Sunday thoughts on when to sell....

Its Sunday again, time to sit back and relax and consider those things in the market that daze and amaze, astound and confound.  The things that both thrill and send chills down the spines of retail investors.  Today I'm going to write about selling, not just any selling though....about selling after you've made profits.  

I've put forth some long ideas here at Avoid The Bag that have made some nice gains:

Lithium Americas at $0.75 cents CDN now trading over $0.90 with  gusts up north of a dollar.  

http://www.avoidthebag.com/2016/04/lithium-americas-cup-and-handle-forming.html

Eguana Tech when it was $0.15 CDN now trading around $0.30   

http://www.avoidthebag.com/2016/05/the-lure-of-clean-energy-eguana.html

Xenith Bankshares (pre-merger when it was HMPR) at $1.81 now trading for $2.26.

http://www.avoidthebag.com/2016/05/hampton-roads-bankshares-hmpr-great.html

Resverlogix at $1.25 CDN now trading at $1.53

http://www.avoidthebag.com/2016/06/resverlogix-phase-iii-clinical-trial.html

I also wrote about Aurora Solar at $0.15 CDN and it is currently trading for 10 northern coppers: http://www.avoidthebag.com/2016/07/the-lure-of-green-energy-aurora-solar.html

Four out of those five stocks that I've written bullish opinions about are green, which means there is the potential for profits.  Not bad....gains are good, but until those gains are crystalized by selling, there is no profit.  

My legion of loyal fans (all three of them) have probably come across someone who's owned a stock that dropped in value and heard them say something like:  "Its not a loss until I sell".  And that is true, but it also works when a stock climbs.  There's no profit made until the shares are unloaded. Paper gains and paper losses are notional and only become real once a stock is sold.

But selling is hard, and I will suggest it can be even harder after big gains than after a stock has dropped.  Why?  Psychology, and the triumvirate of emotions that seasoned market players know oh so well: Fear, Uncertainty and Doubt....or FUD for short.

FUD doesn't just rear its head when a company's stocks falls, it also pops up after a stock has climbed.  You've bought my favorite hypothetical stock ABCD at $1.00 per share when things were quiet and volumes were light.  You've read all the filings, the PRs, all the industry stories related to ABCD, you even know the histories of the CEO and other board members.  

Then ABCD starts attracting attention, volumes pick up....it getting mentioned in social media. The PPS starts climbing, to $2 then $3....before you know it ABCD is trading at $5 per share and you're sitting on a 500% paper gain.  Its not a capital gain though because you haven't sold.

And here's where FUD kicks in.  Let's say you bought 5,000 shares for an initial investment of $5,0000....and now those same 5,000 shares are worth $25,000 for a paper gain of $20,000 if you sell. But things are obviously going well now, better than they were when you bought shares at $1. Maybe there's analyst coverage, or a newsletter has picked up ABCD and is touting it to its readers. Those storming into ABCD are all over social media with predictions of $10 and $20 valuations to come.

What if they're right?  What if ABCD does go to $10...or even $20.  Those 5,000 shares could be worth $50,000 or maybe even $100,000 for monster gains in other words.  A new car, a bigger and better house....that dream vacation.  Sure $20,000 profit is incredible, but damn!  Won't you be kicking yourself if you take $20,000 when you could have had $95,000 in profit?

Time to take a deep breath.  A lot of people start investing with the goal of making huge "life changing" returns.  The stock market is the epitome of the Dream Factory.  And people do fall in love with their stocks, digesting every tidbit of news and opinion that hits the internet.  Whether its something from a respected analyst, a Seeking Alpha or Motley Fool author, or some moron like me with a blog.

I will suggest that you consider, when a stock has made big gains, whether or not its a profitable company.  Of the five stocks I mentioned at the beginning, four of them are not....

Lithium Americas is a junior mining company developing a Lithium mine in Argentina, Eguana makes inverters for battery storage power systems, Resverlogix is trying to develop a drug that will reduce major adverse cardiac events and Aurora is in the solar panel space.  None of these four companies is profitable.  Only Xenith Bankshares has actually achieved positive earnings.  

Next I will suggest you look at recent volumes.  Has trading in the stock exploded or is the PPS climbing higher and higher on light volume?  I have a rule of thumb, if between 5 and 10% of the float trades in a day, I start thinking about looking for the exit.  And that is doubly true if higher than historic volume happens in tandem with lots of Promotion, News and Hype.  Especially when its a company with a history of using shares to fund operations, pay salaries and keep the lights on.

My ultimate goal with this blog is to help retail investors understand the forces at play.  And I will suggest that these forces are most active when a stock has made big gains.  The goal of the industry players, in my opinion, is to get retailers buying when stocks are high while the true professionals sell.  And if a retail player is lucky enough to have bought in early and is sitting on big gains, to keep that retailer holding tight.....to fall in love.

I'll end with my favorite piece of market wisdom:  Nobody ever went broke taking profits.  And if the stock you sold at a profit keeps climbing, and you miss out on even bigger gains?  Then cry into the money you made.  

Good luck