I sold some stock the other day. Not enough that I’m about to retire or anything, but enough that I had to give it some thought before pulling the trigger.
When trying to figure out whether to sell or not, I actually came to the realization that I had to figure out how to figure out whether to sell or not. In other words, I needed to come up with a way to quantify the decision. So I came up with what I call the "regret index". It’s very simple, and it works like this:
- Calculate how much you will make at the price you think you can get. Call this "real value".
- Calculate how much you would make at a price high enough that there would be no question in your mind as to whether or not to sell. Call this "potential value".
- Calculate the difference (potential value – real value). Call this "floating value".
Now imagine you were walking down the street with exactly the floating value in your pocket, and you just happened to get mugged. Would you feel:
- Just glad to be alive.
- Mildly inconvenienced.
- Very upset.
The number you chose indicates your regret index. Obviously the higher the number, the more you should think about waiting to sell. If your regret index is a 1 or a 2, you’re probably safe to place the order.
Although the regret index is highly scientific, and was painstakingly devised, if it doesn’t work for you, here’s another approach. Think about:
- What you could do with the floating value at some point in the future.
- What you can do with the real value now.
With any luck, your gut will tell you exactly what to do. If not, your wife probably will.
As you can see, I’m clearly no financial wizard, but both of these approaches actually helped me quite a bit. In the past, I’ve tended to try to squeeze every last penny out of my stock, however after doing the math, I came to realize that with the amount of stock I have access to (again, we’re not exactly talking about entire fortunes here), a few cents, or even a few dollars, didn’t make that big of a difference. In some cases, it wasn’t even worth the stress of constantly refreshing E*TRADE in my browser, not getting any work done, and waking up at 6AM here on the west coast to watch the market (very little, I have found, is worth getting up at 6AM).
The last bit of advice I can offer is to never calculate the regret index after the fact. In other words, after your stock is gone, never calculate what you could have made if you had held on to it. Keep yourself ignorant. Focus on not doing the math. Blast music and stare into a strobe light if you have to. Believe me, absolutely no good can come of it.
Surely the regret index works the other way too what if you hang on and the stocks go down?
I usually do the following:
1. buy the stock
2. decide how much profit on it is my goal
3. decide if I want more if it goes too low or if I want to sell (usually sell since i am not a day trader and want to cut my losses)
4. based on the above set up triggers for all of my decisions and never look at them again unless I know something has changed.
Automatic Millionaire is a good book – one section talks about how even stock geniuses should not manage their own funds because they have emotion involved which means when the stock goes high, you wait for it to go higher, and when it goes low, you wait for it to go higher. As you see the problem – you never sell. It has worked well for me so far, I would have quite a bit more cash now in some situations but at least I got out ahead. Could have happened differently, on top of that I might still be holding on to those stocks still and they could fall tomorrow.