Stock investing advice: The best way to react to bad news about a stock you own

There is plenty of bad news plaguing the markets these days. But bad news about an individual stock can crop up any time, in good markets or bad. It’s always upsetting, but it’s not necessarily a calamity.

When you hear bad news about a stock you own, it’s easy to react impulsively and sell. But all investments come under a bad news cloud from time to time. If you always sell on bad news, you’ll pay lots of brokerage commissions, but you’ll never make money for yourself.

To decide when to sell on bad news, you need to develop perspective. You need to be able to tell if the company has hit a bump in the road or gone off a cliff. Here’s our stock investing advice on the good reasons to sell on bad news, and the bad reasons.

Good reasons to sell:

• News of criminal activity: If a company is accused of underworld ties, money laundering, or even “accounting irregularities,” it’s probably a good idea to sell. Because of libel law, outsiders rarely make such accusations unless they can back them up. You may not miss much if the accusations prove unfounded. But you could lose 100% of your investment if they are true.
• Loss of a big part of yearly sales: If a company has just one product and it proves to be dangerous, ineffective or uncompetitive, sell the stock. Don’t wait for the company to launch a new product.

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Bad reasons to sell:

• Weak quarterly earnings report: One quarter of weak profit may simply be a normal fluctuation. By the time the news of a weak quarter comes out, it may have already had its impact on the price of the stock.
• Strikes: A single strike rarely puts a lasting dent in a company’s profitability. However, chronic labour troubles are a bad sign and may be a good reason to sell.
• Environmental, regulatory or anti-trust problems: These laws are complicated and constantly changing through court and bureaucratic decisions, so it’s easy for well-meaning companies to run afoul of them. Also, unethical companies sometimes raise these issues to hurt their competitors.

Knowing when to sell is the hardest part of investing. Our stock investing advice is that you’ll make your investment life easier and more profitable if you mainly choose high-quality investments with honest managers and established profit-making, reputable businesses. You can make money by holding these stocks and collecting dividends over long periods, even if you sit through lengthy price setbacks.

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