The toughest part of a broker’s job is not convincing someone to invest. That’s easy! Everyone wants to make money, and the historical numbers from the markets are pretty compelling.
No, the toughest part of the job is getting a client to take a profit.
In the 25 years I’ve been working with investors, this has been the one part of the job that has never made any sense.
They finally get a winner and they won’t take the money off the table.
(Well, that’s not the only thing that doesn’t make any sense. There are other things they do that make little sense, too. They complain if you lose them money, as they should. But they complain just as much about taxes when they make money.)
Take Your Profits
Anyway… back to profit taking.
[ad#Google Adsense 336×280-IA]Most clients believe every winner will go to the moon and will make money forever.
I know that sounds stupid, but that is what their actions, or inactions, say about their thinking.
And the money that has been lost because of this crazy thinking is mind-boggling.
When you add the “buy high and sell low” doctrine most small investors adhere to, the losses really start piling up.
A Cautionary Tale
Here’s maybe my best “hold a winner until you’re broke” story from the last 25 years:
Back in the ’90s, a client of mine got a tip from a secretary at a company she did business with that its stock would take off, and soon. She asked me what I thought.
Brokers and advisors hear this all the time and it is a really awkward situation.
After I made certain this was not illegal insider information and cleared it with my manager – I didn’t need that kind of trouble with the Feds – I did my best to dissuade her.
One of the first things you learn about clients is this: No one wants to be told their hot tip is really just a loss in its earliest stage. And if I told her the whole truth, that 99.9% of these tips are worthless, I’d run a very good chance of losing her as a client.
I definitely wanted to keep her account, but I wanted to do the right thing for her too. So I gave her what was then my standard line: “Well, maybe a small position,” just in case she was right and it did run.
And run it did: from about $10 a share to $25 in just days.
And then the worst possible thing that could have happened, did: It continued to run straight up, all the way to the high $90s.
Somewhere around $50 and again at $60 and $70 a share, I suggested taking some money off the table, at least the money she had put into it.
Nope! She wanted more and she bought a lot more. In fact, I stopped trying to talk some sense into her because every time I called, she bought more.
When it was in the $90s, I pleaded with her to take her money off the table.
Nope! Not one cent because, of course, as I said earlier, winners never stop going up, and the next stop was the moon.
Everything this person had learned about money and investing was long gone, right out the window. She was overcome by the Moon Shot Trade Emotion.
Well, I’m sure you know how this one – and almost every one of these – ends. The stock dropped back to around $15, and all of that money went right down the toilet… and it was a lot.
If that wasn’t bad enough, I lost her account, too. She never said another word to me and quietly transferred her account to another brokerage.
Not Just a Problem for Stock Investors
Now, this sort of thing in stocks is understandable, to a certain degree. Stocks do run wild sometimes and it is tough for most folks to pull the trigger.
And, despite the fact that bond investors are supposed to be more reasonable, this same behavior happens in bonds, too.
No one buys bonds with any pretense of them running up or going to the moon. But when they do, a surprising number of investors won’t take a profit.
In my Oxford Bond Advantage trading service, we always assume we will hold a bond to maturity. That’s the safest way to own a bond. The worst-case scenario, which happens in over 98% of cases, is that you hold the bond and collect the interest and principal.
But, if a bond runs up in price and we can take a much larger annual return than we thought we could – and do it much earlier than planned – I will sell long before maturity.
I call it, “take the money and run!” Because, in my experience, there is a very good chance that free money won’t be there tomorrow.
So, I tell them to sell and move on. And then the emails start.
“Why are we selling? Why don’t we hold it for the interest? You said we would hold to maturity… Can’t it go higher? This isn’t what I signed up for!”
Even when we double and triple our expected return – and we have done it quite often in the last three years – the average guy won’t pull the trigger.
Just as a stock investor thinks a holding can run up forever, income buyers can’t see how taking two and three times the expected annual return long before maturity benefits them.
We income folks have to take the money and run, too.
No Set Formula for Taking a Profit
I wish there were a way to share with you how much money I have watched vaporize because clients wouldn’t sell.
Or that there were a set formula for selling so you would never have any doubt about when to take a profit in bonds. But there isn’t. It’s a judgment call and one based on experience.
But that’s what you come to us for: accumulated market wisdom and experience.
Good investing,
Steve
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Source: Wealthy Retirement