In this segment from Market Foolery, Mac Greer is joined by Ron Gross and Matt Argersinger as they reach into the mailbag to address this common investor quandary -- what to do when certain stocks in your portfolio have racked up significant gains. Should you sell some of the winners to lock in profits and rebalance your portfolio?
Tune in to find out.
A full transcript follows the video.
This video was recorded on March 8, 2017.
Mac Greer: Jerry writes: Due to the great market over the past year I have a few stocks in my portfolio that have doubled since I bought them. I have been reading up on the strategy of selling half a position when the position doubles. The pro seems to be locking in profits and rebalancing your portfolio. The con seems to be cutting in a half a potential huge winner. I was wondering what your thoughts were on this.
Matt Argersinger: Jerry, I'd say the con is pretty strong for us. We have a term hear at the Fool, and I'm not sure if David Gardner coined it or if he was the first to use it, but it's called trimming your flowers and watering your weeds. Jerry, that sounds a little bit like what you're thinking about doing. In most cases, you actually want to do the exact opposite. You really want to add to your winners and sell your losers, in most cases. But have a healthy biased toward holding on to your winners as long as you can. And, I'd say, especially if you have high conviction in the company, you don't need the cash immediately, and, of course, if you don't see better opportunities elsewhere. If that's all going for you, I would always lean toward holding onto your winners.
Ron Gross: Yeah. I take a little bit more of a value investor slant to that, although I won't completely disagree with Matty. In fact, I won't disagree with a lot of that. But for me, it boils down to two things: Do you think the stock still has market-beating potential? If it doesn't, you probably shouldn't own any of it, if you really want to take a value investor perspective. But if you think it does, then own as much as you like. The second thing is: Can you sleep at night? If a stock is 20% to 40% of your portfolio, is it literally affecting your sleep? If not, maybe it's OK. For me, it's not. I don't typically go over 10%. That's a big number for me. Everyone is different. But for me, the bottom line is, it's not how big of an allocation you have, it's what is the future potential of the stock?
Greer: And guys, Jerry also had some thoughts on how Starbucks could solve its traffic problem. You may have read recently that Starbucks, with the popularity of its mobile ordering system, a lot of in-store traffic. Here's Jerry's idea: After listening to your report that Starbucks' problem is too many orders at morning rush hour, it got me to thinking that maybe they should institute Uber-like surge pricing. During the morning rush, it's $0.10 or $0.20 more, and then cheaper in the afternoon when demand is slow.
Gross: So Jerry got two questions here today?
Greer: It's a question and a comment.
Gross: OK. The business term for what he's talking about, Uber's surge pricing, but it's dynamic pricing. And most pricing is based on demand, and supply, for that matter. But typically, it doesn't get adjusted intra-day like you could see in surge pricing with Uber. But, a great example would be airlines. Airlines fluctuate their prices based on demand and the seat supply all the time. Auto dealerships do it, bars have happy hours where they charge less of a price at the time of day where it's not typically crowded.
Greer: I've heard of that.
Gross: [laughs] There's dynamic pricing all over the place. Disneyland is starting. I read a great article that really summarizes all the ways dynamic pricing is currently being used. The problem is, there's going to be backlash. There's backlash at Uber. People hate the surge pricing. There have been giant periods of time where they've had to phase it out, it still remains, however. If you go to Starbucks and you end up leaving angry that you paid more than you would have if you had waited a half hour, I have a feeling that won't work.
Argersinger: Yeah. I think with quick serve restaurants -- it's not fair to put Starbucks in that category -- but there is a transparency of pricing that's pretty important. So I think if you walked into a Starbucks and you're thinking, "I know what I want, but I don't know how much it's going to cost until I go up to the cashier," that creates an interesting dilemma. But I have to say, I think Jerry is onto something here. I think dynamic pricing, as Ron described really well, that's something that can work for more and more industries. And I think because we are an on-demand consumer now, we're willing to pay more if our time is more important to us in certain cases. So I like the idea.
Gross: I think the stock market is the biggest example of dynamic pricing. The pricing changes literally by the second based on supply and demand. And we seem to accept that. So, I think it could translate elsewhere.
Greer: But, do you think, in our situation, we have a Starbucks and a Dunkin' Donuts right by the office. If Starbucks did something like this and hiked the price of coffee $0.10 to $0.20 in the morning, could they get away with that? I already go to Dunkin', so I'm probably not the best example, but do you think they could get away with that?
Argersinger: You'll start seeing, like with gasoline, they put the prices out front, and it's like, "Oh, it's $0.20 cheaper over here, I'll go here." I'll walk an extra two blocks to save myself $0.20 on a cup of coffee. I don't know.
Gross: The toll roads have it now based on the demand for the express lane. They have the prices change up and down. And for me, it remains to be seen. It sometimes can backfire, and you have the opposite reaction that you want folks to have, ends up happening. So you run into Dunkin' Donuts instead because you're angry at Starbucks? That could be a problem.
Argersinger: It really is fascinating, because it is the value placed on time. I've been in lines many times where I thought, "I will pay an extra $1 if I can get out of here in two minutes as opposed to waiting 15 or 20 minutes." That happens all the time.