The psychology of taking profits.

letspretendforaminute · 13 March 2018 at 12:11PM

I invested in an AIM listed precious metal tailings retreatment company over five years and built up quite a large stake and the price went in my favour and I sold 60% that returned to me my original stake. Roll on today and I have 200,000 shares valued at 18.5p which is a huge private investor gain however when I go into my account I!!!8217;m finding it hard to sell out as I!!!8217;m emotionally attached to the shares. Is this normal behaviour? Going through my late fathers accounts he held shares in a few companies that on paper made him a millionaire but held until they became worthless again.

Linton · 13 March 2018 at 12:43PM

Yes, this is standard inexperienced investor behaviour. Emotional attachment will cloud your judgement - remember that the shares dont feel the same way about you.

A better way to manage things is not to have one share forming a significant part of your investments - it is too much of a risk as you could lose the lot overnight. Then if one share performs very well just cut it back to a reasonable % and re-invest the proceeds elsewhere.

kangoora · 13 March 2018 at 3:28PM

Let me give a personal example. A director I knew well in a previous company was a double millionaire at one point in his stock options, bonus shares etc. When I spoke to him last he was down to 'only' $400k. If he'd held those shares until 2009 they'd be worth nothing.

That was a company with a $30 billion turnover that everyone expected the Canadian government to support - it went bankrupt with a loss of over 60,000 jobs in Canada alone.

I'd probably keep 'some' of the shares you already have if you have confidence in the company but I'd definitely be taking a decent proportion of the profits out and diversifying.

Until you actually sell the shares they are nothing but pieces of paper/digital bits somewhere and as you know, that perceived or actual value of them can go up - or down to nothing.

Filo25 · 13 March 2018 at 3:48PM

kangoora wrote: »

Let me give a personal example. A director I knew well in a previous company was a double millionaire at one point in his stock options, bonus shares etc. When I spoke to him last he was down to 'only' $400k. If he'd held those shares until 2009 they'd be worth nothing.

That was a company with a $30 billion turnover that everyone expected the Canadian government to support - it went bankrupt with a loss of over 60,000 jobs in Canada alone.

I'd probably keep 'some' of the shares you already have if you have confidence in the company but I'd definitely be taking a decent proportion of the profits out and diversifying.

Until you actually sell the shares they are nothing but pieces of paper/digital bits somewhere and as you know, that perceived or actual value of them can go up - or down to nothing.

Nortel Networks?

dividendhero · 13 March 2018 at 7:35PM

Linton wrote: »

Yes, this is standard inexperienced investor behaviour.

While the behaviour may be standard for inexperienced investors, the underlying emotions are part of how humans are wired. The experience and skill comes in acting in a more robotic manner.

Can highly recommend a book called "Your money and your brain" by Jason Zweig. It goes into great deal of how the financial brain works - even down to which part of the brain experiences such as the "grief" on experiencing an investment loss

C_Mababejive · 13 March 2018 at 8:33PM

buy low,sell high,,,i must remember that mantra for the next time the rollercoaster hits the top of the curve...err..or is it?

chucknorris · 13 March 2018 at 9:32PM

letspretendforaminute wrote: »

Going through my late fathers accounts he held shares in a few companies that on paper made him a millionaire but held until they became worthless again.

Unless he had a multi (and I don't just mean a few) million pound portfolio, he wasn't very wise storing the majority of his wealth in single company shares. He was asking for trouble.

grey_gym_sock · 14 March 2018 at 5:03AM

if you're retired, and you have enough to live off even if your speculative shareholdings become worthless, then i suppose you can just treat it as a game if you want to. which is not to say that you should. and the "game" may not be so much fun when you're losing money (even though it's just "paper profits").

why are you investing? e.g. towards your retirement? how much of a setback, to your objectives, would it be if this 1 share became worthless?

do you think you were skilled or lucky in picking this share? it can be hard to tell. if you have skills, can't you use them to pick other good opportunities, so you can diversify across more shares? even skilled investors pick some shares that turn out very badly. if it's luck, then there's all the more reason to diversify much more broadly, e.g. consider a world equities tracker or a multi-asset fund.

i find that taking gains within the annual capital gains tax allowance, just before the end of the tax year, is a good way to persuade myself to scale back a holding that's grown too large. though that won't help if this is in an ISA.

Ifts · 14 March 2018 at 7:35PM

I find it's often harder to decide when to sell than it is to buy.

Usually what prompts me to sell each year is using that years CGT allowance to sell what has risen over the year. Sometimes it goes in your favour but other times the shares keep rising after you've sold - for example Sports Direct went down after I sold some but WH Smith continued to rise after id sold some to make use of the CGT allowance over the years, some you win some you lose.

And at other times the 'Sell' decision is made for you! I bought Aldermore Group shares a few days after the EU ref and they got taken over by Firstrand Intl Ltd the deal will complete this month, as it said on the letter from the broker 'Please note that this event will be mandatory' so I had no choice - fortunately I had bought these through my ISA so it doesn't effect this years CGT allowance.

edit: oh and once you've sold you then have to decide what/when to buy next! And on it goes

Thrugelmir · 14 March 2018 at 8:22PM

You don't say what % of your total assets this investment is. I hold a similar sum in one AIM listed company. I follow it closely along with looking at wider external issues that could influence the financial performance. To diversify I invest the dividends elsewhere. The market noise of the rise and fall in the share price doesn't concern me. As the fundamentals of the business are sound.

For me it was bailing out of poor performers. You always believe that they can bounce back. Majority don't. Something I've chalked up to experience. Now I have no hesitation in selling out of a stock. Nor any remorse if I'm ultimately proved wrong.

dividendhero · 16 March 2018 at 9:17AM

An interesting angle on the psychology of taking profits, two scenarios

(a) You buy 10,000 shares at £1 each and sell them six months later for £2 each
(b) You buy 10,000 shares at £1 each, five months later they reach £20 then start rapidly retreating, a month later you bail out when they reach £2.

The outcomes of a & b are identical - but no matter how much of an experienced investor and even if you fully understand the psychology you'll still prefer a!

The psychology of taking profits.

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