Sell a Stock Early

Learn From My Mistake – Don’t Sell a Stock Early

Yes, I committed one of the worst slip ups with the first stock I ever purchased.  Please learn from my mistake and don’t sell a stock early. The worst part, I didn’t realize the atrocious error until years later.  I mentioned the story in this post about SIPC limits but wanted to provide the whole story.  Let me tell you the story of this blunder with my investment in Activision.

I spotted this business, due to my on and off love affair with video games through high school and college.  Activision had the best games.  I am not sure if they were the pioneer of reselling to the same customer, but they sure did it well.   They succeeded with recurring revenue streams through subscription.

One of their biggest brands was released in 2004, World of Warcraft.  They still have over a million active subscribers for this game 13 years later!  I never played this one, but my understanding was the customer paid for the software.  The customer paid for expansion packs.  And the best of all the customer paid a monthly fee to play the game.  Whats not to love about this model.

There other big hit was the Call of Duty Franchise.  Similar concept.  The customer paid for the software.  Every couple of months they would provide additional map packs to keep the customer engaged.  The double or triple the revenue on a single game this way.

Take a look at my investing results with the chart courtesy of Yahoo Finance.  The blue line is Activision and the green line represents the S&P 500.  I held this dog for over four years collecting a paltry dividend.

Months after I sold, it started to take off.  Lets assume I purchased 1,000 shares (pretty close).  This cost me $11,110 plus commissions.  For years later I sold it for a couple hundred bucks profit and collected a few dividend checks. Had I retained those shares they would be worth $63,660 today absolutely crushing the index. The four years after selling the stock early were astonishing.  It went from $11.40 to $63.66.  These are the kind of companies we want in our portfolio.

My Lesson Learned:  Don’t Sell a Stock Early

My reason for selling was sheer boredom.  I am surprised I lasted four years holding this one.  Back then,  I thought all stocks would rocket like my investment with Sirius.  Boredom is not a good reason to sell.  If fact, investing should be like watching paint dry, most of the time.

The company was still performing extremely well and the valuation was within tolerance.  Mr. Market just hadn’t visualized the value of the company.

This makes me think of one of the great quotes from Charlie Munger in his book Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger, Expanded Third Edition.  This book is absolutely fantastic, by the way.  I have read mine cover to cover four times.

If you buy something because it’s undervalued, then you have to think about selling it when it approaches your calculation of its intrinsic value. That’s hard. But if you buy a few great companies, then you can sit on your ass. That’s a good thing. 
We’re partial to putting out large amounts of money where we won’t have to make another decision.

Possible Reasons To Sell a Stock Early

Tremendous turnover in one’s portfolio is usually a recipe for bad returns.  Turnover leads to capital gain taxes and commission expenses.  However, there are times when it may make sense to sell.  Usually the reason to sell a stock early falls in one of these camps.

Fundamental Business Change

Business disruption occurs all the time.  Some companies even make a strategic decision to cannibalize their own market share in order to be on the forefront ahead of competitors.  Other times, it could be a change in technology or natural resource that disrupts.  Think of natural gas versus coal power.

There are very few companies that will have a ongoing durable competitive advantage over investors lifetimes.  Perhaps Charlie Munger found that with Coca Cola.  But these examples are few and far between.    Even Berkshire Hathaway trades in and out of a substantial portion of their portfolio.  Coca Cola is one of the examples where they held for decades.

Dividend Cut

Most dividend growth investors will sell once a dividend cut is announced.  This is probably a good strategy but not one I follow blindly.  Once the cut is announced the stock price falls like a rock.   Once the bottom has been reached value investors may start piling into it and catch a rebound to fair valuation.  The cut itself, is a reason to go back to your investment thesis to see what caused the cut in the first place.  Does it still make sense to hold on?  When will they reinstate the dividend?

Absurd Valuation

Let me be clear, a reason to sell is not because your stock ran up in price.  Most literature suggests to let your winners run.  However, there are times when companies become very overvalued based on historical measures.  This is usually when the media starts pumping it for whatever reason.

The valuation may get stretched on many valuation methodologies.  A simple one is to look at the historical PE ratio and compare that to where the company is now.  Is the ratio much higher than the 15 year history, it might be time to do some additional due diligence.  Sometimes this is distorted by one-time events, you may need to look deeper.

Opportunity Cost

There are times when an investor finds themselves without ample cash in there arsenal should they identify an undervalued company.  In this case they might start looking at trimming one or few of the positions to free up capital for the investment.  Minimizing this tendency is key to successful investing, but sometimes a deal is just so much better than what you are holding.

Mistake with Investment Thesis and/or Lack of Conviction

Usually these are the types of investments that you worry about at night when you shouldn’t be thinking about your money empire.  Speculation is a hard way to invest.  Alway have a reason why you bought a stock in a company.  If the story doesn’t play out as you thought, move on.

Or if you can’t explain why you purchased it to your spouse or your child, it might not be a good investment after all.  Or maybe it just falls our of you circle of competence.

Admitting failures is not always easy.  I prefer to document them so hopefully I don’t commit to same mistake twice.  Have you ever sold a stock to early?  Hopefully it wasn’t Amazon!

3 comments

  1. I had a semi-fail for selling stocks. It wasn’t terrible, but when we bought our house, I sold some of my shares of company stock (I acquired at a 5% discount through an ESPP). We had intended to fund some of our downpayment through this and we did sell higher than we bought (past short-term capital gain period), but the market was lower than it is today… so I try not to look at how much it would be valued at today 😉 Not terrible, but not ideal!

    1. Your sale was justifiable 🙂 The opportunity cost was a home to live in. However, I understand it is hard to not look at the current valuation. Thanks for stopping by!

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