When to Sell Stocks: Learning from my mistakes
What's up, y'all? Today, I want to share one of my golden rules when it comes to investing: knowing when to sell stocks. I learned this lesson the hard way so I figured I would share it here. So let's dive in!
The Importance of Taking Profits
One of my fundamental rules is to take profits when a stock experiences abnormal gains. Now, I don't mean that gains should be abnormal—I expect stocks to increase in value over time if I've done my research right. However, it's essential to remember that along the way, we need to secure our profits. I learned this lesson during the pandemic with a company I had great hopes for—Cerence Technology.
Cerence, specializing in voice-enabled technologies, is like having Alexa in your car (which Amazon failed at). As a spinoff from Nuance, a company known for its dictation software, I was particularly drawn to Cerence. During the pandemic, their profits skyrocketed, and the stock surged fivefold. I thought I had hit the jackpot and decided to hold on for the long term. Boy, was that a mistake.
Soon after the surge, the stock took a nosedive, dropping a staggering 50%. I found myself holding the bag, regretting my decision. It was a tough lesson, but it made me realize the importance of taking profits along the way.
Refining My Investment Strategy
Following that experience, I revamped my investment strategy. Instead of solely relying on balance sheets, I now focus on value fundamentals and technical indicators. I search for undervalued companies with low beta and a return on equity greater than 20%. I also started using some technical analysis in my decision-making process. I look at short-term and long-term trends, ensuring they align before making a move. By diversifying my risk and keeping a close eye on these factors, I’m starting to see some success. But to be honest, that will be determined over time.
Applying the Strategy in Real-Time
I wanted to learn from my past mistakes, so today, I sold half of my position in an energy company that had surged 80% in a couple of months. Why? Because I now understand the importance of securing profits and reducing potential losses. I hate bagholding, thus It's crucial to know when to lock in gains and not let greed cloud your judgment.
Trading Isn't for Everyone, but It Can Be Fascinating
Trading individual stocks isn't for everyone, as it requires time and expertise. However, if you're interested in the world of trading, having an edge and a strategy that works for you is crucial. In my case, I follow a systematic approach based on quantitative factors with a sprinkle of some technical analysis on top. While I may not have an edge, I rely on a combination of value fundamentals and technical analysis to make informed decisions. It's important to acknowledge our relationship with money and set limits accordingly.
Learning and Resources
For those eager to learn more about trading, there are countless resources available. Books, forums, and blogs provide invaluable insights. One book I highly recommend is "Market Wizards." It shares the wisdom of successful traders and has been a gem for my own learning journey.
Conclusion
I hope you're doing well on your own investment path. Remember, whether you're in it for the long term or seeking quick gains, always keep in mind the importance of taking profits and sticking to your strategy. Take cues from my successes and failures as we explore the fascinating world of trading and investments.