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Instead of focusing on stock prices, here’s a better way to determine when to sell.
Q: When I buy stocks, should I have a price target in mind where I’m willing to sell my shares and walk away?
I’m not a fan of price targets, and I’ll share a personal story of why.
A couple of years after Tesla’s (NASDAQ: TSLA) initial public offering, I bought shares of the then-unproven company for just under $35. I said to myself, “If the stock doubles, I’ll sell.” Not long after I made my investment, the Tesla Model S shocked the world when it became Motor Trend magazine’s Car of the Year in 2013, and the stock shot up so quickly that I didn’t have time to sell at double my purchase price. I ended up unloading my shares for about $85 each.
Today, Tesla stock is worth more than $370 per share. To say that I sold too soon would be an understatement.
I learned the hard way that instead of setting a specific price target, it’s far more important to ask yourself whether your reasons for initially buying the stock still apply, and if they do, whether the current share price is justified.
In the case of my Tesla investment, not only did my initial reasons for buying still apply (game-changing automotive technology), but the company had gone from a niche player with the Tesla Roadster to a viable mass-market electric car manufacturer. Not only was the higher share price justified, but due to the success of the newly released Model S, the company’s future looked brighter than ever.
Price targets can be a useful tool in the context of “I think Company X is really worth $50 per share, but it’s trading for only $30.” But the reasons for selling a stock should go far beyond the movement in its share price.
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