Number Four Rule for Selling an Investment.
Review: Rule 1 is: “If a dividend is cut or suspended, sell.” Rule 2 is: “If a position grows to more than 5% sell at least a portion to lock in profits and avoid disappointments.” Rule 3 is related to competition. “Has competition or any noticeable outside force altered the investment landscape? Sell before others panic.”
Rule 4 requires more thought, but when this event happens, I usually sell. The rule is related to the future of the company after being acquired. If the company is going to be acquired, the price per share of the company often goes up, often dramatically. If the proposed acquisition goes sour, the price could once again plummet. If the merger is with a company I already own, I may keep it, but often I don’t want more shares of the company. Give me the cash from a sale for more opportunistic investments. Sometimes the price/share of the company doing the buyout drops. That might give me an opportunity to sell the acquired company and buy more shares of the acquiring company. But, in general, my default is to sell and move on.
Let’s say, for example, that Amazon is buying a company like Wal-Mart. It isn’t likely, but this is only as an example. I don’t own shares of Amazon, and I really don’t want to add Amazon to my portfolio. This isn’t because I don’t like Amazon. I am an Amazon Prime customer. But Amazon doesn’t fit my written investment plan requirements. If Amazon made an offer for Wal-Mart, I would expect the price of my WMT shares to jump higher. I would sell my shares. AMZN doesn’t pay a dividend, so I only would buy AMZN as a speculative short-term buy.
This does happen, given the number of positions in our accounts. Keep in mind, I try to buy quality companies. That means other companies may try to buy the quality to add to their own business. You might want to read this Investopedia article about “How company stocks move during an acquisition.” It includes a good, short video. LINK: https://www.investopedia.com/ask/answers/203.asp
Here is one way to look at the scenario of the target company and the acquiring company’s stock price. This often happens.