MARKET COMMENT
When You Should Sell Shares

By Cliff D'Arcy
January 31, 2003

Over the years, my wife and I have invested in quite a few companies. Our first gains came from buying shares in the companies we worked for via employee share schemes.

Later, working in financial services gave me the confidence to invest in banks and insurance companies, as these businesses were within my "confidence zone". More recently, I branched out into buying shares in other sectors, usually targeting under-valued and unfashionable businesses, or companies that looked ripe for acquisition (becoming a "bid vulture").

After many years, although I feel I have a fair eye for attractively priced shares, I still struggle to decide at what price to make my exit.

It's one of our biggest decisions: when do we sell? I don't know the definitive answer, but here's what some world-renowned investors have to say on this subject (edited):

"The investor...should never buy a share because it has gone up or sell one because it has gone down."  Benjamin Graham, author of The Intelligent Investor

"I do not believe that selling at very low prices is a remedy for having failed to sell at high ones. I feel no shame at being found still owning a share when the bottom of the market comes."  John Maynard Keynes, acclaimed economist and investor

"A price drop in a good share is only a tragedy if you sell at that price and never buy more. To me, a price drop is an opportunity to load up on bargains from among your worst performers and your laggards that show promise." -- "If you can't convince yourself, 'When I'm down 25 percent, I'm a buyer' and banish forever the fatal thought, 'When I'm down 25 percent, I'm a seller', then you'll never make a decent profit from shares."  Peter Lynch, author of One Up On Wall Street

"...Do not disturb a position that is going to be worth a great deal more later."  Philip Fisher, author of Common Stocks And Uncommon Profits

These thoughts can be distilled into some simple guidelines:

* Don't sell a share simply because it gone down.
* Don't be afraid of holding a share (or buying more) after falls. You can't predict the market bottom and price drops may indicate bargains.
* If you sell too early, you could miss out on future gains.
* If you're happy with the current price, don't sell.

To these wise words, I add my personal observations:

* If you need money urgently, such as to pay an unexpected bill, use "rainy day" money before selling your shares, unless you have no choice.
* If your shares pay an annual income of 5% and you have a storecard charging 30% APR (or other non-mortgage debts), your shares will have to rise by 25% to outperform the debt. It's sensible to sell shares to pay off expensive debts.
* If you want to use your annual Capital Gains Tax allowance to realise a tax-free gain but want to keep your holding, you can sell your shares and buy them back in an ISA or have your spouse buy them back. Alternatively, if you wait more than 30 days, you can buy them back yourself, but this can be risky because the price could move against you in the meantime.

Remember, every seller has a matching buyer. Ask yourself, why is someone else willing to take the opposing view to you? This may help you to be more cautious when cashing in.

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