The old saying, “buy low and sell high” is a very noble goal to have as an equity investor. And during times of extreme prosperity, when the stock market is regularly reaching all time highs, it can seem easy to turn a little into a lot. However, most of the time, history has shown, investors get the timing wrong.
I made this mistake as well in my own life. When I was 16 or 17 I got $100 for Christmas along with a brokerage account, in my parents name, that I was allowed to trade with. After adding $10 of my own I opened it with $110 of fresh money to invest. I was excited!
My first trade, which wasn’t really researched, was the Walt Disney Company. The first month or so it went up. I became so elated as it continued to climb that after I took a “brief” fall I panicked. I told myself, “You’ve got to think long-term.”
So I didn’t sell. As the stock continued to fall gradually I continued to tell myself it would rebound eventually. At some point I caved and sold the stock, regrettably at a $5 loss. After this I purchased a Vanguard real estate ETF along with two shares of GE, which had recently been plummeting.
I have held onto these stocks for a while now and they have finally rebounded back to around $110 in value where I started. The real bummer though, is what the Disney stock has been doing. After I sold, it dropped a little more and then has continued to rise to around $117 per share.
If I had just held on I’d be $7 richer!
This silly little example shows that investing isn’t a day-by-day or even a month-by-month game. It’s a long-term play. When you buy a stock you’ve got to be willing for it to go down temporarily and eventually rebound. The important thing is making sure the fundamentals of the business are strong and then buying at a discounted price.
So, when exactly should you sell a stock?
You should sell when the stock is overpriced. And when is that? When the value you place on the overall business is significantly lower than the value the market is placing on it. That’s when you should run.