Is it time to take your chips and cash out?

I read an interesting article today by broker and Money magazine contributor Marcus Padley. In it, he lists a few golden rules of brokering and explains how stock brokers save marriages. Apparently that 1% brokerage fee you pay is for the privilege of blaming the broker when you’re wrong, and taking the credit when you – or he/she – is correct.

What really got me thinking however was the closing line of the article: “if you’re counting your money, it’s time to sell”. It refers to the fact that the psychology of an investor is just as important as the fundamentals of the companies they own to successfully grow – and keep – the value of their portfolio. With this in mind, it’s time for a little wisdom from Kenny Rogers’ “The Gambler”.

Investing in the sharemarket is often compared to gambling – usually by those who have never owned shares, I might add. You pays your money, picks a number, and if it comes up you take your winnings and leave.

Those with a little more experience know that safe investing is more about picking companies with growing earnings and watching them grow year after year – because good investing is conducted over years, not months or days. However company earnings don’t always go up, so as part of this process, investors need to learn when to hold ’em, when to fold ’em, and when to walk away. My article today is about the often overlooked lesson: “never count your money when you’re sitting at the table.”

When a share you own in rises drastically over a short period of time – which could be days, months, or even a couple of years — you might be asking yourself, “should I sell?”

Take Woolworths (ASX: WOW) for example. If you bought in early 2012, you paid around $25 a share. They’re now worth $36 two years later, a gain of 70%. Should you sell? On one hand, you never go broke taking a profit. On the other, you could be missing out on years of future gains by selling out of a company that has no fundamental problems and should be growing earnings for years to come.

If nothing has changed in the company to warrant selling, the answer lies in your own stress and excitement around the prospects of that company. If you’re starting to get excited, ‘hyped’ about the prospects, it’s probably better for you to sell out. Particularly so if you start buying more shares without considering what you’re doing, ignoring mildly negative announcements that could indicate upcoming slowdowns, buying more shares in similar companies trying to replicate your success, or worst of all, counting your ‘winnings’ before you’ve sold out and claimed them.

My Woolworths example is a fairly mild success story; investors can imagine just how magnified their excitement would be if they owned companies like Capitol Health (ASX: CAJ) or Nearmap (ASX: NEA), which both grew roughly 1000% in that same time. The risks associated with getting caught up in any sort of hype can be greater than the profits you won’t earn by selling out.

Foolish takeaway

It can be hard work regulating motion and excitement when it’s your hard earned money at the mercy of the market’s histrionics, but doing it successfully pays well.  One of the things I do is to lock away my investing portfolio in an account unlinked to my main bank, and only put money in there I will never need to touch. This turns my money from easily accessible cash into mere numbers on a screen, which helps immeasurably in keeping a cool head. The other thing I do is never count my money when I’m still sitting at the table, because there’ll be time enough for counting when the dealing’s done.

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Motley Fool contributor Sean O’Neill doesn’t own shares in any company listed.