Do You Have A Selling Strategy For Your Stock Market Investments?March 2007: With markets suddenly volatile, it seems like an appropriate moment to once again revist the idea of a selling strategy. This is one of the fundamental skills of investment. As my friend Phil would say, 'A profit isn't a profit until it's in the bank'. Quite so. A solid strategy for selling and the discipline to carry it through is one of the core talents that divides investment winners from investment losers. Alas, we can't all be like Warren Buffett and hold 'forever'. If it were that easy, we would all be billionaires. This is one of the constant and cyclical problems for mostinvestors. A purchase is made at a reasonable price and then heldas prices rise. A paper profit is made. Over time, the market will inevitably turn and sentiment changes. As prices fall back, a paper profit turns into a paper loss. By not selling 'into strength', the opportunity to take that profit and put it in the bank may be lost for months, years or forever. At worst, this may mean that a profit is impossible for this holding. This may have been caused by a change in business fundamentals, trading conditions, management or many other factors. This problem gets me too. My selling strategy isn't always asrational and mechanical as I might like. Of course, if you investenough, you will have the odd moment of calamity. You know the kind of thing... You return from a two week holiday to see a profit warning and price plummet has happened on a favourite stock - straight through it's stop loss. Whilst you were on a beach somewhere, blissfully unaware. This cannot usually be helped. Most investors don't have a stop loss though. (A stop loss, by the way, is a preset target for selling if a share price falls too low. This is set usually at between 10 and 20 percent below the previous highest price to lock in profits and protect from losses.) Investors in individual securities need to follow the marketclosely. Generally, this means studying far more than most peoplerealise. It also means that when 'the writing is on the wall' it is time to look at lowering holdings. This is purely conjecture on my part, but I have a theory. Thetheory is that most people make lousy individual investors because they are too caught up in the hectic pace of life to really follow the market they are investing in. Being busy is no bad thing. But, if it impacts your investment time, commitment and skills, it may mean that direct investment in equities isn't for you. Of course, I may be wrong. Most people might fail to analyse their prospective investment closely enough, or fail to assess the competition in a market or simply be unrealistic about company prospects. Whatever the true answer may be, failing to get out and sell when you can is often costly for a shareholder. This article was first published to my newsletter on 6th March 2007. To read more about similar subjects, please follow these links:
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