It is undoubtedly the most difficult decision to make for investors in the share market: when is it time to sell?

I am not talking about when to jump off perennial high-flyers such as A2 Milk (A2M) or Altium (ALU), where the decision most likely translates into when do I start crystallizing some of my profits, and by how much? – I am talking about that part of the investment portfolio that is least talked about: the dogs, the bad decisions, the ‘it looked a good idea at the time’ losing positions that continuously test our character, our resolve and confidence, and possibly our mental sanity.

Just to be clear: owning a few bad apples in a portfolio is not something that happens to inexperienced, unlucky, or lesser informed investors only. It happens to all investors of all colors, shapes, and levels of experience.

If we take guidance from the fact that, as a general rule, good stock pickers average six out of ten winners, with five (50%) more likely and seven being exceptional (also: exceptionally lucky), simple logic tells us not every investment decision lives up to its potential or expectations. At least not right away.

Impatience seems seldom the correct response, but then a lot of investment capital goes out the window each year from investors holding out for a share price recovery that simply won’t arrive.

“Don’t fight the tape” and “don’t ignore the trend” are typical statements heard from shorter-term traders, but not every share price that falls is doomed. Take one of my favorite stocks in the share market as an example; Technology One (TNE).

Between September 2016 and September last year, the stock simply could not attract any positive momentum. Today the share price is up by 50%, and it all happened in a heartbeat, really, without major new developments or a major announcement from the company.

As an investor, you’d feel mightily guilty if you had allowed short term “noise” to infect your mindset, leading to the misguided decision to sell all your shares.

The offset is, you’d feel far worse if you are still holding shares in AMP, iSentia, or Retail Food Group. So how do we distinguish the latter from the former? When do we sell and when do we hold on and possibly buy even more shares?

Judging from my own experiences, there is no single golden rule, but a lot of confidence stems from thoroughly understanding what the company is about; what it does, how it operates, how it compares to its peers, whether industry dynamics are changing, and who’s benefiting, et cetera.

Admittedly, it’s not always clear, nor easily established what exactly is weighing upon a given share price, in particular not when other parts of the market are trending upwards.

But if your company in question is of high quality, with a robust growth outlook under the belt, and there is no particular bad news or negative development impacting on it, you are able to feel a lot more relaxed about the falling share price.

Sometimes, however, the company in question does not own that same high-quality label, and its growth profile has been impaired. Maybe the facts have changed since we jumped on board, or maybe we just erred in our judgment. All too often our interest is triggered by a seemingly attractive looking share price, and all too often do we find out the hard way, there was a very good reason why the share price looked “cheap”.

Most investors try not to over-pay when making purchases in the share market, but according to my long-standing market observations many more unfavorable investment decisions are made, every single day, by investors trying to jump on “cheap” bargains. The problem often then becomes that the share price simply becomes even

Let me first point out that making mistakes is simply par for the course. It will happen, and it will happen again. Take this prime piece of advice from someone who in the past has allocated positions in Slater & Gordon (SGH), Vocus Group (VOC), Pact Group (PGH), and Clip Group (ECX): it never is too late to sell.

So rule number one should be that every decision and judgment needs to be made independently from what we’ve paid for our shares. All too often investors won’t sell at a loss, which can be the ideal starting point for accumulating much larger losses.

It always can get worse, still. Companies on occasion are forced to call in administrators, instantly making their shares worthless as happened last year with RCR Tomlinson.

Time to call out averaging down as a high risk and very dangerous practice, all too often employed by investors trying to cover up an error. What you are in fact trying to do is make a dud investment better by throwing more money at it. Why risk making it far, far worse? Get over yourself!

I have never averaged down on a dud investment, and I will never do it. On occasion, I increase positions after a pullback, but that’s because I remain convinced I am buying more of a good opportunity. I am not throwing good money after bad at the risk of incurring even larger losses (while your average price might fall, your total exposure increases).

One of the clearest warning signs I have found stems from companies issuing disappointing statements. Looking back at the early days of my allocation, in essential, small disappointments seemed always included, and they simply grew bigger until it could no longer be denied here was a company in deep troubles (by then I had already jumped ship, thank goodness).

It’s a harsh lesson also experienced recently by shareholders in Pact Group and Clip Group, with both management teams issuing yet more bad news announcements, further depressing the share price. “Value” in a share price is directly linked to how the business is operating. If there is no trust left in what the company actually can and is likely to achieve, do you still want to be around hoping for the best?

“It never is too late to sell”

Probably the second most common error is investors being hoodwinked by a seemingly high dividend yield, too often ignoring the fact that an above-average yield can be a warning signal indicating the dividend might not be sustainable.

AMP used to be a dividend staple, until it wasn’t. Telstra used to be everyone’s go-to non-bank dividend favorite, until the share price eroded by – 60%-plus. Investors should understand that Bank of Queensland (BOQ) shares are offering 8% plus franking at the present share price because the market sees a prolonged period of declining profits and cash flows.

The market’s risk assessment was confirmed through BOQ releasing a subdued interim report, including a reduction in dividend and a rather sober outlook.

The best protection against a perennially bad investment remains, of course, to only buy high-quality companies with a proven, robust track record, but during times of disruption and rapidly changing global trends, any list of such companies on the ASX will always have a limited number of names on it.

And then there is the wide dispersion in views and opinions about what exactly makes a company high quality. Few will deny CSL is one such high-quality achiever, but is BHP Group (BHP)? JB Hi-Fi (JBH)? What about Macquarie Group (MQG)?

One thing can be put forward without the slightest hint of ambiguity: quality companies do not issue a profit warning by -42% seven weeks after repeating guidance for the year. This takes me back to earlier observations: share prices can come under pressure for all kinds of reasons; management teams can disappoint in many ways. CSL, for example, disappointed in February because it didn’t upgrade guidance for the full year. TechnologyOne in 2017 disappointed because growth would be lower than in prior years.

Sometimes all market participants want to hear is “they missed”, or “they disappointed”, or “earnings estimates are being cut” and thus share prices can remain out of favor for much longer than we’d like or expect. But there is a big difference between the market getting all hyped up over a lot of short-term noise and a company missing its own forecast by -42%. I’d hope we can all agree the latter is not characteristic of a high-quality company.

Sometimes, during times of ultimate despair and confusion, we can also take guidance from the share price. I am loathed to put too much “value” on share price movements in the short term, as they can deceive as much as they can guide, but there is one trend that should be on every investor’s radar; when a share price continues to trend lower, following up with lower highs and lower lows, it is time to put your ego aside and take your losses, before they become too large.

In line with the yield-risk indicator I mentioned earlier, this too is the share market sending you an unambiguously clear signal that all is not well with this company.

Rudi Filapek-Vandyck is the founder & Editor of FNArena, which provides assistance to self-managing investors who conduct their own market research. The service can be trialled for free at www.fnarena.com