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The Market NZZ

When Should You Sell? Twelve Rules Show the Way

Buying stocks is easy. But when should you sell? If you buy at the right time, it is almost never. But sometimes you have your back to the wall. There is no holy grail, but there are methods to increase the probability of being right, preserving your capital and making money. That is enough to be successful. Here are my twelve sell rules.

The best offense is a strong defense.

A lovely sports cliché. The funny thing about clichés is that they are usually true. The best example is Greece, who won the 2004 European Football (Soccer) Championships because they played an incredible defense and somehow always scored a free-kick header goal. The same goes for investing. Without a strong defense to protect you from big losses, you cannot win big in investing.

Since I love statistics, here are three things to keep in mind when picking stocks. First, over the last 100 years, only 4% of stocks have been responsible for the total gains of the entire stock market. Second, 48% of all stocks are just equivalent to the performance of a one-month US Treasury Bill. Thirdly, the point of no return begins at around –30%, i.e. the burden of negative performance begins to have an exponentially negative impact on your capital.

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Chart 1: The law of big numbers, the point of no return, starts at -30%

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