With respect to capital gains you never make money until you sell out of a position.
You might be up 15%, 50% or 200% but the gains aren’t real until you hit the sell button and crystallize the money you’ve made into real tangible gains
When to properly sell your investments is the first lesson I teach when I am investment coaching with clients. All new investors struggle with this concept. We lose money early on because of it and through the process of maturing as an investor we struggle on different strategies we try to avoid making a mistake.
The recently proposed takeover of Tim Hortons by Burger King has been a topic of discussion in conversations with my fellow investors and clients. If you have held THI since its IPO in 2006 you’re up just over 160% (not including dividends) and with a nice pop of 40% over the past 30 days many people are wondering what is the right move?
For me the answer is clear and obvious. I would sell. Not because of a change in fundamentals, or disliking the takeover or because I have something else to invest in. The main reason would be to redeploy the capital to another opportunity. I talk about this in a post from 2008 that is still very relevant today; 30% today vs. 50% tomorrow.
Investors always wonder how further a stock can climb, but rarely stress about how far it could fall. If I’d made 160% on THI since 2006 what is another 5-10%? The upside is limited by possibly another 20%, but the downside is surely much greater if the deal falls through or investors in THI vote down the offer.
Two other posts are from a few years ago;
Both of these posts discuss my approach to selling that I still practice today. My approach is cold, calculated and emotionless. 15 years of investing has taught me a lot of important lessons and one is not to take anything for granted. If you have the opportunity to crystallize a gain DO IT. You can always move back into a position on weakness, there is always the chance you might have to buy it back a little more expensive, but at the end of the day money doesn’t go into your pocket until you sell your gains.
When investing try your best to invest from a position of strength. That’s my fundamental approach and why I focus on dividend growth. If you invest from a position of strength you are far more likely to be successful on a consistent basis and consistency is what leads to long-term gains and financial success.