Most investors never sit still
I was never one to sit still. At church, school, and even while I was eating or sleeping, I would squirm and wiggle like a worm, constantly making excuses to get up and get out! To this day, I can vividly remember my mom saying, “Patience is a virtue.” Patience is a what? I thought. It sure didn’t sound like anything I needed, and off I went!
It wasn’t until I started my investing career that I learned the real virtue of being patient. In fact, I admit I learned patience the hard way—by making my move on a stock way to early or way to late, many a time.
The most difficult decision an investor has to make is when to buy, sell, or hold a stock. Although it goes with-out saying, making a great investment decision requires extensive research, learning essentially everything possible about the company: its products and services, innovation, research and development activities, management and their operating habits, numbers, statistics, and every little financial detail, the company’s history, present and future outlook, affiliations, setbacks, and so on and so forth. Buying a stock may be the easiest part of the investing equation, but that’s only if you’ve exercised due diligence.
After you have patiently analyzed a company forward and backward and then again, the next major hurdle is deciding when to buy and at what price. Once again patience plays a key role here.
For example, let’s say your analysis of the Smith & Wesson (NASDAQ: SWHC) points to an optimum price of $5 but the stock is currently trading near $7. You may be able to maximize your chances of getting a lower average price for SWHC, by buying different lots, as the stock fluctuates down and back up again. In this example, let’s say you buy a third of the total amount you have allocated for SWHC right off the bat at $7 a share. Then, using patience, you wait for the stock to drop, and when it does you pick up another third at $5.50. At this point the stock starts trending back up, so you buy another third at $6.10. This example would give you an average cost for SWHC of $6.14 per share.
The key is patience!
By far the hardest investing decision to make is when to sell a stock. I have to stress here: please think twice before you sell, as selling a winning stock too early has haunted many investors throughout history. Just for an example, let’s follow what happened to David early on in his investing career. In 1990 David had $2000 to invest, so he decided to buy $1,000 of Dell stock (NASDAQ: DELL) and $1,000 of Wal-Mart stock (NYSE:WMT). Over the next 3 years, both stocks did very well. However, from 1993 to 1995 both stocks traded relatively flat to down, and thus David got bored with the investments and decided it was time to sell both of them, which he did in January 1995.
He did quite well, too, as his Dell investment went from $1,000 to just over $14,000, and his Wal-Mart investment grew from $1,000 to nearly $2,000. However, five years later, David realized he had made a terrible mistake as both stocks kept climbing and never looked back. Had David held on to those shares for just another five years, his Dell stock would have been worth more than $900,000 and his Wal-Mart stock worth nearly $13,000. Again, think twice before you sell!
I know what you are thinking: Most stocks do not deliver the incredible returns of Dell or Wal-Mart. True, but there are quite a few (and I can show you literally hundreds) that have, and you just may be holding one of these future millionaire-makers.
To avoid missing out on these potential opportunities, some investors sell only a portion of their stocks, reinvesting what they sell and letting the rest ride.
Before selling a stock
If you are unsure of what to do, here are a few key questions to ask yourself before selling a stock:
✟ Have you lost enthusiasm for the company, its products or services?
✟ Is the company really struggling or is the current lack of performance fixable?
✟ Is management fiscally responsible, committed to renewing growth and creating value for shareholders?
✟ Is the company improving existing products and services, inventing new ones, or spending more on research and development?
✟ Is the stock price capable of pushing even higher or outrageously overpriced?
✟ Is the company taking on way too much debt, burning through its cash pile?
✟ Has the market(s) for which the company operates within turned sour with no recovery in sight?
Remember, patience is virtue! Just sit back and relax, no wiggling or squirming, please, and make a well-thought-out wise decision. You will likely be much better off.
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