| You are probably wondering why I decided to write an | | | | has increased too much comes long after the price |
| article to explain how to sell an investment for a gain. | | | | has already peaked and started to fall. |
| But if you are anything like me, you have probably also | | | | Another factor to consider is the quality of the |
| seen a gain on an investment melt away and ending | | | | company. If it's a high quality business, earning high |
| with you eventually selling the investment for a smaller | | | | returns on capital, or the industry is growing strongly, |
| gain or a loss. | | | | you may want to give these companies more of a |
| Selling for a gain in contrast to selling to limit a loss is a | | | | chance to run. |
| pleasurable experience. | | | | An example |
| In this article I will suggest strategies you can use to | | | | I bought the German steel and pipe manufacturing |
| maximise your gains. | | | | company, Saltzgitter, in August 2003. It was trading at |
| Movement of the share in the ranking | | | | 50% of book value with a debt to equity ratio of 15%. I |
| If you buy stocks based on a ranking or mechanical | | | | sold half my position in December 2004 with a 115% |
| strategy, such as a low price to earnings ratio, low | | | | gain when I became uncomfortable with the booming |
| price to book ratio, or high dividend yield, the movement | | | | steel price and this basic commodity company's stock |
| of the stock from cheap to expensive through the | | | | price was reaching new highs. After I sold the share |
| ranking can be used to determine the selling point. | | | | the price appreciated another 900% before falling |
| If the strategy is based on buying the cheapest 10% of | | | | back sharply. I should have let it run even though I |
| shares in terms of price to book ratio, you can set | | | | made a really good return. |
| your sell point as the shares reaches the mid point in | | | | It is important to note that taking the first run up in the |
| the ranking. This will save you from being overly | | | | stock price from an undervalued share is the lowest |
| enamoured with a stock and free up funds to invest in | | | | risk profit. Holding on for the last cent becomes more |
| the target part of the strategy. | | | | and more risky. |
| Also, when a company in your portfolio starts to reach | | | | However, if the value keeps building in the business, so |
| market average or peer-group multiples, it may be time | | | | that the valuation metrics stay the same in spite of the |
| to exit the investment. For companies to trade at | | | | share price increasing, you should be patient before |
| better than market or peer group average valuations | | | | selling. |
| they have to be exceptionally better businesses. If this | | | | Furthermore, slightly over-priced stocks in the hands of |
| is not the case it may be time to exit the position. | | | | skilled management can be used as a currency for |
| When your premise is fulfilled | | | | making acquisitions and building the business. So you |
| This is what it is all about - selecting a share because | | | | should not be entirely averse to holding a share should |
| of a reasoned, well-thought investment premise, and | | | | this be the case. |
| things work out exactly like you expected, or better. | | | | When it doubles |
| When this happens you have every right to feel | | | | An old adage in the market is that you should sell half |
| confident and take your well earned profits. | | | | your holdings when a stock doubles. This is a purely |
| Should the premise, however, not work out, it may be | | | | emotional reason to sell a stock. But for many, it |
| best to sell the share rather than thinking of new | | | | works. |
| reasons to hold onto the investment, whether you | | | | It allows you to feel like you have received all of your |
| have suffered a loss or not. | | | | money back and that the money you now have in the |
| After a substantial rise in price | | | | share is pure profit or "house money". |
| Another reason for selling is when you think the stock | | | | The concept of "house money" is purely emotional as |
| has become more valuable than it should really be. | | | | all the money, including the gain, is always all yours. |
| This is often hard to determine, as many companies | | | | But if selling half when a share doubles makes it easier |
| continue to grow and perform after their share prices | | | | for you to hold the investment, then this is a sound |
| have increased substantially. | | | | strategy. |
| Sadly, for many of us, the realisation that a stock price | | | | |