Growing Rich - Arabictrader.com

Rule 12
KNOW WHEN TO SAY
GOOD-BYE
The focus of this book has been to give you advice for identifying
and buying winning growth stocks for your investment portfolio.
However, it’s equally important for you to know how and when to
“sell” one of your holdings. Letting go is never easy. After all, if
you’ve done your homework right, you have spent a lot of time researching
and getting to know each company in your portfolio. Saying
good-bye can be tough.
STOVALL: BE READY TO SELL BEFORE YOU BUY
Robert Stovall calls deciding when to sell a stock the single-most
trying chore investors face. Still, it is something you will have to deal
with. While your goal should be to own the companies you choose
forever, the reality is you must never become complacent. Instead,
you should be prepared to let go if your reasons for buying in the
first place either change or, better yet, come to pass and you make a
lot of money in the stock.
In Stovall’s case, he often determines when he’s going to sell a
stock before he ever buys it. “I always set price targets,” he explains.
“These price targets are based on a number of factors, including
earnings expectations, the company’s current and historical PE ratio,
price-to-sales ratio, the market’s PE ratio, and the dividend yield
(which has become less important in recent years as corporations use
free cash for reinvestment instead of paying it out to shareholders).”
Here’s an example. Let’s say Stovall finds a stock selling for a PE of
17. He might calculate that, based on its past record, it really merits
a PE of 22. When he buys this undervalued company, he sets a target
price of 22 times earnings. Once it reaches that level, he knows it’s
time to sell.