Be a better investor: knowing when to sell

As an investor, at some point in your investment career, you’ll be faced with one tricky dilemma. When, exactly, do you
cut your losses? The fact is that selling a stock is much more difficult than buying one – especially a loser. Whether it’s pride or hope, there are plenty of psychological obstacles in your path. So to avoid being undone by your own emotions in the heat of the moment, you need to have a dedicated action plan in place, preferably from the minute you first invest in a company.

So how do you go about it? Firstly, you need to take control of your portfolio. What do I mean by that? Well, like most investors,
you probably use online valuation tools to monitor your portfolio. That’s all well and good. But these valuation statements don’t have anything like all the information you need to monitor your investment – not least the reasons you bought the stock in the first place, and any thoughts you had on when you might sell.

That’s why you should have a notebook
of some sort. I used to do this in an accounts ledger; these days it’s all on a spreadsheet. But it doesn’t matter what you use – the point is to have one place where you record not only the stock you bought, and the price you bought it at, but also your reasons for buying and what gave you the idea in the first place.

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At a bare minimum, I’d include the date, the company name, the source of the tip, the price you bought it at, the reason you bought it – in other words, what you expect to happen – and a rough idea of what sort of price you might consider selling at.

What’s the point of doing this? It’s because if you don’t write it down now, when you first invest, there’s much more chance that you’ll make a bad decision further down the line. You see, without this reference data, there’s
 no way of judging success – or failure. As soon as the share price has a bad day, you might be scared into selling, unless you can look back at your notebook and realise that your rationale for buying hasn’t changed. Equally, it’s all too easy to hang on to a loser after things have turned bad, but you have stubbornly persuaded yourself that you expected this all along. Looking back on your initial thoughts will make that sort of self-deception a lot harder to pull off.

In the notes I write, I also include a column assessing the management. Are they building trust, or destroying it? If they’ve made mistakes, how many more am I willing to take? The City adage is that profit warnings usually come in threes – are you willing to wait that long? And on some stocks, I’ll put together a timeline of how long I’m willing to wait for it to meet my targets – such as winning new contracts, or cutting costs – before I sell and find opportunities elsewhere.

The other thing to be aware of is your reaction to news about your stocks. When news releases come out – and as an investor, it’s easy enough to sign up to get all the latest releases on any given stock straight to your inbox – it’s important not to indulge knee-jerk reactions. Take a break from what you’re doing, and take a long hard look at the actual company news release – not some newspaper interpretation, which are flawed more often than you’d think.

Private investors have a great benefit at this stage. Yes, many people in the City react mmediately to these releases, but for most investors, it takes time for the information to sink in. Analysts will reflect on the news and write a note. Fund managers will learn about it all in tomorrow’s Financial Times. Many won’t have a clue until the situation is discussed in the next investment strategy meeting.

As a private investor, on the other hand, you shouldn’t have more than one or two dozen stocks to look after; or at least, if you keep on top of selling the losers, you shouldn’t have. That means your reactions should be lightning quick.

This may all sound like hard work. But,
in reality, the ideas I’ve suggested here are
the only things we, as private investors, have got to go on when judging the merits of our investments. Without documenting our thoughts, hopes and dreams, how can we know when it’s time to close the position down? And that’s vital – because, as with gardening, pruning is the key to a fruitful investment portfolio. And if you leave the pruning too long, it’s going to get messy. So set up a system and stick to it – then you won’t go far wrong.