Why investors give up on their big winners way too soonIPL is a winner. It is never wrong to take your profit but with stocks like IPL you could miss out on a lot more. Below is the article from the Financial Post.
Why investors give up on their big winners way too soon Peter Hodson: The next time you are tempted to sell a stock 'just because it has gone up' think about these five points 
One of the best ways to achieve long term investment success is to not sell your winners too early. Sometimes, stocks can up,
a lot: 1,000 per cent gains, 10,000 per cent gains — and more — are possible, but you will never get these if you sell too early. As we like to say, you can never get a triple if you sell after a double. How about some examples? Apple shares (APPL on Nasdaq) were 46 cents (split adjusted) in 1997; they are US$204 today. Booking Holdings (BKNG) shares were US$6 in 2002, and are US$1,919 today. Constellation Software (CSU on TSX) was $18 in 2006 ($1,250 today); Ilumina (ILMN) was US$0.90 in 2003 (US$377); Intuitive Surgical (ISRG) was US$2.20 in 2001 (US$537).
Sometimes, you don’t even have to wait too long to make these giant gains in the stock market: Kirkland Lake (KL on TSX) was $1.70 in 2015; it is $55 today. Arqule Inc (ARQL) is up 329 per cent this year alone. We have excluded cannabis stocks in this discussion, where some reverse-takeover stocks are up thousands of percentage points this year as well.
But keeping a big winner can be very hard to do in reality. Fear of losing what you have gained can often see you sell a big winner, when you perhaps shouldn’t. Sure, there are some investors who ‘will let it ride’ and enjoy long-term success. But these investors are the exception, not the rule. Why is it so hard to keep a winner?
Here are five reasons why it is so hard to keep your stock winners. Keep these points in mind the next time you are tempted to sell a stock ‘just because it has gone up.’
Valuations, of course, change A rising stock usually means much higher valuations on a company, such as price/earnings, price/cashflow and so on. Sure, sometimes a company’s earnings will grow faster than its share price (hint: this might be a stock to buy!) but, generally, valuations move ahead of earnings and revenue growth. Investors
anticipate growth, and bid the stock up. This can result in some extreme valuations, and it can be difficult to keep a stock with a price-to-earnings ratio of 541 (such as Shopify, up 117 per cent this year). Investors see these extreme valuations, and get worried, and sell too early.
Short sellers often emerge Nothing attracts short sellers more than a stock that has gone ‘way’ up. First, these companies can be easy targets for the shorts because (as noted above), valuations can be extreme. Second, many short sellers will target stocks that have done well, simply knowing that ‘most’ companies cannot sustain such big gains, and stock returns tend to revert to the mean. Third, it does become difficult for a company to sustain its growth rate as it becomes larger. Short sellers have math on their side. Shorts will often spread rumours, and stress out stock holders with big embedded gains. To fight this urge, put yourself in the buyers’ shoes: why is someone paying 2,000 per cent more for your stock than you did?
Something must be going very right at the company!
No one goes broke taking a profit Analysts, brokers and investors say this all the time. What’s wrong with taking a profit and claiming a big stock market ‘win’ by selling your big winners? Of course, brokers like doing this as they can earn two commissions (another one when you redeploy sales proceeds), and also because it keeps clients happy (‘look how much we made on that one!’). We can’t stand this phrase though: not only will selling perhaps trigger a big tax hit (unless in a registered account), you now have to replace a stock that is clearly a winner with something else that (more than likely) will not be even as close as good as the one you have just sold.
Analysts get super conservative As we have noted before, being an analyst on Bay or Wall Street is a great job. It pays well, and everyone loves you when you get one right. Most analysts want to keep their gigs, and it shows in their recommendations. When a stock continues to rise, almost all analysts will temper their enthusiasm for the company. It is risky to remain bullish after a stock has risen 1,000 per cent, and, let’s face it, since not all stocks will be the next Apple, many stocks will still falter. Being conservative protects the analyst in case things at the company go awry. This 2014 analyst quote on Apple says it all, “They only have 60 days left to either come up with something or they will disappear. It will take years for Apple’s US$130 billion in cash to vanish, but it will become an irrelevant company.” Apple shares, of course, have done very well since that ‘conservative’ viewpoint.
Insiders often sell, causing investor angst when it really shouldn’t Investors like to watch insider selling activity for clues to a stock’s direction. But many forget about the
dollar value and only look at the shares sold. For example, suppose insiders sell 20 per cent of their holdings. On the surface, this might look really bad. But if the stock in question has risen more than 50 per cent in the past year, then the insiders still have more money ‘at risk’ than they did before, even with some significant share sales. In addition, of course, if a stock rises year after year after year, there is going to be a lot of insider selling activity reported. Fight the urge to focus too much on this. Again: put yourself in the
buyers’ shoes and the
sellers’ shoes. If the stock is still rising, you have positive confirmation that other investors still like the company, a lot. In terms of the sellers, think of your own portfolio: if you owned a stock that represented more than half of your total portfolio, you might sell a little too. Insiders of companies often have giant exposure to the own company, and some insider selling is simply insiders being prudent with their portfolios.
Peter Hodson, CFA, is Founder and Head of Research of 5i Research Inc., an independent research network providing conflict-free advice to individual investors (https://www.5iresearch.ca).