When to fold 'em? Stock selling strategy

[rmendpara]

'Sup.

Anyone have thoughts on what a viable selling strategy is for stocks? Do you have any experience on what works well, what does not work so well, and ideas on how to prevent emotions from getting too involved in the picture? Perhaps any links to others who have written about the topic?

I have considerable exposure to index funds through 401k and IRAs, but since I'm still accumulating assets, I generally just redirect contributions if things get out of whack. Eventually, I'll probably re-balance one every year or two.

In this situation, I'm referring to individual stock portfolios. I have a decent mix of stocks that pay dividends vs. ones that I bought as values, but a few large gains have started bringing me to question when (if ever?) to sell all or part of a position.

If it helps, the names in question today are MO (~4.5k), AAPL (~4.5k), although I'm trying to think more about an overall process for how to consider selling rather than these two stocks in particular. Average new purchases are ~2k today, and total investments ~170k (so the larger positions are ~2.6% weights). Oldest position is MO at almost exactly 3 years old, and since mid-2014 I no longer reinvest dividends directly (i.e. into the same stock that paid out). I have some losers too, so not only a selling strategy for winning stocks.

Any differences in opinions whether it's in a taxable or tax-deferred account? Size as % of total portfolio? Other metrics?

So, few ideas for the world to think about:
1) Sell when stock price doubles
2) Sell when stock price halves (downside)
3) Sell when dividend increases by 50% since inception
4) Never ever never ever sell!!!
5) Something else?

Hopefully I didn't ramble too much. Appreciate the readership!

[Scandium]

1-3 seem completely arbitrary. I don't see how that makes sense.
If your ok with long term underperforming your index funds with more risk then don't sell. If you're ok with that then keep them. I have a couple stocks, but I'm fully aware of the foolishness of it and it's less than 2% of NW, probably even less now.

[clifp]

Selling stocks is as much of an art as a science.

In taxable account.
Always sell losing stocks before you have held them a year or at the end of the year in order to tax advantage of harvesting tax losses.
I almost never sell a winning stock until I have held it for a year and day (long term capital gains).

When I buy a stock I set a price target. (I use Morningstar and I generally but not always use their targets.)
When I stock hits the target, I re-evaluated the target, if something has happened in the company that is better than I expected I'll move the target up.
I also adjust the target based on the over all market. So If I buy a stock at 50 with a target of 75, and it hits the target but the rest market moves up say 30%, I'd be inclined to move my target up another $10.
A big factor for me in selling is determining is there another stock or investment that I feel confident will out perform my current holding on after tax basis.  So if I bought 500 shares @$20 with a $50 target, I've raised my target to $70 and now I should sell it.  I'll owed $10/share in taxes (70-20) * (15% Fed+5% state).  If I don't have a good investment out there for $30,000 I often don't sell.  As I result in my taxable account with 20 stocks/EFT I typically only sell 1-2 a year.

In a tax deferred account, since taxes don't matter, I tend to be pretty good about selling when stocks hit a target, or on the downside when the companies or market situations changes. (I haven't had too much of the downside recently other than international ETF).  This makes the turnover of my roughly 30 positions in my IRS about 3-6 companies a year.

[hodedofome]

Unfortunately most people, and most of the investment literature, only deal with what stocks to buy and when to buy them. They almost never mention position sizing and when to sell. It's a shame and we should really focus more on those 2 topics. IMO this is the importance of a trading system, in order:

1) The markets/stocks you are going to trade
2) Position Sizing
3) Exit strategy
4) Entry strategy

You'll notice that entries are the least important to me. You can have a completely random entry system that makes a decent amount of money, as long as you get the first 3 nailed down. This blows people's minds but it's true. Grab a quarter and do a coin flip, if it's heads you'll go long and if it's tails you'll go short. Completely random. Use SPY as your trading vehicle (tight spreads, superb liquidity and easy to short). Enter and put your stop loss $1 away from your entry, and make your profit target $3 away from your entry. Although I would never trade this system (it will have horrible drawdowns), you'll be amazed that it actually makes money over enough trades. If a random entry system can make money, then just how important are entries in the first place? You can make it even more intelligent by using a trailing stop (like a trailing ATR stop) and let your profitable trades run as long as they continue to go in your favor, boosting your profitable trades considerably.

Van Tharp has some good info on position sizing in his books, Ralph Vince has some as well but I haven't read any of this books, just Tharp's. Most of the investment literature simply mentions diversification as the position sizing strategy, hold 10-100 stocks (at equal weight???) and don't worry about it further. But most of the really successful investors didn't hold their positions at equal weight. For their high conviction investments they may have put 25-50% of their portfolio into that one trade. And it made them a ton of money. I don't know how you could quantify that style into a repeatable system however.

Some things that come to mind that would be objective and take the emotions out:

1) A trailing stop like a moving average, trailing ATR stop, or some other volatility-based trailing stop
2) A system that automatically sells and buys cheaper/better stocks like the Magic Formula
3) A system that automatically sells and buys stocks with better momentum
4) For dividend investors, sell a stock if they ever cut the dividend
5) For growth investors, sell a stock if the story changes, it stops growing earnings, management begins to reinvest profits poorly (deworsification), is the management executing on their plan to grow? They usually say what they plan to do, if they aren't doing what they said they would do, that could be the signal.
6) Don't make it an 'all or nothing' deal. If the price doubles, take off 20% for each time it doubles. This allows you to keep a good chunk of your investment while taking some money off the table if it reverses back down. I believe this is what David Merkel at alephblog.com does. You can search for his posts where he gets into more detail, but the basics are here http://alephblog.com/the-eight-rules-of-my-investing/