When should you sell a stock?

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Peter Lynch is arguably one of the best investors of all time. From 1977 to 1990, the thirteen years during which he managed Fidelity's Magellan Fund, the fund was up over 2,700 percent. Pretty amazing returns indeed!

 

But what was his secret—how did he do it?

 

One thing is for certain: The amount of research Peter Lynch put into each investment is absolutely incredible. What's even more incredible is the amount of time people have spent researching Peter Lynch himself. Folks all over the globe have combed through Lynch's career, investing habits, and his life. Numerous books have been written and countless interviews have been done, all with high hopes of figuring out the keys to his success.

 

One of my favorite interviews on Lynch was done by PBS and titled Betting on the Market. During this interview, Lynch explained one of the secrets to making big money on Wall Street: "Well, I think the secret is if you have a lot of stocks, some will do mediocre, some will do okay, and if one or two of ’em go up big-time, you produce a fabulous result. And I think that's the promise to some people. Some stocks go up 20–30 percent and they get rid of it and they hold on to the dogs. And it's sort of like watering the weeds and cutting out the flowers. You want to let the winners run. When the fun ones get better, add to ’em, and that one winner, you basically see a few stocks in your lifetime, that's all you need. I mean, stocks are out there. When I ran Magellan, I wrote a book. I think I listed over a hundred stocks that went up over tenfold when I ran Magellan and I owned thousands of stocks. I owned none of these stocks. I missed every one of these stocks that went up over tenfold. I didn't own a share of them. And I still managed to do well with Magellan. So there's lots of stocks out there, and all you need is a few of ’em. So that's been my philosophy. You have to let the big ones make up for your mistakes. In this business if you're good, you're right six times out of ten. You're never going to be right nine times out of ten. This is not like pure science where you go, ‘Aha,’ and you've got the answer. By the time you've got ‘Aha,’ Chrysler's already quadrupled or Boeing's quadrupled. You have to take a little bit of risk."

 

Cut Your Weeds and Free Those Dogs!

 

Two hundred seventy-five words of pure delight! With the many valuable tips Lynch provided in that quote, it warrants reading over and over again. Let's pick apart a few of them.

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Face it, we all make investing mistakes. Some are big mistakes and some are small. And while they all hurt, it's part of the investing game and something we all have to get used to. As Lynch put it, even the best investors are only right six times out of ten. Which means even if you’re a good investor, it’s likely that 40 percent or more of your investments will fail to beat the market. The key here isn't necessarily focusing on how many bad decisions you've made, but more so on identifying those bad choices and acting on them quickly.

 

The faster you can discover and remedy bad investments, the quicker you can potentially avoid greater losses and put that money to work on your flowers that are performing well or investing in prospective new winners.

 

Think about this. How many times do you find yourself holding a lackluster stock with the hope it will eventually come back. In reality, most losing stocks are performing badly for a reason, and many times some of these "falling knives" will never fully recover. The question you have to ask yourself is: Could this money be spent on a better investment?

 

Water Those Flowers and Plant New Seeds!

 

"You have to let the big ones make up for your mistakes."

 

Good advice don't you think? One of the biggest mistakes I constantly see investors making is selling a winning stock way too early. As Lynch said, "You want to let the winners run." The power of holding on to your winners is that usually winners win. Even during mishaps or uncontrollable events, winners always seem to find a way to regain their vigor, zeal, and prowess, eventually returning to their winning ways.

Say you're an average investor and 40 percent of the time your investments perform very well. Guess what? That means, of all the stocks you are holding, 60 percent or more could be losers. But here's the good news: Holding those winners will more than make up for your losers. If just one of them goes up tenfold, you'll likely at least recoup all your losses. If two of them go up big, you're sitting pretty.

 

Here's the best news of all. There are a lot of stocks out there that produce incredible returns of ten-, twenty-, fifty-, and even one hundred fold. Lynch himself admitted he found more than a hundred stocks during his tenure at Fidelity that went up more than tenfold, and guess what, he owned none of them and still produced fabulous returns. That should tell you something—there are lots of high-quality stocks ripe for the picking.

 

At the Faith-Based Investor we're dedicated to finding high-quality stocks we know you will be proud to own. We do this by finding companies that meet our clients moral preferences and have good upside potentia

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