It has been a tumultuous time on the market, and you can often get caught up in everything that is happening. So personally I have felt a need to read and think about the market, and when I do I think of shares or industries. However me writing about one (1) share doesn't add much value as that is a moment in time, whereas a philosophy or way of thinking can change things forever. Sometimes it is worth taking a step back and looking at the bigger picture.
So here are somethings to consider when investing in a volatile market (like this moment in time).
Sometimes the hardest thing is this world is patience
I think often a first tendency when things start moving, up or down is to sell. Theory says people often "buy high and sell low". I can definitely attest to the feeling the urge to sell when things drop and also to sell when you are up!
Once a share has gone down 20%, you need to make a decision:
1. Did I buy the share because I believe in the company, and it has a long term future.
OR
2. Did I make a mistake.
Irrelevant of the above you should first remember one thing - Creating wealth is not about making 1000% a year, it is about consistently compounding over long periods of time and NOT LOSING YOUR CAPITAL.
So let's say your answer above is option 1. Then just hold, there is no rush. Some people might suggest selling and then you can buy lower or doubling down (see below)? My thoughts are if you believe in the company why do you think it will keep going down? How about double down to average your cost? I would say this depends. If you have done enough work on a share and you understand the business and can see value then it is likely a good idea. Where there is doubt, I would exercise caution, and if there is doubt do some work.
If your answer is 2, well make sure you learn your lesson!
When a share goes up, should you sell?
For me another difficult thing is not selling when you are up! Things are bouncing around up 10% down 10% on a weekly basis (well that is what is feels like in the current market), do you sell and buy lower? Do you take profits in case the market collapses?
What I can tell you for certain is I tried trading and it is not for me, but if you want to do it go for it, just know you need to have a feel for the market and be reading every piece of information constantly (i.e. it better be your full time job).
Little example:
Let us say a share is currently R1, you do your research and think there are good growth prospects and it is a solid business and will be between R3 and R5 in three (3) years time.
If I said to you: "Would you pay R1 now to get R3 in three (3) years would you answer yes?
How about if I asked you: Would you pay 90c now to get R3 in three (3) years would you say yes?
If the answer is yes to both above, my question is if you have a good investment why sell?
OR
Why sell it, based on the "potential" chance of making an extra 5-10% in three (3) years, when you would be happy with what you have now?
Another example:
You have bought a share a year or two (2) ago and it has gone up 50%, and is looking fairly priced should you sell and take profits?
Some thing to think about before making this decision is:
- Do I want to be the investor who bought Microsoft share for 38c in 1988 and sold them for 77c in 1990, or do I want to be the person who sold it for $48 in 1999. (You don't make a 1000% over night but you do want to make 1000% and that takes time!)
- From doing your home work, has the business changed in anyway or the future outlook changed? This is another gem of wisdom from Kyle: "Good business always look expensive, and they tend to stay expensive." You are buying a solid business and unless there is a big disruption to the industry it is going to stay a solid business for a long time, so people will keep paying a lot for it. Yes it might dip for a couple of months or even a year, but over 3-5 years the returns will come.
There will be a time to sell, but let's save that for another post, but the key above is take a step back and don't get caught up in the moment.