written by reader Holding Period for Stocks?

By Anonymous Questions, May 1, 2013

What is your holding period for stocks? Do you sell upon reaching a profit target or wait for over a year for long term gains?

Also, do you follow stops – be it hard stops or mental stops in case some investments don’t work out?

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Travis Johnson, Stock Gumshoe
May 1, 2013 12:47 pm

That differs quite a bit depending on the investment, at least for me. Unless there is a specific catalyst or change I anticipate that will impact the company’s price, I usually assume I will hold it until the story changes or my assessment of the valuation changes. Some stocks I’ve held for a decade, other stocks I’ve sold within months — I tend to be patient, probably too patient, and I am definitely not a trader. I am not motivated primarily by tax avoidance, partly because a substantial portion of my holdings are in tax-sheltered accounts, so I don’t specifically aim for a one-year target holding period — but my preference is generally to hold for much longer than that with most of the stocks I buy anyway.

I rarely start a position with a stop loss in place — I will sometimes use a stop loss with a stock that is rising and that I think is worth a gamble but that I don’t know well, something that I take on as a small speculation. I know that a great many investors will use stop losses to cull losers from their portfolio, but I generally need a reason to sell other than “the price has gone down” — that’s usually because most of my larger holdings are in place because I think the company is a good long-term value proposition, or a good dividend compounder, so unless my opinion of the company changes a lower price just means it’s a better value.

I would have been stopped out of Apple with a 25% stop loss earlier this year if I held to such a firm strategy, which might have worked out in the short term … but then I would have had to be active and prescient enough to sell at $500 and buy back in when Apple hit $400. Trading in and out actively is not my game, and it’s not something I’m very good ad — it requires you to be right too often, and too precisely, and too often I think it leads to selling stocks just when they look like good buys. Stop losses would have saved me losses in some stocks, particularly in some of the more volatile small cap speculations I’ve dabbled in over the years, so I think they may have some value with smaller and more speculative positions (though they’d have to be looser than 25% in most of those cases) … but a firm rule would also have taken me out of some very strong long-term positions like Rayonier, Markel, Berkshire Hathaway and Google just at the point that I should instead have been buying more. The better I know a company, the less I want to use a stop loss to make mechanical decisions for me.

I will sometimes use a stop loss as a selling tool — as with Agrium, for example. That stock did not hit my short term price target this Spring during the Jana fight, and I had bought it with a short-term move in mind, so I put a stop loss order in to minimize significant losses. I don’t think it’s a bad or overvalued company, so I don’t need to sell it unless or until I have something else I want to do with that money, but it’s not a high conviction position and I don’t wish to lose money on it — and it’s also big enough and liquid enough for a fairly tight stop loss to be useful.

Long and non-definitive answer, I’m afraid — if you can’t tell, I dislike blanket rules and mechanical trading decisions. But I am aware that sometimes they can be useful, it depends a lot on investor psychology, your ability or willingness to take losses, and your level of conviction in a particular holding. I know some folks swear by stop losses, this is just my opinion.

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Pete
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Pete
May 23, 2013 8:47 pm

Your reply, Travis reflects very closely what I have learned through my own experiences over the last 5 years. I do think, to use a stop loss formulae blindly, has the potential to loose one, just as much money as it has the potential to save.
Like yourself Travis, I do use, quite often a trailing stop order to either buy OR sell companies that I was intending to buy or sell anyway. What that allows is potentially a better or worse buy price but depending on how tight the trailing amount is (I use percentages usually between .5 and 5-6% depending on Chart volatility, direction I THINK a stock might travel and my urgency to own or sell said stock) will cap your potential for worse price but the up side price is potentially infinitely better if it’s a sell or of you can’t get lower then $0 if it’s a buy trade. these are of potentials not realisms.
In short I agree with everything you’ve said Trav.
Pete

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