Why You Need to Be a Careful Seller of Shares
Selling shares is the weak link in the strategy of most investors. By being more careful about this side of investment, there’s potential to seriously increase your returns.
Selling Versus Buying
Published recently by a trio of academics and an analyst from a data firm, Selling Fast and Buying Slow explored the ways in which traders deal with their investments.
In particular, it compared their buying and selling behaviours.
The results were the sort of conclusion that at first seems surprising but that, on reflection, fits perfectly with experience.
The authors found that traders tend to put a lot of thought, consideration, and research into which shares to buy and when, but not into when to sell them.
Buying is the focus of the business, selling shares is an afterthought, despite the fact that it is just as critical to profitable trading, and that means that potential profits are being missed.
Simply put, most of us aren’t careful enough when selling shares.
The Missing Link
Selling is currently the missing link in the thinking of professional investors.
A great deal of care is put into balancing a portfolio, working out a strategy for what sort of assets to invest in to achieve short and long-term goals.
Analysis and research similarly see a degree of care.
While approaches vary, from concentrating on a company’s fundamentals to looking at fluctuations in the market, the work is still there.
Any professional or halfway sensible amateur investor will check out the facts on the companies they’re interested in.
That research and strategizing pays off when buying shares.
We pick the company and the moment to buy carefully, to maximise value for money. But bafflingly, most people don’t do the same when selling.
The same degree of thought and research isn’t put into that decision, even though it’s the moment when the investment pays out.
This allows knee-jerk reaction and untested bias to dominate.
For example, a preference for selling winners, which gives the seller something to brag about, often shapes when a share is sold.
But this isn’t always the best strategy. Sometimes it’s better to dump a middling share that’s going nowhere or to hold on longer to one that’s doing well.
Only thought and research will show what the best move is.
Why Do We Think This Way?
Why have we allowed this missing link to dominate our thinking? One reason is undoubtedly just bad habits.
It’s possible to invest profitably without thinking deeply about how you sell, and that reduces the motivation to act. But that laziness means lost potential.
Another reason is the focus on buying.
This has become a self-fulfilling prophecy in which we pay attention to buying at the expense of selling, which keeps our attention on buying.
An investment culture in which it’s common to show off about good buys but rarer to talk about sells is a culture that encourages more thought to buying.
This means that selling is often an afterthought, done to provide funds and space in the portfolio to buy something else.
This further skews selling away from smart decisions, as the selling situation is treated as irrelevant.
How to Get It Right
So how can you make the most of the opportunity this provides?
By being a careful seller. If you put thought into something everyone else is sleepwalking through then you’ll profit in ways almost no-one else is.
This means applying as much thought and research to selling as you do to buying.
Analyse the shares you already hold. Consider how their price compares with the company’s fundamentals.
Judge whether they’re nearing their peak or if you can get more value from them. Don’t just wait until you need to sell something before you do this.
Look at your held shares on an ongoing basis so that you know when a good time for sale is coming. Let that be a motivator to sell, not just the desire for money to buy.
When discussing your investments, get out of the habit of focusing on purchases.
Talk about your sales and the shares you’ve hung onto. Get yourself used to taking a broader view.
Careless selling costs investors in lost opportunities.
By focusing on an area other investors neglect, you can make the most out of your investments.
Paul Connolly
Paul Connolly has been a journalist for more than 20 years, as a reporter and editor for Argus Media, Reuters, The Times, Associated Newspapers and The Guardian. He has covered Islamic Finance for Reuters in the 1990s. Paul has since helped launch three newspapers, as well as reported from Tokyo, Los Angeles and Stockholm.
