When To Take Profits On Stocks
People like Warren Buffet will tell you that you should buy a stock and hold it until you no longer believe in the company or management team. Unfortunately for most of us, we aren’t privy to the level of information and management attention that Warren Buffet gets. For us, we can look at outdated financials online, listen to the quarterly conference call and rely on our own instincts.
In late 2008 – early 2009 I had the correct instincts, to buy the best companies I could somewhere near the bottom. This lead me to buy shares in names like GOOG, AAPL & ISRG in January & February 2009.
Unfortunately, even though I was correct I completely blew it. I set a goal to take profit when I made a 50% profit and Apple went on to run from $80 to over $320 in just 2 years. I never got back in because it never got back to a “reasonable” level.
Today, I’m not in any of those 3 stocks. I made good money on all of them, but I would’ve been much better off if I just would’ve stayed in them. Therefore, I’ve developed a new methodology that might work for me.
When I’m buying an individual stock, I look for a great stock that has been beaten up and is near support or just turning up. In these cases it’s often possible to risk less than 10% on a stop. Then, If the stock doubles I will sell 1/2 recapturing my original principal and just let the rest just run since I’m using the market’s money. This would’ve worked with all 3 of the stocks I bought in early 2009 and I would be much happier today.
The problem however, is that most of the stocks I buy won’t go up 100% so what do I do with those that go up 50% and stall out? Maybe in those cases I could sell 2/3 of the position to recapture my investment and keep the other 1/3 on.
Anyway, it’s really hard to know when to take profits. I bought both Dell and Oracle in late 1990 when Desert Storm was getting underway and sold them way too early as well. I would be retired if I had held them until 2000, but would I have been smart enough to ride them for an entire decade and then get out? Who knows.
The only solution I see is to develop a money management system like the one above that takes the emotion out of stock decisions. I’ve been trading enough years to know that your Emotions are the real enemy.