I’ve just been listening to The FT Money show podcast and to some poor soul asking when he should sell his Lloyds shares. I think he said that he bought thousands of them, as an investment, when they were £4 each, now they are down to 50p. What should he do?
When I used to buy shares I read a vast number of books and magazines on the subject. They all said: don’t get attached to them and sell them if they drop out of your comfort zone. But you do think, “So they’ve dropped to £3, so they must go up”, they might do, then again they might not.
If you’ve studied the fundamentals of the company, read the all the accounts for the last five years and you’ve come to the conclusion that the shares are still under-valued, then keep them. If you haven’t, and you’re getting twitchy, then sell and invest the money elsewhere.
I used to produce graphs on my Psion 3a (those were the days), something I enjoyed doing more than the actual investing. These charts would plot the share price against the FTSE 100 and the FTSE All Share, showing variations above, or below, the market.
Also I used to plot a graph with a trailing sell price. I don’t know if that’s the correct technical term for it but it will do. What this did was show a point 10% below the highest price for the stock. So you buy a stock at £1.00, you would see a point at 90p, if the stock went down from there, the line at 90p would stay. Now that is always a worrying time. You’ve just bought a share whose price has dropped. Should you sell when it hits 90p? But let’s say that the stock price goes up to £2.00, then so does the trailing sell price to £1.80. Then it goes up again and hits £4.00, trailing price also goes up to £3.60. The share price then starts to fall, it hits £3.60 and you sell with a tidy profit.
Setting the comfort zone to 10%, or whatever, is difficult because you are saying that you would sell no matter what. Even if the price drops steadily from the purchase date. Because you have already taken a hit with the purchase fees you don’t want to swallow a loss and selling fees to boot.
It really is all too easy to get emotionally attached to shares. You can only really be detached if you truly believe that the stock is significantly undervalued by the market.