Imagine you're the manager of a city's power grid. For 360 days of the year, the city hums along with predictable energy needs. But for five days in the blistering heat of summer, everyone cranks up their air conditioning at the exact same time. This creates a massive, short-lived “peak” in demand. You have two choices. You could spend a billion dollars building a massive new power plant that will sit idle 98% of the time, just to handle that peak. This is incredibly inefficient and risky. Or, you could implement a “peak shaving” strategy: offer incentives for people to use less power during those peak hours, or draw from stored energy reserves. You don't shut the city down; you just intelligently manage the extreme, unsustainable demand to protect the entire system. In investing, peak shaving is the exact same concept. Your portfolio is your power grid. Your stocks are the power plants. Sometimes, one of your stocks—perhaps a wonderful company you bought at a fair price—gets “discovered” by the market. The story goes viral, analysts fall in love, and euphoric buyers pile in, sending the stock price into the stratosphere. This is your portfolio's “peak demand.” The stock's price is no longer connected to its fundamental earning power, but is instead being driven by pure emotion and momentum. The amateur investor, seeing the price soar, gets greedy. They might even buy more, right at the top. The value investor, however, recognizes this peak for what it is: an unsustainable, high-risk situation. Their margin_of_safety has vanished. Instead of risking a portfolio-wide “blackout” when the bubble pops, they wisely “shave the peak.” They don't sell their entire position in this great company. Instead, they sell a calculated portion—perhaps 20% or 30% of their shares—at these inflated prices. This action achieves three critical goals:
It's a strategy rooted in prudence, not prediction. You aren't trying to call the absolute top. You are simply recognizing that the price has detached from reality and are acting rationally to protect your capital.
“The investor’s chief problem—and even his worst enemy—is likely to be himself. In the end, how your investments behave is much less important than how you behave.” - Benjamin Graham
At first glance, peak shaving might sound like “market timing,” a practice that value investors famously disdain. But this is a critical misunderstanding. The difference lies in the motive for selling. Market Timing vs. Value-Based Trimming
| Characteristic | Market Timing (Speculation) | Peak Shaving (Value Investing) |
|---|---|---|
| Motivation | Based on predicting short-term price movements. “I think the stock will go down next week.” | Based on assessing long-term valuation. “The stock price is now double its intrinsic value.” |
| Focus | Chart patterns, market sentiment, news cycles. | Business fundamentals, cash flows, balance sheet strength, intrinsic_value. |
| Goal | To outguess the market's next move. | To manage risk and reallocate capital efficiently. |
| Underlying Belief | “I can predict what other people will do.” | “I cannot predict the market, but I can assess what a business is worth.” |
For a value investor, peak shaving is a powerful tool for several reasons:
Applying peak shaving effectively requires a plan, not an impulse. It must be integrated into your investment process before emotion has a chance to take over.
The goal of peak shaving is not to feel remorse if the stock continues to climb after you sell. The goal is to have followed a rational process that consistently reduces risk and improves long-term returns.
Let's imagine you are analyzing “American Tower Corp.” (AMT), a cell tower REIT, in early 2017.