Hold ‘Em or Fold ‘Em? Stock Pros Differ on When to Sell

Investors get plenty of recommendations from brokers about what stocks to buy and when. It’s deciding when to sell that’s the hard part. Just ask Margaret Casey.

Casey and her husband, of Austin, Texas, worked in the computer industry in the 1970s and bought shares of some companies they knew well, such as Computervision Inc. They planned to be long-term investors, which in this case turned out to be a mistake.

Bedford, Mass.-based Computervision slipped from its perch as a dominant provider of software for computer-aided design and manufacturing in the early 1980s, and the Caseys saw the value of their investment melt.

“We held on to it as it started to sink,” said Casey, a retired computer programmer. “At the time we were still emotional investors; we were emotionally tied to the stocks we were buying.”

Investment advisors say the Caseys’ experience points out a risk in the buy-and-hold strategy: For even the best companies, business conditions can worsen, so investors need to review their holdings periodically and consider whether their initial reason for buying still makes sense. They need to separate their belief in a company from their appraisal of its business prospects.

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Opinions vary wildly among professional money managers, financial planners and stock analysts on how often that review should take place.

On a brighter note, stocks can rise higher and more quickly than expected, and investors--even those who consider themselves long-term holders--should be prepared to sell if that happens, some analysts say.

Donald L. Cassidy, a financial analyst in Denver, said individuals should sit down every weekend and review their stocks, why they bought them and whether it’s time to sell.

“Not every company that looks like a great company will remain a great company,” said Cassidy, the author of “It’s When You Sell That Counts.” He pointed out that Kmart Corp., Polaroid Corp. and Apple Computer Inc. all had dominant positions in their industries at one time, only to stumble.

Cassidy recommends that investors read all the news they can get on the companies they own, and try to determine whether a problem could cause a long decline in the stock.

For stocks that do well, no difficult judgments are required, he said. When buying a stock, investors should have a target price and length of time and be prepared to sell when it hits that level, he said.

“Let’s say your goal was a double in four years, and it does it in a year,” Cassidy said. “I say, the market gave me an unreasonable profit, thank you, and go on to something else.”

At the other end of the spectrum is Warren Buffett, who has one of the best long-term investing records ever. The chairman of Berkshire Hathaway Inc. said he sells only if he needs money for another investment that’s too good to pass up. He has said he’ll never sell some of his holdings, such as Washington Post Co.

“The best thing to do is buy a stock that you don’t ever want to sell,” Buffett said at Berkshire Hathaway’s annual meeting this month. “You sell if you need money for something else. The real thing to do with a great business is to hang on for dear life.”

Buffett said last year he sold shares of McDonald’s Corp. and other stocks to buy Treasury bonds.

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Bill Bengen, a fee-only financial planner in El Cajon, Calif., recommends an approach somewhere in between Buffett and Cassidy. He urges investors to review investments often, and don’t count on owning a stock forever. Five years, or 10 at the most, is more realistic, he said.

“I’d like to own a stock, ideally like Warren Buffett says, forever,” said Bengen. “But I haven’t found too many companies where you can do that.”

Investors should own a limited number of stocks so it’s easy to track them, Bengen said. Keeping tabs on companies is easier with the wide availability of news and data on the Internet, he said.

Besides worrying about a good investment that turns bad, investors also have to be ready to admit to mistakes if they buy stock in a poorly run company.

Robert Torray, who runs Robert E. Torray & Co., a Bethesda, Md., money management firm, studied Reader’s Digest Assn. Inc. for three years before investing in it. He said he soon realized that the company wouldn’t turn its business around any time soon, and sold the stock.

That’s not something he does lightly. Torray hasn’t sold a stock from his personal portfolio in 10 years. As a professional investor managing $5 billion, he said he sells only if “I think the outlook for the business has dimmed permanently and significantly.”