Recent events with my club and some comments on a TV business news program brought up the issue of when to sell a stock. This is an issue for me personally, my club and for many investors. The decision to sell is usually harder to make and execute than the buy decision. I think part of this is the natural tendency of humans to avoid loss. This may be a financial loss or the loss of a company from our portfolio. How do you and your club get over this tendency? How can we as investors make better sell decisions?

A book I recently read might be a help in this matter. The book is The Checklist Manifesto by Atul Gawande. Dr. Gawande is a surgeon and the book details his findings on how simple checklists improve surgical results in hospitals in both developed and developing countries. Included are several stories from money manager friends who applied the checklist process to their investment decisions with good results. So I thought why not try a StockCentral community effort to come up with ideas for a checklist of sell criteria.

Here are some ideas for criteria I think belong on a list of sell signals:
Upside/Downside ratio on SSG is less than 1.
Return on Equity decreasing
Sales growth decreasing significantly below original estimates
Earnings growth decreasing significantly below original estimates

What are your thoughts on other criteria or processes that should be completed that would help make better sell decisions? Or as Doug Gerlach mentioned in a recent webinar, maybe a better way to express this is – what items should be checked for a REPLACEMENT decision. Maybe his terminology can shift the brain away from the “loss” picture related to a sale.

Russell Malley
StockCentral Community Leader

I agree that a checklist can be useful for both buy and sell decisions. I concentrated on the sell decision because investment clubs and individuals tend to have more trouble with sell decisions than with buys. Since many on this site use the Stock Selection Guide as a tool, it essentially has some checklist items for buy decisions such as pre-tax profit, reasonable sales and earnings growth. The Upside/Downside ratio also is a checklist item as a measure of a reasonable risk profile.
Your practice of using more than one source of information also resonated with me. I have a big interest in neurobiology and much new research here overlaps psychology and decision making processes in the brain. One of these is the confirmation bias. Humans tend to put more weight on information that confirms their (often unconscious)bias. Using more than one source of information helps decrease this bias.
From your post it appears you use the same set of criteria on your check list for buy and sell decisions. I take it that means you use a decreasing score on your checklist as a prompt to consider selling. Is that true or do you have some other criteria you add for sell decision?
One other thing I learned from my reading on brain function in decision making that applies to your checklist is how reducing multi-faceted decisions down to fewer variables helps. Research indicates the logical decision making portions of our brain can only handle about 5 variables well. Over that amount and the logical brain does not work as well. So by assigning a numerical value to items on your checklist and combining them helps reduce the variables the logical brain needs to consider.
I am curious if you have some criteria you consider more important. Can these get more than 1 point and therefore are weighted more than other criteria? For instance, can growth score up to 2 points while stability has a maximum of 1?
Thanks for sharing your process. I think it can help us all become better investors when we share our thoughts.

Russell Malley
StockCentral Community Leader