Every serious investor has thought through this element of 'the game'. Quite simply, if they have not, they are not.
So what can be this important?
Of course it is. When it comes down to it, most things in life are really quite simple. So is this. But, oh-so overlooked.
If you begin to study investment as either a hobby, an intellectual pursuit or a profession, you will find massive quantities of books that can guide you. I know, I have quite a few of them. However, the majority will help you to choose an investment. Stock or fund picking is a vital element in the investment process.
But, selling is where the profits are. After all, if you never sell, you never really make a 'real' profit, it is just a theoretical one. And theoretical profits do not pay the bills.
Years ago, I used to know a semi-retired farmer
in the UK. He was a nice guy who had sold a pig farm whilst it was
profitable and was living on his large 'capital'. He found investing to
be more regular as an income source! (At least that is what he said).
Without trying to be mean, he wasn't the sharpest knife in the drawer
and his investments backed my theory up.
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The first time I was invited to his house he delighted in firing up his pc to show off his investment software and display to me his 'portfolio'. At the time he had holdings in about 100 different UK listed companies. But, about 70% of these holdings were losing money! I was amazed. He had boasted to me that he had 'never made a loss on a share'. Being unable to resist, I quizzed him relentlessly that evening until I found an answer I believed.
The truth was that he had bought all these shares but had NEVER actually sold one. He had not made 'a loss' because he didn't turn the shares back into cash. It also meant that he had never actually made a profit either but he neglected to mention that...
As you might be realising, this did not make him a good investor. He had not figured out how to either buy or sell shares. It was all pure dumb luck either way! When you also consider that I am talking about perhaps 1996 or 1997, towards the end of the greatest share bull market of all time, he was doing worse than pure dumb luck!! During the world's most profitable period for investment EVER, he had found a way to lose money consistently. That takes real skill.
Most people that invest money will never make the kind of errors of judgement that this man made. Most people will never have the money available to lose and it not alter their lifestyle. That may be a blessing in disguise!
With hindsight, as I got to know him better, I began to realise that he was actually a gambler at heart ... horses, cards, shares, spoof (though I never figured out the rules to that) and I'm sure more that I wasn't aware of.
However, most of us are not gamblers. We have some spare money and we want to invest it for the future. Hopefully, it will grow into something more substantial for when we need it. Perhaps it will pay for a child's education or our retirement. Whatever.
The issue that you need to think about when making an investment is when to sell up. The reason is quite simple, it is all about discipline. Even the best companies go through bad times. The course of a business cycle virtually guarantees this. We however, want to be selling during the good times for a profit, not holding on until it is too late for a loss.
Some investors have a preset figure in their mind - when the price is xx I'll sell. Others use a stop-loss system, or better yet, a trailing stop-loss. Each has a place in the investment world.
Alas, we can't all behave like Warren Buffett and buy with the intention of holding 'forever'. Firstly, he is better at this than us. Secondly, he tries to buy a business whole, which is probably out of your reach - I know it is out of mine! And lastly, though I know he will hate to make a loss more than most other people, if it all goes wrong, he can afford it. His life will not be ruined by losing money (and he has been so successful that even his reputation is unlikely to be ruined).
Just remember that the simplest formula for making money in an investment is to 'Buy low and sell high'. Easy stuff. But when things are high (information here), you need to remember to sell. Don't let greed get the better of you.
It has happened to me and probably every investor who ever lived. He or she held on too long and turned a decent profit into a sickening loss. The art of selling investments is one that every investor really must learn.
To quote another friend of mine, "A profit is only a profit when it is in the bank". It is hard to disagree with such logic.
It is worth remembering that selling a holding provides the opportunity to reinvest the capital in a venture, business or opportunity that looks more appealing. The entire basis of compounding returns is based on making profits on profits. As one holding starts to lag and it seems as though the benefit you were hoping for is "in the price", it might be a good time to start looking for the next home for the money.
There are some forms of stock market investment that might actually need some preparation and effort to be able to sell. Selling mutual funds, for example, ought to be very straightforward. These funds (and unit trusts in the UK) usually have a price that all deals will be conducted at each day and there is generally enough liquidity for all sales and purchases to be possible.
In some contrast, selling penny stocks (information here) might take some time depending upon whether there is another party for a stockbroker (information here) to match a trade against and the price you are hoping for may not be possible. These are the extremes though and generally selling securities ought to be very easy using a normal broker.
For those small percent of people that invest in hedge funds (information here), it is typical that their investors agree to some form of lock in upfront. In these types of specialist environment it is much easier to purchase investments than it is to sell. This is partly because of the effort that goes into marketing investments and partly because the fund managers (information here) do not want to be forced into asset sales at the wrong time.
For Americans, a long-process to conclude a transaction - including having a judge approve the trade is selling structured settlements for cash. Because they are initially approved by a court, their sale or transfer also needs to be signed off in court.
The real skill, of course, comes in being able to run profits for a good amount of time and have a sense of when it ir right to get out without losing too much of the hoped-for profits. And at the other end, when something does not perform well, knowing that selling investments should protect the capital in the portfolio reasonably well.
To read more about related topics, please visit:
How To Use Risk Analysis To Make You A Better Investor
Why Low Risk Can Be Good
Some Investment Definitions Explained
How Should A Stop-Loss Be Used?
Does Correlation Influence Portfolio Diversification?
What Is Alpha? Can You Outperform The Stock Market?
Learn How Beta And Volatility Impact Your Investment Portfolio
Understanding Gearing And Borrowed Money
How Do Different Types Of Risk Influence A Portfolio?
Understanding A P/E Ratio (Price To Earnings Ratio)
What Does The Return On Capital Employed (ROCE) Tell Us?
How Does Volatility, Standard Deviation and Beta Impact An Investment Portfolio?