When should you sell?
“Everyone is aware of the old saying that’s meant to convey investing’s core proposition: “buy low, sell high,” according to Mr. Marks. It’s a tired portrayal of how most people think about investment.
“Buy cheap, Sell High” is only a beginning point for a description of a highly complicated process. People may clearly acknowledge the necessity of liquidating valued assets. But how useful is this fundamental concept? Most investors trade excessively to find that perfect high to sell or the perfect low to buy, which is to their harm. This works as speculation and not investment. Many professional investors are concerned about losses compounding, much like others who are fearful of abandoning gains.
Also, fearing illiquidity once the price drops, investors sell at the point which ideally might just be a temporary dip. The greatest way to deal with illiquidity is to develop long-term portfolios that aren’t reliant on liquidity.
So while we now understand where the common investor is making a mistake, we can now further correct our actions by not committing the same mistakes. So when should we sell?
The short answer is: When we need the money. For the long answer: Read along further to find out.
Why do people sell?
There are two main worries that might make the investor wish to liquidate his/her holdings in the asset:
- They are afraid that the gains might go away
- They are afraid of what people will say
For example, if Mr. A buys something at Rs. 100. If the price of the security moves up to Rs. 120 they become hopeful of further upward price movements and reach peak confidence when the price reaches Rs. 160. On the other hand, if the price drops to Rs. 80, Mr. A thinks about averaging down his investment; essentially meaning to have more of an asset that is declining in price which results in bringing down the cost of the investment. If the price continues its downward movement and reaches Rs. 50, Mr. A would become wary of whether to continue down the path of averaging down, and at a price point of Rs. 20, Mr. A’s spike in tensions would become many-fold and he would want a way out of this.
Here comes the fear of selling by being scared of short-term price movements and thinking about what others will say about your holdings. At a price point of say Rs.20, Mr. A would be selling when he ideally shouldn’t.
This results in something that is known as a behavior gap. But what is a behavior gap? Read on further to find out.
A situation when investors sell when they shouldn’t, resulting in a disparity between investment and investor returns is referred to as the Behavior Gap.
The Behavior Gap exists in reality, and multiple studies conducted in the United States indicate that it is several percentage points wide. In reality, this is one of the most significant costs of investing that most investors never consider as in reality the investor is missing put on the actual gains that the asset might gain in the coming future.
But how many people actually do resist their urges to not sell at short-term price movements?
Let us take the example of Amazon; which rose from the price of $5 in 1998 and has now risen to around $2964, giving a return of around 592 times the original investment.
While the trajectory seems fantastic and investors wish they could take part in this upward movement since the beginning, a closer look will highlight all the dips in prices that would have made the investor change their minds about the stock.
- The stock hit the price of $85 in 1999, 17 times less than the previous 2 years.
- The stock dipped to a price of a mere $6 in 2001
- The stock hit a $600 price high after the major downfall in 2001
The investor’s indulgence in the above scenarios would definitely be to sell. One of the most difficult things to do when you discover an investment that has the potential to multiply over time is to remain patient and maintain your position. News, emotion, the fact that they have earned a lot of money thus far, or the thrill of a new, seemingly more promising idea can all easily lead investors to sell.
So in essence what should be the real reason why you should sell?
- When you actually need money
- The investment’s fundamentals have deteriorated to the point of no return, or the original premise on which you invested no longer exists.
- You have found a much better investment than the previous investment
- You wish to diversify your portfolio and rebalance your portfolio.
There are many advantages of holding out an investment for the long term. Long-term investors have an edge over short-term investors While everyone else is worried about what will happen in the next month or quarter and so trades excessively, patient investors are able to disregard short-term performance, hold for the long haul, and avoid unnecessary trading fees.
The only way to get returns that you desire is to stay when invested during the worst times. People who react rashly or those who accept the plausible nonsense that circulates during such times will merely suffer transaction fees and capital gains taxes by losing out on these sudden bursts.
A cardinal sin in investing is reducing market exposure through ill-advised selling and thereby missing out on the market’s good long-term trend. That is especially true when selling assets that have declined in value for no reason, converting temporary losses into permanent losses and missing out on the wonder of long-term compounding.
So the only final thought that comes to mind is that rather than looking out for many awesome and amazing trades, search for a handful of good investments.
(Saarthi for your dreams)