I’ve made my fair share of mistakes in investing. Some of the mistakes include not pacing out my share purchases, buying a lousy company, and trusting management too much.
However, my biggest mistake of all is selling a great company too early. I hope that by sharing this, you won’t make the same lamentable mistake as I did. As Eleanor Roosevelt once said, “Learn from the mistakes of others. You can’t live long enough to make them all yourself.”
Trimming the flowers too early
Here’s some quick math to explain why selling a stock too early is a grave mistake.
Let’s say you buy $10,000 worth of shares in Company A. If those shares go down by 90% and you sell out, you would have lost $9,000. If the company goes bust, you lose 100% of your money.
On the contrary, if you sell Company A after it has gone up by 90%, you would have made $9,000. Making 90% is a big thing, especially if the gain was within a few years. However, what if the company goes on to gain a further 900% after you had sold your stock? You’d be beating yourself up, wouldn’t you?
To make up for the 900% gain that you just missed out on, you would have to invest in 10 companies with 90% gains. That might not be an easy task. Put it another way; you would need to have nine companies go bust.
So, if a company goes bankrupt you end up losing 100%. But an excellent company that can keep on growing can make you way more than 100%.
A criminal act
In a podcast at the end of 2018, David Gardner, one of the co-founders of The Motley Fool, shared his takeaways from 200 months of stock picking for the US’ premium service. One of his key lessons was that you lose far more on a potential winner than you can on a loser. He said in the podcast:
“But the real biggest loser for you, if you’re an investor and if you’ve been acting over the long term, I bet you realize that it’s not the bad-performing stocks. It’s the megawinners that you sold too early. It’s that you didn’t stick with big winners…
If you ever have had a wonderful winner in your portfolio and you sold it too early, that is by far a more criminal act on your portfolio. You’re doing far more abusive damage to your own financial future than if you pick a really bad stock and watch it lose most of its value.”
David Kretzmann, a fellow Fool, also mentioned in our exclusive interview that selling a great business too early is “far more damaging to a portfolio’s long-term returns than avoiding or selling a stock that goes on to be a loser”.
My biggest mistake
The company I sold too early was Raffles Medical Group Ltd (SGX: BSL). Clearly, I regret it.
I first bought Raffles Medical shares in June 2009 at a pre-split share price of S$0.97 (or S$0.32 after accounting for the three-for-one share split that occurred in 2016). Two months later, I sold the company’s shares at S$1.24 a piece, booking a gain of around 28%, excluding commission. What a criminal act!
Fast forward some 10 years, and shares in Raffles Medical are going at S$1.09 each right now. If I hadn’t sold my shares, I would be sitting on a paper gain of 237%. And that is not counting the dividends I would have received over the years. Including dividends, I lost out on more than 420% in total returns!
I sold Raffles Medical shares initially as, according to my calculation, the company was fairly valued. However, I had to buy back the shares at a much higher valuation many years after selling them as the company’s business was still going strong.
Following that episode, I learnt never to sell a great company if the business fundamentals are still intact. Selling a company just because it is slightly overvalued will incur reinvestment risk on my part as I need to look for a new company to re-deploy the proceeds in.
While the company is still growing, I would also be receiving dividends, which can be reinvested into the same company. Furthermore, if the company announces any growth plans, the company’s intrinsic value would rise further, bolstering the investment case.
In a nutshell, the lesson here is: Just let your winners run. High.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Raffles Medical Group Ltd. Motley Fool Singapore contributor Sudhan P owns shares in Raffles Medical Group Ltd.