Thinking of Selling Those Tech Stocks?

Let’s put aside for now whether the technology-stock gold rush is over for good, is just on hiatus or is revving up for another run.

Is it time for you to sell, if you own a “new-economy” tech name that has doubled, tripled or more over the last few months?

The decision to sell is always the hardest call. It doesn’t matter whether you own one stock or 1,000--nobody ever feels as if they have a good handle on when to sell.

Some investors subscribe to the idea that the best time to sell a stock is “never.” As long as you believe in the company, and as long as you have a long-term investment horizon, why sell--especially if selling is going to trigger taxes?

Given the market’s gyrations of recent months, however, it’s clear that somebody has been selling . . . even if just to buy back stocks a few days, hours or minutes later.

What’s more, “never” selling a stock such as Exxon Mobil is one thing. Odds are a company of that size, in a commodity business, will still be around in 10 years.

But in the tech world, predicting which companies will still be around, or viable, in even three years may be a challenge. New technologies make old technologies obsolete overnight. If you wind up owning an obsolete technology, guess how Wall Street will value your stock?

We could have had this discussion about tech any time in the last 10 or 20 years, of course. The difference today is the price of the stocks relative to underlying earnings or earnings potential.

Every tech investor knows, or should know, how high price-to-earnings multiples and other measures of tech-stock valuation are today. There are many reasons given to justify these valuations, some or many of which may be valid.

The point is, because of these valuations, there is little room for error with regard to the companies’ progress. Maybe less room than there has ever been for tech firms.

Last week, when investors began to worry for a few minutes that human-genome-focused biotech companies may not be able to patent some of their breakthroughs, the carnage in the stocks was horrendous. Many lost 40% or more of their value almost overnight.

A lot of people probably wish they hadn’t paid the prices they did for these stocks on the way up in recent months. Many who are still in the stocks probably wish they had sold somewhere, anywhere on the way up.

One of the early rules I was taught on Wall Street was simply that “they don’t ring a bell when it’s time to get out.” We all wish they would--but when it comes to the sell decision, we’re on our own.

Should you sell a hot tech stock? Here are some reasons why you might:

* You need the money. Or you will need it, soon enough, for something major--a house, a child’s college tuition bill.

If your market gains are concentrated in tech, why not take some portion off the table now if those stocks have been very good to you and you’re going to need a lump of cash soon anyway that you won’t be able to secure from another source?

Remember: Seasonally, it’s not a good time for tech. The period from spring to fall has often been when the sector is weakest. (Internet stocks last year saw a steep drop from April through August, for example.)

* You’ve let the stock market do your saving for you in recent years. Forget your tech companies’ fundamentals and how excited you may be about them. How are your personal finances?

Do you have an emergency fund of some kind that you could tap if needed--money that is in a stable account, such as a money-market fund, and isn’t in danger of suddenly being cut in half a la the biotech-stock rout?

If the extent of your saving in recent years has been whatever the stock market has done for you--and you haven’t added much in new money to savings--maybe this is a good time to consider setting up an emergency fund with some of your market profit.

Another idea: How about using some of your stock gains, if you have them in non-retirement accounts, to pay off credit card debt that is probably costing you plenty in interest?

* You’ve set goals for your stocks, and you’ve already reached them. Maybe you expected your tech stock to double in three years. Instead, it has doubled in three months. (This could apply to your entire portfolio.)

Some veteran investors argue that you should just “let your profits run,” even if a stock has performed far better than expected. Often that’s good advice. But just remember the risks: The higher your shares have gone, the greater the potential decline if something goes awry with the businesses--or if the market simply turns against them.

* You know you’ve just been incredibly lucky. If you’ve quadrupled your money in a stock you know nothing about, other than perhaps the ticker symbol, you’ve been lucky. Will your luck hold?

* “Bad” volatility really scares you. Good volatility is when a stock soars out of the blue. Bad volatility is when the price plummets, perhaps for no good reason.

Volatility in most tech stocks has been almost exclusively the good kind since last October. Biotech last week showed us the bad kind.

Maybe you’re new to the game, courtesy of online trading, and have never experienced a stock losing 80% of its value. Trust me, it happens.

* You have a better idea. This is often the best reason to sell all or some of a stock: You like another stock, or other investment, better than the one you’re in.

This is a good time to ask whether some competing ideas really do deserve more of a look, whether they’re “value” stocks like banks or retailers, or perhaps some high-yielding California tax-free municipal bonds.

A “better idea” right now may be to consider just how well-diversified your total portfolio is.

* You wouldn’t buy it at the current price. This is an old rule: If the stock is too high for you to justify buying at this price, how come you’re holding on to it?

Some investors, however, may argue this isn’t practical. If you’ve paid a lot less for the stock, maybe you don’t care that the current valuation is substantially higher.

But if you certainly wouldn’t buy it today, and you’ve got a big paper gain, at least determine how much of that gain you absolutely want to keep. If the stock begins to fall toward that price, the sell decision may become a lot easier.

* Your gut instinct tells you to sell. This may be the best reason of all.

Talking with many individual investors over the years, my experience is that they’re usually most successful when they follow their gut instincts.

Trust yourself: If something is telling you to sell, do it.

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Tom Petruno can be reached at tom.petruno@latimes.com.