Is It Time to Sell?

Lighten up ... rotate out ... take a little off the table.

However you say it, it means "selling," and I say selling is tricky business. So before you reach for the ripcord, ask yourself this:

"What if I had never sold a stock?"
Honestly, would you have more money now, or less? I set out to answer that question myself this morning -- and to back it up with hard data. Then I chickened out.

I knew the answer. If I had never sold a single stock, I would be ... richer than I am today. How much richer? Much richer. I can't give you a precise figure, because I knew that once I saw it for myself, I would scream.

It gets worse and worse and worse
I bought Cisco Systems (Nasdaq: CSCO) on a tip back in April 1990. I dumped it the next year for a quick double. OK, that's not exactly true. In fact, it's a lie. But I'm trying to make a point here.

Think about it: "I sold Cisco in 1991" is a pretty dark secret to have to reveal to another investor -- even if it was for a double. Since then, the stock is up another 15,543%. You read that right, and that's after the tech bubble burst.

For the record, I didn't flip Oracle (Nasdaq: ORCL) for a quick double, either. But I know how it feels. Pull up a 10-year chart for XTO Energy (NYSE: XTO). You'll see a 45-degree ramp skyward, connecting $3 to the ... top of the freakin' world. OK, only to about $60, but still.

You guessed it -- I owned XTO for a few months back in 1999. Sold it for a quick double and never looked back (right!). Now it's somewhere in the mid-$50s. That's what I call the most painful double of my career.

"And what did you do with the cash?"
How should I know? I probably bought another stock, but do you think it did as well as XTO? I know I didn't have a better stock in mind when I dumped it. I don't recall buying a house or furnishing one, either. (You'll see how this is relevant, believe it or not.)

No, I sold my meal ticket to lock in a gain. But what did I really "lock in"? Zip. You never do, unless you pull that money completely out of the market, which is not something you should consider now, especially if you're in your prime investing years like I am.

In other words, I don't think you should try to time the market. A lot of folks claim to do it -- and a few actually seem to pull it off -- but not me. In fact, you might want to brace yourself, because I'm going one giant step further than that.

I barely believe in valuation
At least, not when it comes to selling. Sure, stocks get so attractive sometimes that you have to buy -- for example, when the big banks were priced for bankruptcy in 1990. Citigroup (NYSE: C) got chopped nearly in half in a matter of months. Nutty. Sound familiar?

That's how I ended up with a boatload of Bank of America (NYSE: BAC), which I've added to recently. In other words, "value" can work for you when buying. But the math gets dicey when it comes to selling -- especially growth stocks, and especially big winners.

The fact is, I've met some great stock pickers in my day, but not many great sellers. Come to think of it, I've never met a great seller.

Promise me you won't get too cute
That's why I wasn't surprised to hear recently that the team of analysts at Motley Fool Hidden Gems have uncovered 22 stocks that have doubled over the past five years. They work hard and stick to the fundamentals.

Plus, they're fishing a rich pond -- small caps. Wall Street isn't snooping around these smaller stocks yet, which creates inefficiencies and pent-up demand. As I learned the hard way with XTO back in 1990, these stocks have room to run.

But just so you don't write me off as a cheerleader, I'll let you in on a secret: I use Hidden Gems to lead me to undervalued small caps with big potential. From time to time, they tell us to sell, but I typically don't listen -- and I probably won't in the future. Especially not if it's a winner. I never sell on valuation.

That's how tragedies happen
After all, market-timers tell you that buy-and-holders like us get wiped out in bear markets. But then you pull up chart after chart of "boring" old stalwarts -- even so-called cyclicals like Alcoa (NYSE: AA) or a conglomerate like 3M (NYSE: MMM) -- and what do you see? A gentle slope skyward. So how on Earth did anybody ever lose money on stocks like that? Good question.

Know what else looks like that? The S&P 500 -- a.k.a. the market. Granted, when you zoom in on a period like we've just been through, the ride gets bumpier, but the long-term trend is up. So how do you lose money in the market? Well, you either buy at the top in 2000 -- and only at the top in 2000 -- or you get cute and buy and sell along the way.

Consider this approach instead: Sell stocks when you want to buy a house, furniture, or something else you'll pass on to your kids. Sell when you have too much in stocks, and you want to buy some bonds, gold, or collectibles. Sell when you have too much money in any one stock. But sell a stock purely on valuation at your peril.

OK. Enough preaching
As I said, when you subscribe to a stock-picking newsletter service like Hidden Gems, smarter investors than I will tell you when to lock in your gains. But the choice is always yours.

And when those guys tell you to buy, you'll want to listen. After all, their recommendations are up 23% on average. That's compared with a more "reasonable" 3% if you'd bought the S&P 500 instead. Are you earning returns like that?

You could be. If you're not, you should consider accepting a free 30-day trial to the complete Hidden Gems service right now. This way, you can verify everything I've just told you, and it won't cost you a dime. Whatever you decide, just promise me you won't get too cute.

For a peek at the Hidden Gems team's top five top picks for new money now, and to find out more about taking a free trial, click here.

This article was originally published on July 22, 2005. It has been updated.

Paul Elliott promises to keep you posted on the progress at Motley Fool Hidden Gems. All picks and results are posted on the Hidden Gems website, which is all yours with a free trial. Paul owns shares of Bank of America. Bank of America is an Income Investor selection. 3M is an Inside Value pick. The Motley Fool is investors writing for investors.