Volumes have been written on how to buy securities, but little has been written on how (read, when) to sell, at least profitably. Cramer, O'Neill and Graham have clear rules on selling to avoid a loss, but none of them clearly articulate when to sell to capture a gain. ( To be fair, O'Neill has elaborate technical rules on capturing gains, but I find them obtuse.). So, I am adopting a simple approach. I will consider selling any security that I own if I would not currently buy it. Once in that category, the burden will be to prove why, if at all, the security should be kept.
Allow me to illustrate. Several months ago I purchased Southern Copper (SCCO) at a time when it was paying a 6+% dividend. Today it has appreciated 50%, and as a consequence it is only paying a 4% dividend. I would not purchase it today. But, in my hands it still pays 6+%; it is a copper play which I find attractive; it has little exposure to Europe; all indications are that it can still appreciate; and I want my gain to be long term (held more than one year) subject to 15 or 20% tax treatment instead of 35 or 39%. Therefore, I am keeping it in my holdings.
On the other hand, several months ago I purchased National Grid (NGG), the English/American utility company that trades as an American depository share (ADS) on the New York Stock Exchange which for this discussion means that it pays dividends in British pounds. At the time of my first purchase, NGG was paying a 7+% dividend. I have purchased it over time with the earlier (and unfortunately smaller) purchases having appreciated 15+% and the most recent purchase hovering just below water. Like other European dividend payers, the track record has been spotty with a huge dividend in June but a much smaller one in December. I do like its exposure to the potential devaluation of the pound, an event which may ensue from British exposure to Irish debt. If I had sold on Friday, I would have realized a 6% overall gain in 6 months. The only reason I would keep it is a desire to have "long term" (one year holding period) tax treatment, but I have enough short term loss in 2010 to cover any such gain. I am a seller come Monday.
For similar reasons, I may unload HSBC and Barclay Bank preferreds and Vodafone (British pound dividend payers) as well as ING and Aegon preferreds (Euro dividend payers). The attractiveness of European exposure is now gone. I would not purchase these securities today, and I cannot muster any reason to keep them. The huge amount of European sovereign debt owned by these entities, the EU's pitiful efforts to de-leverage and the lack of credibility of last summer's European bank "stress" test make exposure to Europe (especially the preferred stock of European banks and insurers) too risky for me. I will capture some profit and keep it in cash until I get visibility on how dividends will be taxed in 2011. If dividends are taxed at 15 or 20% come 2011, there are some juicy plays available here in the US. (Look at the "qualified" dividend preferred shares of Bank America as discussed on www.quantumonline.com, for example.)
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