I’m going to be a little more patient and I won’t sell this stock… not just yet
I’m 100% sure you have already said that a million times about a losing stock in your portfolio. Holding a dead cow in your portfolio is probably the worst thing you could do as a DIY investor. But it’s hard to sell. It is! Selling a stock is ten times harder than buying one. When you buy, you do it with the clear intention of making money. As a bonus, you select a dividend stock so you can receive an investment return quarterly while you hold it. Sometimes, we make bad investment choices. This usually happens when you don’t follow your investing rules. This is what happens, in my case, most of the times I don’t follow my investing guidelines.
Over the month of August, I completed three more transactions: 2 Sells and 1 Buy. I can tell you that selling my stocks was tougher than finding a new company to buy.
Selling A Stock At A Loss
This is definitely the worst case scenario; you buy a stock and hold it thinking you will make profit. One day, you or someone else bursts your bubble and you realize that you will not be making money with this investment. Even worse; you might even lose money. Once it’s sold, it’s not a paper loss anymore -- it’s cold hard cash vanishing.
This is what I did when I sold 5N Plus (OTCPK:FPLSF) a few weeks ago. After its latest quarterly result, I finally dropped the hammer. The company was back in black ink but it was pure accounting magic. The company’s order book kept shrinking and resource prices are not going anywhere. I took a bet on this company as I was fairly bullish on rare earth metals and thought 5N Plus was clearly a leader in this industry. I didn’t expect to see the company's financials being beaten-up by its acquisitions. This is what happens when you take a huge bite of a triple ghost jalapeno burger without a glass of water or something else to help digest it.
I had the patience of a gambler in front of a slot machine. I kept losing money on paper for over a year and didn’t do anything. I should have sold when this position was generating 50% profit… instead of losing 67% of its value.
I regret not selling faster for two reasons:
#1 I didn’t earn any dividend payments during this period (since this stock wasn’t paying any dividends)
#2 I let several great buying opportunities fly under my nose over the past 12 months (most of my Best dividend stock picks for 2013 are beating the index since the beginning of the year)
I guess this is the first investing rule I should always obey: “when a stock doesn’t meet your entry criteria anymore, it’s time to sell.” Some investments can be boosted by speculation on future projects or a better economic environment, but once the company doesn’t bring the results to the table, you should get rid of it in a heartbeat. You will save a lot of money by picking a better company right up front instead of desperately riding a dead horse.
Selling a Stock for a Profit
The same day I sold 5N Plus, I sold another stock. This time, I made money on it. I sold my position in Intel (NASDAQ:INTC), generating a healthy 14% profit (not counting dividend payouts received). Intel is a good example of what I should have done with 5N Plus while I had the momentum.
Intel recently showed signs of a business slowdown. The PC industry is lagging and INTC hasn’t shown (yet) its ability to move successfully into the mobile and tablet business. It is still the most important player in the processor business but since sales are not going to grow in the upcoming years, this company just doesn’t fit in my entry criteria anymore. If I wouldn’t buy a stock today that I’m holding, the best move I could do is to get rid of it, right?
This is what it makes a good trade: selling a stock that doesn’t fit your portfolio anymore but generates a profit. I received annual dividend payments exceeding 4% of my cost of purchase during the time I held the stock and made a good capital gain on top of that. If INTC sales lag, it will be hard for the company to increase its profits. If the EPS doesn’t grow, it will be hard for Intel once again to increase its dividend. Therefore, there is no point of buying the stock. I can sell it while there is interest in it and speculation around its future. I might be right, I might be wrong about my timing in selling this stock. But what really matters is the fact that I’m making money with my transaction. What happens with the stock afterward is none of my business anymore. You can torture yourself by checking your previous position and see if you left money on the table, but it’s like stalking your ex on Facebook -- it will only hurt you.
Buying a Winner!
Yeah… this is probably what we all think when we make a purchase, right? I covered Wal-Mart (NYSE:WMT) last week… and you can guess that I liked this company. This is why I used the money generated from 5N Plus and INTC to buy WMT. I think Wal-Mart has all the potential of growing its dividend over the next 10 years and it is fairly valued at a P/E ratio under 16.
Wal-Mart will also be a stock that is easier to follow than resources and technology. This is why I can sleep well at night and won’t worry about a potential meltdown.
What do you think of my trades? Any Wal-Mart buyers out there?