We all love to see our stocks soar to incredible highs. As investors, when we pick winning stocks that pile on the gains, it gives us an amazing sensation of euphoria, but if we are not careful, that euphoria can wind up costing a lot of money.
I will not underestimate the importance of buying stocks at the proper time. There is an art to knowing when to get into a particular stock, but I believe the much harder decision to make is timing the exit. If you sell a winning stock too soon, you lose out on potential gains… hold on to it too long and you wind up giving back a lot of your prior profits.
The reason why selling becomes so difficult is that our human nature allows emotion to come into play. Losing positions spark the feeling of denial that leads us to believe the stock will come back. After all, they always do don't they? The other side of the coin is the emotions that kick in on winning positions. It gives us a feeling that we can do no wrong, and inflates our belief that the stock is perfect. Unfortunately, this is a problem. All stocks have a limit as to their value, and if we let our emotions play too large a role in our decision-making process, we can sometimes forget this rule and hold on to positions longer than we would have otherwise.
A good way to remove emotion is simply to looking at a stock's valuation. When valuations get too high, it indicates that perhaps the market has become too bullish on the stock, and the end of its run is near.
This week we are going to screen for stocks with high valuation that we believe may be ready to head lower.