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Advice that any investor would love to follow would be ‘Sell before the next economic downturn’ or ‘Sell before the company hits a bumpy patch’. If only it was as uncomplicated as that!
The golden rule on selling can be simply stated: the investor does his research, buys his investment and keeps it so long the story remains sound. If the evidence you have gathered tells you the company performance is going well and the share is not vastly inflated, then it’s a shame if you sell. This however is much easier said than done.
Two difficulties occur, both psychological according to Peter Lynch: first, the share price rises; second the share price is static or falls!
If the share price rises, then it can be very tempting to cash in on the shares before it is too late. It can be harder to stick with a winning share after the price has risen than it is to believe in it after the price goes down. But, if you sell at the first decent rise you will never have a ten-bagger.
Just because a share has risen it does not mean it is due for a fall. Many shares keep rising from one period to the next – the reason being that the underlying business just keeps getting better and better at producing profits for shareholders as the company grows and takes market share.
One good piece of advice is to avoid following what Lynch calls the drumbeat effect when undue influence is given to opinions in the financial world and media. Thus an investor might be panicked in to selling: ‘If you flip around the radio dial and happen to hear the offhand remark that an overheated Japanese economy will destroy the world, you’ll remember that snippet the next time the market drops 10 percent, and maybe it will scare you into selling your Sony and your Honda, and even your Colgate-Palmolive, which isn’t cyclical or Japanese.’ (Peter Lynch)
Incomprehensible (to the person on the street) rum…. To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
