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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.
Stuart Langridge is a financial adviser to
expatriates in the Benelux region. To subscribe to his free monthly
financial newsletter and receive a free 70 page ebook about
financial planning, click on the following link:
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