Famed investor Warren Buffett quipped that his favorite holding period is forever. I've started coming around to this view the longer I invest. That's because some of my biggest investment mistakes haven't been the stocks I've bought that turned out to be duds. It's those I sold too early.
Two real estate investment trusts (REITs) I sold way too early were AvalonBay Communities (NYSE: AVB) and First Industrial Realty Trust (NYSE: FR). Here's a look at why those sales were huge mistakes.
This flip turned into a flop
According to my records, I started buying shares of AvalonBay Communities right as the economy began recovering from the financial crisis in late 2009 and early 2010. While I don't remember my initial thesis, I probably thought shares of the apartment REIT would rebound as the economy got back on solid ground. At least that sounds like a reasonable assumption.
Either way, that's exactly what happened. Shares rose from my purchase range ($65 to $79.44 per share) to just over $100 a share by April 2010. For whatever reason, I saw that round number as a good selling point. I cashed in at $100.02 per share, earning a small profit on my trade.
In hindsight, I sold way too early. Shares of AvalonBay would go on to produce a more than 273% total return from the day I sold, or 12.2% annualized. While that was slightly less than the S&P 500's 14.4% total annualized return during that time frame, I had owned shares in a regular brokerage account. That means I had to pay short-term capital gains taxes, reducing the amount I would have had available to reinvest.
I would go on to regret that sale. As someone who likes generating passive income, I wanted to have an apartment REIT in my portfolio. However, AvalonBay and its peers always appeared richly valued, which kept me on the sidelines.
Thankfully, a buying opportunity emerged last year when the stock sold off during the early days of the pandemic. I paid slightly more than $150 apiece for shares of AvalonBay, or 50% higher than my sales price a decade prior.
This trade has worked out quite well so far. AvalonBay has produced a more than 50% total return, slightly better than the S&P 500 during that time frame. I plan to keep holding this time, having learned from my mistake.
Patience would have paid off
I made an even worse decision in exiting my position in First Industrial. I bought shares of the industrial REIT in late 2009 and subsequently sold in mid-2010. However, unlike with AvalonBay, I took a big loss on this sale.
The industrial real estate sector struggled following the financial crisis, which impacted First Industrial. The company cut its dividend in late 2008 and suspended it shortly after that. It didn't reinstate a dividend until 2013, resetting it at a much lower level.
I don't remember why I sold. Maybe I didn't see the light at the end of the tunnel and wanted to cut my losses. Or, I could have sold to offset some of my capital gains, like AvalonBay. No matter what, selling was a bad decision.
First Industrial would go on to produce a nearly 1,000% total return from the date of my sale, or 23.6% annualized. That absolutely pulverized the S&P 500's exceptional 15.2% return during that period.
Driving that rebound has been the growing demand for industrial real estate from e-commerce companies. First Industrial has captured this opportunity by building high-quality warehouse facilities to meet their needs. That strategy has created a tremendous amount of value for the company's investors.
I've also considered bringing First Industrial back into my portfolio to play the growing demand for industrial real estate. I haven't yet. Instead, I opted to buy shares of industry leader Prologis and a few other smaller players. However, I might add it in the future if I see shares trading at an attractive valuation.
Selling these REITs too early cost me dearly
I made many smart investments following the financial crisis, including buying shares of AvalonBay and First Industrial in the first place. However, I also made some mistakes, which included selling them a few months later. Those sales ended up costing me more in missed returns than the losing stock picks I made at the time. Because of that, I'm starting to see Warren Buffett's wisdom in striving to hold stocks forever.