What You Are About To Read: Back in February 2012, we wrote an article that was about the art of selling a stock. This one, on the contrary, lists down some reasons not to sell a stock. Since a lot of Seeking Alpha's readers openly admit they struggle with their sell decision, we hope this article is of use in their decision making process.
Intended Audience: While everyone is welcome to read the article and contribute positively in the comments section, this article is targeting the long term investors and not short term traders. Some of these "Don't sell" reasons may not apply to traders.
Let us get into the details.
Reason#1: 52 Week High: A stock reaching a new 52 week high must be sold to lock in profits ? Not really. How do you know the stock's ceiling ? There is no arbitrary limit to how high a stock can go. If the fundamentals of the company are still good and the earnings/dividends are in good shape, why even bother selling such a stock ? Sure, locking profits is not such a bad idea. But selling just because a stock is at a 52 week high is not a sound technique. On the other hand, if you are talking about stocks that trade in a range, you may be right in selling it near the higher end of its range. But then even this can prove to be a costly mistake. Intel (INTC) was trading between the $20 and $25 range for a long time. But suddenly it almost broke $30, on top of increasing dividends.
AT&T (T) has reached new 52 week highs on more days that not during the last few weeks. So does that make the company vulnerable suddenly ? Not really. You may not want to buy here But selling is an altogether different ball game. In his book "One Up On Wall Street", Peter Lynch quotes the example of the then Philip Morris (PM), now Altria (MO). It was trading at 75 cents in the 1905s and reached $2.50 in 1961. If you had booked your profits in this "triple bagger" then, you would have missed several multi-baggers for decades to come.
Reason #2: An Earnings Miss: Apple (AAPL) comes to mind as a great example here. Apple had its first earnings "miss" since 2001 in its 2011 Q3, at least according to Wall Street. The stock promptly lost close to 6% after the results were announced on October 18th 2011. And just a few months later, riding on two monster quarters, Apple shot up 60%. The point here is, do not pay too much attention to the headlines about an earnings miss. (or earnings beat for that matter).
A company could have taken an unusual loss during the quarter or made an unusual gain that tweaks the EPS for the quarter. Think about it. Did a company that beat even Wall Street's high earning expectations for 10 straight years deserve to be dumped on just one earnings "miss", which most people attributed to slowing sales of the existing iPhone models due to rumors about a new iPhone release.
Reason #3: Because The Others Are: Being in a group is fun. But remember, herd behavior has led to more problems in investing than in most other fields. Like Warren Buffett famously said, long term investors should be greedy when the others are fearful. The panic sell offs more often than not create enticing entry points into strong stocks. Yes, it is hard to see your favorite stock getting pummelled but that alone might not be enough reason to sell the stock.
Remember, the fund managers are the ones who literally drive the market and their investment time horizon would usually make them traders than investors. They have a constant exposure to the market that most individuals cannot achieve and they get in and out of stocks in a flash. Apple's slighshot effect comes to mind.
Reason #4: Stop-Loss: This is a slight cheat as this is not actually a reason but a technique quite a few people use. If you are a trader, stop-loss orders make sense for you. But if you consider yourself an investor with long term outlook, think twice about this. Sure, you are limiting your losses, to say 10% of your investment. But given the recent market volatility, even the most stable stocks swing hard on either side.
It might not be long before your stop gets hit and you are out of the stock. And just like the lane you moved from moves faster than your new lane, the stock you got stopped out might outperform the ones you hold.
