Key to Investing Success: Knowing When to Sell Your Stocks

Four years into my experiment to see whether an educated amateur stock picker could beat the market, my Practical Investing portfolio has become an advertisement for index funds. After nearly three years of staying even with, and occasionally outpacing, my benchmark--Vanguard Total Stock Market ETF (symbol VTI)--my stocks slipped in late 2014 and, frankly, stunk in 2015. The portfolio, which was originally worth $200,000 and is now valued at about $280,000, has returned an annualized 8.4% since its launch in October 2011, compared with an average of 14.7% per year for the ETF.

To be sure, these are tough times for value investors (which I consider myself to be). Not long ago, CNN Money led a story like a children's book to describe Warren Buffett's recent performance: "Warren and the terrible, horrible, no good, very bad year." Among Buffett's top holdings are American Express, International Business Machines and Wal-Mart Stores, all big losers in 2015.

One manager's redemption. Meanwhile, FPA Crescent, comanaged by Steve Romick, another of my investing heroes, is trailing Standard & Poor's 500-stock index for the fourth straight year. True, it's a bit unfair to compare Crescent, a member of the Kiplinger 25, with the S&P 500 because Crescent is not a pure stock fund. Still, Romick strives for stock-like returns and has beaten the market over the course of Crescent's 22-year existence. His greatest triumph came after Crescent lagged the market badly during the late 1990s, when dot-coms and large-company growth stocks were all the rage. Then came the 2000-02 bear market, and growth and tech stocks cratered. The S&P 500 fell three years in a row, but Crescent made money each year.

I mention this not to imply that my portfolio will rise like a phoenix, as Crescent did. Rather, it's to suggest that tracking the progress of long-term goals using short-term measures doesn't make sense. We tend to measure performance over the course of a calendar year. Yet to gauge properly whether a strategy is working, you need to measure results over market cycles--from one peak to the next, with a bear market in between--not "lunar cycles or any other arbitrary metric," Romick says.

Over the past few years, growth has been in vogue, meaning investors have favored firms that typically command high, sometimes exorbitant, valuations. If I tried to buy those kinds of stocks in pursuit of beating an index over the short run, I might lose sight of my long-term goal of buying high-quality companies at fair prices.

That said, it pays to look at your progress against the market every so often and evaluate what you're doing right and what you're doing wrong. Frankly, although I'd like to think I have done some things right, a critical look at my performance reveals a glaring shortcoming: I hate to sell.

Knowing when to sell is as important as knowing what to buy. I own several stocks I should have sold in recent years, but my inherent optimism and a stubborn adherence to a buy-and-hold philosophy prevented me from pulling the trigger. I should have dumped Acacia Research (ACTG) two years ago, when Congress began to scrutinize outfits, such as Acacia, that help businesses protect their patents. When oil prices plunged and it became clear that they would stay low for a long time, I should have sold my energy stocks. When Latin American economies started to slide, I should have let go of Panamanian airline Copa Holdings (CPA). As far as these stocks go, I'm still weighing my options.

Many pros advise investors to review each holding periodically and ask themselves, "Would I buy that stock today?" If the answer is no, it may be time to unload. I'm taking that advice to heart. My investing resolution for 2016 is to be a better seller.

Kathy Kristof is a contributing editor at Kiplinger's Personal Finance magazine.