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Individual investors who know how to manage a winning stock will — over time — outperform the stock pickers who have no sell strategies.
Notice that the above sentence said "strategies." Plural is the right case. The investor must have several tools related to selling.
The weekly stock chart of Palo Alto Networks(PANW) illustrates several sell strategies that could've been used in the stock's six-month run.
Tool No. 1: Cash in at a 20% profit. An IBD-style investor could've bought the stock when the large cap cleared a 156.95 buy point in January. The first offensive sell opportunity emerged the week of March 9. The stock reached the 20% profit-taking level.
Generally, IBD advises investors to sell a stock when the profit reaches 20% to 25%. But at Palo Alto's 20% profit level, an argument could've been made for holding for at least a 25% gain.
Why hold? Palo had closed high in the week's range for four consecutive weeks, which is bullish. Also, the relative strength line, which gauges a stock's performance vs. the S&P 500 was rising. A rising RS line points to outperformance.
Tool No. 2: Cash in at a 25% profit. Palo reached the 25% profit level in the week ended April 6. This was the second opportunity for offensive selling.
Yet the stock was holding comfortably above its 10-week moving average. Holding the stock was reasonable.
Tool No. 3: Book profits on the first defensive sell signal. The warning occurred in the week ended June 8. The stock dropped almost 5% in heavy volume. Palo closed low in the week's range and fell below the 10-week line briefly.
If an investor exited on the 5% drop, a 27% profit could've been booked.
Those who ignored the first defensive sell signal could've booked a peak 39% profit in mid-July. However, holding the stock would've been tough. Beginning in June, Palo's action became erratic.
Tool No. 4: Quit thinking and sell: If an investor still held on, two more sell signals flashed.
Palo Alto fell almost 2 points under its 10-week line in the week ended Friday and closed low in the range. This yelled, "Sell!" A 32% profit could've been booked.
The second sell signal came when the stock dived further under the 10-week line. A 27% profit was possible.
Skeptics might argue that buy and hold would've worked better than taking the 20% to 25% profit. The argument overlooks three realities.
First, taking the early profits creates a calm process. That's important to an investor's psychology.
Second, early profit-taking frees up money for fresh opportunities. In a vibrant stock market, stringing together three stocks that score 20% gains (for a compounded 72% profit) is easier than finding one stock that will go up 72%.
Third, early profit-taking helps an investor avoid greed, which can be deadly to portfolio management.
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