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When to Sell a Stock?Mike Hoy This is a loaded question that can very easily have a variety of answers. Only time will prove whether the decisions made are correct or incorrect. For the purposes of this article I am going to assume that the industries to which I am addressing are in a bull market. I will assume this because I am only interested in the precious metals, base metals and the natural resource sectors. I believe these industries are in a long term bull market and I am only interested in taking profits or losses as a result of how I view the long and short term movements of stocks within this bull market. A BROKEN CLOCK IS RIGHT TWICE A DAY! This is a particularly timely quotation as this pretty much says it all for those people who are fortunate enough to be in the right place at the right time. I have written several articles over the past couple of years that outline the opportunities that we, as investors, have standing directly in front of us for what could be several years to come. Another timely quote would be "a rising tide lifts all boats." In other words, it does not take a genius to make money in these sectors in a bull market. The risks associated with owning good quality stocks in these sectors is not the risk of losing investment capital but the risk of taking your money off the table way too early. Investors have an opportunity to make more money than they have ever or probably will ever make in their lives if they make correct choices in the investments they chose to buy and sell today. I am sure we all have stories of owning companies that we as investors sold way to early. Yes, money was made but the profits that were left on the table were enough to make you sick when you think about the lost opportunities and profits. WE must remember that we are the pioneers; very few investors have any money allocated to the specific industries that we have owned for what seems like an eternity. Just because we have been invested in these industries for a long time does not mean the rest of the investment world has any exposure to them at all. Before the bull market in these three sectors is over I believe good quality companies, within these sectors, that prove themselves, will trade for prices that can be seen on very few radar screens today. I also know that human nature keeps most equity investors from repurchasing stocks that were sold at lower prices. This is the second biggest mistake that investors will make in this bull market. The first biggest mistake is selling these stocks in the first place at prices that will prove to be pennies on the dollar by the time selected individual stocks reach their ultimate bull market highs. WHERE TO START? There is no substitute for knowledge and experience. I have preached time and time again about the absolute necessity to learn as much as is possible about the companies and industries that we want to invest our hard earned capital in. The first place to start is with the management of each company. There is no such thing as a "good investment" without a management team that is capable of getting the job done. I do not even consider an investment if I am not comfortable with management. The second place I turn to is the business plan that the company has put together. I must know where management proposes to take this company and how they hope to get there. If I am convinced that management has a solid business plan then I am in a position to make a decision based on what management expects to achieve and the time frame they hope to accomplish their goals. I know that this article is about knowing when to sell rather than what to buy. In order to get to the sell side of the equation it is so important to remember why we made the decision to make the investment in the first place. DECIDING WHEN TO SELL! In a bull market practically all stocks rise in the sectors benefiting from the favorable market conditions. The key to wealth is knowing which stocks to take profits from and which ones to hold as core positions; adding to, as corrections and consolidations give opportunities to build positions. I always get a charge from people who seem to think that just because a stock rises in value an investor has to take a profit so as not to lose what he has made on paper. I liken this to my days as a broker, years ago, when I saw time and time again how investors were very easily encouraged to take a profit and reinvest the proceeds into a position that was underwater. I too was guilty of doing this as I felt it was the right thing to do. Time and experience has proven the error of this type of thinking. In practically all cases it was the losing stock position that should have been sold with the proceeds used to buy more of the winning stock. Often investors will take a profit from one company to purchase an investment in a new company. I have never been able to understand how this logic is supposed to lessen an investors risk when the capital is reinvested in a new venture. Seems to me the investor is starting the risk all over again. With the rally we have experienced so far in 2006 I must say that I am very pleased with the profits I have racked up in the stocks that I own. For those of you on my e-mail list who have purchased these stocks I am sure you are very pleased with the results you have achieved as well. I am not going to talk about specific stocks in this article as that is not what this article is about; for those of you on my e-mail list you will see an update in the near future that will bring you up to date. Suffice it to say that I think you will continue to be very happy. I am currently hoping for weakness in a couple of stocks I own so that I can build larger positions. Unfortunately the stocks are very stubborn and refuse to give up much ground. Notice I used the word unfortunately; this is no accident as I would love to have a shot at buying more shares at a discount. In my three favorite companies my money has more than doubled in one and tripled in the other and up more than tenfold, on my initial investment, in the third. Once an investor sees returns of this nature on the stocks in their portfolio they will then have the confidence to not worry about the day to day price volatility in their portfolios. This type of attitude can very easily be adopted when one is in a bull market in the sectors that you own. As time moves forward I am automatically checking the progress of my investments with the business plans that the management of my investments have laid out for them to accomplish. If I find that management is successfully moving my investments towards a final goal, which inevitably is proving up an ore body or putting an already proven ore body into production, then I am a happy camper and I will continue to own and build positions in my investments. Most investors do not realize that the companies they own could be considered more undervalued at two or three times their purchase price as management successfully delivers on their business plans. This is where the boys are separated from the men. Being able to understand true value from building a company from the ground floor up versus a stock that simply has a very good marketing team telling a good story is the key in knowing when to take a profit versus owning a stock as a core holding. In the three stocks I referred to I am very happy to say that I have added to my positions as management has proved up additional value to the companies. I have taken money from companies whose management failed to deliver and used that as the additional funds to build my winning positions. The reason I have been drawn to making investments in start up junior mining and natural resource companies deal directly with the rewards of finding the company with a resource that becomes a positive cash flowing mine. I know that very few companies have bodies of ore that will ever see the day when they will be called a producing mine. The odds are stacked against every junior mining company ever becoming classified as a successful producing company. However, the rewards of being successful in finding a junior mining company that is bought out or becomes a producing company, in my opinion, far outweigh the risk associated with making the investment. Huge profits and returns await those who are successful. The ironic part to this story deals with companies that may falter in being able to timely deliver on their business plans. There are many reasons why a company may fall behind; some of these reasons are totally acceptable as being normal in the mining industry. In cases like this positions should be built to take long term advantage over a short term holdup. The "boys" also get separated at this point as many times these failures are warning signs that something is not right. I like to refer to these failures as "Material Changes." Time always separates fact from fiction. A shrewd investor can recognize material changes as time brings the truth out of fiction. As time reveals that management has made mistakes, overestimated ore bodies, underestimated costs, fudged the truth about what they hoped to have, or simply did not have a clue what they originally hoped to accomplish in the first place; there is consolation in knowing that all is not lost. In a bull market there is a strong possibility that good money can still be made when an individual owns a company like this. Remember a rising tide will lift all boats. Knowing that "all is not well" is the first step in knowing that this company is on its way out of my portfolio. I will make sure I liquidate companies of this nature as they move up in price and liquidity offers a timely exit. I get a charge out of being able to make money on companies that deserve to be liquidated at a loss. Have you ever noticed that stocks offer excellent liquidity to sell as they move higher in price? The important point to make here is; if you decide to sell a stock out of your portfolio do it when liquidity gives you the opportunity to do so not when your emotions stir you to sell. THREE SECRETS The three secrets to making big money in the markets are; 1) Accumulating good quality stocks or stocks that have great potential when no one wants them; 2) Being able to let loose of the stocks that encounter material changes when they rise and liquidity offers the opportunity to delete them from your portfolio. 3) Knowing which stocks should be considered core holdings where weakness should be viewed as an opportunity to build positions at a discount. CONCLUSION Like I have said, knowing when to sell a stock can be very complicated. Ultimately my decisions to sell are based on the accomplishments of management in being able to deliver value to their shareholders. Notice that I have said nothing about the subject of paying taxes on the gains that an investor may take along the way. This is a separate article in and of itself. Suffice it to say that paying taxes is not one of my favorite things to do in my life and by holding my core positions I put myself in a position to minimize my taxes and pay long term capital gains when I do decide to take profits down the road. Does my strategy work? I think so as our portfolios are up 9X since 9-11 and I feel that 2006-2007 will blow the roof off those returns as I really like the developments in the companies that I own. Mike
Hoy 321gold Inc |
