Homepage
PR Newswire
05-06-2011, 07:42 AM
What Goh Eng Yeow is describing sounds a lot more like "trading", rather than investing. Yet he ends off his article by saying "Happy Investing".
I realized he hardly mentions about the soundness of a business and its ability to generate good and recurring profits and cash flow as being the basis of investment. Selling would equate itself to these rules being violated, as part of the business analysis aspect of a disciplined investor. As I've mentioned before, the "Buy and Hold" theory is a fallacy - it should be renamed "Buy and Monitor Closely (on the Fundamentals)" instead!
Jun 5, 2011
small change
Getting the 'sell' decision right
Setting targets on profit and loss levels, selling enough to take back capital and some profit can take some angst out of making an exit
By Goh Eng Yeow, Senior Correspondent
Walk into the corner of any bookshop devoted to investments and you will find a host of literature offering advice on how and when to buy shares.
But I have yet to come across a book which offers me good advice on the opportune time to sell a share I hold. Yet, this may be the more critical issue for most investors.
Buying a share is simple. The financial world is virtually your oyster, presenting an abundance of opportunities for you to park your nest egg. But when you sell a share, you are confined to only those stocks which you hold and this can make it tough to make a decision.
As any investor will attest, unless you are a die-hard day trader used to getting in and out of the stock market many times a day, you are likely to face an emotional tussle each time you want to sell a share.
This may mean taking a profit and kissing goodbye to a successful investment whose value may run up further, after you make your exit.
Selling may also mean that you had made the wrong decision to buy the stock in the first place. But as human beings, admitting that we have made a mistake is never easy, especially if we also have to take some losses in our stride.
Most of us find it very painful emotionally to cut losses on a bad investment. It may sound irrational, but most of us would rather take a 'wait and see' attitude, and hope that the bad investment can make a comeback - improbable though that may turn out to be - to allow us to sell without making a loss.
There is no hard and fast rule in the stock market that what goes down must go up again, and the longer we wait, the worse the outcome might become.
In other words, given the way we are psychologically conditioned, the pain we experience each time we make a loss on our investments will always be much greater than any profit that we may make on our investments.
But such irrationality also makes us far more likely to make mistakes in making decisions on how to handle a bad investment.
To lessen the probability of such a painful occurrence, I always try to make sure that my stock investments are sound choices, with great business franchises which I would still want to own many years down the road.
Using such a 'buy and hold' approach, I was able to accumulate many quality stocks such as PetroChina and HSBC Holdings when their prices were artificially depressed by periods of great market turmoil like the global financial crisis that hit the markets three years ago.
In those years when the bulls went on the rampage on the stock market, I would stop investing altogether, as I waited for a correction to emerge. Sure as night follows day, I would turn out to be right. The stock market, after all, moves in cycles.
Yet, even a disciplined investment approach does not turn out to be foolproof. Many years ago, it was the rage to apply for initial public offerings (IPOs) and I too succumbed to the investment fad.
As a result, my investment portfolio has been peppered with a number of counters which I had received as a result of my IPO applications.
Some of them were excellent investments initially, but the pain of cutting losses when their allure faded had simply been too great for me to bear. Waiting for them to recover to their original investment cost proved to be elusive, and I ended up sitting on a whopping loss instead.
I have since given up applying for IPOs on the local market, but there are some pointers worth recounting from the financially expensive and painful experience:
Don't get over-emotional over your shares
If you have lost money because a share price has gone down, it can be very difficult to let go. But remember, most of us have only a limited sum to invest, and we should put the funds to good use to maximise our returns.
Holding a soured investment stops you from using that money elsewhere where you may get a better return.
Top-slice your successful investments
If a share price is on the rise, it is easy to believe that the uptrend will continue indefinitely. But rather than sell off all your shares, what you can consider is to 'top-slice' your investment - sell enough shares to take back your capital and some profit.
If the share price continues to go up, you will still have some exposure to the stock and can make further gains.
Check your portfolio once in a while
Shares are not to be parked under the bed and forgotten. Most people tend to look at their stock portfolio more frequently when the market is on the uptrend and relish the paper gains which they are enjoying.
But when the market turns bumpy and losses start to appear, there will be some who fall into a denial mood and stop looking at their portfolio altogether. As such, it is important to take a cold, hard look at your holdings at least once every two to three months. If they still make sense, fine. Otherwise, you have to trim those stocks that no longer fit your investment strategy.
When to cut losses
No investor likes to lose money. It is always easier to take a poor but positive return, than to accept a small loss.
For stocks which you do not plan to hold as your core investments, you should set a profit target, a target loss level as well as a timeframe for selling the shares. Once the stock reaches your target loss level, you need to take a good look at its prospects and ask yourself if there are any good reasons for hanging on to it.
Of course, the pointers I highlight are easier said than done when put into practice. But it will surely save you a lot of heartache agonising over your selling decisions and hopefully help to maximise your investment returns.
Happy investing.
engyeow@sph.com.sg
I realized he hardly mentions about the soundness of a business and its ability to generate good and recurring profits and cash flow as being the basis of investment. Selling would equate itself to these rules being violated, as part of the business analysis aspect of a disciplined investor. As I've mentioned before, the "Buy and Hold" theory is a fallacy - it should be renamed "Buy and Monitor Closely (on the Fundamentals)" instead!
Jun 5, 2011
small change
Getting the 'sell' decision right
Setting targets on profit and loss levels, selling enough to take back capital and some profit can take some angst out of making an exit
By Goh Eng Yeow, Senior Correspondent
Walk into the corner of any bookshop devoted to investments and you will find a host of literature offering advice on how and when to buy shares.
But I have yet to come across a book which offers me good advice on the opportune time to sell a share I hold. Yet, this may be the more critical issue for most investors.
Buying a share is simple. The financial world is virtually your oyster, presenting an abundance of opportunities for you to park your nest egg. But when you sell a share, you are confined to only those stocks which you hold and this can make it tough to make a decision.
As any investor will attest, unless you are a die-hard day trader used to getting in and out of the stock market many times a day, you are likely to face an emotional tussle each time you want to sell a share.
This may mean taking a profit and kissing goodbye to a successful investment whose value may run up further, after you make your exit.
Selling may also mean that you had made the wrong decision to buy the stock in the first place. But as human beings, admitting that we have made a mistake is never easy, especially if we also have to take some losses in our stride.
Most of us find it very painful emotionally to cut losses on a bad investment. It may sound irrational, but most of us would rather take a 'wait and see' attitude, and hope that the bad investment can make a comeback - improbable though that may turn out to be - to allow us to sell without making a loss.
There is no hard and fast rule in the stock market that what goes down must go up again, and the longer we wait, the worse the outcome might become.
In other words, given the way we are psychologically conditioned, the pain we experience each time we make a loss on our investments will always be much greater than any profit that we may make on our investments.
But such irrationality also makes us far more likely to make mistakes in making decisions on how to handle a bad investment.
To lessen the probability of such a painful occurrence, I always try to make sure that my stock investments are sound choices, with great business franchises which I would still want to own many years down the road.
Using such a 'buy and hold' approach, I was able to accumulate many quality stocks such as PetroChina and HSBC Holdings when their prices were artificially depressed by periods of great market turmoil like the global financial crisis that hit the markets three years ago.
In those years when the bulls went on the rampage on the stock market, I would stop investing altogether, as I waited for a correction to emerge. Sure as night follows day, I would turn out to be right. The stock market, after all, moves in cycles.
Yet, even a disciplined investment approach does not turn out to be foolproof. Many years ago, it was the rage to apply for initial public offerings (IPOs) and I too succumbed to the investment fad.
As a result, my investment portfolio has been peppered with a number of counters which I had received as a result of my IPO applications.
Some of them were excellent investments initially, but the pain of cutting losses when their allure faded had simply been too great for me to bear. Waiting for them to recover to their original investment cost proved to be elusive, and I ended up sitting on a whopping loss instead.
I have since given up applying for IPOs on the local market, but there are some pointers worth recounting from the financially expensive and painful experience:
Don't get over-emotional over your shares
If you have lost money because a share price has gone down, it can be very difficult to let go. But remember, most of us have only a limited sum to invest, and we should put the funds to good use to maximise our returns.
Holding a soured investment stops you from using that money elsewhere where you may get a better return.
Top-slice your successful investments
If a share price is on the rise, it is easy to believe that the uptrend will continue indefinitely. But rather than sell off all your shares, what you can consider is to 'top-slice' your investment - sell enough shares to take back your capital and some profit.
If the share price continues to go up, you will still have some exposure to the stock and can make further gains.
Check your portfolio once in a while
Shares are not to be parked under the bed and forgotten. Most people tend to look at their stock portfolio more frequently when the market is on the uptrend and relish the paper gains which they are enjoying.
But when the market turns bumpy and losses start to appear, there will be some who fall into a denial mood and stop looking at their portfolio altogether. As such, it is important to take a cold, hard look at your holdings at least once every two to three months. If they still make sense, fine. Otherwise, you have to trim those stocks that no longer fit your investment strategy.
When to cut losses
No investor likes to lose money. It is always easier to take a poor but positive return, than to accept a small loss.
For stocks which you do not plan to hold as your core investments, you should set a profit target, a target loss level as well as a timeframe for selling the shares. Once the stock reaches your target loss level, you need to take a good look at its prospects and ask yourself if there are any good reasons for hanging on to it.
Of course, the pointers I highlight are easier said than done when put into practice. But it will surely save you a lot of heartache agonising over your selling decisions and hopefully help to maximise your investment returns.
Happy investing.
engyeow@sph.com.sg
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
