Rathbun: When to take a profit on a holdingWritten by Gary Rathbun | | GaryRathbun@PrivateWealthConsultants.com
Recently, I was asked when one should take a profit on a holding. Although this is a fairly simple question there are several answers that might be applicable depending on your circumstances or goals. There is an old saying, and I don’t know who to attribute it to, but the saying goes, “You never go broke taking a profit.”
If you have a decent profit on a particular holding there is nothing wrong with locking in that profit and realizing the gains. Of course, there are tax consequences to take into consideration, which I will not go into here, but are important nonetheless.
Studying the technicals and the fundamentals are what come into play when deciding the timing on when to take a profit. Last week we talked about the price to earnings, or P/E ratio and the importance of this number when evaluating the price of a holding. As the price of a stock moves up, the price in relation to the earnings becomes greater and hence more expensive.
If the P/E ratio is creeping up and the forward financials indicate a slowing in the earnings, or even flat earnings, you might want to take the profit.
Another strategy for those unsure whether to sell or not is to sell off a partial position and keep the remainder. This is like having your cake and eating it too, but it does provide a compromise on whether to sell today.
Often we take the profit off the holding and invest it into another holding. This helps to diversify a portfolio and spread the risk further.
Options are a little more complicated method of locking in the profit of a holding. You can simply purchase a “put” at a set price that will lock in the profit. The purchase price of the “put” can reduce the overall profit you make on the holding but it does give you flexibility in the timing and pricing of a sale. (Many of the option strategies employed are “cashless” meaning there is no out-of-pocket cost to the investors).
Most investment advisers don’t invest or use options since they are complicated and require diligence in using them, but they are very useful and offer a tremendous amount of protection.
A contrarian attitude of when to sell is when everyone else is buying. If the volume starts to pick up significantly it may be time to get out and take the gain. Generally, once the media starts to sing the praises of a company and how well it has done recently, it’s time to get out and into something else.
Finally, a good indicator of when to get out is if the insiders are selling. If the CEO or other top executives are selling their shares they probably know something you don’t and you might want to follow their lead. This is public information and readily available for anyone who knows where to look.
Many factors go into deciding if and when to sell a holding. For example, a change in the company’s product line, a change in the competition’s product line, foreign competition or the costs of production, and the overall economy and spending habits of the consumer.
I never get emotionally attached to a holding and if there is a profit, I generally take it and move on. You never miss an opportunity because there is always another one coming along. I am also never opposed to buying back into a stock if the numbers change and it looks like I can make a profit again.
Remember … you never go broke taking a profit!
Gary L. Rathbun is the president and CEO of Private Wealth Consultants, LTD. He can be heard every day at 4:06 p.m. on WSPD 1370 AM’s “After the Bell” with Brian Wilson and the Afternoon Drive, and every Wednesday and Thursday evening throughout Northern Ohio on “Eye on Your Money.” He can be reached at (419) 842-0334 or email him at garyrathbun@privatewealth consultants.com.
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