An Alternative to Profit Taking

So, you did your homework & purchased a stock at the right time. Now it has risen a nice 15% or 20% and you’re feeling the pull to take your profit. However, you feel like the stock has promise to perhaps continue rising in the long run. What do you do?

Obviously, there are 3 options:
(a) Sell all shares and take your profit
(b) Hold onto all shares since they may not be done rising
(c) Sell some shares, hold onto the rest

If you feel that the stock may continue to rise, there is a variation of choice (c) I find particularly attractive. That is, sell just enough of the stock to get back the original money you invested. What you’ll have left over are shares that will have much less emotion attached to them. Sock them away and maybe check on them every few years.

As an example, say you put about $5,000 into Apple by buying 69 shares on January 3, 2006 at $72.38 per share. Ten days later on January 11, the stock opened at $83.84 per share, up almost +16% already!

Is Apple peaking? Should we let it ride? Who knew then?!

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To do a middle way strategy you simply recover your initial $5000 by selling 60 of your 69 shares at $83.84. Ignoring taxes & trading fees, you’ve now regained that $5000 and can put it into something else.

And the 9 shares of AAPL that you are still holding are just gravy. They’re “on the house”, so if AAPL drops 50% doesn’t really matter. When and if you decide to cash out 5-10 years down the road, you’ll be paying only long-term capital gains too.

So, maybe not the right technique every time, but something to put in your bag-of-tricks to consider when selling. We’re still obeying Buffett’s rule of not losing money, and at the same time we’re building long-term positions whose price movements won’t keep us up at night.

UPDATE: If only I’d listened to my own advice. Those 9 virtual shares worth about $750 when I “sold” the others went on to be worth $6345 in September of 2012!

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