I read was that once I reached 25% gains I would sell in a systematic approach and that I should not get greedy.

So my questions are:

1. Is there a reason not to sell a 25% Total Gain?

2. Does it makes sense to buy the same stock you just sell? I would end up with less quantity of the stock if I do that due to the transactions fee.

3. If a sell at 25% and buy the same stock. What would “tax wise” happen? For example, if I lost 50% without selling. Do I still have to pay taxes over the 25% already sold?

4. Buy stocks that I already owned to bring up the average price. Would that be the same as putting money on my worst stocks selection? Even though, it sound mathematically correct it sound that I’m “investing” not for gains but for minimizing my losses.

What advice would you give to me?

Thanks!

Answer 1

I bought 1000 shares of a $10 stock. When it doubled, I sold half, no need to be greedy. I watched the shares split 2 for one, and sold as it doubled and doubled again. In the end, I had $50,000 in cash pulled out and still had 100 shares. The shares are now worth $84K since they split 7 for one and trade near $120.

Had I just kept the shares till now, no sales, I'd have 14,000 shares of Apple worth $1.68M dollars.

$130K for an initial $10,000 investment is nothing to complain about, but yes, taking a profit can be the wrong thing. 25%? Was that all the potential the company had?

There's one question to ask, not where is the price today compared to last year or two years ago, but what are the company's prospects. Is the reason I bought them still valid? Look at your investment each quarter as if you were making the decision that day. I agree, diversification is important, so the choice is only hold or sell, not to buy more of a good company, because there are others out there, and the one sane thing Cramer says that everyone should adhere to is to not put your eggs in one basket.

Answer 2

It's impossibly difficult to time the market. Generally speaking, you should buy low and sell high. Picking 25% as an arbitrary ceiling on your gains seems incorrect to me because sometimes you'll want to hold a stock for longer or sell it sooner, and those decisions should be based on your research (or if you need the money), not an arbitrary number.

To answer your questions:

1. If the reasons you still bought a stock in the first place are still valid, then you should hold and/or buy more. If something has changed and you can't find a reason to buy more, then consider selling. Keep in mind you'll pay capital gains taxes on anything you sell that is not in a tax-deferred (e.g. retirement) account.

2. No, it does not make sense to do a wash sale where you sell and buy the same stock. Capital gains taxes are one reason. I'm not sure why you would ever want to do this -- what reasons were you considering? You can always sell just some of the shares.

3. See above (and link) regarding wash sales.

4. Buying more of a stock you already own is called "dollar cost averaging". It's an effective method when the reasons are right. DCA minimizes variance due to buying or selling a large amount of shares at an arbitrary single-day price and instead spreads the cost or sale basis out over time.

All that said, there's nothing wrong with locking in a gain by selling all or some shares of a winner. Buy low, sell high!

Answer 3

1. It was not 100% clear if you have held all of these stocks for over a year. Therefore, depending on your income tax bracket, it might make sense to hold on to the stock until you have held the individual stock for a year to only be taxed at long-term capital gains rates. Also, you need to take into account the Net Investment Income Tax(NIIT), if your current modified adjusted income is above the current threshold. Beyond these, I would think that you would want to apply the same methodology that caused you to buy these in the first place, as it seems to be working well for you.

   2 & 3. No. You trigger a taxable event and therefore have to pay capital gains tax on any gains. If you have a loss in the stock and repurchase the stock within 30 days, you don't get to recognize the loss and have to add the loss to your basis in the stock (Wash Sales Rules).

Answer 4

Consider trailing stop losses maybe 5% below your profit target, if you want a simplistic answer.

Answer 5

You sell when you think the stock is over valued, or you need the money, or you are going to need the money in the next 5 years.

I buy and hold a lot. I bought IBM in 8th grade 1980. I still own it. I bought 3 share it from $190 and its now worth $5,000 do to dividend reinvestment and splits. That stock did nothing for a thirteen years except pay a dividend but then it went up by 1800% the next 20 and paid dividends. So I agree with other posters the whole pigs get slaughtered thing is silly and just makes fund managers more money.

Think if you bought aapl at $8 and sold at $12. The thing went to 600 and split 7-1 and is back to $120.

My parents made a ton holding Grainger for years and I have had good success with MMM and MSFT owning those for decades.