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|Subject: Should I Sell???||Date: 1/26/2013 1:10 AM|
|Author: dvena||Number: 124 of 467|
Hi Fellow Fools,
There have been quite a few posts lately due to run ups in several well followed stocks (DDD, NFLX, SSYS are just three examples). Most of these posts ask the same question in oh so many ways: Should I sell after the run up?
The answer to this question, like so many related to investing, is IT DEPENDS. The standard answer that most give, me included is this: It a stock has become too big a part of your portfolio and this is keeping you awake at night, then you should sell enough to get it back to a level you are comfortable with.
I do, however, want to give a more in depth answer, a different answer; because I think that sometimes it is not that simple. To illustrate, let me recount a piece of my personal investing history, using NFLX as an example.
I bought my first position in NFLX as one of my very first stock purchases after joining Stock Advisor in August of 2007. Being a new investor, I was very open to suggestion and had not yet developed my own investing philosophy. One of the first things I remember hearing was from the Jim Cramer ilk about taking money off the table and playing with house money. At the time, I did not know any better, but I now believe this is a fallacy. All the money in my portfolio is mine. I have earned every dollar in gains by leaving the money there. I would not be playing with house money; I am playing with my money. I listened to those voices and sold half of my very first position in NFLX because it had more than doubled by then. I bought at 17.10 and sold at 41.65. I was proud; because I have I had already taken out all the money I had initially invested in NFLX.
Here’s the thing. I think every investor does what we do for one reason: to make money. The question that each of us has to ask is will you step over a dollar to pick up a nickel? I believe that the holy grail of every investor is the elusive 10-bagger. They don’t happen all that often. This is the Super Bowl of investing. The 10-bagger (or more) is Moby Dick. This is the result we all hope to achieve. Yes, I know, everyone must wants to make money. Everyone wants to beat the market. But hidden down deep in the recesses of your investing soul, you want to conquer the beast.
If this is the case (if this is not you, you can stop reading now), we must answer the question, why do so few investors land the big one? Two reasons, the first of which is easy – finding a stock that will achieve this type of gains is not at all easy. However, we know that both Stock Advisor and Rule Breakers have both found them, so they are there in front of us. The second reason if much more complicated and sinister. I believe I know the reason and I want to share it! Are you ready? OK, here it comes: It is because investors defeat themselves. The amount of patience and perseverance it takes to achieve this feat is very difficult to fathom. When your stock goes up 10% or 50% or even 100%, you may be able to resist. But when the bags start to pile up, it becomes more and more difficult to resist the call of the siren. She will say things like “pigs get slaughtered” or “take some off the table”. I know - I fell victim to her call. If we are in this to make money, why do we run at the early signs that we are doing so successfully? Fear of failure, mostly.
I really love this quote by David Gardner. I read it and many other similar posts that resonated with me and has directed a good portion of my investing philosophy:
For any investors who have ever made a true ten-bagger -- a real-life investment decision with real money that plays into real consequences (really positive consequences) in the market -- I encourage you to ask investors that you know: "Have they ever actually made one?" -- I think we have to recognize as ten-bagger investors ourselves that we may have "thought it looked overvalued" at different points. By no means did we always credit the market with great insight -- sometimes it was just short-covering. (Ouch! Eh?) :)
But it truly takes patience -- patience driven by an insistence on looking PAST the next quarter's earnings, sometimes the next year or two's earnings, to see a place where the company you've bought finds market dominance, leadership, "no Pepsi to their Coke," and high-margin success. These are the ten-baggers -- the ten-plus baggers. And in my experience, they are virtually never achieved by people who are too insistently numerical, too near-term in their thinking, and -- yes -- too "smart" for the market.
(from the Stock Advisor Netflix board, circa 9/22/10)
I believe the biggest ways investors decimate their returns are by selling too soon. The call of the siren is strong. Many investors sell on valuation alone. I would submit that if the investing thesis has not changed, and nothing has changed but the price of the stock, why sell?
Some would argue to rebalance your portfolio. I have always rebalanced my portfolio by adding additional funds, either to stocks I already own or by buying new stocks.
Now, in the interest of full disclosure, you need to steel yourself against the possibility that in the short-term, you may see your results diminish. I indicated earlier that I bought my first shares of NFLX in Aug of 2007. I bought several additional positions over time. At the beginning of summer 2011, my entire holdings of NFLX stock was a 9-bagger. My initial position was 17-bags and counting. (This is where the steel yourself part comes in). The price increase, the Quickster fiasco and the fall from over $300 to $55 per share. I did not sell. Why? Because the investing thesis had not changed. The reasons I invested were still valid. I still believed (and still do) that NFLX could have many more subscribers and make much more money in the future. The investing thesis was not broken, but it seemed that the stock was.
Now, 18 months later, NFLX is back in the spotlight. The shorts are burning and investors are flocking back into the stock. Suddenly, NFLX is in again.
For me, NFLX was never out. That is why I never sold my shares while the share price fell. I am happy to say that now, that first position in NFLX is within a whisper of achieving that elusive 10-bagger status once again. I believe that in time, it will go much higher. Saying that you have a 3 – 5 year horizon is easy to say, harder to do.
Now, there will be those that will disagree. I can respect that. People of good conscience will disagree. But to those folks I ask “Have you ever achieved a 10-bagger?” I have. More than one. I also know that I will again. How about you?
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