You Asked, I Replied - When Is The Right Time To Sell A Stock? | The Investing Engineer

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You Asked, I Replied – When Is The Right Time To Sell A Stock?

trading psychology

This week's question is interesting. When is the right time to sell a stock? According to a reader named Paul, he's having a tough decision to sell.

But is it really that hard? Well, let me give my opinion and answer that question in this post.

Hi Mark,

I've been reading through your blog contents and I am amazed on how much you know your craft.

The contents are informative and give a sense of relief, plain and simple, shared without anything in return. I do hope you continue your work and keep sharing your blessings to the likes of us.

I have a question Mark, I've been investing since 2016 (around July), but I am not the type of an aggressive investor(luckily, I've been reading books/blogs and hearing bad stuffs about stocks) altho trading pop into my mind, (almost tried to attempt c",) ), anyway, back to my question, I wanted to understand "when to sell" by heart, up until now I havent sell, I don't follow any method, I feel like I'm just cruising, I try to save 5K a month, and if the stock is selling low (as they say) I'll buy, when its high, I stop and wait for the next low, as you can see, I don't understand how people make money in Stock Investment aside from just waiting for it to grow (hopefully), as a matter of fact, I have greens and reds in my portfolio, but then I'm lost, I can't sell for the reason that Warren Buffet doesn't sell (hold on forever) so how does he make money if he's holding on forever?

As you can see I don't have any fundamentals nor technical, everything in my portfolio is based on hunches,

Any advice on where should I start? and when to sell?

Thank you in advance. Godspeed!


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On Trading Psychology...

Hi Paul,

Let me tell you this, the reason why you're facing a tough decision to sell is because it has something to do with your trading psychology.

Normally, before we buy a stock, we tend to look at market events such as the stock's current price action, the technical indicators or the fundamental bias. These market events gives us a mental picture of what we think and believe about the stock. You call it, a "hunch". I call this an "intelligent hunch".

Now, this cognitive awareness results to our emotions, behaviours and decisions behind the stock.

Let me explain in this simple scenario.

Let's say that while browsing your Favorite stock market Facebook group, you came at a post that says good about stock ABC. The post say that it will shoot to the moon because the company just discovered a medicine that can cure Parkinson's Disease. Upon reading that, you immediately searched for information online and you found out that it's true. You checked the price and saw that it has risen to 30% from yesterday. Excitement builds up and you now think of entering at those price levels.

For the next couple of minutes, you feel excited to buy because of the fear of missing out but you also fear that the price might be already too high which results to a feeling of hesitation.

But your cognition tells you that it will shoot to the moon higher so you bought. Before the day ended, you gained 25%.

You still believe that the stock will shoot higher so you held a couple more days. During that time, the stock price fluctuated. Sometimes, you see your gains reach 50% and sometimes it goes down to 5%. You feel scared and greedy. A whiplash of emotions sets in. When your gains dropped to 5%, you become fearful because you feel that the stock may drop lower. When your gains rise to 50%, you feel greedy because you want to take the highest profit possible. This emotion pressured you to just hold for the meantime and let the events unfold.

Unfortunately, a news was released after a month stating that the medicine has some form of bad side effects (like the Dengvaxia vaccine). This caused the stock to drop at it's all time lows.

Now, you're holding a worthless stock with no real promise of a rally. You didn't attempt to sell during the downward move because you didn't know what's happening. You just sat back, froze and did nothing.

Instead of making money, you lost.

Now what we have here is an example of how our human mind reacts to different scenarios of our investing journey.

You're having a tough decision to sell because you're emotions is telling you not to.

To make money in the investment world, you have to think differently on how the way you think.

"The best traders think differently from the rest." - Mark Douglas, Author, Trading In The Zone

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Investing is not all about technicals and fundamentals. These are just tools. You need to master them but also remember that the way to make money is by learning to master your right trading psychology.

It takes a few months to master the fundamental and technical analysis but it takes years of practice to master your trading psychology. Even I sometimes struggle with this especially if the capital I invested is substantial.

Everyone can do the fundamentals and draw charts, but the money making part is based on how a trader approach the market with his/her emotions intact.

This article should get you started if you want to explore more of this characteristic.

On Buffett's Selling

Does Warren Buffett sell? Of course he does. But he thinks differently. He doesn't play the markets. He buys businesses and owns them and he makes money through its earnings while his stock positions earns him dividends. Buffett invests billions of dollars and banks in 3% to 5% of dividends. That's worth the investment.

That's the way how Buffett invests.

The difference in scale is why most investors with smaller capital (like us) tend to trade the markets. We buy and sell constantly and overtime, our portfolio grows while Buffett just waits for his yearly dividends and invests it back to other stocks and fixed income securities.

High risk traders trade more volatile stocks. Investors like me, prefer safer companies with consistent earnings and high dividends.

High risk traders grow their money faster but with a great amount of risk on the short-term. Me? I prefer a much slower pace that will enable me to sleep well in the night.

Trust me, I've been in a situation where I placed a high amount of capital in a high risk position. It's unhealthy. Stress builds up. You can't eat, can't sleep and affects your mental stability and decision making. You wouldn't want to be in a situation like that won't you?

Final Thoughts

There is really no golden rule as to where the right time to sell. If Buffett sold every time he makes a 100% return, he wouldn't be able to reach the wealth he has today.

Still, the best advice would be "sell when happy".

Just an advice, don't base your investing decisions in hunches. Look at the fundamentals and technicals. You need to master this craft or else, I would advise to just put your money in an index fund. And while at it, continue to gain knowledge until such time that you're ready to be independent.

Please don't gamble with your hard earned money. Losing money can be discouraging even if it's just a small amount.

If you really want to do it on your own but don't have the time and energy to learn the foundations, then consider using services like TRC and PinoyInvestor. They provide the tools you need on what to buy and sell. It looks expensive but will be well worth on the long run.

Again, master your trading psychology. Don't forget that.

Happy investing!


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