Investing 101: Updated and Expanded

Chapter 6. TOUGH SELL

Many of the nation's top investors have one common credo: Buy good companies and hold them long-term. Billionaire investor Warren Buffett goes a step further. He suggests you buy good companies and hold them "forever."

But everyone makes an occasional mistake. Knowing when to cut and run can be as important as knowing what to buy. Still, even professional investors acknowledge that determining when to sell is tough, for reasons both psychological (it's hard to admit you've erred) and practical (you must keep a close eye on your portfolio).

However, determining when—or whether—you should sell is easier if you spend some time each quarter keeping up with your investments and occasionally subjecting them to the detailed analysis that you conducted when determining which stocks to buy.

KEEPING AN EYE ON THE FINANCIALS

To track your investments with a minimum of time and effort, make a point of looking at the quarterly statements you receive. Publicly held companies send out statements every three months that show how their sales and earnings have fared over the period compared with the preceding three months and the year-ago quarter. The statement also includes a message from the chief executive or chairman that briefly describes the factors that contributed to the quarter's results.

Wise investors take a look at just a few key elements, such as profit, strategies, and extraordinary items. On the profit side, investors want to look at year-to-year comparisons of net ...