The Problem of Selling Too Soon

Investors always encounter the same problem: When is the best time to sell a stock? Is it when the index reaches a certain value? When a stock you hold surpasses a target price you’ve set for it? When your portfolio has amassed a certain percentage of gains? And once you’ve sold, where should you move the capital you’ve freed up? Given all these complications, the right answer for when to sell might surprise you: Perhaps it’s better not to sell at all.

Suppose you have a small portfolio. Each stock has enjoyed healthy gains, enough for you to make a tidy profit. Their prices have risen well above where you bought them, and you’re just not sure whether your stocks can sustain those gains. So you sell – and you start to wonder what you’ll do with the resulting money.

Sure, there are plenty of good companies out there that might prove profitable for your capital. But what if you sold too soon?

Most investors just don’t have the patience to wait for companies to grow. We tend to buy and sell based on the value of a company’s shares – not the company itself. By selling too early, at a seemingly good price, we may be collecting a 30% gain – but sacrificing an eventual 100% or 1,000% increase.

Good companies don’t care whether you lost patience and sold them. They’ll just keep rising. And if you realize your mistake and want to buy back in, you’ll likely have to pay a far higher price to do so.

Selling too soon leaves investors constantly searching for new places to put their money. But the more you trade, the more likely you are to make mistakes, and the more money you’ll lose on taxes and transaction fees. And if you keep selling good stocks, did you really do enough research before you bought them? If you truly understood them well, perhaps you wouldn’t have sold at all. Or perhaps you’re just trying to make a quick profit in the stock market, rather than investing for the long term.

If you’ve really done your research before you invest, your reasons for choosing a company shouldn’t evaporate in a matter of months (barring some wildly unexpected surprise). A truly good company will remain a sound investment for years to come.

You’re not buying stocks to gamble in hopes of making quick cash. You’re investing in a well-run business, and trusting its management to work for you. You’re far better off holding good stocks than continually trading bad ones. Take your time. Do your research. Find anywhere from five to 20 companies that truly earn your confidence. If you do all that correctly, then – at least until you cash out your wealth decades from now – you may never need to sell a stock at all.

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Disclosure: Johnny Chan does not own shares of any companies mentioned. Motley Fool Hong Kong is not licensed by the Hong Kong Securities and Futures Commission to carry out any regulated activities under the Securities and Futures Ordinance.