Considering the markets are still flirting with record highs, you’re probably sitting on some gains. I even recently encouraged you to lock in some of those gains, since the ladies are generally more impressed with cash than they are with paper gains. These gains are all fine and good, but should you be blindly be selling just because the market is high? Just how should you decide when to sell a stock?

I’ll offer some awkward answers, combined with penis jokes. You’ll laugh, maybe cry, and then not take my advice, mostly because you all secretly hate me. IT’S TOO LATE. I SECRETLY HATED YOU ALL FIRST.

This is going to sound somewhat counterintuitive, but you should decide when to sell a stock before you even buy the stock. SAY WHAT? Has all the masturbation finally sent Nelson off the deep end? Is he high on some sort of combination of chips, mosquito bites and lust towards his many internet girlfriends? Probably yes on both counts, but still. It has some merit.

When I’m researching a stock, one of the first things I check is its price history. I’m looking for a stock that’s beaten up to the point where it’s trading somewhere like 60-90% below all-time high levels. I do this for a couple of reasons, one is because the market has proven it’s willing to give the stock a premium valuation, since it’s kinda already happened. And two, it’s easier for a company to recover back to previous highs than it is for a company to make new highs.

A perfect example of this is France Telecom. Let’s look at the 10 year chart.

Screen Shot 2013-05-19 at 10.53.10 PM

Admittedly, this is hardly science, but here’s how I determine a sale price. The stock bumped up against $30 in early and late 2004, and did even better in 2007/2008. Therefore, $30 per share is a reasonable target. The stock has been up against that level before, and I’m confident the stock will hit that level again.

But $30 is kind of boring, and I like to spice things up a little. Therefore, I pulled $30.49 out of my ass. That’s my target price on France Telecom, which represents north of a 200% potential return. Even if it takes a decade for the stock to triple, that’s still a 20% annual return, excluding France Telecom’s generous dividend.

There’s a couple of problems with my system. The first one is having enough patience to stick with the target price. Say France Telecom doubles in a couple of years. Should I take my 50% annual return and call it a day? Should you stick with the target price no matter what? Well, maybe. How’s that for a non-commital answer? That’s worse than when a girl rejects me but doesn’t want to actually turn me down. Oh, how I wish I didn’t have experience with that.

No matter what Warren Buffett says, you can’t just buy and hold forever. Eventually, every high-flying stock will hit the skids. Just take a look at Apple. You’ve got to constantly keep an eye on your holdings. Most companies will let you sign up for free for email alerts whenever there’s major company news. Every company you own is required to send you an annual report. Continue to research the company, even though you already own the shares.

Most of the time, you’ll do nothing. When a company hits hard times, they’ll present a road map to rise back to greatness. As long as they’re still on the road, there’s no reason to get excited. Hell, if the stock starts to go down even though you still like the company, maybe it’s time to buy more.

The point? Continually research the companies you own. If things start to materially change then it’s time to think about selling. If they don’t? Then just ignore the share price and let the market figure out the company is doing good things. If you compare it to buying a car, reading the quarterly and annual reports is like changing the oil and cleaning out the trash from the trunk, assuming we’re talking about my car. I am an unappetizing person.

What if you’ve already bought a stock and you didn’t set a target price? What do you do then? I’d recommend throwing up your hands, screaming like a little girl, and maybe wetting your pants. Or…

Just compare it to the rest of the market and other stocks in the sector. I sold Telus last week, since it’s starting to get expensive when you look at everything from price to earnings to book value. The other thing to look at is asking yourself whether you’d buy the stock at today’s levels. If the answer is yes, buy more. If the answer is maybe, hold it. And if the answer is no or hell no, take some profits, yo. Then you can be one of those guys who causes the market to go down because of profit taking. I will blame you the next time the market goes down.

Knowing when to sell a stock is much more difficult than buying. Having a plan in place when you buy is the ticket.

 

Tell everyone, yo!