You’ve bought a share and – ye gads! – it’s gone up 30%. Should you sell it and take the profit? It sounds like a simple question, but the answer, my friends, is complicated and controversial enough to give us the stock market we know and love, with all its wild oscillations in share prices, swings of fear and greed, bubbles and bursts and even the odd lonely leap from a bridge.
My answer? It depends on the strategy being employed but, generally, no, don’t sell. Cling to your winners like a granny grasping a winning lotterly ticket.
Not everyone thinks the same though, so let’s briefly look at a few reasons why you should cash in on your good fortune.
1. It’s never wrong to take a profit
A hoary old market saying that sounds sensible enough. You’ve risked real money, which you probably earned at an hourly rate in an unloved job, or through previous adventures in the stock market, or which a dead grandparent sweated hard to get and eventually give to you. And now you can get it back, with 30% extra on top? Take the money man! Live to fight another day.
Get out while the going’s good. That’s pretty much the logic behind the saying. Makes some sense.
2. The share is more expensive compared to some key metric
Bit more thoughtful, this one. If you’ve bought shares because they seem cheap to you for some specific reason, then you should possibly sell them when they’re no longer a bargain.
Let’s imagine you buy shares in British Pollutingham because it’s on a P/E ratio of 12, while at the same time its arch rival Well Oil is being valued by the market with a P/E of 18. You judge there’s nothing between the two shares to justify the premium put on the latter. Sure enough, after six months British Pollutingham shares rise 50% so they also trade on a P/E of 18. The P/E disparity that was original reason for buying British Pollutingham has gone away, so you decide to sell.
There’s a lot of logic to this one, and indeed it forms the basis of the Value Investing methodology (and arguably all trading strategies that are not concerned with charts, technical analysis, horoscopes and tea leaves).
If you’re going to trade – as in regularly chopping and changing shares in an effort to accellerate the growth of your investment pot – this rule makes sense. Thing is, do you want to be trading? Or do you want to be making money? Most people can’t trade successfully, so think carefully before you answer…
3. You need the money for a better, cheaper share
Imagine if British Pollutingham in the example above had only risen 25% when you learn about another share, Plentiful Petrol. It’s been drilling off the coast of Papua New Guinea and you have some reason to believe that results of early tests will be triumphant, pointing to a huge acreage of oil that will eventually vastly increase Plentiful Petrol’s reserves.
You judge Plentiful Petrol to be an even more profitable share that British Pollutingham, so you sell the latter and reinvest the lot in your new favourite oil share.
Again, this makes some sense if you’re a trader, and maybe if you’re a long-term investor too, if you’re really excited and confident about the new share. After all, most of us have limited means and can only buy a limited number of shares at once (short of buying a tracker fund or a pooled investment such as a unit trust, of course). Ideally, we want our money to be growing as fast as possible (much, much easier typed than done!)
One obvious danger is over-trading. Many shares may look cheap by some measure at any particular time, and jumping from share to share out of excitement or more likely boredom will likely simply make your stockbroker richer as you pay dealing costs each time, as well as swelling the government’s coffers due to the recurring payment of stamp duty.
Another flaw is that you get the swap wrong, selling a company on a roll for a dud. Of course, that’s a danger with all individual share selections.
4. You need the money. Full stop.
You invest £10,000 in some mining share and it doubles. You’ve never had £20,000 in your life before now, and you’re smart enough to see your lucky break for what it was. You sell.
Or, your partner finally convinces you it’s time to buy that house in the country. Not right away, but in the next few years, say. You’ll need every penny for your deposit. Your investment horizon has changed, and you should sell up.
Or, you lose interest in shares and no longer monitor your trading portfolio. Sell, sell, sell, before the profit goes away while you’re otherwise engaged.
All the above reasons may make sense in some circumstances, particularly reason (2). Nevertheless as I said initially, I believe a strategy based on holding on to winning shares is more likely to beat one based on selling them. Most people can’t trade shares successfully, and are better off investing in trackers or buying and holding for the long term. It’s not as sexy as screaming “Buy!” and “Sell!” like a public schoolboy at a tuck shop, avoiding meddling may well leave you richer in the end.