Keeping the Winner is Important in Stock Investing

When it comes to stock investing, much of the focus tends to be on identifying the right stocks to buy. While selecting the right stock is crucial, an often overlooked but equally vital component of long-term investing success is knowing which stocks to hold on to, particularly the winners. “Keeping the winner” refers to the strategy of continuing to hold high-performing stocks rather than selling them too early. This approach, though emotionally challenging, can be the key to compounding wealth and achieving above-average returns in the stock market.

The Psychology of Selling Too Soon

Human psychology plays a significant role in investment decisions. One of the most common psychological pitfalls is the tendency to sell winning stocks too early. This often stems from the fear of losing unrealized gains, a phenomenon known as “loss aversion.” Investors may feel the urge to “lock in” profits before the stock price drops. On the other hand, they might hold onto losing stocks in the hope of a rebound, even when the fundamentals suggest otherwise.

This behavior is deeply rooted in our emotions and is reinforced by the desire for immediate gratification. Seeing a stock double or triple in price can make the gains feel “too good to be true,” prompting many investors to sell early. However, this short-term thinking often comes at the cost of missing out on much larger gains in the future.

Read More: Stocks Can Move Randomly in the Short Term

The Power of Compounding

Warren Buffett famously said, “The stock market is a device for transferring money from the impatient to the patient.” The key word here is patience. Great companies often deliver exponential returns, not in days or weeks, but over years or decades. Holding onto a winner allows the magic of compounding to work in your favor.

For example, suppose you invested in Amazon stock in 2001 at around $10 per share. If you had sold it when it doubled to $20, thinking you had made a great profit, you would have missed out on the thousands of percent in gains that followed. By 2021, Amazon shares had risen above $3,000, representing a return of over 30,000% from that initial price.

This kind of wealth creation is only possible through long-term holding of quality companies. Selling too early stops the compounding process in its tracks.

Identifying a True Winner

Of course, not every stock that rises in the short term is worth holding forever. The challenge is to distinguish between a temporary winner and a long-term compounder. Here are some characteristics of a stock worth holding:

1. Strong Business Fundamentals: The company has a solid business model, consistent revenue growth, high profit margins, and a durable competitive advantage (moat).
2. Experienced Management: A competent and visionary leadership team can steer a company through changing market conditions.
3. Reinvestment Opportunities: The company has the ability to reinvest earnings at a high return on capital, fueling future growth.
4. Market Leadership: Being a leader in its industry often provides pricing power and economies of scale.
5. Innovation and Adaptability: Companies that continually innovate and adapt to changing technology and consumer behavior tend to stay relevant.

If a stock meets these criteria and continues to perform, selling it too early could mean cutting short a significant long-term gain.

The Tax Consideration

Holding on to winning stocks can also be tax-efficient, particularly in taxable investment accounts. Selling a stock triggers capital gains tax. In the U.S., for instance, long-term capital gains (from assets held longer than a year) are taxed at a lower rate than short-term gains. Still, avoiding frequent trading and deferring taxes by holding onto winners can enhance your overall returns over time.

In fact, one of the reasons many wealthy investors grow and maintain their wealth is because they minimize taxes through long-term investing. Deferring taxes is akin to having an interest-free loan from the government that continues to compound for your benefit.

Letting Your Winners Run

One of the most valuable habits an investor can develop is the discipline to let winners run. This doesn’t mean never selling a stock, there may be legitimate reasons to sell even a strong performer (such as a significant change in fundamentals, better opportunities elsewhere, or a shift in your financial goals). But the decision should be based on rational analysis, not emotional reaction to a rising price.

Some strategies that help investors stay invested in their winners include:

• Re-evaluating, Not Reacting: When a stock climbs significantly, instead of selling impulsively, re-evaluate the company’s fundamentals. Is the valuation still reasonable? Are growth prospects intact?
• Partial Selling: To satisfy the psychological need to “take profits,” some investors sell a small portion of a winner while keeping the majority. This way, they secure gains while staying invested.
• Dollar-Cost Averaging In Reverse: Instead of selling a lump sum, consider trimming positions gradually over time if you believe the valuation is becoming stretched.

Famous Examples of Holding Winners

History is full of legendary investors who have made fortunes by holding winners over the long term. Warren Buffett’s stake in Coca-Cola is a textbook case. He first bought shares in 1988, and despite the stock’s dramatic growth since then, he continues to hold it. The dividend payments alone now yield a significant return on his original investment.

Another example is Apple, a company many analysts once doubted in the early 2000s. Investors who held onto Apple through the ups and downs have enjoyed substantial returns. Peter Lynch, the legendary manager of the Magellan Fund, also famously said, “Selling your winners and holding your losers is like cutting the flowers and watering the weeds.”

Avoiding the Temptation to Time the Market

Market timing, trying to sell high and buy back lower, is notoriously difficult. Even professional investors rarely succeed at it consistently. Selling a winner with the hope of buying it back at a lower price can backfire. The market may continue to push the stock higher, and you may never get another chance to re-enter at a lower level. Worse, you might miss a major upward move while sitting in cash.

A better strategy is to accept that no one can perfectly predict market movements and focus instead on long-term value creation.

Read More: Investing in Growth Stocks is Better

Conclusion

Keeping your winners in stock investing isn’t just about sitting idle, it’s about having conviction in your investments, trusting your research, and resisting emotional impulses. It requires discipline, patience, and a long-term perspective. While trimming or selling may sometimes be warranted, more often than not, the greatest returns come from letting compounding do its work over time.

In the end, successful investing is less about finding the next hot stock and more about recognizing when you already own one, and having the wisdom to hold on.