Whether you’re dealing with winners or losers, every investor inevitably wrestles with the question of how to know when to sell stocks.
What if the stock that fell 25% bottoms and immediately rebounds to new highs?
What if the stock that rocketed 200% tops out and crashes?
Should you take profits on a winning stock that’s doubled? What if it’s just taking a breather before the next leg up?
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The right (or wrong) answers to these questions can mean the difference between market-beating returns and churning your account into oblivion.
As Chief Analyst of Cabot Stock of the Week, I face those questions more than most analysts here due to the simple fact that the advisory adds and removes stocks on a weekly (or mostly weekly) basis due to our 20-stock portfolio cap.
So today, I sat down with my colleague Brad Simmerman for an interview-style back-and-forth on how Stock of the Week knows when it’s time to sell a stock.
Brad: Stock of the Week is in a unique position when it comes to managing a portfolio. You’ve got to add a stock every week, and your portfolio cap means that you need to sell one just about every week, too. I know the cap is informal, but it’s a real constraint. So what’s your first instinct when it’s time to trim?
Chris: I try and trim our biggest laggard, but I don’t force it. If every stock in the Stock of the Week portfolio is performing well (admittedly a rarity in a portfolio with 20 stocks), I won’t just sell something for the sake of selling. Usually, however, the “cap” (my preference is no more than 20 stocks, though that occasionally gets mildly violated) works itself out – typically there’s at least one underperforming stock in that deep a portfolio. Even if it means a quick hook on a stock I recommended mere weeks ago, if that stock isn’t performing, I cut it and make room for a better opportunity down the road.
Brad: And you use a mental stop, right? Not a hard stop-loss?
Chris: Yes. 20% in bull markets is typically my threshold.
Brad: On the other side of the equation, when do you decide to take profits?
Chris: I typically recommend booking profits on half your original position when a stock has at least doubled. Sometimes I wait longer – like if that double was a slower burn that took a year or more. But if a stock doubles quickly, I usually recommend taking profits on half of it and letting the other half ride.
Brad: Stock of the Week pulls from other advisories, which makes it unique among Cabot’s services. How do you factor other analysts’ ratings into your decision-making?
Chris: All of our analysts at Cabot are excellent, so I hold any stock recommended by them in high regard. But after working with many of them for more than a decade, I can tell when they’re really excited about a stock. That carries a lot of weight with me when deciding which stocks to add to the Stock of the Week portfolio every week.
Brad: Do you defer to your profit-taking rules over another analyst’s rating? If Mike Cintolo, for instance, is bullish on a name that’s already doubled, do you still rely on what you said above?
Chris: The original analyst’s opinion certainly matters. If Mike, for example, is still high on a stock that’s already doubled since both he and I recommended it, that can sway me to hold off on taking profits. But since our timelines never perfectly align (the newsletter of origin for each Stock of the Week stock may have recommended it weeks or sometimes even months ago), our profits are typically different from that analyst’s profits. So, in that sense, I do kind of defer to my own system more often than not.
Brad: Last question. If you could give one piece of advice to readers on knowing when to sell stocks in their portfolios, what would it be?
Chris: Keep it simple and manageable. Stock of the Week is different – “buying” a new stock every week isn’t normal. 20-stock portfolios are difficult to manage, which is why the portfolio is more a menu of recommendations than a model portfolio to be exactly replicated.
A more reasonable portfolio size is 10-12 stocks. That’s enough to diversify across several investment types in the way the larger Stock of the Week portfolio does, but not so much that it’s overwhelming to stay on top of everything.
Also, as I said before, if a stock falls below your preferred loss limit, sell it. If a stock goes to the moon, book profits along the way, and let the rest ride. The combination of minimizing losses and maximizing profits is what has helped make Stock of the Week one of Cabot’s best-performing portfolios over the years – and is a strategy that should serve you well, too.
Brad: Thanks, Chris.
P.S. Cabot Stock of the Week is celebrating its first decade of gains! To mark it, this Monday (July 27), at 3 PM ET, I will release my special anniversary recommendation: a company revolutionizing medicine, already up 236% in the last 12 months. To celebrate 10 years of finding one great stock a week, you can join at 60% off. But the offer closes at 3 PM Monday, the exact moment I release the name of the stock. Get all the details here.
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