The Most Important Thing That You Need To Know About Investing
That is a very grand title for a newsletter. But, I kid you not,
what I am going to discuss this month is a rather overlooked but
massively important factor in the success or failure of an
investment strategy.
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?
SELLING.
Simple, huh?
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.
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, 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.
About the author:
Stuart Langridge is a financial planning consultant to
expatriates in the Benelux region. To subscribe and receive his
free monthly email newsletter and a copy of his free 70 page
ebook about financial planning, please click on the following
link:
http://www.freefinancialguide.com/dt/t.php?cid=32&ad=AD_NAME_HERE
&cpc=0
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