One key aspect of investing is knowing when to hold and when to sell. Of course, there is the often quoted Buffett quote, “Our favorite holding period is forever.” Nonetheless, there have been many stocks (including some well known names, like FB, BABA, MMM, GE, PYPL, etc.) that have fallen and have struggled mightily to recover to anywhere near their former levels. (I intentionally mentioned both value and growth names in my examples to show this is not a phenomena that only hits “dinosaurs” or “newfangled tech stocks.”)
Then again, there are stocks like AMZN that have 20% corrections quite often and had one sold in fear of a correction, one would have likely missed out on significant gains over the years. I have also seen stocks getting blown up by a FUD article only to rocket a month or two later on seemingly little news. The FUD article is then forgotten, but if you sold on it, you would have lost big and also missed the strong recovery.
Some say that you should know your stocks and I whole-heartedly agree. However, a couple counterpoints: First, your “knowing” your stocks are only as good as your model, e.g. using the correct growth and WACC assumptions in a DCF or correctly identifying whether a breakout is technically sound or a “fake”. What you know may not actually be so. Second, the fundamentals could change but it is sometimes difficult to know if the stock is just having a “rough patch” or a fundamental shift in its growth potential.
So, what are your thoughts on when to hold and when to sell? Do you use certain metrics or is it more of a “gut feel” process for you?
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