The Psychology of Selling at the Top

Selling after you have made money is more difficult than it sounds. Once an investment runs up there is a decision to make. Then you have to let go.

The decision basically boils down to one thing: do you think the investment is still a good one? Earlier this year I sold Walgreens stock (Nasdaq: WBA). It had been a holding since 2002 and the money in it had doubled. Recently they merged with Alliance Boots in an effort to become a global powerhouse. This did not bother me because I believed in the management. Then they decided against doing a tax inversion. That was a reaffirmation of management. Tax inversions sound good. But I think there is downside for the company, most notably making an enemy of the U.S. Government. A lot of people dumped the stock after that announcement and I bought more. Then the CEO was forced into retirement and replaced by the guy who founded Alliance Boots. Now I’m worried. The management team that made the company a success for so many years is getting shaken up. Sometimes mergers go well (Example: Exxon Mobil) and sometimes they go terribly (Example: AOL Time Warner). So as soon as my last lot of shares hit the one year mark and became a long-term capital gain I sold it all out. If the company still seems to be doing well I can always buy it back. If it doesn’t I doubled my money and who can complain about that?

Recently Walgreens announced that they are buying Rite Aid, a large U.S. pharmacy chain. I think that is insane given that they will be digesting the Alliance Boots merger for some time to come. The market didn’t like it either and Walgreens stock took a dive on their announcement. It has been trending lower ever since.

Another liquidation example involves Healthcare REIT (NYSE: HCN). I’d developed a position in stages over fifteen years. This was based on the notion that the Baby Boomers would cause huge inflows of money into that business. It paid off handsomely. However I started to feel like market sentiment might have peaked. I also held shares in Healthcare Properties (NYSE: HCP). So I sold one healthcare REIT and kept the other.

If you think an investment is still good you might keep the position but take your gain. Two examples of this are Leggett and Platt, Inc. (NYSE: LEG) and American Electric Power (NYSE: AEP). Both of these are income-producing stocks that were bid up due to prolonged near-zero interest rates. I had at least doubled my money in both. But I felt like they both still had a place in the portfolio. So I sold enough shares to cash my gain out and kept the original dollar amount working.

The hardest part of the process comes after deciding if an investment is still good. There’s a point in the movie Wall Street where the character Gordon Gekko says, “first lesson in business: don’t get emotional about stock. It clouds your judgement.” That says it all. In every case mentioned above I had developed an emotional attachment to investments. They had been around for a long time and been successful. People like having things around that make them look smart. The idea of selling also creates fear and pressure. Once sales are made you have to reinvest the proceeds. But what if your new trade is a loser?

Standing by your conviction is the best course of action. The truth is that your position is always precarious. At any time news could come out on any of your investments that could cause one to crater. So there isn’t any real safety in staying in something that has run up. It just feels good. When your rational mind tells you to get out it is best to listen. There are times when I struggle with a decision. At that point I talk with someone I trust. Usually I find they go along with my thinking. But if they didn’t it would be a good reason to reassess.

Trusting yourself and staying steady is the toughest part of being an investor. The better you get at it the more successful you will be.

 

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Articles presented here are general opinions for your own consideration.  They are not specific advice for any one investor.

 

 

Capital Gains, Investing Psychology, Investment Strategy

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