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When to Buy: When to Sell

(This article appeared in Conscious Living, July, 2007)

By John Price, PhD

Most of us have a desire for more happiness and joy of life with less stress and anxiety. One of the purposes of Conscious Living is to clarify these desires and to provide the education and techniques to live a fuller life on all levels: body, mind and spirit.

There are similar desires and anxieties in the world of investing. For a start, most people feel anxious when it comes to the share market. Should I sell my Telstra shares? Should I buy more? Was I foolish (or smart) to avoid taking up the T3 issue? Is it too late to start now?

Even when they do actually invest, they are never quite sure what they are after and what is going to be the outcome of their choices. Something is eating away at their investment enjoyment and investing success, something that I refer to as chronic investor diseases.

I like to think of myself as an investment healer. What I do is help people through education to recognise their chronic investor diseases and to overcome them with my software Conscious Investor. I want to help people fulfill their investment potential and desires.

The two most pernicious investment diseases that I have identified I refer to as getevenitis and consolidatus profitus. Getevenitis is the disease of always hanging on to shares when the price has gone down. We want to be able to say to our spouse or partner, “Don’t worry. It will come back.”

The problem is that if the price has dropped from $5.00 to, say, $4.00, what we own is a $4.00 stock. It is irrelevant that it once was $5.00. The only sensible question is, “If I now had $4.00, would I buy this stock again or would I buy something else?”

Putting it another way, what is the best thing that I can do with $4.00 to get the most value? Should I invest in the stock in question (which in this case means keeping your purchase)? Or should I use the $4.00 to buy a different stock (which means selling your original purchase)?

It doesn’t mean that we made a mistake with the original purchase. Just as in life, I think that we always do our best. However, sometimes things don’t turn out the way we had hoped. It becomes time to make new choices and change directions.

The opposite chronic investor disease is consolidatus profitus. Everyone has heard the expression “you can’t go wrong taking a profit.” Unfortunately it is not true.

Upon taking a profit, most people can’t wait to get back in the market by using their money to buy shares in another company. The problem is that research shows that they tend to put their money in shares that under perform those that they just sold.

We could have bought shares in Westfield, the international shopping centre group started in Australia, 20 years ago feeling very smug by selling in a few years and doubling our money. But if we had held on, then an investment of $10,000 would now be worth around $250,000.

Extensive studies show that the two diseases of getevenitis and consolidatus profitus cost investors around 4-5% per year. In other words, if we made only two changes to our investing, namely always selling our losers and always holding on to our winners, then on average our return would go up by 4-5% per year.

Of course, I am not advocating that we always do this. But just to ask yourself if you have these tendencies. You can do a little self-evaluation. Ask yourself why you are holding on to the shares in your portfolio and what were the reasons for your last sales.

There is really only one rule about buying shares in a particular company apart from being happy with its products and values. Can I be very confident that I will make more money if I do this than if I leave it in the bank?

Similarly, there is only one rule when to sell. Do so only when you are confident that you will get more value from your money by doing something else with it. This could mean using it for a holiday to the Great Barrier Reef, or it could mean putting it in the bank or buying shares in another company. The important thing is not to sell just to take a profit without knowing what you are going to do with the money.

Oh, one last thing. Take your time. You are investing for the rest of your life.

John Price is CEO of Conscious Investing. Email


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