On Selling Your Winners
Board: Pencils Palace
Nice article, but I put a little more into sales.
What type of stock/company? Ex: NFLX is propelled by momentum and shorts that react to the latest news whether it is correct or incorrect. I held NFLX from Jun 2007, sold some at $148 and more at $283. I retained 1/6 in my taxable account. I gifted some of those $21.56 shares for $366 to charity in Dec. After NFLX crashed, I bought it back in a traditional IRA and 2 Roths, using the same amount of cash that I sold off. I purchased at $88, $105 and $77. At that point I owned 13 shares for every 6 of my original purchase.
I set targets ahead to re-evaluate and maybe sell off a portion. $400 was what I set for NFLX this time. Other than the charity, I am still holding.
In 2011 and 2012, I did a lot of selling around a core position. The news machines were spitting out roses and poison every other day for a great recovery/bull market one day then double-dip recession/doom/gloom the next. I used a number of different companies but the best were PNRA, F and CAT. Ex: for PNRA I started with a 10% piece of my position, 25 shares. I picked target sell/buy prices and sold it at the target. Later, sometimes a couple weeks, sometimes a couple days and occasionally the next day, I bought it back around $5 or so cheaper, adding a share and paying the commissions with the cash from the sale. The next cycle would be sell 26 shares and buy 27. In 2012, the 25 shares added 28 new shares over the year, for free.
To facilitate the above, I maintained a simple ledger to keep track of the cash flow since each sale/buy left a little cash extra. Every fourth or fifth turn, I used the built up cash to buy an extra share, ex: sell 31 and buy 33. This was all in IRAs.
For non-momentum stocks, I rely more on the fundamentals. If a company zooms ahead for a period and it is not supported by its sales, known plans/direction, etc., I might sell off a piece. Normally this is 10% or less and I often will put it into something that is under valued. If I don't have anything in that category, it goes to interest bearing. For the most part, if I do not know what I want to put the money into, I won't sell. If the stock I sold gets run through the wringer for some reason, I might buy it back again later if I sell something else.
Then there are buyouts. Over 8% of my portfolio was bought last year. Some of the first one, Heinz, went to expense cash (we need that to live!) and the second, UNS, was fully invested to other stock and interest bearing. Most of the time I sell on the announcement day, often getting a couple cents over the buyout price, sometimes not. Since 1987, I have not had one of the buyouts fall apart.
Another reason I sell is balance. As you mentioned, individual positions may get really wacky but another point is having a cash position and a solid base for the ups and downs. When stock prices are climbing, I slice off bits to add to our interest bearing accounts. In Dec 2008, I pulled a lot of money from these accounts to buy stock. I slowly added to it as the stock portion appreciated. In Dec 2011, they were up to 19% of our portfolio again. Last year, I moved money into them a number of times plus the 4.5% interest they earned. Today they are 20.39%. When the next big crash comes, the lazy money will go back to work. From July 2007 to March 2009, our portfolio lost a bit over 28%.
One last thing on selling. No regrets, ever. When I sell, I sell. I do not say, "Oh I wish I hadn't sold so-and-so." If NFLX had not had a spectacular 3-legged melt-down, I would not have bought more but more importantly, I would not have cried around the campfire about the one that got away.
What profits from NFLX and other high-fliers did for me was allow me to expand our dividend core from a point where previously it could pay around 10% of our expenses when we retired to now being able to pay over 100% of our expenses using 71.06% of our portfolio (44.24% dividend stock and the 20.39% interest bearing accounts) Having money to get back into NFLX for another spectacular run was just gravy.