It can be difficult to know when to sell your stock

January 25, 1993|By Thomas Watterson | Thomas Watterson,Boston Globe

Will it ever end? That's what people who have been holding IBM stock as one of their "safe" investments for many years must be asking themselves.

Each week, it seems, International Business Machines Corp. releases more bad news. Last week it was a record-breaking loss of $5.46 billion for the fourth quarter and nearly $5 billion for the year.

Now, investors who are still holding IBM shares are asking another question: Why didn't someone tell me it was time to sell this stock?

The problem is that almost everyone who has anything to do with investments, including investment bankers, analysts, stockbrokers and financial advisers, spends a lot more time telling people what stocks to buy than telling them what to sell and when. But logic says that if buying the right stock at the right time is important, selling it at the right time may be even more so.

"Most money managers have a system for buying stocks, but most don't have a system for selling stocks," says Patricia A. Bannan, portfolio manager of the Phoenix Balanced Fund in Hartford, Conn. "But if you use a certain criterion, like valuation, in deciding to buy a stock, at some point, by that same criterion, the stock is too expensive and should be sold."

Many investors can make an objective, numbers-based decision to buy a stock, but then they become emotionally attached to the company or they refuse to admit a mistake and hang on too long, says Donald L. Cassidy, an analyst with Lipper Analytical Services and author of a book on the subject. Its title pretty well sums up the issue: "It's Not What Stocks You Buy, It's When You Sell That Counts" (Probus Publishing, $21.95).

If IBM's investors had been more objective in the past few years, perhaps they would have sold the stock before it fell below $100 and certainly well before it was on its way below $50. The bad news about IBM started well before 1993, and even before 1992, Mr. Cassidy says.

"The first bad news is not the last bad news," he points out. "People should have been selling IBM three or four years ago."

In January 1991, for example, IBM Chairman John F. Akers cautioned that "we are dealing with very uncertain conditions that are affecting markets and economies world wide." Two months later the company said earnings would be below expectations and said it would cut its work force by 14,000 people. A month after that, its coveted triple-A credit rating was cut and first-quarter earnings were half the same period in 1990.

Any one of those events probably should have been taken as a sell signal, but when one event followed another, then another, the stock should have definitely been dumped, Mr. Cassidy says.

While an "old-fashioned stockbroker who's watching your portfolio" might recommend a sale, most brokers are taught -- and compensated -- to get investors to buy, he says.

"Brokers are simply more practiced and more comfortable suggesting that the client buy something, not that he sell something," Mr. Cassidy says.

Also, he notes, analysts working for the brokerage have a variety of ways of telling people that a stock may not be the best investment, but they almost never utter the "sell" word, usually because they don't want to get the company issuing the stock angry. After all, if that company's fortunes improve one day and it decides to issue more stock, it's not likely to bring its underwriting business to the brokerage that had told investors to bail out.

That's why the word "hold" is used so often. While it sounds like a neutral term, it should probably be taken as a sign to sell.

"Unless you hear a firm 'buy' recommendation, you should probably sell," Mr. Cassidy says. "Never wait to hear sell advice. Assume it will not be heard."

Other firms use terms like "under-weight," or "underperform" to indicate a lack of full endorsement of a stock.

Some money managers have a fairly rigid formula for making a sell decision. For example, Robert Barcarella, who manages the Monetta Fund, sells when the stock moves up 30 percent from when he bought it and considers a sale if it falls 10 percent.

Rather than selling automatically when a stock goes up 30 percent, Ms. Bannan re-evaluates the stock and decides whether she would buy it again at the new, higher price. If the answer is affirmative, she keeps it; otherwise, it goes.

Also, she says, "We're not trying to top-tick it." That means a stock might go up a little bit after you sell. But that beats watching it drop 40 or 50 percent or more while you're still holding it. Just ask the folks who were planning to retire on IBM stock.

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