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[B1127]Buy Hold Sell Stock

by Amit Kheterpal, Ami

As an investor in the turbulent world of stock markets you always will be tempted to sell your stock and book profits. That strategy definitely works fine but you may lose out on further upswing in the stock if the market is on an upswing. That is why there are pros and cons to a buy and hold strategy.

If you ask any investor a beginner or a veteran they will have conflicting views and opinion about this strategy. Then there is one famous investor of this generation by the name of Warren Buffett who has made billions on dollars just by using this buy and hold strategy. That is not to say that there are others who have made billions by just buying and selling in a very short period of time.

The risks in general associated with the buy and hold strategy are very less because in the long run say bout ten years or so you will generally tend to make handsome returns on your investment. The longer period allows you to tide over the losses during the lean period.

The down side of this strategy is that you need to have enough patience and good amount of capital to sustain patience for over a period of a few years. That is a tough task to follow because if buy a stock at market upswing time then you would be see immediate profits and would like to sell the stock. Let us assume that you get a 30% return in a matter of a month. That would be more than sufficient return to sway any investor and get him to sell his stock. But if you are a proponent of a buy and hold strategy you would actually buy a stock which is worth many times over in the long run. The 30% return will not be enough for you to sell the stock. A long term investor knows that a particular stock is worth say 800% over and that is why it is not prudent to sell the stock now and wait for bigger profits. So it all depends on the kind of returns you are expecting from the market apart form the fact that you need to have patience to hold through a longer period.

On the flip side there will be times when you are have losses on your books and a short term investor will in general as a rule try to limit his losses ad will exit the stock. Whereas a long term investor will hold out knowing that this a temporary blip in an otherwise uptrend stock.

So think hard and decide which strategy you want to go with and select the stocks appropriately.

Here's the issue. You bought a stock umpteen years ago that is now worth 10 times what you paid for it, but in the last 5 years its trading price seems to be super glued to the wall. You have always been a proponent of "buy and hold" and this stock seems to bear out the wisdom of that strategy. But now you're not sure - maybe it is time to move on to something else.

The question you keep asking yourself is the same question thousands have asked before - when do I know this powerhouse has run out of gas and its time to sell?

Here's some help with both sides of the coin:

1. "Buy and Hold" doesn't mean, "until death do we part." Every investment strategy has three basic components: the buy, the hold, and the sell. Obviously, your buy and hold components worked out well. The stock was a good pick and has significantly increased in value despite what was probably some volatility along the way. It looks like you've gotten the "growth" phase out of the security. With the lackluster performance of recent years, the stock may have matured and simply won't repeat its past performance. As Paul Simon might say, "Time to sell, Nell."

2. Is there a dividend yield high enough to support retaining the security? Figure out your dividend yield based on your original purchase price. If its 5% or greater, that's not a bad annual return for a quality security with some future appreciation potential. A company that has a record of dividend increases is more reason not to sell.

3. You do know that if the trading price doesn't move upward, the bragging rights of your average annual return diminishes. If you're up 200% on a stock over 5 years, bragging about an average 40% average annual return makes for a good story . If you're still up 200% in 10 years, in all probability someone has a better story.

4. Anything overheated needs a cooling off period. After a lengthy run up, the closing weekly price of a stock will sometimes be within a few percentage points on below average volume. According to technical analysis, if this continues for a period of time, the stock could simply be forming a new base price. With an increase in volume, the stock may "break out" and continue to rise. In the case where the stock price falls (especially in latter stage bases), a danger sign exists since this could mean institutional money has moved away from the stock.

5. No matter how much you want to, you can't change company change. Change in company fundamentals, management, and business strategy can all affect the price of a stock. Sometimes it's change for the better, sometimes not. You need to realize that nothing you can do will alter this change. Sentimentality doesn't have a lot of room in the stock market. If the fundamentals aren't what they used to be, then that's the way it is. Look at yourself in the mirror.

6. Tell the truth - is this really all about the capital gains tax? We all like to play psychological games with ourselves, so don't be ashamed to admit it. When you add up your net worth on paper, it looks higher before tax than after tax, right? Unless you're planning to die with all your paper gains to receive the "step up" in basis, recognize the difference between a game and reality.

If you're on the fence on whether to hold or sell, take the time to explore your options and decide your best course. Indecision will get you nowhere.

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Both Amit Kheterpal & Glenn are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.

Amit Kheterpal has sinced written about articles on various topics from Fitness, Property Investment and Parenting. Amit suggests that as an investor should go outside help. He has a resource on. Amit Kheterpal's top article generates over 40500 views. to your Favourites.

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