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,
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.