Tags: Hulbert | sell | stock | market

Hulbert: How to Decide When to Sell a Stock

By Dan Weil   |   Tuesday, 18 Feb 2014 01:48 PM

Many investors have a far easier time jumping in to buy a stock than they do to sell. But holding on to dogs can greatly limit your returns.

Mark Hulbert, editor of Hulbert Financial Digest, offers several tips on when to sell.

"One general rule of thumb is to subject your stocks to the same valuation criteria that you used when initially deciding to purchase them," he writes in The Wall Street Journal.

Editor’s Note:
5 Shocking Reasons the Dow Will Hit 60,000

"If you bought a stock because its price-earnings [P/E] ratio is well below the market's, for example, then you should consider selling it if its P/E is now well above."

Given investors' reluctance to sell stocks, when one does become heavily sold, it's likely to underperform in coming months, Hulbert writes.

Andrea Frazzini, a principal at AQR Capital Management, recommends that you sell stocks that have significantly trailed the overall market in the last year, according to Hulbert.

Experts also tell him that stocks with a consensus "sell" rating from Wall Street analysts and stocks with a heavy amount of short interest are ripe to be sold as well.

According to Terrance Odean, a finance professor at the University of California, Berkeley, investors usually only sell a stock when they need money to buy a different stock. In addition, he adds, investors often would rather hold a stock than sell it at a loss, which does not reflect what the stock's potential is.

"For most investors, buying is a forward-looking activity and selling is a backward-looking activity," Odean tells Hulbert.

"Even if you get smarter at selling, though, you can't overcome a bad buying decision," Hulbert explains.

With the Standard & Poor's 500 Index just 12 points (less than 1 percent) below its Jan. 15 record high, not everyone is thinking about selling stocks.

"I think the market is still believing that the economy is moving in the right direction," Robert Pavlik, chief market strategist at Banyan Partners, tells Bloomberg.

"Folks are looking to buy on the dips. The pullback is still fresh and they're looking for opportunities."

Editor’s Note: 5 Shocking Reasons the Dow Will Hit 60,000

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