Hello Fools:
I am considering selling some of my winners, reduce my margin balance, and raise cash for opportunistic buys. I know it’s a general question. With that caveat, would you consider this a viable strategy in the current environment? Why and why not?
Thanks!
Hi, mrjmousavi.
I cannot offer you individual or specific investing advice, so consider the following to be general musings which may or may not apply to where you are on your investing journey.
The first question I would ask myself is whether I just want to invest in something during a down market and ride the wave to recovery, or do you have a prioritized Buy Watch List with specific investments that you would undertake if/when the market provides discount buying opportunities?
I belong to an investment club with over $3m in assets, well, maybe under $3m after today. 
We had an ill-advised in-person meeting in June 2020 because some members wanted to invest in a recovery wave. They didn’t look for the best companies or consider their long-term (3-5 years or longer) business growth potential. They simply looked at which companies had market prices that had fallen the most, reasoning that they produce the most gains when they returned to their previous highs.
Except many of their choices didn’t return to norm, and some that did fell back again. But just as hard as it is to predict a bottom, they couldn’t predict a top and instead of selling for profit as they had promised they would do, we watched the prices drop again, clipping back on the potential gains. Market timing is a tricky business and you can almost never get it right.
So let’s assume you have a specific list of companies in which you have strong conviction in the potential for long-term (3-5 years or longer) business growth and just need the cash to take advantage of market discount buying opportunities. So now the question is where does the cash come from?
Of course, my preference would be to have an investable cash reserve handy for opportunities just like this. I know many Fools like to be fully invested, but sometimes the opportunity cost not being prepared to mount an offense during market downturns can be greater than the gains to be made being fully invested. An analogy would be to use your best reliever in the 6th inning to get out of a bases-loaded jam. Yes, you could escape the immediate challenge, but you will no longer have that weapon in your bullpen in the top of the 9th when the game is on the line.
For me, a Buy Watch List is divided into four categories. First, there are the Must Haves, companies in which you have deep conviction and absolutely want in your portfolio. Second, there are the Strong Haves, companies in which you have strong conviction but wouldn’t just totally die if, like, they weren’t in your portfolio. The third category is the Nice Haves, companies in which you have positive conviction but aren’t especially excited over. The last category is Never
Haves, those companies you just flat out think are wrong for you.
This way, when the market presents discount opportunities, you are ready with a shopping list. The trick is to already have the list of companies you want to open or add to a position on in advance and then your focus is on the opportunity rather than the market price.
BTW, the Atlanta Braves are going for their 15th consecutive win on Friday. Go Braves!
Back to investing, let’s say you did not have the foresight to maintain an investable cash reserve, or have already spent it on your Buy Watch List and you are still hungry for more. Do you sell your winner to raise cash? Well, not so fast. Companies that have lived up to their potential for long-term (3-5 years or longer) business growth are more likely to continue growing than companies that have struggled to grow. Selling or trimming them now could mean leaving future growth and gains on the table.
So maybe it is better to unload those positions in which you have the least conviction for their long-term (3-5 years or longer) business growth potential. One strategy would be to create a Sell Watch List, dividing your companies into 4 groups. The first group is No Way In Sell Do I Part. These are the companies in which you have the highest conviction and would not want to sell even if the earth was coming to an end. The second group is It Would Really Bum Me Out To Sell. These are companies in which you have strong conviction but it wouldn’t make you question your faith in all things Foolish if you did.
Then the third group is It’s Not Like I’m Married To This Company, investments in which you have a positive conviction in their future potential but you wouldn’t lose any sleep if they weren’t in your portfolio. And finally the fourth group, What Was I Thinking?, includes those companies in which you have the least conviction or cannot remember what they do or why you opened positions in them.
Then, once you have your portfolio organized, you take the last group and rank each company in order of highest conviction to lowest conviction. Then you start liquidating from the bottom of the list. Easy peasy, right?
Of course, sometimes the decision of what to sell is made for you. Much of my investable cash comes not from sells (I almost never sell) but from invested companies that are acquired for cash, or from positions sold because I did not want to be invested in the acquiring company. I sold my Time Warner shares which I had held for 25 years dating back to my Turner Broadcasting Employee Stock Purchase Plan (ESPP) because I did not want to be a shareholder of AT&T. I used that cash to invest in Discovery Communications. Then Discovery bought the Warner Media assets from AT&T and became Warner Bros. Discovery. Bam, I’m a shareholder of TBS, TNT and CNN again. Cartoon Network, I just can’t quit you!
Another way I have raised cash is when a position has grown so much that it became an outsized percentage of my overall portfolio and thus a risk to be mitigated. For me, the threshold is 10%, but different Fools have different risk tolerances. I first bought Netflix in 2007, and by 2011, it was an 8-bagger before the Qwikster debacle halved the market price. I held on and actually added to my position and half a decade later, my position became a 48-bagger and 14% of my portfolio. I ended up trimming that position twice as it kept growing after the first time. It’s fallen back a bit (only a 35-bagger now) but it the pull-back could have had a bigger impact if I had let it remain so large a position.
But doesn’t this conflict with your rule to let your winners run? Well, yes and now. Rules are not absolute. I would amend the rule to say let your winners run unless they become so large they represent a risk to be mitigated. And even then, trim, don’t purge.
But really, I haven’t touched upon the most obvious way to find cash for your portfolio to take advantage of market discount buying opportunities for the companies at the top of my Buy Watch List: Save it, don’t spend it!
Yep, the old fashioned way. Monthly contributions into your Traditional or Roth IRA, or even setting aside cash for your non-tax-advantaged brokerage account. Many Fools save up and invest an initial block of money into their investment acount(s) and then that’s it. Smart Fools that have access to a 401k will contribute automatically from their paycheck. Smarter Fools with access to company matching will contribute enough to earn any matching company contribution. And even smarter Fools will set aside cash from their net pay to fund an income-eligible IRA.
But the really SMART Fools are the ones who take the further step of saving even more money. Just as you might have savings goals for an emergency fund (a priority!), car, home down payment, vacation, engagement ring, etc., you can set a savings goal for investing to build out an investable cash reserve. Investing is not a once and done activity - it is a lifelong journey that requires a regular infusion of cash fuel.
So bottom line, selling my winners would probably be my last approach to raising cash for future investing, even if I had really strong conviction candidates in my Buy Watch List. But if push came to shove, I might sell out of my Sell Watch List. But that would mean I had tried all my other strategies to raise investable cash.
Fuskie
Who would add, not that it was suggested, that under no circumstances EVER would he borrow money, out of his 401k or against his mortgage, to invest, no matter how high his conviction…
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With so many good quality stocks way down from their highs, there must be good buying opportunities out there.
Selling winners to buy them requires caution. Are you sure the ones you are buying have better performance prospects than the ones you are selling. And in what time frame?
If you are sure, so ahead.
Hi Mrjmousavi,
Just a few quick comments.
Margin is dangerous, particularly when we have high volatility. Please be cautious with its use. It can ruin not just your day, but all your hard work up to today.
Why not sell losers? Unless you don’t have any. Or at least your lower conviction companies (maybe those are your winners).
If your winners have gotten to be larger positions than you like, trimming is always an option.
Vicki
…and raise cash for opportunistic buys
I would ask... please define "**opportunistic buys**". Investment or something more of a personal nature... like buying a car?To me, an opportunistic buy is having the opportunity to invest (either a new position or adding to an existing position) in a company that you have already prioritized as being on your Buy Watch List. In other words, the decision to invest in the company comes first, the buying opportunity comes second.
This is fundamentally different from looking at the market and saying the timing is great to invest right now, what company should I look at first. The former focuses on a company’s business performance, while the latter anticipates a company’s market performance.
The analogy of buying a car is interesting. You may decide you want to buy a car (invest in equities), but do you wait for prices, or car loan rates, to come down before you start looking at what kind of car you want? Or do you decide on your make, model and trim package, then look for discount buying opportunities to place an order?
Many will buy a car because the time is right and then see what’s available. My brother just did that, listing for family the features he wished the car had. Why did he not order the car he wanted? He would have had to wait for it to be made. Did he need a new car now? No, he just didn’t want to wait. Timing was more important than opportunity.
I will always decide on the need, the make and model, and the features I want for my next car and I will prepare to purchase that car, saving up for a down payment to minimize my car loan, and then I’ll look for a good 4-year loan opportunity (but not a longer term). I will buy that car on my terms, just like I invest on my terms. I decide what I want and then wait for a good opportunity to get it.
Fuskie
Who notes it may not be the best opportunity, but it will be a good opportunity, whenever it comes along…
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Disclaimer: This post is non-professional and should not be construed as direct, individual or accurate advice
Disassociation: The views and statements of this post are Fuskie’s and are not intended to represent those of The Motley Fool or any other sane body
Disclosure: May own shares of some, many or all of the companies mentioned in this post: https://tinyurl.com/FuskieDisclosure
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Thanks everyone! I am impressed by your replies especially that of Fuskie’s! Just to give better context, my thinking was to trim winners like Tesla (bought at $200) that account for over 10% of my overall portfolio and sell dividend paying utility stocks like D and DUKE that are moving sideways to raise cash and buy high conviction stocks that are undervalued and may visit lower lows. I am fully invested and do not want to use reserves to dollar cost average. My crystal ball says lower lows are on the horizon as interest rates continue to rise.
Thanks for your time. Please feel free to continue the discussion on pros/cons.
Somehow, I am scicologically better with selling winners that losers unless its a done deal. I stay hopeful the losers will return to green… Thanks for the reply.