Morton Fox (mortonfox) wrote,
Morton Fox

Trading Blather and Sell Discipline


I'm out of JADE. I sold half my position earlier this year when the stock had nearly tripled year-to-date. Then, more recently, I sold the remainder when I saw that company had missed the deadline for filing its fiscal year-end results and was in danger of getting delisted from NASDAQ. Which was not good, of course. The amazing thing is today, the stock was up 38% on no news! However, at this time, I'm just watching it for entertainment. Speculative forces have taken over and there is no longer an investment reason to be in this one.

So how do you decide when to sell? That has actually been the toughest question I've had to deal with in over a decade of stock investing. One rule of thumb I heard is when a stock doubles, sell half to take your initial investment out and let the rest ride. (Of course, if you factor in capital gains taxes, you'll have to wait for it to more than double before selling half gets you your money back.) However, I just did a web search and other than on some message boards, there is no support for that rule of thumb anywhere.

In practice, I don't follow that rule strictly either. I do apply it if the stock is overvalued or if I have some doubt as to the business or management. All those reasons were in place when JADE was close to $12 per share, which is why I cut my position. On the other hand, if the stock doubles but there is no fundamental reason to sell, I'll hold it. An example of that is Johnson Controls, which has not been overvalued in nearly a decade because the underlying business kept pace with the stock. However, I did eventually have to reduce my position anyway. As a six-bagger, it had become overweighted in my portfolio.

Note also that the sell-half rule of thumb is a double-edged sword. If the stock continues moving up, you'll leave a lot of money on the table. Crown Holdings was one stock on which I applied the sell-half rule when it was a three-bagger. I did that because I was still concerned about its asbestos liability at the time. Three years later, it became an eight-bagger! Nevertheless, I was able to use the proceeds from the sale elsewhere so it wasn't so bad.
Tags: crown holdings, investing, johnson controls, lj international, sell discipline, stocks, trading
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