What to Do When Your Stocks Double
by Marc Lichtenfeld, Investment U’s Senior Analyst
Wednesday, December 8, 2010: Issue #1403
“What no books, no schools, no brokers will teach you.”
That’s the Investment U motto. And the motto I’m about to share with you today attests to that. How so?
Because the most valuable and profound investment lessons often don’t come from reading stuffy textbooks; they come from experience.
In short, learning the easy way – and the hard way.
And take it from my experience, here’s one of the best approaches you can take when it comes to selling your stocks – both for your portfolio and your sanity…
Grab Your Profits… Play With House Money… Get Peace of Mind
A friend of mine once worked in the sales department for Polycom (Nasdaq: PLCM) – the maker of video conferencing products and the ubiquitous three-pronged speaker-phones that seem to be in every conference room in America.
As the company was going public, my friend suggested that I buy the stock. I bought a few shares at a split-adjusted price of about $4.
A few months later, I bought more shares, based on my buddy’s upbeat report. While he never gave me specifics, he continued to tell me that things were going well, so I was also able to stay patient while I held the stock. That patience was rewarded as the price climbed.
And here’s the crucial part: When it surged to over $10, I sold half my position, taking my original investment off the table, plus a decent profit – what I call partial profit taking.
The result was that I was then playing with the house’s money. In turn, I no longer agonized over every tick of the share price because I knew that no matter what happened, I couldn’t lose a dime.
When the stock hit $25, I sold half of the remaining position, before finally cashing out the last of my holdings at over $40 per share.
Without taking this approach and grabbing profits when the stock doubled, I can say with absolute certainty that I wouldn’t have had the patience to hold the shares all the way to $40.
But by removing all the risk, I was able to ride the uptrend free and clear. In the end, I actually made more money by selling half after it doubled than if I’d held onto the entire position.
That’s the “do” part of my advice. Now for the “don’t” portion. Whatever you do, don’t repeat this painful lesson…
Next Stop: The Basement
I was always skeptical of the dotcom boom… even as everyone else was plowing headlong into the frenzy.
After all, I was right in the heart of it, speaking with the CEOs and CFOs of some of the largest and most revolutionary high-tech companies.
One such company was Quokka, which broadcast niche sports on the web. I had a good relationship with the executives and some other employees, but despite the fact that most people didn’t have broadband access at the time (which was required to watch the videos), the CEO believed his company was destined for greatness.
Throughout the period, I repeatedly challenged CEOs about how they were going to make money. But I was consistently told that I “didn’t understand the new paradigm.”
However, when Quokka landed a major deal to cover the 2000 Olympics, broadcasting events that weren’t being shown on TV, I bought the stock. I figured that with Internet stocks going crazy, once the Olympics took place and Quokka started getting press, the stock would take off.
I was right. After buying shares around $7, the stock climbed steadily. When it hit $15, I told my wife I was going to sell half of the shares and take our risk off the table.
But she argued that we should let it ride. At the time, we were in a cramped one-bedroom apartment and had dreams of buying a house. The exchange went something like this:
“If it keeps rising, it could be our down-payment,” she insisted.
“I’ll sleep a lot better if we take our original investment off the table,” I responded.
After going back and forth for a while, she resorted to challenging my manhood.
So I did the manly thing and gave in.
The stock started to drop. To $12… then $10… and all the way back to my $7 buy price. When it hit $5, I promised myself I’d sell it if it got back to $7. But it didn’t. Instead, it slumped all the way to zero, as the firm eventually went bankrupt – and I rode down with it.
The lesson here?
Sell half of your position whenever a stock doubles in price.
That way, no matter what happens, you can’t lose any money.
Hoping your longs go up and your shorts go down,
Marc Lichtenfeld
P.S: In case you’re wondering… yes, I do still listen to my wife. In fact, that was the last time she was wrong… or so she tells me.
Feel free to share your own list of investments “do’s” and “don’t's” in our comments section below.
Any investment contains risk. Please see our disclaimer.
13 Responses to “What to Do When Your Stocks Double”
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Marc is a senior analyst at Investment U. His investment career started out at the trading desk of Carlin Equities in San Francisco, CA, where he executed dozens of trades each day for his clients.
I definitely agree. I just did that a couple days ago with a stock I was lucky enough to enjoy a double. I bought ROM at $4.20 and sold half at $9.10. This should be mandatory training in anyone’s financial education.
Yeah!
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I use the Oxford club trailing stop loss (somewhere between recommendation. My rationale is that:
o You keep the opportunity for extra profit if the stock continues to rise
o You cover your losses in the event of a serious pull-back
What am I missing in terms of the above being a better strategy than merely selling 1/2 once it hits 100% increase?
Best Regards
Steve
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I am still waiting for a 100% rise in any stock. I have been using Oxford for some time. I have had a few very good ones, and not many losses. I have been stopped out of several with the stop losses when the market dropped, then the stock continued to rise. My stop loss was less than Oxford’s.
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Great advice!
I wonder if sticking to a 25% trailing stop could achieve the same?
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I am 24 years old and started playing the market a couple years ago and have always appreciated the advise in Investment U.
Being 24 years old, I am not yet married, not by a long shot. But the lesson I learned here today is don’t listen to your wife! (when it comes to financial advise at least).
On a side note, how often do people get to use this advice? In other words, how often do your shares for a given company double?
Cheers.
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Selling has always been my most difficult investment decision… I’m curious as to how your theory compares with the 20 or 25% trailing stop philosophy i.e. let your winners run?
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Some of those comments above are on the right track. The answer is TRAILING STOPS. Put them just under the current price and keep raising them if the stock keeps climbing. You and your wife are both right. Protect the profits and let the winners run at the same time. How much more could you have made in your PLCM position if you had followed the trailing stop policy?
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Excellent advise and I have been following this rule since I first heard you talk about it while at the SF Chairman’s Circle meeting. I will sell half after a double but I will just use the 25% trailing stop on the rest. Since the SF trip I took this and applied it to 4 of my positions that had already doubled. I feel a lot better about it as well.
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I did the same thing with Ford stock. When all the auto stocks were down I figured the market was blaming Ford for GM’s problems, etc., and I was right. Also I was looking for a cheap stock that I could buy lots of shares of and sell several covered calls against. So I bought Ford at $2.17 and later sold half at $5.62. Meanwhile, several times I’ve sold calls against it, though I’ve had to buy them back a few times. Now it’s above the strike price of my latest calls ($15) and I’ll probably let them be called away for a nice profit plus the money made selling the calls.
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Aldo is correct. When it comes to financial advice, never listen to the wife. I made that mistake twice, and it will cost me for the rest of my life. First time, we got invested in a Ponzi scheme and lost everything, and the second time, I listened when she forced me to take my Social Security before my full retirement ago so she could start receiving her share of mine. Now, I’m stuck with receiving only 80% of what I should be getting. That was when I didn’t realize I could have cancelled my benefit and let her receive her reduced share.
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I’ve been applying the same philosophy to my options buys: I put a limit order on half of the contracts at just a little over double the buy (so the net sale after commissions gets me my money back), and put a stop-limit on the other half at 50% of the high price. If the latter stops out, I sell the first half as well; otherwise I let it ride.
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“But by removing all the risk, I was able to ride the uptrend free and clear. In the end, I actually made more money by selling half after it doubled than if I’d held onto the entire position.”
I understand the sleeping more soundly but you lost me on the arithmetic backing this statement. Seems to me the half you sold would have generated exactly the same gain as the half that you kept, DOUBLING the end result.
I’m of the opinion you should have kept it all and used a trailing stop for safety. Let the winners run and cut the loses.
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If manliness is defined as having the courage to stand firm on one’s convictions in the face of adversity, then why does true manliness get redefined to buckling to our wife’s will?
Marc, you did the right thing. Many things are backwards in the love relationship
Carpe Diem
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