Your Next Great Stock: How to Screen the Market for Tomorrow's Top Performers

Chapter 25. When to Sell

Knowing when to sell stocks is second only to knowing how to find great stocks in terms of its importance to growing your stash of money. Yet investment books often devote many pages to finding stocks but leave only a skimpy section on how to sell them.

This book will follow in that tradition. Don't blame me. Throughout the book, I've tried to take stock-picking ideas developed by meticulous researchers and incorporate those ideas into stock screens. I'd love to do the same here. But it turns out that while there's plenty of good research available on finding stocks, there's little available on selling them. How can I be expected to steal something that doesn't exist?

Short of being able to offer selling tips that are firmly based in evidence, and not wanting to simply whip a few of them up as an afterthought, I'll present here the ideas I hear most often on the subject from investors and market strategists.

Some investors make selling decisions easy on themselves by using an automated, mathematical approach. For example, an investor might decide to limit losses by selling stocks immediately when they fall 8 percent from their purchase price. Since growth stocks can often produce price fluctuations larger than 8 percent on their way up, these investors might allow for a bigger decline on rising stocks—say, 20 percent. Often they'll use stop orders, which are stock trades that get sent automatically once a stock trades at a certain price. By continuously ratcheting ...