Ignore the tips when deciding to sell

Added: (Thu Jul 12 2007)

Pressbox (Press Release) - The theory behind selling stocks is pretty simple; the hard part, as always, is putting it into practice.

The question of when to sell a stock is one of the most talked about areas of investing. It's also one of the most vexing. And it's no accident that these two things appear together. There are scores of little stockmarket tips thrown around on when to sell, but if you followed most, or even a few, of them, you'd soon get yourself tied up in knots.

'You'll never go broke taking a profit', it is often said, and at first it seems like sensible advice. But you won't get far in the stockmarket if you sell all your stocks the moment they pass your buy price (and you eventually will end up broke from all the trading costs).

Another tip is to 'Buy the rumour; sell the fact', meaning that you should buy stocks when good news is rumoured and sell when it actually appears. The idea is that people tend to overreact to rumours, pushing a stock beyond what's actually justified by the news. This may be true, but it is of course fuelled by people 'buying the rumour'.

Perhaps the most curious advice of all is the English 'Sell in May and go away; don't buy back 'til St Leger day'. The St Leger Stakes is the last English 'classic' horse race of the flat season and is held in early September. The theory goes that you should skip the summer months in the stockmarket (at least in London) because prices will just drift lower as the 'City' professionals bunk off to enjoy Wimbledon, Ascot, Henley and all the rest of it. But if everyone did sell in May, then you'd need to be selling in April, and perhaps March and so on. And ditto for buying back in September (or August ... or July ... ).

Means to an end

The truth is that you should make your sell decisions according to basic investing principles. The trick is to remember that profits in the stockmarket come from holding undervalued investments and that buying and selling are simply means to that end. Of course, as we discuss in this issue's cover story, you also need to combine the right blend of undervalued investments so you're not too exposed to any particular economic shocks.

Visit The Intelligent Investor for the rest of this article on selling stocks to find out more on the share market.