Realizing Gains as an Instrument for Portfolio Management: The Example of Brown-Forman

Managing your own portfolio can be exciting in particular when you invest long-term and your strategy pays off. Long-term usually means that you buy shares (or other securities) that meet all your requirements and are (relatively) low in price and then keep them for the foreseeable future. "Foreseeable future" is a bit abstract. We mean by that a minimum investment term of 10 years. At least that is the plan for each position we start.

Having said that, at times it pays off to not just site and wait but to realized gains if a stock had a really good run. Factors that influence the decision are various. For us this includes if a particular position has grown too large in proportion to the overall portfolio. We have a simple set of rules that guide us in respect of this factor. Other factors may be significant events that may have an impact on a particular company, e.g. being the target of an acquisition, an investigation by market authorities or even allegations of illegal actions like "cooking the books".

Brown-Forman (BF.B) is a solid company and we created our position in October 2016. We bought the initial shares at a price of about USD 46.00. At a time in February 2018 the price had increased to about USD 69.20, a plus of about 50.4%. At that point this position had grown faster than the average portfolio, giving BF.B more weight than we liked. Therefore we sold a portion of the position. We deduct the sales proceeds from the total costs of the position. This reduces the unit costs. In our case the unit costs decreased from USD 46.00 to about USD 32.70.

In the meantime BF.B also executed a 5 for 4 stock split. Our unit costs decrease further to about USD 24.90. Of course the stock price decreased in line with the stock split, so as such we didn't "gain" anything from the stock split.

However, what makes all of this significant is the news about the possible trade war between the USA and the EU. The EU is considering to put tariffs on Kentucky Whiskey which would affect Brown-Forman's brand Jack Daniels. As a result their share price declined by over 5% today in response to those news. However, given a unit cost of about USD 24.90 and a current share price of about USD 52.90 this means that also because of realizing gains before the news our US portfolio still has an unrealized gain of about 112%. Not too shabby at all!

While we certainly do not enjoy the 5% decline of the BF.B share price, there are two things that confirm our approach:

1. Spread the risk over a large number of positions and 
2. Realize gains to re-balance your positions according to your appetite for risk

Taking this advice to heart will help enjoy long-term success with investing in the share market.

Happy Investing!

Disclaimer: We own shares in BF.B. We have no intentions to add or reduce our position within the next 24 after publishing this post.