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Here’s why you should think againPeter Hodson: From locking in gains to a price plummet there are lots of good reasons to sell. But is it always wise?Last updated 49 minutes ago You can save this article by registering for free here. Or sign-in if you have an account.Traders work on the floor of the New York Stock Exchange during afternoon trading in New York City. Photo by Michael M. Santiago/Getty Images filesThis week, I am going to discuss one of the hardest issues that investors face: the issue of selling. Most investors, helped by ever-bullish Bay and Wall streets, see lots of “buy” recommendations and know that long-term buys are usually the best strategy. According to Business Insider, only three per cent to eight per cent of stock recommendations are “sell” or “underweight.” So, everyone knows how to buy, but all investors have had issues with the sell side of the equation. Everyone has a story of that “loser” stock that they should have sold but for some reason just didn’t. In columns over the summer I am going to highlight some reasons to sell and some strategies to help investors cope with this age-old problem. But first, I am going to outline some reasons not to sell a stock.Subscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.Subscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountorCanada's best source for investing news, analysis and insight.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Investor will soon be in your inbox.We encountered an issue signing you up. Please try againSure, as they say, “nobody ever went broke taking a profit,” or “pigs get slaughtered.” Suppose you own a stock and are up, say, 150 per cent since purchase. Congratulations, nice purchase. So now you want to lock in a profit and sell your winner. You can brag about the gain and maybe buy yourself something nice. But should you really be selling your winners? The stock is up a lot so you know other investors like it too. Positive momentum can be very powerful. Also, the buyers today are not buying with the expectation of losing money. What do they see that is making them buy now? You can’t go broke taking a profit but you also can’t see a stock go up 1,000 per cent if you sell after a 150 per cent gain. If you think 1,000 per cent is impossible my Bloomberg terminal tells me that 94 North American stocks have risen 1,000 per cent or more in the past five years. Sell to raise cash, or to buy a house or a boat, or on high valuations or to cover a debt. But don’t sell just because a stock is up.We see it time and time again. A company misses earnings estimates one quarter and their stock plummets. So many investors are short-term focused these days. Often a stock will fall on earnings news and then rebound sharply as investors realize things are not as bad as the headlines indicate. There are many reasons why a company might miss earnings estimates. Maybe the analysts were wrong. Maybe, and this is a better reason, the company is spending now to set up future growth. Maybe there is a new product in the wings that hasn’t launched yet. Maybe a giant order came two days after a quarter end. The point is: The best investments are usually held for the long term. Ninety days, or one quarterly period, is not a long time for an investment that should have a 10-year holding period. Just to make our point, let’s look at Nvidia Corp. In 2018 it missed its earnings estimates for the third quarter by four per cent. Investors panicked on the miss and the stock fell 18 per cent on this news to US$4.11 per share. It is about US$200 now.Sometimes, due to bad short-term news such as wars, inflation readings or political moves, the market will drop a lot. This happened earlier this month, on June 5, when the Nasdaq dropped 4.18 per cent in one day for a variety of reasons, including fears of an interest rate hike and a drop in tech stocks. This makes for headlines, but how does a single day drop impact your company? Unless your company is an asset manager, the answer is “not very likely at all.” Companies continue to bring in earnings and cash flow if the market is down four per cent. Customers show up and business continues. Don’t let a scary short-term market cause you to panic and sell a good investment.Sometimes a stock will decline and there will be no news at all to account for the change. Investors may worry about the decline, sensing something worse is hiding. The problem? There are dozens of reasons why a stock might decline. But without a press release, a fund or insider disclosing trading or a competitor reporting something negative, you will never know what the reason is. It could be simply a large seller. It could be a fund shifting asset allocation. It could be someone covering a margin debt. Sure, it could mean bad news as well, but without confirmation you are just guessing. Like any guess, you could be wrong, and we at 5i Research would never advise selling a stock on a guess.Sometimes I get flack on this one from investors who believe that all insider selling is bad. But let’s do some math: Suppose at the start of a year insiders own 20 per cent of a company that is doing well (for simplicity let’s set market cap at $1 billion). The sector and stock rise and the gain for the year ends up being 60 per cent. Market cap is now $1.6 billion. Then, insiders report that they are going to sell five percentage points of their holdings, bringing ownership to 15 per cent. Yikes, an $80 million insider sale; that must be bad. But is it, really? If you have been following the math, even after the sale, insiders still have $40 million more at risk in their own company than they did last year ($240 million, up from $200 million). So, all the shareholders who sold on this insider selling news neglected to realize insiders have even more money at risk than they did the prior year. So, not all insider selling is the same, and we at 5i Research would not sell in such cases.Peter Hodson, CFA, is founder of 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals. He is also portfolio manager for the i2i Long/Short U.S. Equity Fund. (5i Research staff do not own Canadian stocks. i2i Long/Short Fund may own non-Canadian stocks mentioned.) If you like this story, sign up for the FP Investor Newsletter. Join the Conversation This website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.