Diversifying -- Google Sale (GOOG)
Though I still love Google the company and I still think the stock (GOOG) is likely to have a good long term future, albeit a volatile one, I've long been concerned about my large overweight position in GOOG and am taking advantage of what seems to me to be a reasonable price today to take a little bit of my position off the table.
I was a little surprised at the level of beating that Google took when they mentioned that their growth might be slowing (duh) ... and I have noted before that I wanted to consider lightening my Google holdings if the shares returned to a reasonable price following my one year holding period for taxes.
So today, I sold roughly 30% of my Google position at $395. I hope not to sell any more.
Anyone who has been using this blog as a contrary indicator can, therefore, expect GOOG to rocket back up to $475 within minutes. That's often how the market reacts to my decisions in the short term, I've found.
I did have several readers ask me why I chose not to sell at the high ... and that's sort of a reasonable question, since back in January I was already getting a bit itchy about my overexposure with Google well above $450. But back then I would have sold with short term capital gains, which I'm very, very wary of doing.
I think we often underestimate the impact of taxes on investing -- I have several retirement accounts, but in my larger regular accounts I always consider the tax impact of what I'm doing. In some cases I'll sell to harvest a tax loss in December if I've been considering selling a company for other reasons but have been patiently waiting to decide (as I did with DWRI last year, a company I was much too patient with).
But when I do have significant gains in a stock I am very leery about selling before the one year holding period. The difference between the long term capital gains rate of 15% and my top marginal income tax rate of roughly 31%, which is what I expect to have to pay on my gains this year (hopefully it will be higher next year) is 16 percentage points -- that is a lot of money, and taken in the abstract a very likely 16% gain would be enough reason to hold a stock for a year.
So If I had sold, say, 10 shares of Google that I bought at $200 (to simplify the math) for $475 in January when Google was universally beloved and analysts were pegging it with $2000 price targets, I'd have $2750 in gains. At a 31% rate the taxes would be $850, giving me an overall return of $1900, or 95%.
If those shares could have been held for a copule months longer and still sold at $475, the return at the lower tax rate of 15% would have been $2338, or 117%.
That is a wide enough margin to prevent me from trying to take profits before a year in most cases, even though in this case I would have done slightly better if I had hit the absolute top of the market with my sale than I did selling some here at $395.
But I wouldn't have done much better, and I would have really had to hit the absolute top of the market for my sale, which I have found virtually impossible to do (saving an occasional bit of luck).
Using the math above, today's sale would have been for a gain of $1950 at $395, and I would pay taxes that reduce my actual gain to $1658 -- a bit worse than the $1900 I would have received for selling those shares at the top of the market and taking the larger tax bite.
If, however, I had missed the absolute top of the market by about 7% -- much more likely than hitting the absolute top, In my experience and opinion -- and instead sold at $440 in January, my after tax gains would have been the same as they were today with a sale at $395.
Close enough, and enough ranting about the importance of short-term capital gains taxes.
This sale is something that's been bouncing around in my head for quite a while -- while I love Google's growth potential, the shares that I bought in the $170s and $180s gained well over 100% in less than a year, which is more than I was expecting and, rationally, probably more than the company deserves. Today, with my average Google position at just about a double and the law of large numbers beginning to drag at the market cap, I'm taking a bit more than half my initial purchase money off the table to reduce my exposure.
This decision is primarily about reducing risk and diversifying.
On the diversification point, Google before this sale made up close to 15% of my individual stock portfolio, and I'd like to keep that down to 10% or below for any stock. One way to do this rebalancing is to simply sell partial positions of big gainers and use that money to invest in stocks that seem undervalued, depressed, or undiscovered in my portfolio ... I've got a few ideas in mind for this money.
And on the risk front, I do occasionally take portions of winning positions off the table in order to reduce my exposure and recover some of my intial investment -- I did so with Vertex and Middleby a little while ago, even though I generally really don't like selling. I am especially inclined to do this with shares that have a margin component in my portfolio, as VRTX, MIDD, and GOOG all do -- reducing risk of loss on borrowed shares is more critical than in the shares held in my cash accounts (I only use margin for about a third of my portfolio).
I do expect Google to be a dominant company in the world for many years to come, but I also have some concerns about competition with a reinvigorated Yahoo, MSN and Ask.com, and about valuation. Google is obviously never going to look cheap, but I do think they're coming to a point with their increasingly large need to invest in new markets, people, and technologies where there are likely to be additional speed bumps along the way.
I have no intention of selling my remaining Google position, which I'm now holding at an average purchase price of about $194. Barring any shenanigans or unexpected problems with the company or management, I'll be holding these shares for many years.
I was a little surprised at the level of beating that Google took when they mentioned that their growth might be slowing (duh) ... and I have noted before that I wanted to consider lightening my Google holdings if the shares returned to a reasonable price following my one year holding period for taxes.
So today, I sold roughly 30% of my Google position at $395. I hope not to sell any more.
Anyone who has been using this blog as a contrary indicator can, therefore, expect GOOG to rocket back up to $475 within minutes. That's often how the market reacts to my decisions in the short term, I've found.
I did have several readers ask me why I chose not to sell at the high ... and that's sort of a reasonable question, since back in January I was already getting a bit itchy about my overexposure with Google well above $450. But back then I would have sold with short term capital gains, which I'm very, very wary of doing.
I think we often underestimate the impact of taxes on investing -- I have several retirement accounts, but in my larger regular accounts I always consider the tax impact of what I'm doing. In some cases I'll sell to harvest a tax loss in December if I've been considering selling a company for other reasons but have been patiently waiting to decide (as I did with DWRI last year, a company I was much too patient with).
But when I do have significant gains in a stock I am very leery about selling before the one year holding period. The difference between the long term capital gains rate of 15% and my top marginal income tax rate of roughly 31%, which is what I expect to have to pay on my gains this year (hopefully it will be higher next year) is 16 percentage points -- that is a lot of money, and taken in the abstract a very likely 16% gain would be enough reason to hold a stock for a year.
So If I had sold, say, 10 shares of Google that I bought at $200 (to simplify the math) for $475 in January when Google was universally beloved and analysts were pegging it with $2000 price targets, I'd have $2750 in gains. At a 31% rate the taxes would be $850, giving me an overall return of $1900, or 95%.
If those shares could have been held for a copule months longer and still sold at $475, the return at the lower tax rate of 15% would have been $2338, or 117%.
That is a wide enough margin to prevent me from trying to take profits before a year in most cases, even though in this case I would have done slightly better if I had hit the absolute top of the market with my sale than I did selling some here at $395.
But I wouldn't have done much better, and I would have really had to hit the absolute top of the market for my sale, which I have found virtually impossible to do (saving an occasional bit of luck).
Using the math above, today's sale would have been for a gain of $1950 at $395, and I would pay taxes that reduce my actual gain to $1658 -- a bit worse than the $1900 I would have received for selling those shares at the top of the market and taking the larger tax bite.
If, however, I had missed the absolute top of the market by about 7% -- much more likely than hitting the absolute top, In my experience and opinion -- and instead sold at $440 in January, my after tax gains would have been the same as they were today with a sale at $395.
Close enough, and enough ranting about the importance of short-term capital gains taxes.
This sale is something that's been bouncing around in my head for quite a while -- while I love Google's growth potential, the shares that I bought in the $170s and $180s gained well over 100% in less than a year, which is more than I was expecting and, rationally, probably more than the company deserves. Today, with my average Google position at just about a double and the law of large numbers beginning to drag at the market cap, I'm taking a bit more than half my initial purchase money off the table to reduce my exposure.
This decision is primarily about reducing risk and diversifying.
On the diversification point, Google before this sale made up close to 15% of my individual stock portfolio, and I'd like to keep that down to 10% or below for any stock. One way to do this rebalancing is to simply sell partial positions of big gainers and use that money to invest in stocks that seem undervalued, depressed, or undiscovered in my portfolio ... I've got a few ideas in mind for this money.
And on the risk front, I do occasionally take portions of winning positions off the table in order to reduce my exposure and recover some of my intial investment -- I did so with Vertex and Middleby a little while ago, even though I generally really don't like selling. I am especially inclined to do this with shares that have a margin component in my portfolio, as VRTX, MIDD, and GOOG all do -- reducing risk of loss on borrowed shares is more critical than in the shares held in my cash accounts (I only use margin for about a third of my portfolio).
I do expect Google to be a dominant company in the world for many years to come, but I also have some concerns about competition with a reinvigorated Yahoo, MSN and Ask.com, and about valuation. Google is obviously never going to look cheap, but I do think they're coming to a point with their increasingly large need to invest in new markets, people, and technologies where there are likely to be additional speed bumps along the way.
I have no intention of selling my remaining Google position, which I'm now holding at an average purchase price of about $194. Barring any shenanigans or unexpected problems with the company or management, I'll be holding these shares for many years.
This article posted by One Guy @ 4/04/2006 11:00:00 AM 0 comments
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