The Only Three Questions That Still Count: Investing By Knowing What Others Don't, 2nd Edition

When the Heck Do You Sell?

Picking stocks is only half the battle. How can you know when to sell? Just like buying a stock, a sell decision should be attacked top down. The first and easiest answer for when to sell is if you fathom the likeliest market scenario over the next year is down a lot. Then, selling most of your stocks is good—but also rare. What about in between true bear markets? How do you know when to cut and run?

The answer is: You have used the Three Questions and discovered something fundamental has changed about why you hold a stock. For example, after a fairly flat yield curve, the yield curve suddenly gets steep. You might decide to pare back your growth stocks in favor of more value stocks.

If you think firms with elastic demand (Tech, Consumer Discretionary) will do better than those with inelastic (Health Care, Consumer Staples), you can change your weights—necessitating the sale of some stocks. Or maybe you fathom some other economic, political or sentiment force impacting a certain sector or industry. For instance, you know Congress will enact yet more accounting restrictions which you (and few others) fathom will harm Financials. Or maybe, after a lengthy period of high-dividend stocks outperforming, everyone is deliriously enthusiastic about Utilities, so you somehow know it’s time to underweight Utilities shifting to non-dividend-paying stocks. Mind you, this doesn’t mean the stocks you sell are bad. They just don’t fit what you now need as a result of ...