The Most Important Thing You Need To Know About Investing
By Stuart Langridge, Thu Dec 8th
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 butmassively important factor in the success or failure of aninvestment strategy. Every serious investor has thought through this element of 'thegame'. 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 lifeare really quite simple. So is this. But, oh-so overlooked. If you begin to study investment as either a hobby, anintellectual pursuit or a profession, you will find massivequantities of books that can guide you. I know, I have quite afew of them. However, the majority will help you to choose aninvestment. Stock or fund picking is a vital element in theinvestment process. But, selling is where the profits are. After all, if you neversell, you never really make a 'real' profit, it is just atheoretical one. And theoretical profits do not pay the bills. Years ago, I used to know a semi-retired farmer in the UK. Hewas a nice guy who had sold a pig farm whilst it was profitableand was living on his large 'capital'. He found investing to bemore regular as an income source! (At least that is what hesaid.) Without trying to be mean, he wasn't the sharpest knifein the drawer and his investments backed my theory up. The first time I was invited to his house he delighted in firingup his pc to show off his investment software and display to mehis 'portfolio'. At the time he had holdings in about 100different UK listed companies. But, about 70% of these holdingswere losing money! I was amazed. He had boasted to me that hehad 'never made a loss on a share'. Being unable to resist, Iquizzed him relentlessly that evening until I found an answer Ibelieved. The truth was that he had bought all these shares but had NEVERactually sold one. He had not made 'a loss' because he didn'tturn the shares back into cash. It also meant that he had neveractually made a profit either but he neglected to mention that... As you might be realising, this did not make him a goodinvestor. He had not figured out how to either buy or sellshares. It was all pure dumb luck either way! When you alsoconsider that I am talking about perhaps 1996 or 1997, towardsthe end of the greatest share bull market of all time, he wasdoing worse
than pure dumb luck!! During the world's mostprofitable period for investment EVER, he had found a way tolose money consistently. That takes real skill. Most people that invest money will never make the kind of errorsof judgement that this man made. Most people will never have themoney available to lose and it not alter their lifestyle. Thatmay be a blessing in disguise! With hindsight, as I got to know him better, I began to realisethat he was actually a gambler at heart ... horses, cards,shares, spoof (though I never figured out the rules to that) andI'm sure more that I wasn't aware of. However, most of us are not gamblers. We have some spare moneyand we want to invest it for the future. Hopefully, it will growinto something more substantial for when we need it. Perhaps itwill pay for a child's education or our retirement. Whatever. The issue that you need to think about when making an investmentis when to sell up. The reason is quite simple, it is all aboutdiscipline. Even the best companies go through bad times. Thecourse of a business cycle virtually guarantees this. Wehowever, 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 theprice is xx I'll sell. Others use a stop-loss system, or betteryet, a trailing stop-loss. Each has a place in the investmentworld. Alas, we can't all behave like Warren Buffett and buy with theintention of holding 'forever'. Firstly, he is better at thisthan us. Secondly, he tries to buy a business whole, which isprobably out of your reach (I know it is out of mine!). Andlastly, though I know he will hate to make a loss more than mostother people, if it all goes wrong, he can afford it. His lifewill not be ruined by losing money (and he has been sosuccessful that even his reputation is unlikely to be ruined). Just remember that the simplest formula for making money in aninvestment is to 'Buy low and sell high'. Easy stuff. But whenthings are high, you need to remember to sell. Don't let greedget the better of you. It has happened to me and probably every investor who everlived. He or she held on too long and turned a decent profitinto a sickening loss. About the author:Stuart Langridge is a financial planning consultant toexpatriates in the Benelux region. To subscribe and receive hisfree monthly email newsletter and a copy of his free 70 pageebook about financial planning, please click on the followinglink:http://www.freefinancialguide.com/dt/t.php?cid=32&ad=AD_NAME_HERE&cpc=0 |
