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An old Wall Street saw has it that nobody ever went broke taking a profit. Actually, that saying isn't 100% correct. You won't go broke so long as your profits are always bigger than your losses.
When a stock is going the right direction, your decision making is not as easy. How long should you hold? Here's a specific rule to help boost your prospects for long-term stock investing success: Once your stock has broken out, take most of your profits when they reach 20% to 25%. If market conditions are choppy and decent gains are hard to come by, then you could exit the entire position.
But if the market winds are favorable and your stock appears to be still in the early stages of its run, then go ahead and sell at least part of the position, such as a third or half, to lock in gains. Keep watching the stock's behavior to decide how to handle the remainder.
IBD founder and Chairman William O'Neil formulated this rule in the early 1960s, when he noticed that most stocks broke out of well-formed bases, ran up 20% to 25%, then corrected sharply in price. O'Neil learned to sell on the way up. And so have many readers since the newspaper launched in 1984.
The exception to this sell rule? When a stock runs up 20% or more in one, two or three weeks after breaking out of a sound base, and the market is in a healthy uptrend. Hold it for at least eight weeks to see if it can be held for a bigger long-term gain. Stocks that get off to a fast start often yield the biggest profits.
"Those could be your big leaders and should be held for a potentially greater profit," William O'Neil wrote in "How to Make Money in Stocks."
Here are more reasons to take many gains on the way up:
One, all of your stocks aren't going to be huge winners. Many, probably most, of the stocks you buy in a bull market are going to be profitable, but won't become among the best winners of the decade.
Two, you will have inevitable losses along the way, which should be cut at no more than 8%. So you can lose twice and win once and still be ahead.
Three, taking a profit feels good. It helps your confidence when you move some cash to the realized capital gains column in your brokerage account.
Four, money committed to a stock going through a monthslong correction is dead money. That cash could be applied to another stock that's rising and even stronger than the one you just sold.
Five, once a stock's correction ends, there's no assurance it's going to continue to be a big winner. You may have sat through that correction only to find your choice is a mediocre performer.
Six, you can always buy a stock back if it presents another valid buy point.
In 2013, Las Vegas Sands broke out of a cup-with-handle base with a 58.21 buy point during the week ended Sept. 16. Over seven weeks, it gained 26%, a good time to take profits (1).
It paused to build a six-week flat base with a 73.59 buy point (2). Sands broke out again in the week ended Dec. 6, 2013, but the gain was limited to 12%. The stock pulled back and surrendered all of those gains.
A third breakout from a faulty base failed almost instantly. By September 2014, Sands retreated all the way back to its early breakout price of 58.21, then continued to fall sharply 2015 as China's government began to clamp down on big spending in Macau, the only place in the country where gambling is legalized.
By January 2016, shares in Las Vegas Sands dropped to a low of 34.55, down more than 60% from the 88.28 peak in March 2014.
The problems with the third base and the sharp decline had foreshadowed a slowdown in Las Vegas Sands' fundamentals. Earnings per share showed excellent growth, starting with a 48% jump in the second quarter of 2013 and followed with increases of 78%, 33%, 37% and 31% in the next four quarters through the second quarter of 2014. Revenue also grew at a hot rate over the same period.
But in the second quarter of 2014, a 12% top-line increase showed a marked slowdown from gains of 26%, 32%, 19% and 21%.
When a company has logged four quarters or more in a row of fantastic profit and revenue gains, you can expect a material slowdown to occur. Indeed, Sands saw revenue dip 1% to $3.53 billion in the third quarter of 2014. Earnings rose only 2% to 84 cents a share after catapulting 78% higher in the year-ago quarter.
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