With most of our income stocks on a roll this year already, the Fed's announcement this week propelled some of them even further. This has created a "good headache" where we are sitting on substantial gains on some stocks. Although we try to focus on income, sometimes it is hard to look at the screen or an excel spreadsheet and not be tempted to sell or at least trim some of these positions. Even if the sole intent is not to book the gains, what do we do about overweight positions like AT&T (NYSE:T), Altria Group (NYSE:MO) and Realty Income (NYSE:O)? These aren't overweight because of capital allocation, but due to their robust returns so far.
When in trouble, never assume you are alone. Hence, we decided to pose a few questions to some of Seeking Alpha's best about the temptation to sell and how they overcome it. Let us hear from the expert panel. The answers have been paraphrased for brevity.
David Van Knapp [DVK], David Crosetti [DC], Mike Nadel [MN], and RoseNose [RN].
1. To begin with, how do you resist the urge to sell if you are sitting on a 50% gain, 60% gain, or 100% gain on a stock?
[DVK]: I am investing to build an increasing stream of income over a long timeframe, not to make short-term profits. So my reasons to sell rarely have anything to do with price gains.
[DC]: I have many winners. I bought them so long ago and reinvested dividends, which means more shares. Often, if I have a 50% or greater increase in the value of a position, I might be inclined to add an additional 100 or 200 shares to that position. Assume my cost basis for the initial shares is $20 a share and that they are currently selling for $50 a share now. An additional 100 shares would change my cost basis to around $25 a share, which is a long ways away from the current $50 market price.
[MN]: Experience is a great teacher. Earlier, I couldn't resist the urge to sell and I made some boneheaded decisions. That memory influences me. I also think about all the articles the last couple of years saying it was the "right time" to sell MO. As it turns out, it wasn't. It just about never is.
[RN]: I do have trouble with the urge to trim and it is screaming at me to trim some Coca-Cola (NYSE:KO). I just sit back and enjoy, but now have a value written down as to when I will trim. I thought it was now, but those notes are what saves me from temptation. I even sometimes increase the value as things heat up.
2. If you sell, what are some of the factors that influence your decision to do so? (Please ignore some obvious reasons like a dividend cut if you are a typical DGI, or if a company is a total mess, etc.) Has a sizable gain ever been a reason to sell?
[DVK]: Since I began using the DG strategy, my sales have all been because (1) the company failed to be worthy to keep in light of my long-term goals, or (2) the company's size exceeded the maximum proportion that I want in my portfolio. Category (1) covers things like dividend cuts or the company becoming a total mess. Category (2) covers what some people would call rebalancing.
[DC]: I used to sell for the obvious DGI reasons (dividend changes). But I've come to realize that sometimes the best thing that a company can do in being fiscally responsible is to change the dividend. Take the oil companies, for example. If you were the CEO or on the board, what would you think about retaining capital vs. paying dividends? Which would be more prudent? Holding the cash or giving it to shareholders? I don't normally sell my stocks unless something really dramatic happens to the business model. The other reason to sell is that you realize you have made a mistake in the purchase. That's the best reason. You were wrong. We've all been there and done that. Mistakes happen. Cut your losses.
[MN]: I have sold because of a sizable gain but, as I said in No. 1, I've come to realize that's not a good reason, not for me at least. I also have sold when I was worried about politics, such as the sequester or debt-ceiling debate; again, those decisions proved to be awful. Sometimes I sell because I decide I want to buy a company in a certain sector but I already have a ton in that sector. For me, sell decisions mostly are based upon evidence of a weakness in the company or its sector. Wal-Mart (NYSE:WMT) and Kinder Morgan (NYSE:KMI) are two fairly recent examples. I also will at least consider selling if I believe the dividend is in peril, as I did with ConocoPhillips (NYSE:COP).
[RN]: Some reasons are:
To diversify the portfolio by sector, to keep any one position from getting too heavy, to improve the portfolio for income, to improve quality in the holdings and thus safety, to obtain cash for personal use.
If I thought I have a bad investment I would just sell it period.
If I thought I didn't understand it, I would just sell it period.
If the management became questionable, guess what, I would just sell it period.
3. Do you advice investors to have two separate portfolios: "core, never-sell" positions and "not-so-core, for sale" positions?
[DVK]: Invest with a purpose and write out a plan. I do not segregate portfolios along the lines you suggest.
[DC]: I have, in my retirement account, a group of companies that I am unlikely to sell and that I view as core holdings. These are companies like KO, MO, and WMT. I have a "core" of blue chips and I have a part of my retirement portfolio that I've used for more capital gain purposes and have bought stocks like The Western Union Company (NYSE:WU). These were not intended to be building blocks, but represented a good opportunity for potential gains.
[MN]: Do whatever makes you comfortable. Personally, I do not sell my core positions, which are great companies. I don't sell and I want more of them.
[RN]: I do have some speculations and they are vivid in my mind. I do not have many as this is serious business. The BDCs are the ones right now for me. Now some might say eREITs are speculative, but I believe they are solid and excellent investments.
4. If a particular position becomes overweight because of gains, do you rebalance?[DVK]: Yes. See #2. My maximum position size is 10% of the portfolio. But I am loose about applying this; it is more of a guideline rather than a rule.
[DC]: I used to rebalance once a year. I've kind of gotten away from that notion and have embraced Chowder's view of letting winners run. So, I've kind of taken a step back from that idea of rebalancing. I guess I've become more of an accumulator. Why fix things if they're not broken?
[MN]: I do not rebalance. I let the winners run. I also drip everything. So far, I have not been disappointed with this practice.
[RN]: Overvaluation is the scariest or most tempting time to trim, or as some say, rebalance. I did trim some stocks. I can trim those because I have a core number, I hold and keep no matter what. My index cards help me in the matter, as they have reminders of DNS = Do Not Sell or CORE holding. I also remind myself why I bought and what would I replace it with. That is so KEY to it all.
Our thoughts and conclusion:
The points below are very clear from the answers above, although not every member of the panel has the same thoughts on every question.
- If something ain't broken, don't fix it. That means, if you have a stock that has done well, don't worry about losing the gains but think about how to increase those gains by increasing your stake.
- Why you bought a stock is critical. If the reason holds true in spite of substantial gains, why sell it? For example, people buy Altria and AT&T for dividends. If the company keeps paying you more each year, what is the reason to sell?
- Have no pride. Have no shame. If you made a mistake, admit it. Cut your losses and move on.
- Put your time in the market and you will learn from your own mistakes. This proves more reliable over the long term than any short-term technique you might learn.
As a bonus, check out this article from Mike Nadel that discusses more about selling. This one from David Crosetti reminds us that you need to dance with the ones you brought to the party, and not always the prettiest one. David Van Knapp tells us how to analyze the facts and to avoid panic. RoseNose talks about the importance of having a plan here. These 4 articles cover the most important aspects in our opinion: have a plan [Rose's], never panic [DVK's], don't keep hopping [DC's], and how to cope up with selling [Mike's].
As a result of this experiment, we aren't selling any of the winners we have and might add more to them periodically.
Disclosure: I am/we are long T, MO, KO, O.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.