Profit Taking

Sometimes it is OK to sell something that is doing well.

I sold half my interest in Berkshire-Hathaway today.   50 whole shares of class-B, as I am a big-time investor.  I bought this stock a couple of years back for $8000 and it remained flat for a while.  Today it is worth $16,000.   So I did OK.   I am selling half of it to lock in my gains.

The temptation is, of course, to say, "Keep it!  It will double again in value soon!" and that is the logic many people use to "ride it all the way down" with a stock.   But I have qualms about the "Oracle of Omaha" for a number of reasons.

First of all, he is getting old and will die some day, and no apparent successor is in the wings.  There was one, but he got bounced.   And when Buffet dies, well, the stock will take a nose-dive until the succession thing settles.  He could die tomorrow, for all we know.  It may rebound, of course, but be prepared for a bumpy ride.

Second, was a piece in the news that Buffet is investing in troubled Canadian mortgage company.  If you've been astute, you've heard the rumblings about how the Canadian real estate market is getting overheated and the denials from everyone that it is a bubble.   Having been down this road before, one sure sign of a bubble is articles (usually from Real Estate agents) saying it isn't a bubble.

People also like to say, "Well, if it is a bubble, why doesn't it burst?"   Bubbles are elastic, and they tend to overshoot a market due to hysteresis.  Hence they are bubbles.  If housing prices tracked reality in real-time, there were never, ever be bubbles - nor in the stock market.   People get ahead of themselves.

I got out of the Real Estate business in the USA in 2005.  The bubble didn't burst until 2008.   My timing was off, but better two years early than two years too late.    What kept the bubble going was funnier and funnier loans, culminating in the "payment optional" buydown ARM liar's loans that went toxic in a matter of months.   The low payments made the houses "affordable" but the terms of the loan insured eventual default.

Time will tell whether this company Buffet is investing in is the next Countrywide.  You remember Countrywide.  Bank of America thought it was "smart" to buy that troubled mortgage company (are there any other kind besides troubled?).   It blew up in their face and nearly bankrupted BoA.  It also gave them a black eye as people blamed the bank for the shitty loans than Countrywide made.   If anything, Bank of America was another victim in this scenario - being sold a bill of goods like the rest of us.

Funny thing is, the financial press is silent on why this Canadian company is "troubled: because they misreported some issues about mortgage fraud.    I have written about this before, and most people don't get it, so I wrote about it again.  It is not fraud against the borrower, but against the bank.   So $2 Billion in bad loans are made, the criminals paid by the loans (sellers of homes with padded prices) take the money and run.  The bank is stuck with a home worth less than half the value of the loan.  This to me is another sure sign of a bubble-in-the making.  It is Ft. Lauderdale, 2008 all over again.

By the way, the complexities of mortgage fraud and people's unwillingness to learn about it and unwillingness to even understand it when explained to them is why I say never invest in something you don't understand.   And we don't understand much in this world, as the press reports things at an 8th grade level, if that.   Details are deemed "boring" and "messy" and will turn off readers and viewers.   You still sure you want to get your info from the financial press?

But the third reason is profit-taking.   It is OK if you've made a lot of money in something to sell it.   When I made a staggering sum (for my investment) in AVIS, I quickly sold half of it.  And indeed, over time, the stock has dropped somewhat (from a high of a 7000% gain to "only" 2400% today).   When my friend's bank stock doubled in value - I sold half of it.   And when it doubled in value again - and again, and again, each time I sold half.

Should I have kept that stock and earned even more profits?  Well, if I had a time machine, I could go back and do that.   But the time machine conundrum again - using backward-looking statistics to invest is a really shitty idea.  Coulda, woulda, shoulda is a horrible way to invest.  "I could have made a lot of money if I had held on!  Next time I'm keeping that stock!"

But next time, the stock tanks.  History doesn't repeat itself - exactly, anyway.

This leads to the fourth reason - diversifying.   If I sell half this stock, I can invest in something else.   By doing so, I end up with a portfolio of different stocks over time.  And in fact, this account started with about four or five stocks and and has expanded to about 30 or so.   I used dividends to invest in different stocks (or bonds) over time, or I take profits and use the money to invest in different stocks (or bonds) over time.  I am less dependent on any one stock or bond or other investment going South as a result.

Security is more important than wild profits, particularly as you get older and older.   As a 20-something maybe I could afford to hold on to this stock and see where it goes.  As someone who is pushing 60, I need the money to live on, not gamble on.   So I take profits, invest in other things, and slowly over time move money into safer and safer harbors.

This insures that my retirement is secure and I won't run out of money.

Of course, if I was a stockbroker and gambling with someone else's money that would be a different story!