I received an email from a reader (whose name I’ve concealed) who asked for my opinion on his recent purchase of stock which leads me to write this article.
In the email, he mentioned that he initially bought OCBC at a share price of $11 with the intention of holding it long term. However, as the stock market continues to go up in the past recent weeks, he is now sitting on a decent capital gain over a short period of time, which I assume he did not initially expect, and now faced with a situation if he should sell his stock to lock in the capital gain.
Now, for the purpose of this article, I will be focusing more on the logic behind his action rather than the company itself so I won’t be discussion any of the company’s fundamentals.
In today’s bull market where share price continues to go up despite some scare news in the market, it is common to see people getting uneasy over their decision especially if they are holding on to winner stocks.
This is a first world problem that many investors face in the market this year but one that can still make people go uneasy over their decision, especially after seeing some of their investment sitting on double digit gains over a short period of time. There is always a tendency to lock in the gains and make an attempt to get back in when the market prices them lower eventually.
In case you are wondering, this happens to me (and most likely everyone too) from time to time too, so I am openly sharing how I face these psychological barriers myself and hope it will help others who are facing a similar problem.
Timing The Market vs Time In The Market
The debate over timing the market versus time in the market has been rehearsed through countless times so I won’t bore readers too much with this one.
The main essence of this concept is that timing the market requires you to be right two times, one with the buying and one with the selling, and it is incredibly difficult to be spot on all the time.
Still, I am not here to tell or judge that you should not do that.
If you have good enough justification why you wanted to time the market and believe in your ability to do that, then by all means go ahead.
For instance, if you think the valuation of the companies you owned are stretched and that you are better off waiting for a more comfortable valuation then by all means do what you think is necessary. Over time, you will have a track record to justify if what you are doing is worth exploring.
I’ve seen some friends in my circle group who are extremely good in timing the market so I will not write off folks who can do that.
Profiting/Losing By Luck Or Design
I think this is something worth exploring and expanding a bit more.
In the email, the reader asks for advice on his next course of action that looks like this:
1.) Sell it now or before the dividend date, which he can lock in for capital gains but forgoing the upcoming dividends
2.) Sell it after dividends, which means the dividends will be in the pocket but not sure how much is the share price going to drop
3.) Hold it for long term, receive and take dividends for this round first
You can see where I have issues with his listing of the actions he wanted to take.
If I read him correctly, he seems to struggle to come against his own conviction because he initially wanted to keep this for a long term yet he is being tempted and swayed by profits he could gain over a short period of time.
I think the more important discovery that we can ask ourselves as investors of our own game is if we are able to deduce whether we are profiting/losing our investment by design or luck.
By design, it means spending a worthwhile effort to understand the fundamentals of the company or designing a strategy through technical analysis of the company you are prospecting.
Profiting By Design
This is the best outcome of the lots.
If you are an investor who consistently make profits because of design, then you are in a good stead because you have established a good foundation of fundamental research and temperamental adjustment that suit the needs of your investment style.
Perhaps, the only problem that needs to try to be avoided is an issue with over-confidence, simply because winning can inflate a person’s ego over time. It is important that we keep our feet on the grounds and be humble about the prospect of making the next decision because it can impact the outcome that you choose.
Profiting By Luck
If you found out that you have profited on your investment but it is because of luck, then perhaps it is a good time to sit down and review the overall strategy you have on your hands.
Like the reader who wrote to me, the important question that he should be addressing is not if he should sell now or sell later to wait for the next dividend payout. The important issues on hand is how he can turn that luck into design so he can continue profiting over the long term.
Blessed this round, he might not be so lucky the next time round.
It is a matter of time for a person who profited by luck to face a scenario where he will be losing at some point.
Losing By Design
If you buy a company with a strong conviction after doing tons of research but are still losing money at the end of the day, then the key is to be patient.
Mr. Market can be irrational on many occasions that we don’t know why certain companies may be mispriced in a way you think it shouldn’t. If you continue to hold that belief, then it is also a good time to be adding on to your existing position to build up a larger position over time.
Having said that, there are some companies that are value trap by design which track record will usually show some tales so it is important not to be overly biased in one aspect.
Losing By Luck
This is the worst of the lots.
Losing both money and luck on all fronts should tell a conclusive story that something needs to be changed immediately.
Take the right action now!
Overall Thoughts
I can understand that sometimes it is not that easy to deduce if we are profiting or losing by luck or design.
It is usually only an aftermath on hindsight that we get to review if the previous position we took is the correct choice.
Investing is a game of marathon and there will be plenty of chances that you get to review all the 4 scenarios I’ve pointed above.
If we show any complacent or behavioral contempt, it’ll be a matter of time before the results will show and it’s a wasted chance to have lost some or all your money.
I think the key message I wanted to drive here is that we should always be reviewing our strategies and temperamental regularly regardless of any of the outcomes because it is the attempt of hard work that will make the difference at the end of the day.
This is the main reason why I like the investing game. It is a game of self-reflection and one that you can win the game if the process is right.
Thanks for reading.
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Very motivating post for any trader. I agree investing is a game of self-reflection and one that you can win the game if the process is right.
Very true!!
At least to me, the buy/sell criteria must be met in order to buy or sell instead of using the percentage gain or loss.
Well said.
Great read. Thanks for your advice. This one especially – we should always be reviewing our strategies and temperamental regularly regardless of any of the outcomes.
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