Profit-Taking in Tech Portfolios
By Jim Seymour
Special to TheStreet.com
1/12/99 11:29 AM ET
This market has produced some odd reactions among investors, such as
"Always buy, never sell." Nuts to that.
Just a week ago, I published here a watch list for 1999 of 25 stocks I thought
you should keep an eye on this year as potential highfliers. Since then, that
basket of stocks is up, as of mid-morning prices, more than 15%. So how
should you respond?
Read my lips: t-a-k-e p-r-o-f-i-t-s -- at least on some of your positions.
The point is to make money, not to perpetually hover over a portfolio of stocks
that have moved to high valuations. Churning your portfolio to suck out 2%,
even 5%, gains, isn't necessarily smart. But holding when you've had huge
gains is asking for trouble.
I've had a flood of reader mail since that column and its precursor, Nine
Trading Principles for '99, appeared. The overwhelming majority has been
positive; thanks to those who wrote with kind words. Thanks, too, to those
who wrote with some less-than-flattering comments. I learn from them as
well.
But for me, the most interesting -- and worrying -- thing about that pile of
emails wasn't the ratio of yeas and nays or the warm, fuzzy stuff, but the
number of readers who set out one or another of three portfolio strategies:
This stuff if always going to be going up, so there will be no reason to
sell this year.
I liked one of those stocks so much that I put my whole portfolio into it.
Looks like it's finally time for me to go out and establish a position in
some of those highfliers.
Scary, scary, scary.
No reason to sell this year? When one of your positions has a nice gain --
and the gains of the past week in some of these stocks, such as Broadcom
(BRCM:Nasdaq), Yahoo! (YHOO:Nasdaq), Lycos (LCOS:Nasdaq), Amazon
(AMZN:Nasdaq) and Excite (XCIT:Nasdaq), are truly spectacular -- it's time to
take some profits.
Yahoo! is up to 403 today, a 70% gain over the end of 1998. Lycos is at 115,
up from 55 at year-end -- better than a 100% gain. Amazon closed at 171, up
60% from the first of the year. And so on.
It's time to take some profits on these big winners.
It doesn't necessarily mean sell your whole position. Sell half; keep half. If the
gain has been really huge (that phrase's meaning changes daily!), and you're
getting nervous, sell 80% or 90%. Or maybe the whole position. And then
re-establish a smaller position in the securities, if you wish.
Pocket the profits, establish a new, higher basis (cost) for tax purposes, and
look ahead.
(Tax consequences? Sure, I prefer to shelter gains under the
capital-gains-law provisions. (I hate the capital-gains-tax structure, which is
an insult to your intelligence and mine. But it's one of the rules under which we
play, so ...) But I don't give up hard-earned gains by holding too long or by
failing to turn part of a position into realized gains just because I hate
short-term-gain taxes. I pocket the gain when it's worth it and pay up.)
Make money. Keep money.
One-stock portfolios? I've never met a company I liked so much I wanted to
put my whole portfolio into it. And I never will. You don't have to run amok on
diversification -- and it's certainly true that many small to midsize investors
have too much diversification, holding portfolios of 40 or 50 stocks, even
more.
But especially in tech investing, you don't want to bet the farm on one issue.
It isn't just a question of the company's management or markets or
new-product stream. It's all those exogenous factors, as the economists like
to say, that can blindside you. The stuff that can kill you. And the company
you love.
Time to establish your first position in YHOO? You're kidding. It's too
late for most investors to get into many of these stocks for the first time. Even
if you bought, say, your first Yahoo! just a week ago -- late -- at
240-something, you have a fabulous gain. With YHOO at 403, you've almost
doubled your money. In one week. If you got in just a little earlier -- say,
around the first of November, just 2 1/2 months ago -- your basis is around
150, so you've nearly tripled your money.
Turn those paper profits into the green stuff.
How can I say that on a day when YHOO is widely expected to post big
fourth-quarter numbers after today's close and maybe an upcoming split,
propelling the stock even higher? Because I don't want to see your double or
triple erode. Maybe sharply.
So sell part of your position, pocket the money. Feel good, very good, about
yourself. Take the wife or husband to dinner. Run off to a warm weekend in
Bermuda.
If you already have a nice position in YHOO, maybe you should take a little
more today, if you're confident about those upcoming fourth-quarter numbers.
If you have enough already, at a low-enough basis, taking a little more won't
average your position's price up all that much.
But if you're tempted to do that, consider your likely marginal gain on YHOO
shares bought today. If you got in at 150 (or even lower), you're up almost
200%. If you got in a week ago at 240, you're up almost 70%. Spectacular,
huh?
Say you take some more YHOO today in the low-400s. Big numbers after the
close today, lots of Instinet activity, and by the end of the week YHOO is
trading at maybe 500-550. (I'm not predicting that; this is a hypothetical!) You'll
be up maybe 100 on those shares -- a very nice move, but just 20% or so.
Yes, you're right: It's hard to say "just" and "20%" in the same sentence. But in
the context of your present holding and gains, that's a pretty small delta.
So think about it. Realize some of those gains.
Make some money. |
