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Stock Picks Bob's Advice
Monday, 17 April 2006
A Reader Writes: "I am reticent to sell any in the face of potential future gains."
Hello Friends! Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice. As always, please remember that I am an amateur investor, so please remember to consult with your professional investment advisors, prior to making any investment decisions based on information on this website.

I was reading through my email today, and found an interesting letter from Gray G. who wrote a long letter about some of his invesment dilemmas. Gray writes:
"Dear Bob,

My name is Gray G. I currently live on Whidbey Island north of Seattle in the north Puget Sound. We, my wife and I moved here from northern Illinois to be closer to our grandchildren a few years ago. We have less that 10 years untill we reach 65.

I have enjoyed your comments about snow in Wisconsin though I will admit to be happy to be out of the snow belt. Our investment account is our primary retirement account and I try to grow it carefully.

Thanks for your obvious effort that you put into the website and the podcast. I have been reading for some time now. I review from 6 to 12 stock blogs daily and yours is one of my regulars. I have valued your sell advice.

In my investing career- most of it directed by a
paid advisor, I have lost money by "hoping for a rebound" or just plain waiting too long. Your system gives a good guideline as to when to sell on both sides. Your podcasts have been valuable in
understanding the simplicity of your guidelines. I can make any system too complicated and then lose sight of the goal..profit.

I have two questions if I may. One, do you ever find a reason to hold on to a stock in the face of good news rather than sell?

Here's the scenario: I purchased 3 stocks and when they achieved a sell point on good news my analysis indicated that the stocks in question were still
moving upwards. Let me state that I employ a similar research approach prior to purchasing or selling stocks. I review the individual stocks through
a list of screeners and evaluative websites including IBD and Morningstar. I review performance via StockCharts.com and http://www.stockta.com/ to tell me what the market is doing with respect to that individual stock.

I had purchased small holdings in 3 stocks within the last 12 months that have moved up 40%,50% and 87%. One stock I did sell a portion at 30% but all three looked capable of moving higher.... and did.
My dilemma is that all three stocks are still rated as bullish in both short and long term. I am reticent to sell any in the face of potential further gains. Please give me your thoughts on this.

I have been content to "let it ride" instead of adhering to the system you use and that I have come to admire. Yet today I read an editorial written by Richard Russell who stated " In this world, in
investing, in any field, there is no substitute for taking action." . I read that and wonder if I am fearful of taking action even if it benefits me. He went on to say that .."hope, hope is a money-loser
in the investment business" .

Second question. I inherited a small portfolio placed with a major brokerage firm. I have taken some control of small portions of the portfolio at times in order to learn by trying. I feel I have had some success and am questioning paying a fee when I rarely receive timely sell advice from the portfolio
manager.

I have had some infamous holdings...comcast,global crossings and worldcom, and can ill afford such loses. Please comment as I am sure there are still many people who pay for financial advice. Please also know that I will not make any decision based solely on your comments. I gather information from others and then decide based on a pool of information.

Thanks for listening
peace
Gray G.


Gray, thank you so much for writing. I took the liberty of posting your letter in the blog as I believe you raise questions that many investors, including me, regulary struggle with.

Regarding your first question, about whether I ever find a reason to hold on to a stock in the face of good news rather than sell?

You bring up an example of three stocks you own which seem to still have positive price momentum and you are reluctant to sell anything.

I think you know my answer :) before I give it to you. Many, many times, I have wondered about whether I should be selling portions of strong stocks when maybe I should even be adding to these positions as they still look like they have great potential.

However, it isn't what I do.

I try to stack my deck in my portfolio. I only want to own stocks that have bullish outlook and I expect all of them to rise in price! However, if you can buy into my concept that successful investing will involve selling losing stocks quickly and totally and selling gaining stocks slowly and partially, you will know that I would start selling 1/6th positions of my holdings if I were in your shoes, as they hit my appreciation targets. Selling 1/6th gives one peace of mind. You have taken some money off the table. You aren't gambline with a continued rise in the stock yet you are still letting your position actually continue to grow in size!

There isn't anything wrong with "letting it ride" as you state. In fact, most financial advisors would tell you to do exactly that. However, I believe the disciplined selling of stocks as they appreciate will protect you in the long run from stocks that climb high and then collapse....and then you will be wishing you had done exactly what I advise, sellling a little bit as the stock climbs in price.

What to do with what you have inherited? I would sell anything that didn't have a good earnings report, a solid Morningstar.com report with steady earnings and revenue growth, free cash flow growth, and a nice balance sheet.

If you want to start a portfolio, depending on the size of your funds, I like to suggest starting at 50% equity and 50% cash. Use sells at gains (1/6th sales) as signals to buy additional positions. Use sales of positions (on 8% losses, etc.) as a signal to "sit on your hands" and allow your portfolio to drop to a minimum of 1/4 invested (1/2 of the original # of positions). At that point, go ahead and replace your positions.

I have a very mechanical approach to investing. But this discipline, I believe, will allow me to be successful in the long-run. My portfolio is made up of stocks that I review on the blog. Scan through my entries and you will find all of my transactions both purchases and sales.

Let me know if you have any other questions. Good-luck and thank you again for your kind words and allowing me to reprint your letter here.

Bob


Posted by bobsadviceforstocks at 11:06 PM CDT | Post Comment | View Comments (2) | Permalink

Tuesday, 18 April 2006 - 12:38 PM CDT

Name: Jim

Hi Bob,
I found your site last week, and have enjoyed reading your log. I would like to say you have a good approach and trying to keep emotion out of the buy and sell is sometimes hard but keeps you out of most trouble. On your 1/6 sell advice, I use something close to that and may adopt your logic. The 1/6 sell may give some readers a problem because of commissions of full or discount brokers. I use scott trade, which prevents erroding my profit as I am a small investor. Your Thoughts!!
And Thanks again and continued success...

Tuesday, 18 April 2006 - 1:22 PM CDT

Name: Robert Freedland
Home Page: http://bobsadviceforstocks.tripod.com/bobsadviceforstoc

Good point about commissions.

I use Fidelity which has a fairly low commission schedule. I do not think this approach would work in a full-commission environment unless we were talking about rather large numbers of shares. But for the small investor, with a discount broker, the small sales still can make sense.

Others may wish to set up a different schedule, but having a schedule, or a plan regarding when and how much to sell is probably a good idea imho. Seems to work for me!

Thanks for writing and please feel free to comment again and visit often!

Bob

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