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Book Review

It's When You Sell That Counts
by Donald L. Cassidy
reviewed by Marco den Ouden

Originally published at About.com - March 29, 2001
This review is also available at Stocknowledge

"It ain't over 'til the fat lady sings!" goes the old baseball saying. The market version says "It ain't a profit until you sell!" And while much is written on stock selection, precious little is written on selling. Donald L. Cassidy, senior analyst with Lipper Analytical Services, sets out to remedy this neglect with this fine book.

The mantra from most circles is "buy and hold for the long term". Tell that to the folks who bought Nortel at $120 - a price level it may not see again for many years. Or late buyers of Amazon.com or Yahoo or countless other new economy stocks. The blunt fact is that markets have their ups and downs. Individual stocks are even more prone to wide fluctuations. And without a selling plan, all your paper profits could well go up in smoke, as they did for many investors since March 2000.

In a chapter called "Rethink That Old Buy-and-Hold Religion," Cassidy argues that the bias towards buy-and-hold is based on the long term bull market we've had since 1982. Most of today's young analysts and fund managers have not seen a long two-year bear market. They didn't experience the 1973-74 or 1977-78 slumps, let alone the massacre of 1929.

Students of market history know that it took until 1954 for the Dow Jones Industrial Average to recoup its top in 1929. The Japanese Nikkei is still trading at less than half its 1989 peak and is once again approaching the low set in 1995. Many think it may be years before the NASDAQ recovers its former highs.

As Cassidy points out, fundamentals drive stock values, and fundamentals change. The buy-and-hold philosophy assumes that a company that has historically grown will continue to do so. It also assumes that the company's growth rate will remain constant. And thirdly, it assumes negligible fluctuations in interest rates with negligible recessions. "Brave suppositions indeed!" he avers.

He points out that even such a stalwart blue chip as IBM at one point suffered a 75% drop in price. And Big Blue was lucky. It is the only survivor of the seven largest computer manufacturers of 1984. Other former market leaders - Apple Computer, K-Mart, Levitz Furniture, Polaroid and Winnebago among others - suffered similar fates.

Clearly Cassidy thinks a buy-and-hold approach is similar to being an ostrich with your head in the sand. He believes a pro-active approach to investing is far sounder.

Psychological Barriers to Selling

The book is divided into four sections, each looking at a different part of the selling puzzle. The first section - Roadblocks to Profitable Selling - looks at institutional and psychological roadblocks. These include the reluctance of broker analysts to issue sell recommendations, an institutional bias towards buy-and-hold, comfort zones, commission phobia and other rationalizations.

These factors are expanded on in the second section - Developing the Proper Mindset for Profitable Sales. The successful investor must learn to acknowledge mistakes, take his lumps and move on. He must also learn to recognize and avoid being drawn into the psychology of the crowd. The investor must think independently. Cassidy explains how to turn denial into action.

Perhaps one of the best insights that Cassidy offers is that "the hold decision ought to be a decision." It should be an active choice, not a passive product of neglect. It is the equivalent of buying a stock now without the commission. Your holdings should be regularly reviewed with this in mind.

Other suggestions - forget your cost price and separate the stock from the company (e.g.: selling Nortel is not unpatriotic!)

Cassidy goes on with a section on "Mastering the Contrarian Approach." The essence of this approach is to buy when everyone else is selling and sell when everyone else is buying. He discusses the telltale signs of an over-exuberant market - many of which were evident at the peak of the NASDAQ and Internet boom. Stock market news on the front pages of the newspaper. People talking about stocks over lunch more than usual. Numerous IPOs, many doubling or more immediately. General bullishness. The expectation of historically unrealistic returns. The downplaying of risk. And so on.

Cassidy spends considerable time discussing such psychological issues as emotions, self-discipline, and greed. "Sell when it just feels so good!" he says.

Selling Tactics

Cassidy concludes with a section on selling tactics. He goes into some detail discussing market stocks versus loner stocks, above-market orders as an alternative to stop-loss, the different approach to take with penny stocks, interpreting the significance of good and bad news and what to do in a crash.

He concludes with a Hold-Versus-Sell Decision Check List. Twenty questions focus your attention on the stock at hand to help you decide whether or not to sell. The first five are asked at the time of purchase - date, price paid, price target, target date, and why the stock is expected to go up. The rest of the questions, such as "Are you currently more, less, or equally excited and sure about the company versus when stock was first bought?" help to focus on the current status of the stock. Most have to do with re-appraising the stock in light of the assumptions made when the stock was bought.

But the ultimate test is this - would you buy the stock today? Cassidy phrases it even more persuasively calling it the "Mother Test". Would you recommend the stock now to your dear old gray-haired momma?

"Your mother might forgive you an error, but you will still feel bad for having made it," says Cassidy. So "treat yourself as well as you would hope to treat Mom!" Touché!

This review necessarily only gives an overview of the valuable insights offered by this excellent book. It contains much more depth than I can give justice to in such a short space.

If you're one of the many people who made great paper profits in the first quarter of 2000 only to watch them dwindle away to nothing or a loss, you need to read this book! If you lost money on Nortel, you need to read this book! In fact, all investors can profit from Donald Cassidy's insights into stock selling strategies.


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