We generally consider the investment to be a purchase (of assets) activity. Hence, we are mainly focused on buying decisions and give fewer thoughts and time while selling. However, selling decision is as important as buying. Many investors may have adequate knowledge on how to value and purchase a stock. But, they may lack the proper system and skills to sell those stocks. Having a precise selling strategy can help to achieve a maximum profit and minimize losses.
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Here are some of the valuable tips provided by William J. O’Neil regarding selling rules and its importance in your investment career.
When To Sell Stocks And Take Profits?
“You must sell your stocks if you’re to realize a profit, and the best way to sell a stock is when it’s on the way up, while it’s still advancing and looking strong to everyone else.”
“You simply must get out while the getting out is good. The secret is to hop off the elevator on one of the floors on the way up and not ride it back down again.”
“If you don’t sell early, you’ll be late. The object is to make and take significant gains and not get excited, optimistic, greedy, or emotionally carried away as your stock’s advance gets stronger. Keep in mind the old saying: Bulls make money and bears make many, but pigs get slaughtered.”
“Sell when there is an overabundance of optimism. When everyone is bubbling over with optimism and running around trying to get everyone else to buy, they are fully invested. At this point, all they can do is talk. They can’t push the market up anymore. It takes buying power to do that.”
“You positively must always act to preserve as much as possible of the profit that you’ve built up during the bull market rather than ride your investments back down through difficult bear market periods.”
“Be careful of selling on bad news or rumors; they may be of temporary influence. Rumors are sometimes started to scare individual investors- the little fish- of their holdings.”
When To Sell Stocks & Limit Losses?
“The best offense is a strong defense. Unless you have a strong defense to protect yourself against large losses, you absolutely can’t win big in the game of investing.”
“You should cut all your losses immediately when a stock falls 7% or 8% below your purchase price. Always, without exception, limit losses to 7% or 8% of your cost. To preserve your hard-earned money, I think a 7% or 8% loss should be the limit. The average of all your losses should be less, perhaps 5% or 6% if you are strictly disciplined and fast on your feet. “
“If you hesitate and allow a loss to increase to 20%, you will need 25% gain just to break even. Wait longer until the stock is down 25%, and you’ll have to make 33% to get even. Wait still longer until the loss is 33% and you’ll have to make 50% to get back to the starting gate. The longer you wait, the more math works against you, so don’t vacillate. Move immediately to cut out possible bad decisions. Develop the strict discipline to act and to always follow your selling rules.”
“Every 50% loss began as a 10% or 20% loss. Having the raw courage to sell and take your loss cheerfully is the only way you can protect yourself against the possibility of much greater loss. Decision and action should be instantaneous and simultaneous. “
“It is exactly the same for the winning investor who cuts all losses quickly. It’s the only way to protect against the possible or probable chance of a much larger loss from which it may not be possible to recover.”
“Wide diversification is a substitute for lack of knowledge. It sounds good and it’s what most people advise. But in a bad bear market, almost all of your stocks will go down, and you could lose 50% more in some stocks that will never come back. So diversification is a poor substitute for a sound defensive plan with rules to protect your account”
Small Losses Are Cheap Insurance
“I am happy to lose money when it’s only 7% or 8%. If it hadn’t been for the sell rules, I would have lost my shirt, And I wouldn’t have resources for the next bull market.”
“Small losses are cheap insurance, and they’re the only insurance you can buy on your investment. Even if a stock moves up after you sell it, as many surely will, you will have accomplished your critical objectives of keeping all your losses small, and you’ll still have money to try again for a winner in another stock.”
“This policy of limiting losses is similar to paying insurance premiums. You’re reducing your risk to precisely the level you’re comfortable with. Yes, the stock you sell will often turn right around and go back up. And yes, this can be frustrating. But when this happens, don’t conclude that you were wrong to sell it. That is exceedingly dangerous that will eventually get you into big trouble.
Think about it this way: If you bought insurance on your car last year and you didn’t have an accident, was your money wasted? Will you buy the same insurance this year? Of course, you will! Did you take out fire insurance on your home or your business? If your home or business hasn’t burned down, are you upset because you feel that you made a bad financial decision? No, You don’t buy fire insurance because you know your house is going to burn down. You buy insurance just in case, to protect yourself against the remote possibility of a serious loss.”