In Leo Gough’s book – Fred Schwed’s Where are the Customers’ Yachts?, there’s a great passage on riding your winners that should provide investors with food for thought. Here’s an excerpt from the book:
Let’s suppose that you just can’t help it, and you have to try your hand at picking shares for yourself. Well, at least you’ll be saving a lot of expensive fund management fees. Here’s one method of going it alone that some people swear by – for reasons that will become obvious, it works best in a bull market.
First, pick a number of shares in substantial companies that you believe are well run and have good prospects and, crucially, that have a track record of good performance for at least three years. Tell yourself that you are going to keep them for a minimum of three and more probably eight or more years, UNLESS they start to perform badly.
Next, check your share prices regularly. Every day is preferable, but every week will do. If nothing happens for a long time, that’s fine. If one of your companies gets taken over, take the cash and don’t keep any shares in the new, merged company. Use this cash to invest in another good performer.
When one of your shares starts to perform poorly, try to find out why: read the specialist financial press and try to establish just what the problem seems to be. If it looks like a long term problem, or the share price drops significantly, sell it and forget it.
The next rule is, don’t touch the winners! Let them keep on going up. Maybe they go into the doldrums for a year or two. Don’t worry – as long as they don’t actually start dropping in price substantially and there is no good reason to believe that there is something fundamentally wrong, just wait. The temptation to take your profits may be immense, especially if you have, say, doubled your money on a particular share.
Don’t succumb to this feeling; sometimes your winners will just keep on growing and growing, and for your overall portfolio to do well you need some winners like these.
Many people find riding their winners one of the hardest things to do in investment. They don’t have the courage of their convictions. But if you really believe that Company X is a fabulous company, wouldn’t you want to hold it forever, or at least until it changes fundamentally for the worse?
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