Whenever I discuss an investment idea with someone, or talk about a past investment that I have made, I tend to get asked: “When do you plan to sell it?” When I then indicate to them that I have no intention of selling, I’d get – more often than not – a very surprised look that’s accompanied by another question: “If you do not sell, how do you realise your gains?” I believe, in that question, lies the fundamental issue: There is a difference between the way each individual views their investments. From the above example, it’s easy…
Whenever I discuss an investment idea with someone, or talk about a past investment that I have made, I tend to get asked: “When do you plan to sell it?”
When I then indicate to them that I have no intention of selling, I’d get – more often than not – a very surprised look that’s accompanied by another question: “If you do not sell, how do you realise your gains?”
I believe, in that question, lies the fundamental issue: There is a difference between the way each individual views their investments.
From the above example, it’s easy to conclude that most of the people I’ve spoken to view their investments as a way to make money. But, I see my investments as a way for me to store my wealth and there is a subtle difference between the two.
If you view your investments as just a means to add to your cash holdings, then there’s likely to be a constant strong urge to convert those investments into cash in order for them to be considered a “gain”. However, if you see your investments as an integrated part of your wealth (like I do), then it really does not matter if your assets are kept in cash, or shares, or any other type of investment vehicle.
Looking at your investments as a part of your wealth
So, if you view your investments as part of your total wealth, you should be thinking of each asset class as an alternative to another. For instance, before you sell an investment today and keep the proceeds as cash, you should have thought of the following first: Do you believe that the interest rate you can earn on the cash is going to outperform the future gains on that investment?
When Should You Sell
A dear friend once told me that throughout his years of investing, he has never sold a single share. That is quite an amazing feat and I wished I could say the same for myself.
However, I personally have sold many investments I’ve made and here are some of the main reasons why I did so:
1. Needs and wants
My investments (such as the shares I own) are part of my wealth and if I needed the money for something more important, then it is an absolutely clear reason for me to liquidate some of my wealth for that.
In fact, I did just that when I asked the girl of my dreams to marry me.
2. Event-driven investments
I started out investing based on what Warren Buffett describes as “cigar butt” investing. That is a style of investing that involves looking at companies that are undesired by the market but might still have some value left.
Most of such companies are not market leaders in their industry and would also likely not have strong potential for any future growth. However, such companies might still be good investments if (1) their business is currently in a turnaround situation and/or (2) a certain event plays out for them.
Typically, once I’m quite confident that any positive catalytic events have occurred or might never occur (indicating that my initial analysis was wrong), I would strongly consider selling the investment; the last thing I’d want is to fall in love with an event driven investment which might never make any more future gains after the catalytic-event is over as its business just can’t grow.
A company such as canned fruit processor Del Monte Pacific (SGX: D03) might be considered as a possible event-driven investment (putting aside questions about its ability to grow) with it taking on huge leverage to acquire the consumer food businesses of the non-related company Del Monte Corporation. Investors with keen insight into Del Monte Pacific’s ability (or lack thereof) to successfully digest the acquisition could see this as a potential event-driven investment.
I believe the key takeaway here is to start viewing our investments as part of our total wealth and not just as a short term tool to make money. If there’s a shift in mind-set toward the former, we might just realise that there is no real urgency for us to sell any of our shares as long as we have not made any mistakes in investing in them in the first place. And when that happens, we can then count on time (one of the investor’s greatest allies) in helping us tilt the odds of investing success in our favour.
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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 contributor Stanley Lim doesn’t own shares in any companies mentioned.