Hazelle
in Memos & Musings · 3 min read
In my line of work, it is often that I first do a review of my clients’ existing investment portfolio before making any new recommendations. In most instances, their portfolios may have several positions that are either going nowhere or going downhill.
These clients continue to hold on to such positions either because they are not making money or at least hoping to breakeven. The worst thing is that for companies that are not doing well, they continue to drop further when I meet them a few more months down the road. It is understandable and not easy to cut losses because it often means that we are admitting the previous investing decisions were not a good one.
Cutting losses
Being an investor, you must treat your investment portfolio as a running business. If there are units that are not bringing in the money, and have proven not to be worthy of spending more time on then, then the right thing is to cut losses and move on to better ventures. These are what we consider sunk costs. Just because you have been making losses does not justify that you should be holding onto them going forward because chances are it will continue to bleed. There is an added opportunity cost of holding onto something that is losing money as opposed to something else that is making money too. Your investments cannot compound when you are making losses.
Taking profits
On the other hand, you can also be in a situation where you would like to take some profits off the table and to raise more cash for your portfolio. By selling at a good price, it generates you the cash flow that will come in handy as the market retraces in the future. You never go broke by taking profits and learning to take profits is something you must do as an investor too.
The fundamentals of the company have changed
Lastly, you may also decide to sell a stock because the fundamentals of the company have deteriorated and there is no longer a good investment thesis. They may have changed their business model that will have a material impact on future earnings or things like that. It is irrelevant if you are currently making or losing money because you expect it to be going downhill from there on.
As an investor, the above are three scenarios why you may want to consider selling a stock.
But are there exceptions? Yes.
When should you hold on?
The only instance you should hold on is unless those stocks are indeed fundamentally sound and that they are currently not performing because of either general market sentiment or facing company specific problems that are still solvable. In most cases, unfortunately they are not. So that is why you will then sell and perhaps redeploy them to better investments.
But in order to do so, you must have some knowledge in being able to identify if a company is sound and at which stage of the market cycle we are in so that you can make an informed decision.
Closing thoughts
Hence, it is equally important to spend time learning how to invest properly before earning. Most people are more interested in earning than learning. But life never happens this way. Before you want to earn money by running a successful business, you have to learn how to add value to your customers first. Similarly you have to add value to yourself in terms of knowledge and skill sets before you can become a successful investor. Get yourself educated from reading or have someone who has been there or done that to shorten your learning curve.
About Hazelle
Chief trainer of The Moneyball Investors Playbook program and founder of The Joyful Investors, a financial education firm that seeks to help avid investors learn to invest better and make the journey a joyful one. I graduated with a first class honors in Bachelor of Accountancy from Nanyang Technological University (NTU) and started my auditing career in one of the Big Four. I believe that once we know how to build our wealth sustainably, we can then live our best lives ever.
Important Information
This document is for information only and does not constitute an offer or solicitation nor be construed as a recommendation to buy or sell any of the investments mentioned. Neither The Joyful Investors Pte. Ltd. (“The Joyful Investors”) nor any of its officers or employees accepts any liability whatsoever for any loss arising from any use of this publication or its contents. The views expressed are solely the opinions of the author as of the date of this document and are subject to change based on market and other conditions.
The information provided regarding any individual securities is not intended to be used to form any basis upon which an investment decision is to be made. The information contained in this document, including any data, projections and underlying assumptions are based upon certain assumptions and analysis of information available as at the date of this document and reflects prevailing conditions, all of which are accordingly subject to change at any time without notice and The Joyful Investors is under no obligation to notify you of any of these changes.
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