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By Jeremy Glaser and Matthew Coffina, CFA | 06-18-2013 10:00 AM

When's the Right Time to Sell a Stock?

It might be never, but investors should focus on how share price relates to a company's intrinsic value and also consider their alternatives before making a move, says StockInvestor editor Matt Coffina.

Jeremy Glaser: For Morningstar, I’m Jeremy Glaser. One of the biggest questions that stock investors have is when is the right time to sell? Here to shed some light on this subject is Matt Coffina. He is editor of Morningstar StockInvestor.

Matt, thanks for joining me today.

Matt Coffina: Thanks for having me, Jeremy.

Glaser: So, what are the key things that investors should keep in mind before exiting a position? Is just a big sell-off in the stock enough to maybe raise a red flag knowing that you should get out? What are those key factors there?

Coffina: I think the key thing to keep in mind is how a stock's price compares to its intrinsic value. This is true both on the upside and the downside. Say some news comes out that a company's margins are going to be much higher than other investors previously anticipated, than you previously anticipated, and the stock runs up 20%. Is that a time to sell? Well maybe the fair value estimate on that stock is actually up 30%, in which case it could be even bigger bargain than it was before the news was released.

Similarly on the downside, it depends on why the stock went down and what the new fair value estimate is. If intrinsic value doesn't change and the stock goes down for no good reason, that might actually be a time to consider buying more rather than selling just because the stock is down.

Glaser: So what would you think about things like a stop-loss order, and say, "I am definitely going to just cut my losses after 20%," or something like that?

Coffina: I think that's not a good strategy in general. [Noted investor] Peter Lynch once said, "Show me somebody that has a stop-loss order of 10% below their purchase price, and I'll show you someone that's guaranteed to lose 10%." Stock prices move for all sorts of reasons. We have flash crashes every once in a while where the stock price is down for no reason at all. The stock price might recover within an hour. But if you had a stop-loss order sitting out there, it's quite possible that your shares will be sold at that low price, and then you won't have an opportunity to buy back.

Similarly, stocks often make their biggest moves after hours when earnings are released and other news comes out. In those circumstances, a stop-loss order won't help you at all. The stock could open up 20% down, and then a 10% stop-loss order is going to cause you to sell your shares for 20% less. But it's not really going to save you any money.

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