Most of the time, for most of us, the decision as to whether or not to buy a given share is a fairly straightforward one. It meets our buying criteria, or it doesn’t. The risks appear acceptable, or they don’t. And so on, and so on.
Selling a given share is a different matter, though. Investors can easily go through agonies of indecision – particularly when selling involves crystallising a loss, or foregoing a reliable income stream. Selling might be the right thing to do, but all too often it feels like the wrong thing to do.
And all too often, it probably is the wrong thing to do. As I’ve mentioned before, some well-known research carried out by American academics Brad Barber and Terry Odean – who analysed the trading records of 10,000 individual investors over a seven‑year period, using brokerage records – showed that often, investors would have been better off not selling.
‘Nobel Prize’-winning behavioural scientist Daniel Kahneman summed it up well in his best-seller Thinking, Fast and Slow:
“On average, the shares that individual traders sold [subsequently] did better than those they bought, by a very substantial margin: 3.2 percentage points per year, above and beyond the significant costs of executing the trades… It is clear that for the large majority of individual investors, taking a shower and doing nothing would have been a better policy than implementing the ideas that came to their minds.”
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When to sell
That said, there are times when selling does make excellent sense.
Has the original investment thesis changed, for instance? In other words, have the arguments that persuaded you to buy the share in the first place, changed? If so, selling may be appropriate.
Has your risk appetite materially changed? You might have retired, or your personal circumstances might have changed so as to make being a little (or a lot) more risk averse look like a smart move. If so, selling may be appropriate.
Has a given share performed so well that your portfolio is now seriously unbalanced, with that one particular share making up a significant proportion of the overall portfolio value. If so, selling may be appropriate.
Have your income needs changed? Your portfolio might be positioned for growth, for instance, and now you need more income – perhaps due to retirement, or economic downturn, or other external factors. And if so, then once again, selling may be appropriate.
When might selling not be appropriate?
Now, I freely admit that this is a wild stab in the dark, but I’m guessing that many of those ‘sell’ decisions observed by researchers Barber and Odean were not in fact predicated upon the sort of sensible and rational reasons outlined above.
I think it more likely that the selling decisions of those 10,000 investors over that seven-year period were more impulsive, and more influenced by emotion.
‘Cold feet’, for instance. Or buyer’s remorse. Having fantasised about purchasing a stake in a company, they’ve now actually parted with cold, hard cash – and are feeling nervous.
Perhaps the share price has sagged a little. It’s gone down – while many other shares have risen. Oops. Buying was a mistake! Sell!
Perhaps there’s been a market correction, or even a full-blown crash. All of a sudden, their shares are worth 25% less – and share prices could go down even further. Sell!
Nerves, in short. Whatever they might aspire to in terms of being long-term buy-and-hold investors, those aspirations don’t last long in a collision with reality. Yet share prices, as we all know, fluctuate.
Think carefully
How to summarise all this? Buy carefully, to begin with. Have a clear investment thesis, and – ideally – identify in advance the circumstances in which you might consider selling.
And if those circumstances don’t arise, be very leery about selling – and try to understand what it is that has made you consider selling. Selling might be the right thing to do – but for plenty of investors, the evidence suggests that it’s not.
