I recently explained that selling your winners and hanging on to your losers can hurt returns for most investors.
Whereas the alternative strategy – run winners and cut losers – is endorsed by everyone from academics to super-investor Warren Buffett.
So how have you got on since my article? Dumped a couple of dogs in your portfolio while smiling as your best performer scales more dizzying heights?
Or better yet perhaps, have you done nothing at all? Most investors are prone to over-trading.
Either way, good for you!
However, I suspect that of the tens of thousands of readers out there, a fair number read my article, nodded sagely – and within days sold some position they had just because it had gone up a lot.
I am confident of this because, as I previously explained, the desire to sell winners is hardwired into our brains. And because I’ve done it myself, even though I know the theory of why I shouldn’t!
7 anti-selling strategies
Fact is, unless you’ve gone the logical brain of Mr. Spock, you can’t expect to overcome your emotions and instincts without a fight. You need to tame the urges to lock in those tasty gains too soon.
Voila! Here are seven strategies to help you keep your winning shares.
Note I’m presuming you’re a Foolish-style investor in great companies. That is where you’ll find the few mega-outperformers that can reward ultra-tenacious long-term holders.
(If you’re a day trader punting whatever penny stock is hot on the bulletin boards right now, you’re on your own…)
1. Go for a walk
Seriously! Similar to how people often overeat out of boredom, or find it hard to give up smoking because they’re used to the ritual as much as the nicotine, trading your portfolio can become a mindless habit. Maybe you’re selling winners… or maybe you’re just over-fiddling with your holdings full stop? Leave well alone and go do something more constructive instead.
2. Avoid checking your portfolio too frequently
Warren Buffett says he buys companies he’d be happy to own if the market closed for ten years. Most of us aren’t going to be able to stomach that – but restricting your portfolio checking to regular reviews (monthly or quarterly, say) should help control your urge to act. Most investors are bad at reacting to short-term news or price moves. Let a long-term perspective be your edge.
3. Review the fundamentals
A share price reflects the value the market puts on a company at some instant in time, which is basically down to supply and demand. But a company’s fundamentals – its sales, margins, people, and business model – are stickier, and usually slower to change. Review your winners’ progress. Is it performing as you expected? Then why sell? Check out your favourite metrics, such as the P/E ratio or the dividend yield. The price may have risen, but if the business has grown too then intrinsic value may not have budged much.
4. Look at forecasts
Similarly, a fast-rising share price may reflect the market attempting to put a value on better prospects for superior growth. Analysts’ forecasts of profit growth are far from perfect (in fact they tend to be overoptimistic), but they can provide a sanity check that your shares have gone up for a good reason.
5. Study the graph and ask why didn’t you sell before?
I’m not a great believer in price graphs as tools to divine the future. However, I do think it’s useful to look at the graph of a winning share, to think about other times the company looked expensive, and then to see its graph eventually head higher anyway. A massive long-term winner like Apple is a good example. You’ll see many times where people argued such a gigantic company couldn’t get any bigger, or that all its great products were already out in the market – only for sales and the price to double again. Of course, Apple has been one of the greatest investments of all-time. But that’s the point! You don’t want to be spooked out of the few long-term winners too easily.
6. Consider selling a loser
I’ve already said you might be tempted to trade out of boredom. However another reason – particularly a few years into a bull market like this one – could be that you feel, perhaps subconsciously, that you’re too exposed to shares. If the thought of a market crash has you sweating – then maybe you should indeed lighten the equity load. However, look first to losing companies (with poor fundamentals) for any chop. All companies usually do badly in a stock market correction. But in a recession, weak companies can go bust.
7. Sell half
You’ve strolled around the local park, you’ve dumped some perennial losers, and you’ve reviewed your winners’ fundamentals. You’ve decided that while your high-flyer is indeed delivering, the price is just too far ahead of any valuation you’re comfortable with. Sell at last? Maybe. I’m not against selling at all costs, but remember great companies can surprise even their biggest fans (again, think Apple).
One option is to sell half your shares. If you’re right and the price falls, at least you locked in some of the gain. If it continues to rise then you’ll have a new case study to rue the next time you think of selling a winner!
