As shocking as this is going to sound, I occasionally make mistakes.
I flubbed the over-under on the Patriots vs. Broncos game last weekend, for instance. That mistake cost me just 20 cents (my self-imposed maximum wager when I'm betting on sports).
When it comes to investing, though, some of my mistakes have been much costlier.
Selling McDonald's, for example.
Back in December, 2014, when the burger chain's sales were in a protracted slump, I punted the stock from my Strategy Lab model dividend portfolio. I also sold the shares personally.
Although I still made a modest profit on the shares, I could have made a lot more had I just held on. Since I sold, McDonald's has been showing early signs of a turnaround and the shares have surged more than 30 per cent. Including dividends and a strong tailwind from the falling loonie, I missed out on a gain of about 63 per cent in Canadian dollars.
McDonald's isn't the only stock I sold too early. Several years ago I held Dollarama, which went on to produce big returns after I got out. Ditto Microsoft and Starbucks.
The lesson here? There are a couple, actually.
The first is that, unless a company is clearly broken, it is often prudent to hang on instead of bailing out. In the case of McDonald's, although I had what I felt was a strong argument for selling, it turns out the McDonald's board was just as dissatisfied with the company's performance: Two months after I sold, the board brought in a new CEO, Steve Easterbrook, to shake up the company.
In hindsight, it's clear that my patience was running out at precisely the same time as the board's. The difference was that the board was in a position to do something about it.
Although I don't remember the precise reasons that I sold Dollarama, Microsoft and Starbucks, concerns about valuation – combined with worries that growth would eventually hit a wall – were almost certainly factors. As with McDonald's, I would have been better off just sitting on my shares instead of selling them because they continued to rise.
I don't mean to suggest that selling a stock is always a bad idea. Years ago I held TransAlta and AGF, and I saved myself from some major financial pain by dumping them when it became apparent that their problems were getting worse, not better. But on balance, I'd have to say that one of my most frequent mistakes as an investor is selling too early.
As it turns out, I'm not alone.
"My findings show that two-thirds of the time investors will bank their profits when they have made up to 20 per cent," Lee Freeman-Shor, a portfolio manager at London-based Old Mutual Global Investors, wrote in a recent blog post.
"While it may feel good, snatching at profits is a character trait (a habit) of a loser. In fact, I discovered that 61 per cent of investments that were sold for a profit of less than 20 per cent kept going up. Had the investor stayed invested, they would have made more money. Worse still, big winners were to be found among those [stocks that were sold]."
Yeah, that sounds familiar.
The second lesson I've learned is that, when mistakes happen, you have to accept them and move on. Would I buy McDonald's now? No. At more than 22 times estimated 2016 earnings, the stock is far too expensive for my taste. The same goes for Dollarama, whose price-to-earnings multiple is an even richer 25 times fiscal 2016 estimates, and that's after a 20-per-cent pullback in the stock. As for Starbucks and Microsoft, with the Canadian dollar sitting at about 71 cents (U.S.), I'm not itching to increase my U.S. exposure; if the loonie rises, the currency tailwind would turn into a headwind.
Thankfully, the stocks I've sold too early are far outnumbered by those I've held for years and have no intention of selling, ever – including banks, utilities, power producers, blue-chip consumer stocks, telecoms and real estate investment trusts.
In my books, buy and hold is still the best strategy. Sometimes, it takes a few bad experiences to remember that.
John Heinzl