The
Most Important Thing You Need To Know About Investing by Stuart
Langridge
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
