If You Wouldn’t Buy It, Don’t Hold It
Analysts always have three recommendations: Buy, Hold, or Sell. I understand buying, I understand selling, I cannot fathom a middle ground. A stock is either great or it’s not, that’s it. If a stock is merely good, sell it and buy one that’s great.
The only reason to hold a stock is the only reason to buy it: It’s trading for less than it’s worth. If it’s not trading for less than it’s worth, get rid of it and find one that is. I read recommendations all the time for a middle ground, where it’s not quite a buy and it’s not quite a sell. That’s absurd. I don’t want mediocre, I want amazing. Anything less is a crystal clear sell.
To be fair, I have found two reasons to hold rather than sell, but they have nothing to do with how well the stock is priced. In taxable accounts, it is sometimes reasonable to hold onto a less-than-amazing stock for tax advantages. It may be helpful to carry the capital gain or loss into the next tax year where it will have a more favorable impact on your taxes. The other reason is to increase your holding period into the ‘long-term’ tax holding period which reduces the capital gains tax based on how long you have held a position. However, at times when there is no tax advantage, or they are in a tax-free retirement account, ‘Hold’ is synonymous with ‘Sell’.
Far too often I see people considering what price they purchased a stock when they determine whether it is worth selling. This is hazardous to your portfolio, they don’t care one bit where you bought them at. Often people confuse ‘Buy-and-Hold’ with the idea that if a company was great when they bought it, it will surely come back to where it was and all they have to do is hold on long enough to realize the gains. Like flipping a coin, the only impact a stock’s historical price has on its future price is psychologically projected by the observer. Because of that, I have a better way to think about Buy-and-Hold: Buy only what you would hold, and hold only what you would buy.
If you had to start over and there was a stock you wouldn’t buy tomorrow, you shouldn’t be holding it today.
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