Selling shares standing at a gain

Uncle_Bob · 21 August 2017 at 5:31PM

Hi all,

I'm a novice investor and I'd be interested to hear the approach that forum members take when it comes to deciding when to sell shares.

* Do you have a mechanical 'system' that you stick to come what may or do you rely on how you 'feel' a share might respond in the current market?
* If you have a system, what is the basis used? For example, do you sell once you've made a fixed percentage gain (say, 25%)?
* If a share doubles in value do you sell half of your holding to 'bank' your original cost?

I'd like to have a system but haven't yet formulated one. I can see the pyschological value in the third point above (so that you can't make a loss) but doesn't that then mean that you are selling shares in a company whose value is still rising?

Thanks.

eskbanker · 21 August 2017 at 5:42PM

Your approaches sound more like trading than investing - there are some experienced investors on here who'd consider buying and selling individual shares but for the vast majority, especially novice investors, the most sensible route is to buy funds (to diversify and minimise risk) and hold for the long term, rather than dabbling and trying to beat the market.

Your options above seem to be predicated on shares rising all the time but of course that's not how it works!

Uncle_Bob · 21 August 2017 at 5:50PM

Thanks.

In hindsight that did sound more trader than investor and that wasn't my intention. I'm not talking about shares/funds held for hours, days, weeks - if you hold shares that have doubled in value in, say, 5 years, what would make you want to sell those shares?

I do, of course, realise that shares don't rise all the time. However, a simple stop-loss policy offers the chance to mitigate any such losses on a mechanical basis, if that is desired. But deciding what to do when they move in the other direction seems tougher. Am i over-thinking it?

bigadaj · 21 August 2017 at 6:18PM

Uncle_Bob wrote: »

Thanks.

In hindsight that did sound more trader than investor and that wasn't my intention. I'm not talking about shares/funds held for hours, days, weeks - if you hold shares that have doubled in value in, say, 5 years, what would make you want to sell those shares?

I do, of course, realise that shares don't rise all the time. However, a simple stop-loss policy offers the chance to mitigate any such losses on a mechanical basis, if that is desired. But deciding what to do when they move in the other direction seems tougher. Am i over-thinking it?

For investing rather than trading then what you're talking about really is rebalancing. So determining your allocation by sector, geography, asset class etc and maybe annually buy and sell back to the original allocation you determined was appropriate.

This doesn't really apply to shares, more funds, but is the closest to what you want to do I believe, but it's a conscious decision, whether you do this annually or quarterly is an individual decision. Whether you change your allocation due to your own circumstances or wider economic circumstances also needs to be considered.

serko · 21 August 2017 at 6:58PM

I buy and sell shares based on my perceived value of the company. I buy shares that I believe are significantly undervalued either on current fundamentals or on my prediction of future performance of the underlying company. I Sell if I believe the company is no longer undervalued either due to it's shareprice rising over my valuation or business performance being lower than my expectations and therefore I amend what I believe the company is worth.

However this does mean continually evaluating news and performance to ascertain my valuation.

For example if a companies shares are priced at £1 and I believe their true value is £1.50 I'll buy the shares. Let's say the market eventually agrees with me and the shareprice rises to £1.50. If I still believe fair value is £1.50 I'll probably sell as I want to invest in undervalued companies. However if the company has outperformed my expectations and I believe the fair value is now £2 I won't sell.

Let's say I buy that same share that I believe to be valued at £1.50 for £1. This time they have some terrible news and the price drops to 75p if I believe that 75p is now the fair value I will sell.

The thing is to have faith in your own valuation and let that dictate your decisions rather than emotions.

I've had a share that I bought at 60p drop to 30p due to poor sentiment. I didn't sell as I still believed in my valuation. It eventually went up to £8.

So in answer to the question I don't have a set rule on selling after a certain percentage gain or loss. Instead I continually reassess my valuation of the company.

Tom99 · 21 August 2017 at 6:58PM

[FONT=Tahoma, sans-serif]I have used the sell 50% approach to shares in a portfolio when the share might have gone up by 200%, 300% or 400%.

[/FONT] [FONT=Tahoma, sans-serif]My reasoning is that I have taken some profit and don't mind if the share then goes up or down. Also my holding in that one share has become disproportionately large.

[/FONT] [FONT=Tahoma, sans-serif]I have to say though that the shares where I have sold 50% have mostly continued to increase in value.[/FONT]

serko · 21 August 2017 at 7:04PM

I have used the sell 50% approach to shares in a portfolio when the share might have gone up by 200%, 300% or 400%.

My reasoning is that I have taken some profit and don't mind if the share then goes up or down. Also my holding in that one share has become disproportionately large.

I have to say though that the shares where I have sold 50% have mostly continued to increase in value.

That's one of the things is that often the winners keep on winning as they're often well run companies. ASOS or FEVR for example. Your potential profit will be a lot lower if you had continually sold into the rise.

Tom99 · 22 August 2017 at 1:31AM

serko wrote: »

That's one of the things is that often the winners keep on winning as they're often well run companies. ASOS or FEVR for example. Your potential profit will be a lot lower if you had continually sold into the rise.

[FONT=Tahoma, sans-serif]I agree with that, if the stock keeps on rising you will lose out by selling 50%.

[/FONT] [FONT=Tahoma, sans-serif]My greatest riser has been Shire, I bought at 891p and last year they were 5070p so over 500% rise. They are currently at 3613p

[/FONT] [FONT=Tahoma, sans-serif]I have twice applied my sell 50% approach to this share so now only own a quarter of my original stock. My 1st sale was at 1960p so that was a loser. My 2nd sale was at 4750p, 31% above the current price so that was a winner.

[/FONT] [FONT=Tahoma, sans-serif]As I said in my earlier post my experience of the shares where I have sold 50% is that they have generally continued to rise. However I am happy to have crystallised a profit and if they continue to go up I will still have some benefit. There is also the rebalancing aspect to consider.[/FONT]

Apodemus · 22 August 2017 at 6:45AM

serko wrote: »

That's one of the things is that often the winners keep on winning as they're often well run companies. ASOS or FEVR for example. Your potential profit will be a lot lower if you had continually sold into the rise.

Conventional wisdom used to be "ride your winners cut your losers". But that was back when people tended to invest for the long term...

Biggles · 22 August 2017 at 8:37AM

I don't sell a share just because it has gone up; after all, that was what I expected it to do. Many people get 'stuck' with shares just because they don't have an 'exit plan'.

But most thinking (of investors, not traders) is much along the lines of serko's post: if it's no longer what you perceive as 'good value', then consider selling. If, at the new price and with the latest results in mind, it's starting to look 'bad value', then it's time to sell all or some*. Some shares you may still feel have a chance of a great future, in which case you might want to keep a small holding.

* That's whether it's gone up or down; this is no time to get sentimental.

Glen_Clark · 22 August 2017 at 10:34AM

serko wrote: »

I buy and sell shares based on my perceived value of the company. I buy shares that I believe are significantly undervalued either on current fundamentals or on my prediction of future performance of the underlying company. I Sell if I believe the company is no longer undervalued either due to it's shareprice rising over my valuation or business performance being lower than my expectations and therefore I amend what I believe the company is worth.

However this does mean continually evaluating news and performance to ascertain my valuation.

For example if a companies shares are priced at £1 and I believe their true value is £1.50 I'll buy the shares. Let's say the market eventually agrees with me and the shareprice rises to £1.50. If I still believe fair value is £1.50 I'll probably sell as I want to invest in undervalued companies. However if the company has outperformed my expectations and I believe the fair value is now £2 I won't sell.

Let's say I buy that same share that I believe to be valued at £1.50 for £1. This time they have some terrible news and the price drops to 75p if I believe that 75p is now the fair value I will sell.

The thing is to have faith in your own valuation and let that dictate your decisions rather than emotions.

I've had a share that I bought at 60p drop to 30p due to poor sentiment. I didn't sell as I still believed in my valuation. It eventually went up to £8.

So in answer to the question I don't have a set rule on selling after a certain percentage gain or loss. Instead I continually reassess my valuation of the company.

This is the way the likes of Warren Buffet have achieved consistent high returns
Anything else is just gambling - and the odds are against you because of trading charges.
The problem is, of course, that assessing the true value of a company is not easy. In fact its mind boggling when you see the complexity of major companies, and then try to see into the future.
So I stick mainly to low cost index ETFs.

Selling shares standing at a gain

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