How to sell your favourite stocks

One of the hardest decisions in investing is deciding when to cash in your chips. When and how do you walk away? I’m sure it’s a question that you’ve asked yourself recently. If you are sitting on a sizeable profit, the question probably haunts you.

Well today I’d like to address this crucial dilemma. I’ll tell you about a solution that’s worked for me in recent years. And seeing as I’m in the throes of reducing my bond allocation, I’ll use that asset as an example. Here’s how it works…

What if the stock goes up after I sell it?

There are two considerations when you are deciding to sell – two questions that you have to ask yourself…

First, on a practical note, what’s driving you to sell? What factors determine your exit?

And secondly, how do you cut your position? Sell it all, or exit by selling small chunks over time?

There’s a time and a place for both. Sometimes it can be right to sell it all, and other times I’d definitely consider selling in dribs and drabs. Today we’ll look at both strategies – and when it’s best for each one. Take this bond here…

One-year performance of Enterprise Inns 2018 bond 

1-year performance of Enterprise Inns 2018 bond chart 

Source: Digital Look

I first tipped this bond just over a year ago – and as you can see, it’s had a good run. My reason for buying was clear. With interest rates set to stay low for the foreseeable future, we were looking for some decent income plays. And with this bond we were set to receive over 12% a year! That includes both the running yield (ie, what the bond is paying in coupons) and the capital gain when the bond matures at the end of 2018 (assuming Enterprise is still in business by then).

Given that this bond is secured by a mortgage over a property portfolio worth twice as much as the bond issue itself, my feeling was that it shouldn’t be paying out anything like 12%. Therefore it was a fantastic buy.

It now turns out the market agrees. With the bond trading at about £1 (what we call par), it yields 6.5%. That’s much more sensible!

The decision to sell is now relatively straightforward. 6.5% is a reasonable enough yield – but it’s not enough for me to stick with the bond. I’m inclined to sell the lot.

But I did say that there’s also a time to sell a stock in dribs and drabs. So let’s look at that:

Enterprise Inns share price over the last year 

Enterprise Inns share price over the last year chart 

Source: Digital Look

Though I didn’t recommend buying shares in Enterprise Inns, in reality they’ve performed even better than the bonds. The shares have motored up from around 30p to over £1.

But the problem with the shares is they’re much harder to value than the bonds. There’s no dividend – so you can’t value it in terms of income… any income considerations come down to as and when the dividend may be reinstated.

And in terms of growth, well the pubs game is generally in negative growth! These guys are more into selling pubs than building the business up. In fact, it’s selling the pubs that’s improved Enterprise’s liquidity position, which in turn has put a rocket under the shares.

Hypothetically speaking, if I had held the stock, my approach to exiting the position would be to sell down the position in thirds. With shares so much more difficult to value than bonds, I wouldn’t want to be so forthright as to say “sell the lot”.

Had I bought at 30p, I would have sold one third of my holding as the stock hit 60p. The fundamentals of the business hadn’t changed that much. And the stock was always at risk of sliding back.

A 100% gain in a matter of months would have triggered some profit taking on my part. And, as it happens, I would have been both right and wrong. Yes, the stock continued to motor… it’s a shame that I’d cut my exposure. But then again, I still would have had two thirds riding. And as part of the strategy, I would have sold another third as the stock hit 90p.

Remember, that second lot would have made me a 200% gain!

As for the last third, I’d still be sitting on it.

The point is, shares can be a devil to value. Even the best analysts can’t really say with much conviction where a share price is heading – and therefore when is the best time to sell. There’s an awful lot of randomness involved. It would be very conceited to suspect that you can work out the best time to get in or out of your stock. That’s why it’s usually best to phase your way in and out.

But when it comes to bonds, the position is much more black and white. It’s a matter of working out the yield to maturity (ie, what the bond pays in income and capital upon maturity) and deciding whether the bond is a good credit risk.

Ultimately, you can be more confident in your decision making with a bond. To my mind, it isn’t conceited to say that it’s time to sell Enterprise bonds. It’s a simple statement of fact. Today, the bonds yield much the same as an equivalent secured bond from a relatively risky provider. If that’s what you want (6.5%), then by all means stay in. But as for me, it’s a fond farewell to this one.

• This article is taken from the free investment email The Right side. Sign up to The Right Side here.

Important Information
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13 Responses

  1. 11/01/2013, RedBaron wrote

    Bengt,
    I don’t see the logic in selling – I bought the bonds and am sitting on a 14% gain after 5 months + having received 3.25% half yearly dividend. As part of a balanced portfolio I don’t see the reasoning behind selling a relatively secure investment paying 6.5 %.

  2. 11/01/2013, David Morgan wrote

    Good, well argued sense, as so often from The Right Side. Keep it going!

  3. 11/01/2013, David M wrote

    Bengt,
    The email I received of this article seems to include the share price graph twice instead of the bond and the share.

  4. 11/01/2013, Gary P wrote

    Recomended in December at roughly same price and yeild, Im somewhat bemused that this article is now recomending a ‘sell’.

  5. 11/01/2013, DKS wrote

    #1 RB. I think Bengt’s reasoning is sound for one very simple reason – the time value of money. You may have bought the bonds at, say, 75p a year ago on the expectation of receiving what was then a 12% return over the years to maturity (the 6.5% payout per year plus the 33% increase in the value of the bond at maturity evened out over the years) – I certainly did. By selling them now, though, you are getting that 33% (or near to it) today, rather than having to wait until 2018, when at 3% inflation it would be worth almost 17% less than it is now.

  6. 11/01/2013, DKS wrote

    Taken another way, you could look at the opportunity cost of selling. Because you’d be selling at par, you would forgo only the 6.5% coupon value, against which you have to allow for inflation (I’ve assumed 3%). Which means you are making only 3.5% in real terms. Is that acceptable for a sub-investment grade bond rated at BB-? If you feel it is, and you feel that bonds are not in a bubble, then maintain. If, however, you feel, as I do, that the bond is now over-valued for its risk profile, that you would not buy at today’s price, that the aim that you set out to achieve when you purchased the bond (did you write that down?) has been achieved, that there is a better investment opportunity out there, or even that you’d like to simply sit on the cash, then sell.

    I sold mine this afternoon. When the bond bubble bursts and they drop back down again, I will look at diving back in. Right now, though, and please forgive the pun, I very much feel on the right side of this deal.

  7. 11/01/2013, JONESTHESPY wrote

    I’m inclined to agree with DKS bought these @0.90p October 2010 so have a rocky road, I think this could be the time to sell, there must be safer opportunities out there with this yield?

  8. 11/01/2013, Carter wrote

    Why not switch to the Enterprise Inns 6.875% 2021, which is around 93p, and undoubtedly, will get to par soon too?

  9. 11/01/2013, DrD wrote

    Very interesting article as always.
    I have a generic question about selling in stages, rather than in one hit. Particularly for small investors, this will obviously add significantly to your trading costs. e.g. assuming £10 commission, buying once and selling in 3 stages would cost £40, i.e. 4% of a £1000 trade. For a £4000 trade £40 is only 1% ofcourse, but in the interest of minimising trading costs I was wondering what rules of thumb might be useful for the minimum transactions?
    Personally I only dabble in stocks and like to buy in £1000 stages and average down, but if I decide to sell my instinct is to bite the bullet and sell the lot in one hit.

  10. 12/01/2013, Mike wrote

    If you got 12% on the money you invested in Enterprise Inns, that it is now yielding 6.5% does not seem an argument to sell. You are still getting 12% on your investment. To cash in a capital gain is a quite different argument.

  11. 12/01/2013, Dave wrote

    @carter I saw those a while ago- they seem to be in blocks of 10,000, rather than the 1000 I can get from my broker for the 6.5, that’s the main reason I won’t be looking any further.

    I am pleased to see this article because I sold a couple of days ago, it’s nice as someone who is still new to this to see your judgment confirmed. these bonds have been a stand-out success for me in my first year of investing.

  12. 12/01/2013, George wrote

    Bengt has decided to reduce his bond holdings from 25% to 20%, so this is a no brainer.

    My perspective is somewhat different. Having paid only 74p per unit, as the price approached 90p I began to consider selling, especially as the 2018 redemption date has always been cause for concern – I would be 88 by then, and probably deceased.

    However, after careful consideration, it seems to boil down to the fact that I could receive the capital gain now instead of December 2018 (when it would be worth less), but would forgo the 8.78% yield (£6.50 per £74) and receive c1% less tax from a bank.

    There are several equities I wish to buy when prices return to a reasonable level, but in the meantime it’s best to continue receiving a decent yield. Of course, any increase in interest rates would necessitate an immediate sell decision, but a pullback in share prices seems likely to occur first.

  13. 13/01/2013, Andreas wrote

    When i am in doubt whether to sell a share or not, i put a trailing stop order to sell the share if the current price falls by x%

Commenting on this article closed

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