Remember Warren Buffet's two famous rules... No. 1: Never Lose Money; and No. 2: Never Forget Rule No. 1. No doubt about it, two very smart rules. But someone should have come up with something equally clever to say about when to sell, too. Why? Simply, because most investors put in a huge amount of time researching what stocks to buy, but very few bother researching selling strategies.
How does one research selling strategies?
It is not so much researching, as it is one's own soul-searching. First of all, have an honest conversation with yourself about your risk tolerance levels. If you find yourself to be a conservative kind of guy deep down, then here's the rule for you: if the stock you bought falls between eight percent and 10%, just sell it! This way, you're not "weathering" anything, you're not "hanging in there;" you're simply cutting your losses while you believe them to still be reasonable.
If you believe yourself to be a "buy-and-hold" kind of investor, you have chosen to follow the good, old advice to buy stocks with strong valuations worth holding for the long haul. After all, it is absolutely true when they say you haven't lost anything until you sell. But being a buy-and-hold investor does not mean you should buy stocks first and then forget about them the next second.
There are so many things a buy-and-hold investor must do if he wants to stay true to this investment strategy. Among other things, researching the stocks after they were bought involves monitoring the competitors' performance, what new products are coming into a company's market, how the market is impacting the company's share prices and earnings, etc.
As a buy side analyst, I should be the last to recommend researching and developing selling strategies to investors. But all I want is for my readers not to get tangled up in an emotional struggle every time it comes to selling shares. All I'm saying is to develop your strategy for losses and stick to it. That way, you have the control over when to buy and when to sell because you're the one in the driver's seat.
