When you have a winning trade, there is only one thing to do: sell and take the profits. Sure, there could be more profits to be had, but if you insist on holding out, you could be left holding the bag.
Remember GameStop a few years back? Stubborn investors made a roundtrip (down, up, down) if they did not do the prudent thing when they had profits.
During a bull market, fear of missing out (FOMO) can easily take over our decision-making. I’m seeing this play out while stocks run higher this year. The indices are mostly positive as stocks respond to a positive outlook for the economy that includes better growth ahead.
Strong groups, like semiconductor stocks, have served as the pace car for the markets, leading all other groups and helping to pull up the laggards. And some stocks in this group have risen sharply. In fact, some have gone parabolic.
Super Micro Computer (SMCI) has been all the rage for the past few months. It has enjoyed a massive run-up thanks to the company’s relationship with NVIDIA and support for their AI initiative. The stock was roughly $144 in November 2023. Just three short months later, the stock was trading above $1,070! That is a meteoric rise of biblical proportions! If you bought this stock along the way (and I have heard about many who have) and still own it, congratulations are in order!
Here’s what to do when you have a winning trade
When you own a stock like SMCI that continues to move higher at a blistering pace, it’s really hard to know when to sell.
Take a step back. Your sensibility and discipline should define your actions. If you are responsible and respectful of your capital, then the question of when to sell becomes moot. Why is that? Because your ego won’t take over. You can simply take your profits and move along.
Now, if you want to hold some of the stock for the long term, at the very least you should take most/all of your original investment off the table and let the rest of it ride.
I did something similar back in late 2022. Meta Platforms (META) was down sharply for poor execution and spending. It fell to nearly $120 per share, and I thought that was a good opportunity to buy some. I did, and I held onto it. However, I trimmed the stock a few times along the way. Whenever I had profits, I took some.
Since my purchase, Meta is up an extraordinary amount – nearly 300%. I still have some shares left but far less than I started with. If Meta suddenly fell to zero, I would not lose a nickel of my original investment.
You may criticize my approach. “Bob! You left money on the table by not staying with Meta!”
While technically this is correct, my approach is part of an overall risk management strategy that ensures I don’t wait to take profits.
As much as SMCI has risen over the past few months, it could be taken down very quickly. Do you want to book a profit today, or would you rather risk those gains? We can never know what will happen in the future.
Remember this: At some point, the big money will be selling this stock in droves. You won’t know when, but if you’re holding shares at that moment you’ll be punished for it.
Always sell a winning trade when you can take a nice profit.
