Once we had built a sturdy base of ultra-low risk (read cash, bonds, GICs, etc.) investments, we decided to start buying some individual stocks. (We already have some index funds/ETFs through defined contribution pension plans.) Since we are financially very conservative, we bought what Gordon Pape calls “defensive” stocks: ones that withstood the most recent market crash better than some of their peers. These stocks are not meant to generate the best capital gains. They are meant to generate some capital gains and some dividend income and plod along in a steady profitable manner. So how on earth do you decide when to sell these kinds of shares?
Enbridge Has Gone Up 58% per Share
Here’s an example. We bought a few shares of Enbridge just before it split.
(A split is when the company issues more shares to all of its shareholders based on some formula. In the Enbridge case, they issued one additional common share for each common share you already owned on the specified date. So it you owned 100 shares on that date, you would then own 200. The price per share is cut in half in this situation.)
In the months after the split, the price per share rose steadily. Today it’s trading at $48.75 a share. We bought at $61.50, which is $30.75 if you adjust it for the split. So today, we could have a profit of $18 a share (less the cost of commissions) if we sold.
So should we sell?
Don’t Sell! The Stock Market is Climbing!
Some people would say we obviously should not sell. The stock market is, overall, climbing. Since January, Enbridge has basically been steadily climbing in price.
In fact, aside from a few flat patches, ENB has been going up since 2009.
Ah Yes. 2009. WHY has it been Going Up Since 2009?
Well for one thing, in January 2009 the stock market had an awful lot of room to go up into.
If you go to the stock chart at Globe Investor at http://www.theglobeandmail.com/globe-investor/markets/indexes/chart/?q=tsx-I and select the 10-year chart, you can see how badly the S&P TSX Composite was hit. In fact, we still haven’t climbed back up to where we were at in May 2008. (I’m glad we were mostly invested in GICs then.)
So what’s the picture like for Enbridge?
Actually, I’m pleasantly surprised. Enbridge didn’t collapse during the 2008-2009 crash as much as many stocks did. The 10-year chart on their website at http://www.enbridge.com/InvestorRelations/StockInformation/StockChart.aspx shows they did suffer, but not that badly. (Of course, thinking about it, that was why we bought this stock. It is defensive during crashes.)
My point (and I actually have one) is that markets that seem to be climbing can, at almost any time, collapse.
Should We Take the Profit and Run?
When will the market collapse again?
I haven’t found anyone willing to commit to that one. So we could sell our shares now and run off with the profits and…..
And what, exactly? Where else would we put that money?
- Real Estate? Which is more likely: a stock market collapse or a housing price collapse?
- GICs? At 1.75%? With “real” inflation at about 2% or higher?
- Different stocks? Why would they be safer than Enbridge?
None of these solutions seem an obvious choice.
How Stable is the Company?
Another factor (especially if considering just moving the money from one stock to another) is how is the company itself doing? What are the risks of that changing significantly and/or swiftly?
Enbridge sounds like a very defensive investment. It’s a utility with regulated pricing on many of its activities. There are thousands of us residential customers heating our homes and our water with natural gas delivered to our meter by Enbridge.
Enbridge also has a huge network of pipelines. Any of which, however unlikely it may be, could leak. Or catch fire. Or otherwise cause damage. That kind of damage can be costly to repair and mitigate.
Some of Enbridge’s plans for expansion are also risky. Various proposed pipelines have been stymied by a mixture of environmental, First Nations and nearby residents concerns.
How do you weigh these factors when trying to decide, personally, whether to sell or hold?
Most of us think Monte Carlo is just a place somewhere near France. If you asked me to set up and run a Monte Carlo analysis on this situation, I would look as blank as my turned off TV screen. I’m not a securities advisor nor do I play one on YouTube.
So what DO you do?
My sometime solution is covered in another article: When Wishy-Washy Works.
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What factors do you consider when deciding whether to sell your position in a company? Do you use a mathematical formula or an emotional intuition? Please share your strategies with a comment.