The Stock has Dropped
By themselves, share price movements convey no useful information, especially because prices can move in ALL sorts of directions in a SHORT TERM for completely unfathomable reasons.
The long-run performance of stocks is largely based on the expected future cash flows of the companies attached to them - it has very little to do with what the stock did over the past week or month.
Always keep in mind that it doesn't matter what a stock has done since you bought it. There's nothing you can do to change the past, and the market cares not one whit whether you've made or lost money on the stock.
Other market participants - the folks setting the price of the stock - are looking to the future, and that's exactly what you should do when you're deciding whether to sell a stock.
The Stock Has Skyrocketed
Again, it matters little how those stocks have done in the past - what's important is how you expect the company to do in the future.
There's not a PRIORY reason for stocks that are up substantially to drop, just as there's no reason for stocks that have tanked to "have to come back eventually."
Most of us would be better investors if we could just block out all those graphs of past stock performance because they convey no useful information about the FUTURE.
So When Should You Sell?
Run through these 5 questions whenever you think about selling a stock, and you'll be in good shape.
1. Did you make a mistake?
2. Have the fundamentals deteriorated?
3. Has the stock risen too far above its intrinsic value?
4. Is there something better you can do with the money?
5. Do you have too much money in one stock?
By themselves, share price movements convey no useful information, especially because prices can move in ALL sorts of directions in a SHORT TERM for completely unfathomable reasons.
The long-run performance of stocks is largely based on the expected future cash flows of the companies attached to them - it has very little to do with what the stock did over the past week or month.
Always keep in mind that it doesn't matter what a stock has done since you bought it. There's nothing you can do to change the past, and the market cares not one whit whether you've made or lost money on the stock.
Other market participants - the folks setting the price of the stock - are looking to the future, and that's exactly what you should do when you're deciding whether to sell a stock.
The Stock Has Skyrocketed
Again, it matters little how those stocks have done in the past - what's important is how you expect the company to do in the future.
There's not a PRIORY reason for stocks that are up substantially to drop, just as there's no reason for stocks that have tanked to "have to come back eventually."
Most of us would be better investors if we could just block out all those graphs of past stock performance because they convey no useful information about the FUTURE.
So When Should You Sell?
Run through these 5 questions whenever you think about selling a stock, and you'll be in good shape.
1. Did you make a mistake?
2. Have the fundamentals deteriorated?
3. Has the stock risen too far above its intrinsic value?
4. Is there something better you can do with the money?
5. Do you have too much money in one stock?
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