Selling stock and taking a 'free ride'?

I’d love to tap into the collective wisdom of the hive mind and see what you think about the concept of taking a ‘free ride’ by selling stock once it’s reached a certain multiple of the purchase price? The theory goes that if, for example, the price of a stock more than doubles once you’ve purchased it and you’re in for a 100% profit, you then sell enough stock to recoup your initial investment in order to remove all risk of making a loss and let the rest “ride for free.” If the stock continues to rise, you’re still in for a profit without any risk, though obviously less than if you hadn’t sold any stock - you give up some of the upside for the guarantee of not making a loss. It doesn’t need to be a 100% gain, so if you’re up 50%, you sell two-thirds of your position to take out the money you initially invested. Here’s the thing…I can’t work out whether this is a smart & prudent thing to do (I have a medium risk profile when it comes to stock investing), or only makes sense if you think the stock isn’t going to keep rising AND you find another stock to re-invest the money you withdrew, that rises at a similar rate as the stock you sold some of.

2 Likes

To me it only makes sense to sell down positions if you me view of the company has changed. Let’s take my position in Tesla say, I started building at $199. It then hit $400 and I could have sold half, but I firmly believed that people were misunderstanding how loyal Tesla fans were and how good and useful the batteries could be. So I bought more at $400. I would only have sold down if I believed the run of the company was unlikely to continue, in which case I would have sold all of it. If I had sold my position would have been risk-free but would have massively reduced my returns. Think for example, of Apple. If you sold out of Apple back in 2010 for a 100% gain from 2008, you would be feeling pretty sick right now as instead of making a huge gain you made less than half of that had you left your position. I would suggest only selling if you no longer believe in the company or find better returns elsewhere. All money is ‘on risk’ until it isn’t.

7 Likes

@PaulBackman It is an appealing thought isn’t it! - take some profit to get your original stake safely back, and continue to take a “risk-free” chance with the rest of it. I wonder if it is logically inconsistent though. You’d be saying it has become a poor investment for this money here (the original stake) so I will sell it, but it is a good investment for that money there (the growth), so I shall keep it invested. So maybe one way to think about it is: if I wasn’t invested in this stock at all, would I buy it at this price? If so, don’t sell! Which I think is another way to put @hrochfor1’s point.

On the other hand, taking some profit can be be a Good Thing. And if it lets you diversify your holdings, or if it helped you keep going with investing in the long term, that could also be a Good Thing!

5 Likes

@hrochfor1 Thanks so much for your thoughts. You make a really good point about only selling down if you believe the run is unlikely to continue and I’d also add to that, if you anticipate getting a higher rate of price increase / dividends elsewhere. Weighing up missing out on potential upside versus derisking is always a tricky balance, and probably related to an investor’s overall risk profile or what their portfolio looks like at the time in terms of spread of holdings and overall returns.

1 Like

@rod Yes, derisking is definitely sometimes appealing though FOMO is always an investor’s dilemma and not always a good force to be driven by. Balancing being rationally optimistic and sensibly prudent is difficult and messy. You really nail it when you highlight the contradiction between taking money out (for better returns elsewhere) and leaving it in (for possibly good returns in the original stock). I like the question you pose about asking oneself if I’d put more money at the time when I’d be considering selling down my position. Thanks so much for your thoughts - I really appreciate them.

1 Like

This makes no sense to me personally.

The only two sensible things to do in my opinion is to sell stock either because you don’t see it growing any longer or you have a better place to put money into. Both those options have nothing to do with how much you already made.
[edit] I just managed to come up with a third reason — you might consider selling if a position becomes too large for your liking and you want to diversify. Not something I would do, but I can see why some people may want to do it.

I think your question illustrates why is it generally not advised to invest money that you feel you might need some time in the future. If you have enough cash to cover absolutely everything you may need for months, what’s the urge to “take profits”? There is nothing useful for you to do with those money. Unless ofcourse there IS something useful, like investing in a better venture, in which case you sell. But not to “take profits”.

3 Likes

If you were a robot with no emotions then its not a good idea and is logically inconsistent etc.

I think it can be a good idea for those more speculative stocks with a pretty binary outcome ie they either hit it very big or flop. Example would be a biotech running a pivotal clinical trial or a company whose success depends on the outcome of a legal trial or a miner evaluating a new area. For stocks like these typical analysis is not as applicable since it doesn’t help you be any more accurate in your prediction of the binary outcome.

Even for less speculative stocks I think it can be good to consider your own psychology and place some importance on that as well as your analysis of the company. If you know you don’t deal with massive volatility well and have sometimes panic sold just because a stock is down, does it make sense to invest in very volatile companies even if you think they will perform best over a ten year period?

3 Likes

I agree with this. For speculative stocks, if you reach a point in which you are up 200% (multiply by 3 your investment) I would most probably retrieve my initial investment and just leave the profits or take half.

1 Like

Thanks - super helpful insights. I appreciate it.

1 Like

As you say, risk profile is key. Thanks for your thoughts.

Yes, I think trying to set yourself some rules and sticking to them is important, to override in the moment enthusiasm or panic. It’s knowing at what level you sell all or sell some, and then (as other posters have said above), what you’re going to do with the money you make by selling down your position (i.e. find a faster growing / higher dividend stock or to add portfolio diversity), that will govern those rules.

1 Like

‘Taking profits’ is important for good portfolio management if you are picking individual shares. For example, I bought Tesla shares at $200 and $400 to compromise 10% of my portfolio. Following the recent share price explosion they become 45% of my portfolio. Now that is just too risky for me so I ‘took profits’ and scaled back my holding. Ideally I would hold near 100% of my portfolio in Tesla but I do not have that sort of risk tolerance. I don’t really see better opportunities elsewhere, not saying that they do not exist, but good risk management dictates I ‘take profits’.

I’d say it wholly depends on what your investment strategy is.

I invest for value and have a price target in mind for the stock i’m holding, I usually re-assess my position when the target is reached. If a company exceeds my expectations and I think it has more value, I will hold. It’s important to realise what your expectations for the investment are and to get out at the right time and not get greedy.

It depends on the individual’s situation, but i’d say it isn’t smart or prudent to use this as a strategy to apply to all or even some of your investments. Know your holdings well, try your best to assess whether you see more value or not and then come to a conclusion.

This is very comparable to recent gambling techniques with cash outs and I see it as a gamble rather than an investment, unless you’re using this to reduce risk and investing the funds for growth elsewhere.

1 Like

Love it. Great and very clear summary - thank you. Having read through all the comments above, I agree that it only really makes sense to take out your initial investment when you hit a decent multiple of your original stake (rather than staying all in) if you believe there are richer pickings elsewhere or you want to diversify.

2 Likes

Thanks for the great comments. I was thinking exactly the same as the OP, and specially in relation to Tesla so it must be a common stock for a lot of people.
I have also decided to stick with my holding as I can’t answer the questions about what I would do with the money and my views of the company have not changed.

2 Likes

This topic was automatically closed 91 days after the last reply. New replies are no longer allowed.