How to know when to Sell a Stock

So the best wisdom (as far as I am concerned anyway!) is the buy and hold approach, if you can. Build up enough equity to live off the income thrown off by the capital and enjoy the rest of your life. Easy to say, very hard to actually do. If you are mostly in trackers, then buy and hold becomes easier although you will still need a very large amount of capital, but what if, like me, you are drawn to the buy and sell of individual stocks? [Disclaimer: I wouldn’t recommend it :)]

For my Go T’ Pub ISA, my aim is to simply throw capital at the VWRL (for now, I may add bonds in the future) and watch the income slowly add up as it gets thrown off, there is no need to be trying to time my buying and selling, I should only ever be adding (via regular monthly contributions) or using the yield. I’ve seen a great psychological difference to me in this approach, in that I really don’t care about it – I don’t check it hourly / daily etc. and I actually feel quite free about it! It is what it is, and it is outside of my control.

For those of you who have followed my actively managed ISA will know, however, that for me I can’t resist trying to beat the market. I am trying to get more into trackers, but I just can’t help myself trying to play the great trader (and we all know how badly that should end). My trackers do well, but how do I know when to sell an individual stock? Note I am excluding trackers and Investment Trusts and only thinking of directly held, individual shares.

A lot of commentary out there says to put a trailing stop loss at 20%, but if you believed enough in the first place to buy it, short of major catastrophe, what has changed? It seems sensible to put something like this in place (I don’t), but then do you buy back in? Do you shiver every time you see that company mentioned? Do you quickly flip past the financial sections of your paper / website / tv show?

I’ll be honest. When it comes to selling, I have made some monumental f**k ups. I lost my nerve, so for example on Aviva I bought in watched the shares slump, collected the dividends and then as soon as it was in profit, I sold out. It has of course since continued to go up.

With RB I bought in after their old CEO resigned and the share price dropped. I cashed in with over 10% gain in something like a month or two and felt very proud of myself. Its more than doubled in price since then, never mind the dividends. Whoops.

I’ve tried to start putting a number on the stock I purchase, at the time of purchase, that I will sell at – that way when I hit the number I shouldn’t have any emotional ties to it, but can take the profit and run. After all I was happy at the time why wouldn’t I be now?  This goes against the run the winners philosophy and I seem to have a track record of selling out too early. I do need some form of mechanism to say when to sell out if I will however. The shares like RDSB and BP I don’t intend to sell for now, so I have no number. The higher risk (HMG, BMS, BOD etc.) items I will sell when I get a good profit (I have already cashed in about 60% of my HMG profits) – for some I have a figure in mind, others I don’t.

I have also not sold when I should – I have bought in on a number of “distressed” items (Northern Rock anyone?) on the hope of turning a quick profit, only to watch the entire holdings disappear. This is one of the real challenges with individual stock holdings, the volatility is huge as is the risk. This is why you really, REALLY shouldn’t try trading and for most people stick to just trackers.

So how do I now know when to sell? The short answer is, I don’t. This is one of the drivers behind why I am slowly rebalancing my actively managed ISA to have more trackers and Investment Trusts in to balance out the volatility.

For each stock I do still revisit them as fundamentals will change over time (for example, over a few years more investments in the company come online and increase revenue and profit) and see if I should change my target. One of the major problems I have however is greed. As I see the numbers going up and the profits going up, when it gets to my price point I wonder how much further it will go up and should I hang on for more money. I still haven’t got the right answer!

The flip side is then also when stocks drop – can you hang on, should you hang on? I purchased BMS on what I thought was a good price. They then missed targets and the price dropped further. If I had put in a stop loss then I would have cashed in loss, now they are slowly coming back up and into profit. I nearly bought more after the dip, but resisted.

Investing in individual shares is high risk and you really need to DYOR. The main thing is to try and take the emotion out of it. Select your stock, work out what you think a good price for that stock is, and wait. I have a variety of calculations to tell me what I think the target sale price should be, and then I can put that number in. When it hits it – I (should) sell out. Let’s see.

How do you cope with the emotions of individual stocks? Or do you just stick to trackers?