Our Everyday Reality Check

As you probably know, our Successful Investor business model has two parts. We publish investment advice through The Successful Investor Inc., and we manage investor portfolios through Successful Investor Wealth Management Inc. (These two companies are affiliated by common ownership; I own both but keep them separate for regulatory purposes.)

This two-business model has advantages for our subscribers. The problems we encounter as money managers, and the solutions we come up with, help us to give our readers unbiased, practical advice. This serves as a counterweight to advice you may encounter elsewhere that is based on misapplied theory, or tainted by conflicts of interest.

Good problem to have

For instance, an investor recently told me that he sold half of his Canadian Pacific stock after it doubled for him. His broker didn’t object and in fact complimented him on his conservative approach.

Selling half after a double makes sense in a high-risk investment such as a penny mine. In fact, in Stock Pickers Digest (our investment advisory covering more aggressive investments), we routinely advise selling half of any high-risk investment you own that doubles.

That way, you get back your initial stake. This can give you a clearer perspective on what to do with the other half of your investment. If you are too slow to sell speculative stuff, after all, your profits and even your principal can evaporate all too quick. But it’s a mistake to apply this rule to CP.

To succeed as an investor, you need to hold on to your best picks for lengthy periods. If you’re too quick to sell, you’ll never hold a stock that vastly outperforms the market, and you need a few of those to offset the inevitable disappointments.

Over the course of several years or decades, you’ll find that of all the stocks you own that vastly outperform the market, most were already well established when you bought them.

That’s why you need to know the difference between well-established companies like Canadian Pacific, and the more speculative issues you may invest in occasionally. We still see Canadian Pacific as a buy. We would only sell a portion of a client’s holding in this stock if it made up an excessive part of his or her portfolio.

It’s easy to sell too soon or too late. But you’ll limit the cost to you of poorly timed sales if you practice our three-pronged Successful Investor approach. That is, invest mainly in well-established companies; spread your money out across the five main economic sectors; downplay stocks that are currently in the broker/media limelight. You can follow this advice directly, or through mutual funds.

Apply our 5%/10% rule

In investing for our clients, we rarely put much more than 5% of a portfolio in any one stock. But if a stock does so well that it comes to represent 10% of a client’s portfolio, then we at least consider selling part of it, to cut the risk. However, every case is different.

For instance, because of the takeover offers for Inco and Falconbridge, and the fact that we invested heavily in Falconbridge predecessor Noranda, some of our portfolio management clients have substantial holdings in these companies. Combined Falconbridge/ Inco holdings make up 10% or more of some of our client portfolios.

We are inclined to hang on rather than sell either of these holdings at the moment, since new offers or better terms on existing offers remain a possibility. In addition, Inco and Falconbridge are both well established companies and leaders in their fields.

However, you also need to consider your diversification across the five main economic sectors. If your exposure to the Resources sector now exceeds, say, 30%, then you may want to sell some of your Resource holdings, to cut risk.

To do that, start by selling any lower-quality Resource stocks you own, while hanging on to high-quality issues like Inco and Falconbridge.