When you should resist the impulse to sell a stock

If you feel an urge to sell a stock because it has been performing well for a few years, lie down till the urge goes away. If you give in to it, you may deprive yourself of even bigger gains in the future.

Lots of longtime holders of Canadian Pacific and Canadian Tire are developing what’s known as an “itchy trigger finger.” That is, they were thinking of selling these two long-time mainstays of the Canadian stock market simply because they have been particularly strong performers in the past few years.

This impulse rarely pays off.

When you follow the stock market for a few years, it’s easy to assume a certain consistency that just isn’t there. You may get the idea that a particular stock is a slow-moving dog that will stagnate forever. (Do you remember when BCE was a go-nowhere stock?) Or it may seem natural that a recognized growth stock has decades of growth ahead. (Does the stock symbol RIM ring a bell?)

If these stocks depart from the category you have assigned them to, it’s natural to assume the changes are temporary and that things will eventually “go back to normal.” So, for instance, if a long-time income stock you own suddenly begins moving up and doubles in price over, say, three years, you may decide to sell all or part of it now, in hopes of buying it back “on a dip,” as investors say. Or, you may want to go on to something new that has not yet had a substantial rise.

The problem is that you are basing a sale decision mainly on a change in the price. But the price change almost certainly reflects other, more fundamental factors. If you only look at the price, you ignore these fundamentals.

3 guidelines to consider before you sell

Perhaps the stock went up because of misinformed or groundless takeover speculation. In that case, it maybe a good time to sell. However, takeover plans sometimes stall for months or years because the buyer isn’t in a hurry, or has to find financing, or has other interests to keep him busy.

Maybe the stock went up because of favorable internal company improvements that are not apparent from a glance. Or, maybe the stock went up in reaction to favorable events going on in its industry that are not yet widely appreciated, or even known.

Sometimes a stock that has doubled in the past three years will go on to double or even triple in the next three. Or, it may stagnate for the next three years, then go down. We dig into the fundamentals to try to figure out what we can reasonably expect.

Selling guidelines

Here are some guidelines to consider before you sell:

Be quicker to sell low-quality stocks, and slower to sell shares of high-quality stocks.

Before you sell, ask yourself this: does the stock have a poor outlook? Or, do you want to sell because it just doesn’t fit your portfolio? If neither condition applies, and you just think it has gone up too far or too fast, then you should ask yourself if selling will improve your portfolio, or if you just want to tinker with it.

Avoid portfolio tinkering, especially when it comes to selling stocks that you feel have gone up too far and too fast. To succeed as an investor, you need a big winner in your portfolio from time to time. One key fact about big winners is that they tend to go up further and faster than most investors expect, and they keep doing it for years if not decades. If you sell them when they’re just getting started, you may never experience the joy or profit of having a big winner in your portfolio.

Courtesy Fundata Canada Inc.© 2015. Patrick McKeoughis a professional investment analyst and portfolio manager. He is the host of TSINetwork.com, where this article first appeared. Investments mentioned are not guaranteed and carry risk of loss.