March 2, 2010 - Many stocks have rallied significantly over the last year. In fact, if you bought almost any stock on March 9, 2009, you would have made a great deal of money. That was the low point for almost all stocks as the market gave in for its final capitulation and beat most of us over the head one last time with the heaviest frying pan it could find.

But of course there was more than hope. There was the American spirit, American energy, American capital. It all came together and started to lift the economy. How far it can take it at this time is unknown. There are samples of good news such as car sales in February for the U.S. automakers. Ford is even hiring more workers in its Cleveland plant to fill orders for the hot new 2011 Mustang, sporting a V-6 engine and more than 300 horsepower. Innovation will drive us forward, create new jobs and heal the economy. The question is when.

So we don't know the future, but we can see where our stocks are today. Some of them are most likely up, others still haven't joined the party. Should you sell your stocks that have had great gains in one year or less? Should you wait for a year before selling because capital gains taxes are lot less than income tax rates?

First rule of selling: never let taxes rule your investment decision making. That's the tail wagging the hippopotamus. If you own a stock that has done better than expected, is trading at a price that is hard to justify based on simple valuations such as P/E ratio, Price To Sales ratio and/or several others, then it's a stock vulnerable to bad news. Investors have bid up the stock in anticipation of good news, better than anything already published. If they are not rewarded with better than expected earnings or a new large contract or some other positive event, the stock is going down, hard. And if you owned the stock 350 days ago and are waiting for that good news to happen and don't sell because of taxes, you will have saved the tax differential between capital gains and income rates and lost a whole lot more because the price cratered.

When you've made 600% on a stock, you need to be realistic. There aren't many stocks that return returns like that. Prudent investors will think about selling half of what they own before the announcement (remember that a lot of a stock's price run up comes from the anticipation of good news, so even if there is approval in this case the stock may sell off when it finally happens). If the announcement is positive, the stock may keep going or it may stabilize for a while until actual sales begin. Or it may sell off a little. In either case, you've booked gains, no matter the tax angle.

Ultimately, that's what makes a good investor: booking gains. I was talking with a friend the other day. He had a stock that went from $4 to $14 and wondered if he should sell it. He said he'd most likely follow his usual pattern: watch it go to $18, not sell it, then watch it go to $3 and then dump it. Sound familiar? This is not successful investing.

Be realistic about a stock. None goes ever upward, but they can go to nothing. When it trades at a price that can't be justified by fundamental analysis, sell some or all of it. It will most likely come back to rational levels. And not that the actual price is high (say $100). The decision is based on the valuation of the stock, not on the price. And if you sell at a high price, you can buy it back at a lower one. There's concept: Buy low, Sell high. I think I'm on to something there.

ed Allrich