Diversified Bullish

Musings About Investing (Not Financial Advice)

Apr 03, 2024

Why is it Hard to Let Your Winners Run?

Something I've been meditating on lately is the concept of "letting my winners run". This is a common trope in investing. In a nutshell, the idea is hang on to your best stocks and sell the bad ones if you need to sell something. Of course, it's not so cut and dried. How do you know which ones are the good stocks?

Additionally, at what point do you harvest gains on an investment? The hang-up is that you could sell a stock too early. This is a solid reason for long term investing, holding a stock for many years, regardless of what the price of the asset is. In theory, this should be easy. Just hold onto your shares. In practice, it's much more difficult to let your winners keep winning. Why?

Sometimes we need money to live or pay for things. A lot of times, stocks are a source of money that provides a means to an end. I can't fault anyone who sells for this reason, I've done it many times.

Diversification is another valid reason to take profits. When a stock increases in value more rapidly than the rest of your portfolio, it begins to have an outsized impact on its trajectory. However, be cautious of selling too early in the name of reducing risk.

Conviction to hold a stock comes from the prospects of the business it represents to make money. The stability of a business can fluctuate wildly in a chaotic world. If for some reason you lost your conviction to hold a company, I understand that as well. Investing is not "forever", it's only as long as you believe the company has positive cash flow and will continue to reap profits.

Many times a stock can shoot up in a short period of time, and then it's flat or negative for years at a time. It's impossible to know when a stock is about to run. In those years of consolidation, it's easy to look at the hot stock of the moment that's blowing up. It's easy to start thinking, "Why am I holding stock A when stock B is about to take off?" So you rotate into stock B just in time for its period of consolidation.

Price can also become disconnected from the fundamentals of a business. It's easy to start second-guessing what could happen to a stock's price if a black swan event were to hit its industry. Nvidia comes to mind as a company whose stock price rocketed up so fast above $400, that many people started screaming sell. Time will tell if it was too early to sell Nvidia. Currently the price hovers around $900/share, and some people are still selling because the price went up. The price of an asset rising is not always a good reason to sell.

Additionally, humans are wired to appreciate making money but to fear with more intensity losing what we've gained. This can cloud our vision. When we start thinking about preserving our unrealized gains, we're no longer investing in a sense. In that moment, we are more like a trader speculating on short-term price movements. This is why, in my opinion, it's so hard to let your winners run. We want to preserve our wins.

We need to shed our instinctual preservation tendencies in order to really win big in the stock market. Most of the time, you need play the game for 10, 20 or 30 years to win at stocks. Hold for a long time and ignore your fears of losing your wins.

As is often said of stocks, "no one ever went broke taking a profit." My response is: no one ever made it big selling early.

Disclosure: as with all writings on this blog, it is not financial advice. Without risk, we cannot reap rewards. Good luck and happy investing.