You don’t need to be told that Warren Buffett is one of the most amazingly successful investors in history. He’s developed a phenomenal system that’s resulted in making billions of dollars in the stock market.
But unfortunately, small investors have tried to emulate the methodologies Buffett used at Berkshire Hathaway. It sounds easy enough: You learn about a company, spot so-called “undervalued” stocks, buy them, and hold on!!
We said “unfortunately” above, because too often, that method just doesn’t work out. And it fails for the same reasons that growth systems don’t work for most people: It’s too complicated and time-consuming. That’s obvious. It also requires some guesswork on the part of individuals. How can you be certain that a company is currently undervalued, and it will eventually begin to rise higher again? Do you have the time, resources and know-how to do all the research and analysis that Warren Buffett and Charlie Munger do at Berkshire Hathaway? I’m gonna say that’s a no.
And that’s just on the buy side. How about on the sell side? This is where the Buffett emulation has hurt a lot of people. Don’t get me wrong – I’m not disrespecting or doubting Mr. Buffett! He’s got a great system that works well in his situation. I’m just saying it’s not so easy to re-create at home.
For most at-home investors, it’s not the waiting that’s the hardest part – it’s the selling (sorry, Tom Petty). The old adage about “buy and hold” morphs into “buy and forget about.” So investors often sit with big losses, continuing to believe that the stock is bound to go up…someday.
15And by the way – Buffett does sell shares. He’s not obligated to tell you about it on the day he sells, but the news media often learns about it after the fact, as Berkshire Hathaway discloses its trades. So even buy-and-hold investors understand that selling is often the right move. And to be fair – the retail investor and the news media have seriously misinterpreted Mr. Buffett’s strategy over the years. Of course, they’ve oversimplified it to the point where it’s useless to individuals in many cases, and even harmful in some. You can bet that’s not something that Warren Buffett intends.
If you need any proof that buy and hold isn’t necessarily the best strategy, think about what happened to investors in the 2008 and 2009 bear market. The general market had begun to show weakness in the autumn of 2007. But as selling intensified in the autumn of 2008, many investors didn’t know what to do.
Because there’s a bias among investors against selling, individuals waited for things to get better. But it took until March of 2009 for a new uptrend to begin – and as of November, 2009, most investors still aren’t back to where they started!
16Remember – that bias against selling comes from those professional investors who appear on TV and write columns for magazines. They can’t just start unloading all their holdings, because they need to keep a certain amount of money invested at all times (essentially, most of them are fully invested 100% of the time). So they advise you to act the same way. That’s pretty silly, and it results in you getting hurt.
Think of it this way: What if a professional athlete advised you to train exactly the same way he does, year-round? Sounds good, right? Here’s the training plan of a winning athlete! Just follow this, and you’ll be a winner, too!
Not so fast. That pro athlete has a staff. He’s got a sports-medicine doctor. A physical therapist. A nutritionist. Maybe a massage therapist, yoga or stretching instructor, weight trainer, and undoubtedly some coaches for sport-specific instruction and motivation. You. Don’t. Have. That. So when he tells you to eat spinach every day and run wind sprints, he’s not lying, but there’s a lot he’s omitting. And by omitting what really goes into his program, day in and day out, he’s leaving out the very information that you need, if you don’t want to get hurt.
Same with the advice from the professional investors. They discuss what they’re buying at any given time, but not too often do they discuss what they’re selling. They don’t tell you that they’re not alone in making decisions – that they have a full staff of analysts, traders and other assistants – and they don’t tell you they need to remain fully invested. So their “advice” is predicated upon that requirement, which doesn’t apply to you. Someone is obviously selling when you see huge, catastrophic declines in the major indexes, as we did in 2008 and the early part of 2009. But because the pros are telling you where they’re putting their money now, you feel as though that’s the correct advice.
For the individual investor, there’s nothing wrong with selling as you see market weakness, and simply parking your money in cash for a while. Months, if necessary.
17Selling is not a dirty word, despite strong cultural bias. We think of selling a stock as giving up, showing weakness or raising a white flag. That’s really stupid and ridiculous. The only way to keep your gains in the stock market is by selling, isn’t it? Say you’re a real estate investor. You don’t think, “Gee, this house has really appreciated since I bought it. And it looks like the real estate market’s about to drop, but it would be admitting defeat if I sold the house now, and pocketed my profits. So I better hang on for awhile.”
Huh?For the individual investor, there s nothing wrong with selling as you see market weakness, and simply parking your money in cash for a while.
That wouldn’t make any sense, but it’s exactly the irrational way people often think about the stock market. And it comes back to this weird, illogical bias individuals have against selling stocks – even to keep a profit!!
We’ve referred a few times to some legendary growth investors – Jesse Livermore and Nicolas Darvas, for example. They made their money not only by buying properly, but by selling at the right times. Same with other wise growth investors – Gerald Loeb and Bernard Baruch, to name a couple.
One other thing that all those investors had in common, and you should make it your practice, too: Determine a point at which you’ll sell any stock to prevent big, catastrophic losses. This is a move which will protect your capital, and you’ll never suffer those double-digit losses in the stock market.
Determine a point at which you ll sell a n y s t o c k t o p r e v e n t b i g , catastrophic losses.
18For example, if you decide that you’ll sell if a stock falls 6% below the price where you bought it, just sell if the stock falls to that point. If it rebounds, you can always buy it again. But especially in weaker markets, if a stock drops too far below its buy point, it frequently won’t bounce back any time soon.
So make a habit of selling to cut losses. That’s another wise move that protected the most successful individual investors in the 2008 and 2009 market downturn.
What good is holding your shares until you lose 50% or 60% of what you had before? What good is holding your shares until you’re dead?Sure, there are the old stories of Great Aunt Betty who owned shares of Early American Railroad and Telegraph and Motorcar (we made that up, by the way), which she bought in 1933 and still held when she died in 2005. Yeah, yeah, they’d split 17 times and this and that, and were now worth $1 million when she’d paid $26.50, and her heirs are whooping it up. Whatever. Yes, that happens once in a blue moon. So does winning the lottery.
Learn to sell at the right time to keep your gains – or cut your losses very small – and you ll make money.
Don’t count on long-term investing, or buy and hold as your little ticket to heaven. Learn to sell at the right time to keep your gains – or cut your losses very small – and you’ll make money.
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