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Is Impatience Silently Killing Your Portfolio?

By Lawrence Rothman, CFA – Aug 14, 2021 at 11:57AM

Key Points

  • It is best to evaluate a company's prospects to determine your course of action.
  • Selling too early can result in leaving profits on the table.
  • A patient approach with strong companies will likely result in fatter profits.

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Selling too soon can cost you a lot of money.

Patience is not only a virtue, as the old saying goes -- it can also have positive real-world implications for your investing prowess. After all, legendary investor Warren Buffett has stated that his "favorite holding period is forever."

That's easier said than done, of course. But when you find good companies with strong management teams executing well, holding on is often the prudent thing to do.

It's time to delve into the real-world ramifications of selling too soon.

Three people looking at graph on laptop.

Image source: Getty Images.

Lost profits

After a stock has run up by a large amount, you may feel tempted to sell out -- particularly if you have earned a nice profit. But if the investment thesis remains the same, staying put might very well be your best option.

It's important to review your investments regularly to see how the company is doing against expectations, both its own and yours. If the business climate hasn't changed much and management keeps on executing its plan, there's likely little reason for you to cut and run. Thinking as a part-owner in the business can help you maintain your perspective.

For instance, Amazon (AMZN -0.77%) conducted its initial public offering in 1997 at a split-adjusted price of $1.50 per share. Unshakeable patience in this dominant online company would have you sitting on a very large gain today.

In January 2010, the stock was trading in the $125 range. If you had held it for the next five years, you could've sold the shares when they were trading around $300. You might've felt pretty good about that gain. However, you would've missed out on the more than tenfold price increase in the subsequent years.

Even if you missed out on investing in Amazon's early days as a public company and waited, not quite believing that the online seller would become consistently profitable, you still would have made quite a bit of money by holding on to Amazon shares from a later point of entry.

The taxman cometh

If you have profitable investments, the federal government gets a cut. However, you don't owe taxes on unrealized profits. Rather, you pay the capital gains tax the year that you make the sale.

That means you can delay taxation for a very long time. You can even pass along the asset to your heirs, who will not pay capital gains at that time. Rather, they will inherit the stock at the value it was at the time of your passing.

While you should make investment decisions based on your thoughts about the company rather than one based purely on tax effects, it is another reason for you to hold on to your favorite stocks.

When to pull the trigger

Of course, you may have times when it is prudent to sell your shares. The key is to hold on to winners and sell losers.

Naturally, that is easier said than done, and no one can expect to have a perfect record. A good way to improve your chances is to review your investments periodically. I advise following the same criteria you used when making the initial purchase. That way, you can decide if the investing thesis still makes sense.

For instance, in the case of Amazon, back in 2005 online shopping was still growing in popularity, and shoppers were attracted to the company's low prices and convenient delivery. That year, it launched its ever-popular Amazon Prime subscription service.

But how about a company like General Electric? The stock price was in the $250 range in 2016 and GE currently trades around $100 per share. While some investors believe the company is ripe for a turnaround, you would've lost a lot of money in the interim waiting for its fortunes to revive. Holding on to your GE shares through these difficult times may lead to a better result if the company can pull off a turnaround. Selling the stock removes that possibility.

Selling shares in a good company because it reaches a certain price can result in lost profits. These don't come out of your wallet directly, but that doesn't lessen the pain to your fortunes. Patience with companies, providing their prospects remain enticing, will prevent this sense of regret.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Amazon Stock Quote
Amazon
AMZN
$93.41 (-0.77%) $0.72
General Electric Stock Quote
General Electric
GE
$88.14 (0.31%) $0.27

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