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When Wishy-Washy Works: Taking Part Profits from a Skyrocketing Stock

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I recently lamented in How on Earth do you Decide WHEN to Sell Your Shares of a Successful Stock how difficult it can be to pick the time to sell. One strategy I (and others) sometimes use is to take “part profits.” Yes, it’s wishy-washy. But it works.

Let’s look again at my old friend Enbridge. We bought at $30.75, split adjusted. It’s trading today at $48.75. So each share is up $18 in just under 2 years. Our trading commission at BMO InvestorLine, where this stock is held, is $9.95. It’s held in an RRSP so there is no capital gains tax, although all monies withdrawn from the RRSP in the future will be taxed as income.

Calculate the Impact of the Sales Commission on Your Total Return Before Selling

You should calculate how many shares you would have to sell just to pay the trading commission. Then you’re ready for the next step.

Here’s the analysis for my situation:
With an $18 gain, we could sell one share and still make an $8 profit. That’s a return of more than 13% on the original 30.75 investment, since it has been just 2 years since we made the purchase. Cool! (Most of my investments report in negative numbers.)

In case anyone wants to know what math I used:
(48.75-30.75) = 18
(18-9.95) = 8.05
(8.05 / 30.75)*100 = 26%
(26%) / 2 = 13%
You can see where your mileage may vary.

If you have a sales commission of $29, obviously selling one share would lose you money. You’d have to sell 2 shares just to make $7. Still, for each share you sold after that you’d make the full $18 a share of profit.

Does the Sales Commission Use Up Too Much of the Profit?

If you are going to have to sell a quarter or half of your shares just to pay the sales commission, you may decide you don’t want to sell now. All decisions are 100% personal, but it doesn’t seem like a great profit will be made if so much of the growth in value in the stock will be going to pay fees.

An example of this might be if you bought 100 shares at $1 each including the fees paid to buy the stock. They are now worth $2 each. But you have a trading commission of $29. You would have to sell 29 shares just to pay the commission. Even though the stock has doubled in value, you might not want to sell.

Or you may feel that’s as high as the stock can go, so you’ll just have to accept the painful fee, sell, and take your $71 profit. It’s still a return of 71% and if you bought those shares in the last year, that’s an amazing annual rate of return compared to a GIC.

Defeating Analysis Paralysis by Taking Part Profits

The worst part of owning a very successful stock is deciding when to sell. You keep wondering if it is going to continue to climb into the stratosphere leaving you stranded on Earth wishing you had stayed aboard. Then you start agonizing that maybe it has run out of fuel and is about to nosedive down to plunge back into the ocean, sinking all your hopes fifty fathoms deep.

For the wishy-washy part profits are the answer.

Instead of selling all of your holding, you sell part. That leaves you with some bragging rights either way the stock goes.

If the stock continues to climb, admittedly you will not maximize your benefit from that improvement. However, if you put your part profits to work in another successful way you may not suffer a substantial setback.

If the stock plummets, you will still lose money, but hopefully your partial profits will offset the loss or enable you to make an overall profit.

How Much Should You Sell to Take the Partial Profit?

Of course now you’re back at a variation of the original question: how MUCH do you sell?
This is where the sales commissions may play a role.

With my Enbridge stock, I could actually sell one share at a time, since I make a lovely little profit on each one. It does, even to me, seem a bit silly to do that, though.

Making too many sales and paying too many fees makes even less sense if the commission uses up a substantial amount of the profits.

Do I Have to Sell in Groups of 100 Shares?

In the bad old days, this question was often simpler. Brokerages did not like to accept or fill orders for sales unless they were in multiples of 100 shares. The use of computerized trading has changed that significantly. Now the large brokerages like InvestorLine don’t seem to care whether you place an order to sell 10 shares, 100 or 1000. So keeping your sale in lots of 100 isn’t a factor for most sales.

The Wishy Washy Way to Pick the Percentage to Sell for a Part Profit

Luckily, the wishy washy world has developed a standardized decision to avoid excessive dithering. These rules suggestions apply AFTER you have decided it is time to take partial profits and AFTER you have decided that the trading commissions will be a reasonably small cost. Not every stock should be sold when it’s up 50% or even 100%.

  • If a stock is up 50%, take part profits by selling 25%.
  • If a stock is up 100%, take part profits by selling 50%.
  • If a stock is up 200%, take out your original investment by selling 100%.

All of these rules are based on the assumption that you have somewhere to invest those profits (or spend them) that will be safer and still generate a good return.

Getting Back to Enbridge and Part Profits

So what did we do with Enbridge? We sold down to our “core holding” position. We want to always have some Enbridge stock in our portfolio (at least based on our analysis of today). So we took as much profit as we could but now we have to leave it alone. It’s a dividend-paying long-term defensive stock. We just have to ignore that “paper” capital gain and leave it be.

Now we might just have to take a look at our CNR though….

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How do you choose when to sell a skyrocket in flight? How much do you sell? Please share your strategies with a comment.

How on Earth Do You Decide WHEN to Sell your Shares of a Successful Stock?

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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.