When Is The Right Time To Sell A Stock, If That Stock Is Shopify?

How do you know when it’s time to sell a stock? Is it an innate skill you’re born with? Or is it something you learn, like your multiplication tables? If you’re not a professional securities analyst, if you don’t have the time to dive into a company’s earnings report and make your projections based on the data, then what? The easiest thing to do is nothing. I still firmly believe the best investing strategy is to buy good companies and get out of the way. So what to do with Shopify?

For anyone that bought the stock early, you may be wondering if now is a good time to sell given that the company is trading for a gajillion times earnings. To figure it out, I turn to the white-haired wonder, Peter Lynch. Whenever I feel a little unsure about anything in life, from what kind of dog to adopt to what color T-shirt to  wear with jeans, I always turn to Fidelity’s famed money manager for inspiration. As a reminder, Lynch managed the Magellan Fund at Fidelity Investments between 1977 and 1990 and averaged an astounding 29.2% annually, making Magellan the best-performing mutual fund in the world. He was the Jay-Z of the investment universe, with the heart-thumping bass and the memorable hits one after another. So as I sit here wondering whether it’s time to pull the plug on Shopify, I’ll turn to Lynch for inspiration.

“The key to making money in stocks is to not get scared out of them.”

We’ve been reading for months about the hordes of traders who are short Shopify and yet the stock continues to defy gravity.  No doubt it’s overvalued but if you still believe a majority of small businesses have yet to embrace the cloud, Shopify could still have a long way to run. In 2019, six out of every 10 small businesses still didn’t have a website for their business but a whopping 58% of those businesses planned to build one. With the pandemic turbocharging that growth, now is not the time to be scared.

“There’s no shame in losing money on a stock. Everybody does it. What is shameful is to hold on to a stock, or worse, to buy more of it when the fundamentals are deteriorating.”

So true. But here’s the thing, Shopify’s fundamentals aren’t deteriorating, they’re flourishing. Shopify’s revenue was $767 million in the third quarter, an incredible 96% increase from the third quarter in 2019.

“In stocks – as in romance – ease of divorce is not a sound basis for commitment.”

I don’t know anyone who got married because they knew the divorce would be easy but I respect the foresight. Seems like something Larry David would do. But I didn’t buy shares of Shopify because of how easy it would be to get divorced. I bought the shares because I fell in love with the narrative. And because there was this guy I worked with who set up an entire small business helping other small businesses figure out how to use Shopify’s tools effectively. If you can make a good living helping other small businesses make a good living simply by mastering Shopify, that seems like enough for a long-term commitment.

“The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them.”

My gut tells me to sell a few shares to realize a profit because the stock is up 1,486%, my biggest gainer of all time. But if I analyze those feelings, I’m thinking of selling because, like Marc Maron, I’m a neurotic Jew and I don’t know that I ever fully believe I can do something and be successful at it. So part of me is saying, ‘Sell the shares. It’s an amazing return. You don’t deserve to make any more with this stock. You never developed range beyond the college three-point line. You don’t deserve it.’ But the white-haired wonder is telling me to ignore my gut and give Shopify a chance to become the next Amazon. I wonder if Marc Maron would’ve had Peter Lynch in his garage. What a weird combination of human beings that would’ve been.

“Investing in stocks is an art, not a science, and people who’ve been trained to rigidly quantify everything have a big disadvantage.”

I love this quote because Lynch came before Billy Beane, Daryl Morey and the whole analytics movement. But even today, despite the huge increase in data, an argument can be made that investing is still an art. Part of investing success is being able to gauge the way the cultural winds are blowing and spot trends early. Setting up a business online isn’t exactly groundbreaking anymore but Shopify has expanded its operations to include warehouse management, logistics and lending. In fact, behind WordPress, the next five most popular content management systems are Joomla, Drupal, Magento, Blogger, and Shopify.

“All the math you need in the stock market you get in the fourth grade.”

According to one analyst, Shopify currently handles one-fifth of the retail volume that Amazon handles but get this, if you add Amazon and Shopify’s combined retail sales, they still handle less than three percent of total retail sales around the world! We tend to think of Amazon as a global monster. And it is. But at less than three percent, Amazon and Shopify still have a ton of room to grow for a long, long time.

“Know what you own, and know why you own it.”

That’s really what it comes down to, right? Why do I still want to own Shopify? First, I believe more small businesses will move online in the next decade. Second, I think partnerships with Facebook and Pinterest have the potential to pay off in a huge way as social media networks get better at encouraging e-commerce. And lastly, I’m too scared to sell because if Shopify really does have a chance to become the next Amazon, who wants to miss out on that life-changing run?