When should you shed a long-term stock holding? When circumstances change, in a big, meaningful way. Not for just a transitory blip.
Investing triggers many emotions; especially when investors have a personal attachment to a company and its stock. For years, I witnessed General Motors employees hold onto their positions in their employers’ stock, regardless of its price volatility.
Personal attachment to companies – especially to former employers or businesses associated with a favorite hobby – is understandable, but financially dangerous. It turned out that holding GM forever didn’t work out so well.
After the automaker filed for Chapter 11 in 2009, its shares became worthless. Worse, when GM emerged from bankruptcy court and went public in late 2010, its old stockholders couldn’t transfer their shares into the company’s new stock. Lately, the General Motors (GM) share price is slightly below the initial offering price of $33, although it has gone as high as $40.
During the late 1990s and early 2000s, I owned a Harley motorcycle and Harley-Davidson (HOG) stock. We traveled the nation’s highways and attended many rallies, including the company’s 100th anniversary celebration.
I kept the memories, but not the stock. For the past several years, Harley has lost market share, as its white male customer base has aged. When conditions change, investors must be willing to part with investments.
The notion of selling a stock runs counter to what many investors believe is prudent, because of taxes and transaction costs. While both are valid considerations, there are still times when it is time to part ways with those long-held shares.
When I announced on my radio program – admittedly with deep sadness– that I sold my Harley stock, I explained my rationale: “I married my bride, but I only date my investments.” While is OK for me to discuss the adventure Barb and I have shared for years, it is not OK to keep a stock today based on its performance a decade ago.
Just because you sell a stock doesn’t mean you can’t buy it back if conditions change. Legendary investor Warren Buffett at Berkshire Hathaway appears to share this view. Buffett is known for his long-term perspective and is not in any fashion a short-term trader. Instead, his team looks for opportunities that include new investments, as well as companies they formerly owned.
A few years ago, Buffett owned shares of Phillips 66 (PSX), an oil refinery company spun out of a larger energy firm, Conoco. Last year, Buffett’s team swapped two-thirds of Berkshire’s Phillips position in return for ownership of the refiner’s chemical division. Back then, oil was over $100 per barrel.
But even though oil has plummeted, Buffett recently announced he was rebuilding his stake in Phillips, and had reacquired 10% of the company. Turns out that the refiner’s net income has held up rather well. The market landscape had changed.
Viewing an investment portfolio during times of market volatility makes it tempting to base decisions purely on a stock’s price. Though price is a major factor when purchasing a company, this is not the overriding consideration influencing a sell. What is important is to ensure the current trajectory of the economy is supporting a company’s business model and that the management is executing effectively. When those conditions change, it’s time to adjust.
Certainly, investors should be aware of taxation and transaction costs when making changes. But these things shouldn’t compel an investor to hold poorly performing stocks over the long run. I would be rich if I had a dollar for every time I’ve heard, “As soon as (pick a company) gets back to (pick a price), then I will sell it.”
Things change, and an investor’s job is to recognize those changes.
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Joseph “Big Joe” Clark, CFP, is the managing partner of the Financial Enhancement Group LLC, an SEC Registered Investment Advisory firm in Indiana. He is the host of Consider This with Big Joe Clark, found on WQME and iTunes. Big Joe can be reached at [email protected], or (765) 640-1524. Follow him on Twitter at @Big Joe Clark and on Facebook at http://www.facebook.com/FinancialEnhancementGroup.
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