When investing, we tend to focus a lot of our energy on finding the companies that are worth investing in. However, finding the right companies is only one small part of the equation in achieving outsized returns. It’s only after you’ve bought the shares of a company when you’d face the hardest part about investing. It might come as a surprise, but one of the hardest things about investing is actually doing nothing after you’ve invested. How often have you bought a share and sold it for a quick 20% gain, only to see it appreciate in price for many years…
When investing, we tend to focus a lot of our energy on finding the companies that are worth investing in. However, finding the right companies is only one small part of the equation in achieving outsized returns. It’s only after you’ve bought the shares of a company when you’d face the hardest part about investing.
It might come as a surprise, but one of the hardest things about investing is actually doing nothing after you’ve invested.
How often have you bought a share and sold it for a quick 20% gain, only to see it appreciate in price for many years and reach levels far higher than where you had sold at? Let’s take the experience an investor might have gotten with Sarine Technologies Ltd (SGX: U77) over the past decade as an example.
Imagine yourself investing into Sarine in 2006 at S$0.90 per share, its peak prior to the Great Financial Crisis of 2007-09. When the crisis hit, shares of the company fell by close to 90% to less than S$0.10 at the bottom. You blamed yourself for investing in this terrible company but were unwilling to sell at a catastrophic loss; you therefore left the share alone.
After the crisis, Sarine made changes to its business model. Previously, it had depended upon one-off sales of its equipment and technologies to diamond manufacturers. The switch saw the company producing even better technology and it started to charge its customers on a per-use basis for some of its products and technology. Sarine’s shares finally became worth more than your purchase price back in 2012, passing the S$1.00 per share mark. You decided to sell the company, ending your 6 year investment with a modest 10%-plus gain.
But, if you had resisted the urge to sell in 2012, your investment in Sarine now would be worth more than 300% your initial cost (Sarine’s shares are going for
S$3.86 S$2.86 each currently). Interestingly, despite the change in its business model, the business direction of Sarine had not changed much since 2006 – it was and still remains a supplier and service provider to the diamond manufacturing industry. But, seeing how Sarine’s shares had fluctuated so dramatically over the years, it would have been extremely difficult to actually do nothing at all once you’ve actually owned shares of the company back in 2006.
So, how can we resist the temptation to not sell our investments even while we see its shares fluctuate wildly? One of the most obvious things to do is to not check the prices of your shares that often. In this way, we might be able to insulate ourselves from our urge to make an immediate action when there’s a huge movement in a company’s shares.
Secondly (and more importantly), we should always have a clear reason as to why we are investing in a company and remind ourselves that as long as that reason remains true, we should stick to our investment. For the case of Sarine, if you had invested in it because you wanted to get exposure to the diamond manufacturing and processing industry, the rational for that was and is still true since 2006. That’s despite Sarine’s share price having swung wildly within a huge range of S$0.09 to
S$4.00 S$3.25 in that period.
So the next time you plan to sell, ask yourself: “Do I really need to sell?”
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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.