When to lock in gains and cut losses?
I believe this question is reflective of what we subconsciously believe stocks are and how we buy or sell stocks is a manifestation of our beliefs and personalities at large. So, to answer this question, I think it is better to reflect upon our belief as it will fundamentally guide our investment decisions in the stock market.
Let me illustrate this by using the ‘Be-Do-Have’ Principle.
In essence, this principle, as quoted by Zig Ziglar, an American author, salesman and motivation speaker, had stated that – You have to Be before you can do and Do before you can Have. As such, the Being is of pre-eminence and our Doing is secondary to what results we intend to have.
Here, I’ll pen down what I believe and practise as a stock investor, based on the chronological order of the ‘Be-Do-Have‘ Principle:
I’m a businessman.
I believe wealth is about income productivity for the long-term.
I believe businesses exist to add value to our lives and our community at large. I find it meaningful as an investor if I own shares of such businesses. As a result, I believe my job as a stock investor is to invest into them at discounted prices. As such, I view the stock market as a marketplace to buy or sell these businesses.
My intention is to own and accumulate shares.
So, before investing, I’ll study a stock’s business model, financial strength, plans to sustain future growth and calculate its valuation ratios. Why? This is because my decision to buy or hold or sell a stock is based on its income productivity for the long-term as my definition of wealth is linked to income productivity.
For instance, if a stock is involved in businesses that produce excellent products and services that add value to people’s lives and are efficient in producing great profits and cash flows year-after-year, I would want to own it for life. If not, I do not want to own it even for a minute.
Years later, I had built a portfolio that is filled with highly productive businesses. Of which, I collect recurring dividends as these businesses continue to generate sales, profits, and operating cash flows over time.
I achieved larger capital gains and incurred smaller capital losses as I bought my stocks cheap as my decisions are guided by calculation of valuation ratios.
My portfolio grew over time as I had focused on accumulation of shares of such businesses and rarely sold stocks (despite achieving decent capital gains). I tend not to sell stocks as long as they remain income productive for the long-term.
Now, on the flip side, I’ll list down beliefs that many common men may have on stocks and how these beliefs affect their decisions to buy and sell stocks. This is more apparent to traders, speculators, and gamblers (TSG) in the stock market.
You may use this as a checklist to reflect on your beliefs about stocks and about wealth at large.
Is wealth about having more money (tomorrow) than what you have (today)?
Would it be better to have more money (today) than to have it (tomorrow)?
The first question is about the quantity of money.
The second question is about the speed to increase the quantity of money.
Hence, if your answers to the two questions above are ‘yeses’, then, what could your real objectives be for getting yourself into the stock market? Could it be to make more money fast? If that is the case, then, ‘money’ itself is your objective and the stock market could be viewed as a place to make money fast, right?
So, how to make money fast in the stock market?
Is it to follow Warren Buffett? Likely not. Why? This is because Buffett took a lot of years to build his billion dollar portfolio via Berkshire Hathaway Inc. Yes, sure enough, Buffett is rich but his returns are just way too slow for there is always a need for speed. As such, it is common for people to do the following:
– Buy stocks if they feel that their prices will go up in the near future.
– Sell stocks if they feel that their prices will come down in the near future.
Why? This is because it is about ‘getting more money’ in the short-term. On the flip side, who wants to lose money shortly after buying a stock, right?
Traders use trading tools to help them to do the above efficiently. Meanwhile, a speculator or a gambler could buy or sell stocks based on their emotion state. It includes mainly fear and greed.
So, how do you fare thus far in the stock market?
Did you make money fast in the stock market or have you lost money fast in the stock market? If you have been successful in making money fast as a TSG, great, you may continue doing what you are doing now. But, if you are not getting the results that you desire, then, it is helpful to start reflecting upon what you think and believe about the stock market and wealth, in general.
So, when to lock in gains and cut losses?
I believe the answer lies in how we see ourselves today. Are we businessmen or are we a TSG? What is wealth personally to you? This is because our decision in buying and selling stocks are often shaped by these subconscious beliefs.
A businessman may buy or sell a stock based on its income productivity.
A TSG goes by gut feel. If he feels that a stock will go up, he will buy the stock. If he feels that a stock will come down in price, he will sell the stock.
Therefore, who are you inherently: a businessman or a TSG?
Stay tuned for my latest next week.