If the purchases have been made correctly, there is little need to make sales. No one can be right all the time, and companies do not operate forever, as they did at the time of purchase, so selling is sometimes necessary. Fisher found three reasons to sell, from an investor's financial perspective:
1. Correcting a wrong decision
2. The company no longer meets the purchase criteria
3. Finding a better investment
An investor must sell their shares when they notice a clear difference in the negative between the company's facts and the assessment made at the time of purchase. Correcting such mistakes requires the investor to be able to control their emotions and be honest with themselves. Ego is an investor's biggest enemy, and no one wants to admit they were wrong. Small losses become large when ego prevents them from admitting the facts. According to Fisher, the biggest reason for investors' losses is hanging on to a stock that they do not actually want to own.
Fisher believes that recognizing reality and acting on it requires skill, understanding, and judgment. He sees achieving superior returns as a complex process. That's why investors make mistakes that they have to correct. By buying great stocks and holding them for a long time, an investor can make back the money they lost many times over. This is true when the investor is able to admit their mistakes quickly. By selling the wrong stocks, the investor frees up his money for better-performing investments.
An investor should sell his shares when a company's operations do not match the fifteen purchase criteria. Over time, business operations change, and the changes are not always for the better. An investor must stay on top of his holdings. A company's business and its growth potential usually decline for two reasons. Either the quality of the management or its future prospects have declined. Sometimes it's both.
Sometimes the quality of the management declines because one or more of its members has become complacent or incompetent. More often than not, the new managers do not perform as well as their predecessors. Either they do not operate according to the old corporate culture or they are not competent enough. When any of the above things happen, the investor should immediately sell the shares, regardless of the general state of the market or the high capital gains taxes.
The size of the company's business can also reach a level where it is not growing faster than the growth of its own industry or the industry as a whole is no longer growing. This usually happens after years of growth. When growth prospects disappear, there is not as much urgency to sell as when the quality of corporate management deteriorates. Fisher can hold on to some of the shares until a better investment is found. He suggests the following test for assessing growth prospects: the investor should ask himself whether the annual growth rate of the company's earnings per share from the current point in time to the peak of the current general business cycle is faster than from the peak of the previous business cycle to the present. If the answer is yes, the investment is worth holding, otherwise it should be sold.
The third reason for selling rarely occurs when an investor follows the right principles when making purchase decisions. An investor should sell his shares when a better purchase option comes along only when he is sure of the profitability of the decision. Attractive purchase options are difficult to find. They rarely come across to an investor when he has extra money. Therefore, selling is sometimes justified. High taxes alone can defeat a sensible change in investment, so the future prospects and growth rate of the new investment must be significantly higher than that of the investment whose shares are being sold.
Fisher urges great caution, because the risk of misunderstanding is high. An investor is very likely to misunderstand some fact when changing investment. In this case, the new investment will perform worse than expected and the switch will not be worthwhile. The business of both companies should be carefully reviewed using fifteen points before considering switching. The great advantage of old investments is that the investor is likely to know them better than the new ones.
The three reasons mentioned above are the only sensible financial reasons for selling stocks, according to Fisher. In addition, an investor may have personal reasons, such as buying a new home, etc. Sensible investors do not consider other reasons, such as bear markets. According to Fisher, only a maximum of one in ten investors buy back the stocks they have sold. If you have done your homework when buying, you do not need to consider selling often.
No comments:
Post a Comment