When To Sell A Share

The Motley FoolSince returning to Singapore, I have been invited to speak at a number of seminars and conferences. Usually at the end of each session (and sometimes before the session even begins), I have an opportunity to meet and chat with participants and delegates.

I have found that many of you are interested in knowing what shares to buy. That is natural – we all do. But equally, many of you also want to know when to sell a share. That is also understandable.

But here is a very quick glimpse into how I invest: When I buy shares, I always intend to hold onto them for a very, very long time – forever if possible.

It is not that I am some kind of closet hoarder. In fact, I dislike clutter. Consequently, I am very selective about what I invest in. For that reason I don’t have that many shares in my portfolio. So unless there is a very good reason to dispose of my shares, I generally don’t.

However, I have noticed that some of you like to have a clear exit strategy even before you have bought a share. Others hold onto shares because they don’t like the idea of admitting that they might have made a mistake by buying a bad share in the first place.

Neither strategy makes much sense to me.

But even though I am an avid buy-to-hold investor, there are some circumstances when I would sell a share. Here are a couple of them.

Reason Number One

The first reason is really quite straightforward. I might sell an investment if I need cash.

I know that my investments are there for a reason. They are intended for using at a later date when I might need the money. So, if I require cash for, say, my children’s education or for a deposit on a house, I will look around for investments that I can easily liquidate.

This is money that I have intentionally put away for a rainy day. So, when it rains, I am prepared to sell.

Let’s face it, not many of us have sacks of cash lying idle in bank accounts doing nothing. In fact, the last thing we should have is bags of money lying idle doing nothing. So, any money that is not needed for a few years or more should be put to work in the stock market in the knowledge that one day they might need to be sold.

Reason Number Two

The second reason is slightly more complicated. It is when the story behind an investment has changed.

Before you invest in a business you should have looked closely at the company’s finances and its business strategy. Together they help to build an investing thesis. However, if, for whatever reason, the thesis has changed appreciably, then you may want to reconsider your investment.

Take, for example, a restaurant chain that once catered for high-end customers but has decided that it now wants to target the mass market instead. There is nothing wrong with a company changing course. But that doesn’t mean you have to go along with it.

When you buy shares in a business, you effectively become a part-owner of the company. So, if you are uneasy with the new direction that a business is taking, then you should reconsider your position. But if you are happy that the change could be a change for the better then hang in there.

Churn and burn

Some investors, it has to be said, believe that it is possible to make lots of money by rapidly moving in and out of shares. But by making lots of trades you are effectively increasing the cost of investing through churning and burning. Each additional churn will inevitably burn into your total returns.

If you have chosen your investments carefully, you shouldn’t need to constantly buy and sell. That is why Warren Buffett advises investors to hold a small piece of a great business with the same tenacity of an owner that owns the entire business.

By adopting the attitude of a tenacious business owner you are more likely to ride out the ups and down of the business cycle. What’s more you could reap the benefits of the increased earnings and dividends over time that should lead to better returns.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.

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