When growth stock investing, don’t give up on a rising stock too soon.

Growth Stock Investing

One growth stock investing cliché says “don’t fall in love with your stocks,” but you shouldn’t fall out of love with a stock so soon that you miss a winner.

Most investor sayings and clichés have at least a hint of truth. But they can still lead you to make good or bad investment decisions, depending on how you apply them. One of these clichés is very applicable to growth stock investing.

For instance, you’ll sometimes hear investors say that you shouldn’t fall in love with your stocks. This seems to make sense. You should keep an open mind about your investments, rather than falling in love with them and holding them forever, despite any adverse changes in their business or the field in which they operate. However, investors sometimes use this tidbit of advice as a justification for selling a stock that has shot up unexpectedly.


Keep the Dividends Coming

If the markets can’t get settled, you can. This is the perfect time to benefit from more dividend payments. Low interest rates and volatile markets are both pushing more investors to seek dividend stocks for income. And many companies are raising their payouts. To take full advantage, get your free copy of Pat McKeough’s “How High Dividend Stocks Can Supercharge Your Income Investing.”

Download this free report  >>


It’s easy to jump to the conclusion that unexpected strength in a stock won’t last. Brokers and cable-TV commentators may advise you to “take some money off the table” —that is, sell all or part of your market-beating stock pick. They may justify this advice by informing you that “you never go broke taking a profit”, and that you can always “buy it back on a dip”.

In fact, unexpected strength in a stock you like is a terrible reason to sell. The stock may be stronger than you expected—you may have under-estimated the growth potential or competitive advantages that led you to like it in the first place.

The danger of selling superstocks just when they’re getting started

Experienced investors can tell you that some of their best stock picks started going up out of proportion to what they expected, and kept out-performing for years. By the time the first significant “dip” or setback comes along in a stock like this, it may have tripled.

Remember, no one can predict which stocks will be average performers, which will be losers, and which ones will turn into the superstocks that wind up rising five-fold, 10-fold or more. You may avoid some temporary losses if you sell every stock you own that goes up faster than you guessed. But do that, and you will also sell any superstocks you stumble upon, often when they are just getting started. That could mean that your growth stock investing strategy never pays off as well as it might.

After all, you need a few superstocks during your investing career, to make up for the inevitable losers.

Above all, when a stock you own is unexpectedly strong, resist any impulse you feel to sell, even if you like the idea of “nailing down a profit”. Instead, look at it closely. See if you can find any good reason to sell, apart from the fact that it’s beating your expectations.

If you can’t find any good reason to sell, hang on to it. Maybe your expectations are just too low.

Should you buy stocks based on popular indicators?

When they look for stocks to buy, investors sometimes fall into a habit of focusing on those with a particularly attractive reading on a single investment measure. For example:

  1. Low per-share ratio of price-to-earnings—a sign of safer, less volatile investments.
  2. Low price-to-book-value ratio—a possible sign that stock is undervalued.
  3. High dividend yield—the cash you’ll get from a stock’s dividend.

Any one of these indicators may seem like a quick, easy way of spotting an investment bargain or a cheap stock. However, relying on just one could be a mistake.

Have you had a major success with growth stock investing strategy? Have you ever sold a rising stock too soon, only to see it continue to soar? Please share your experience with us in the comments.

Note: This article was originally published in 2013 and has been updated.

Comments

  • I suspect every experienced investor has sold a rising stock prematurely – its almost as difficult to avoid as buying a stock just before it drops. I recently sold Boeing shares at $97 after holding them through a drop to $65 just to reduce my risk of loss – then watched them proceed to $107. Meanwhile I’m still looking for another $US stock to purchase to take its place.

    Its frustrating, but deciding when to sell is the most difficult part of investing for me.

Tell Us What YOU Think

You must be logged in to post a comment.

Please be respectful with your comments and help us keep this an area that everyone can enjoy. If you believe a comment is abusive or otherwise violates our Terms of Use, please click here to report it to the administrator.