Harvesting the profits

Thursday, 1st June 2017 07:47 - by Eric Chalker

To any readers who may have noticed my lack of recent contributions, I apologise for the gap.  The cause was a major domestic building project, followed by a rather strenuous and extended period in southern Africa.  It may be pertinent to observe that neither would have been possible without harvesting the fruits of successful investing in equities, by taking out the profits.

What constitutes successful investing does depend on each investor’s objectives.  My investing objectives have changed several times over the years, but I have always regarded a readiness to sell as a key element in deriving profit.  This includes biting the bullet when a stock has fallen and appears to offer no hope for the future, so that the money can be reinvested better.  More importantly, it means exercising judgement when a share price appears to have risen excessively or plateaued, in which case it might also be better to sell, either to reinvest or use the money in some other way.

For me this is part of the pleasure of equity investing, because I enjoy making decisions, exercising my judgement for personal satisfaction as well as for reward.  Over the periods when I have had time to apply myself in this way, the rewards have certainly been greater than from simply buy and hold.

Measuring performance

This implies a readiness to measure performance on a regular and not infrequent basis, which would not suit an investor who lacked the time or inclination to do so.  Neither would it be appropriate for an investor who would prefer to lock shares away and leave them to grow over time, which can be a successful strategy too, as I have experienced in managing some trust portfolios.  What I am describing here is a level of activity that many authorities frown upon, but it is clear to me that better performance does not come from taking greater risk, but from allocating more time to thinking, reading and making decisions. 

Some share prices rise almost uninterruptedly, but many have significant ups and downs.  The ups can rise beyond reason, caused by excess enthusiasm, market complacency or from the momentum which is often advocated as a good time to buy.  A rising share price may continue to do so, but unless this is supported by solid company prospects it will at some point tail off or, at worst, suffer a catastrophic fall either because something nasty is revealed or because a major shareholder chooses that moment to get out.  Those who have time to do careful research are likely to make better decisions than those who simply follow the graph, but among the stock market aphorisms it’s worth remembering is this one: it’s never wrong to take a profit.  I’ve also learned not to be greedy.

Of course, if the share price keeps rising after you have sold, there’ll be some regret.  I certainly have such regrets, because I misjudged the prospects, but there are other instances where I hung on too long and saw my money disappear.  Even solid buying by directors can be an unreliable guide, so there is no substitute for one’s own judgement.  Better to switch money into a more attractive stock than hang on complacently.

When to sell

In a later article, I’ll offer further thoughts on when to sell, but simply looking at graphs is nowhere near good enough in my opinion, nor is looking at share price movements unrelated to time.  For me, percentages are everything, measured against purchase price and time.  I do not mean to suggest that profits should be taken blindly, at a predetermined percentage point.  It is my belief though, that when a share price has risen enough to justify taking the profit, a fresh judgement should be made as to whether it is worth continuing to hold at the new price.  If I were not already holding it, would I be buying it at the latest price and why?  There is a cost to selling one stock and buying another, but there can also be a cost from holding – the cost of a lost opportunity. 

I believe it is JP Morgan who was reported as saying he had made most of his money by selling too soon.  This can be interpreted as meaning he sometimes could have made more by holding on, but by selling when he did he avoided losses, or perhaps avoided greater losses.

Eric Chalker, UK Shareholders’ Association Policy Co-ordinator & Director, 2012-2016