Having spent the last few years investing and having read some of the widely recommended investing books – I have come to the conclusion from my experiences that the toughest decision to make in Investing is “When to Sell”.
Here are the reasons why I feel it is the most difficult decision –
1. There is no way to know if you’re selling at the highest value.
a) The stock can still go up (little up OR much higher) from the price you sold it at. It can go downwards too. But it is peculiar human nature that we remember only the times when we were left rueing our decisions.
It is said it is impossible to “time the market” i.e buy at the lowest point and sell at the highest point on the graph. There’s absolutely no way to do that so futile to try for that.
b) Also, we keep hearing some surreal stories like so and so bought a stock at X and after few years it was worth 10X (multi-bagger). Everyone believes/hopes that his pick would turn out so. There’s a saying “Do not be married to the stock” – so keep emotions out of your decisions.
2. External Factors (sometimes Noise)
At any given time – there are investors/traders/brokerage houses standing up for both sides of the trade for any given stock. It is very hard to make a choice if you are to listen to them.
With so much information floating around it (and the subsequent confirmation bias from that), it gets incredibly confusing and often the window of opportunity passes and you’re left to regret.
Try to lean towards the most rationale/practical choice. [easier said than done!]
3. Keep collecting profits
There is also a school of thought which recommends that you should keep booking some profits from time to time as to hedge against the decent element of uncertainty (Black Swan events as Taleb would call it) in the markets. Now how to decide when to collect some of your money from the table; how much money should you collect (5%? 15%?).
4. After selling – how to re-invest?
If you eventually come to a decision that you need to sell, you have another HUGE decision to take – how to reinvest the money?
To me increasing the number of decisions you need to make in investing increases your chances of failure. Unless, it is plain and obvious to sell [you need the money/need to pay off the creditors/you got the returns you aimed for] – you shouldn’t.
This is why when to SELL is the biggest and possibly the trickiest decision in an investing lifecycle.