If I’ve doubled my money, is it time to sell?
Risk and investment go hand in hand, and the skill is being able to manage risk against potential reward. It can be difficult for an investor to resist the urge to protect and hoard any investment gains, harder still to avoid the temptation to try to double your investment.
And there can be a lot of conflicting information on what to do when your investments become profitable, but Bernard Baruch’s quote ‘Nobody ever lost money taking a profit’ suggests that even a small profit is an effective strategy.
On the other hand, a quote attributed to the Rothschilds ‘No one ever got poor by taking profits. But I doubt they got very rich either’ suggests there are greater gains to be made through restraint when deciding whether to take a profit in the short term or hold onto your investment and reap even greater rewards later.
In short, investors will have varying opinions on what to do with profits, and what to do if those profits grow way beyond what was originally invested.
And it highlights how opinions may guide your investment decisions, but you will only get so far without additional information such as data on the company itself.
Know the company as well as you know the price
It is crucial to analyse the quality of the business rather than just looking at share price and valuations, so be prepared to examine commercial traction, technology or market readiness, quality of the management team, brand values, the company’s point of difference in its market and financial performance of a company.
It’s often forgotten that it is not always the best ideas that win, but those in markets that are easiest to penetrate with no ‘gorilla’ dominating or protecting its market position aggressively.
It may also be a market that looking for change and in need of disruption. Also, the brand with the largest and smartest marketing will often outwit the start-up solution even if it’s a better option.
Companies with a negative public image or unfavourable reputation may still be a risky investment even if the share price is attractive; just one more wrong move by that company could cause the share price to drop unexpectedly.
On the other hand, it comes as no surprise that well-proven quality companies, carry lower investment risk and deliver steadily rising share prices over long time periods.
Questions to ask about a company’s financial performance should include:
- has it paid dividends to its shareholders?
- how liquid are the company’s assets?
- does it have a suitable level of cash flow?
- is the company in debt?
- is it revenue generating yet?
The answers provide investors with valuable insights into potential losses or gains to be made on a particular stock without even needing to check that company’s share price.
By considering a range of factors when analysing a company’s stock other than just numbers on a graph, your investment decisions should feel less like a game and more like well informed and researched choices.
Taking a more logical first step based on what you already knew about your proposed investment should also, in turn, reduce the temptation to make potentially rash or ill-informed decisions later to realise any retained value from those shares.
Are your investment goals realistic?
Although investors can be driven by thoughts of doubling their money or ‘winning big’, it is important to avoid this sort of gambler’s mentality when investing in stocks. The idea of holding onto an investment until it reaches that heady level of twice the original stake is an unreasonable and unrealistic goal anyway.
It can make sense to make multiple investments to protect your original stake, but this decision needs to follow the same criteria as before. You must also recognise when not to follow your original investment and accept and analyse whether you are just throwing good money after bad.
Sometimes it is a good idea to follow your money with another investment as the company might need its investors to ‘go again’ so it can grow, but you must always apply sound reasoning when considering such opportunities and ask are they realistic assumptions being put to you?
Many investors listen to things they have heard and make them their benchmark or finite position on investment, for instance “I don’t invest unless I can make three times my money” when an alternative investment in a bank will potentially yield less than one per cent a year.
There are many different reasons to invest and many to exit investment, if that’s even possible, but fundamentally you must ask yourself “Am I making these decisions based on learned behaviour or balance of risk?”
It might not be as emotionally exciting to make a 5% a year return on investment but a growing asset is always better than a devaluing one.
Ultimately, shares can rise or fall at any time based on multiple factors, but if you have a portfolio of investment for the long term then you reduce that risk and the emotional fatigue.
Behavioural biases like holding out for doubling or tripling an investment value or waiting and waiting for it to recover can be defined as irrational beliefs or behaviours that can unconsciously influence our decision-making process.
Whereas emotional biases involve acting on our feelings rather than concrete facts or letting our emotions affect our judgment.
Being able to separate investing decisions from such biases is an invaluable skill for any investor, as their choices will be less reliant on feelings and emotions and based more on facts and logic.
Rather than being alarmed by slight fluctuations in the stock price of a company, it would be more pragmatic to ask questions such as has the company’s growth declined? Is the company being managed properly? How are other shareholders/investors reacting?
If the answers trend toward the negative it might be a good time to sell, whereas if they suggest future gains, it may be wiser to retain the investment and reap any benefits further down the line.
Investors should recognise and accept the risks associated with investing.
Certain investments may require you to keep your holding for periods of many years with limited or no ability to resell unless there is a strongly regulated secondary market.
You may also have limited access to periodic reporting, see your holdings decrease and increase in value, or even lose your entire investment.
Investors should decide for themselves whether to make any investment, basing this on their own independent evaluation after consulting with financial, tax and investment advisors.
The Knowledge Hub does not constitute financial advice whatsoever, but rather provides basic general industry information.