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Buy low, hold the winners

One of the first pieces of advice that we ever hear is likely to be: buy low, sell high.

It’s good advice, right? Buy when a share is good value, perhaps when other people are fearful, and then sell when it has gone up. If you do this with all your shares then it’s almost guaranteed gains if you only sell when your investments have made a profit.

But, there could a couple of issues with this advice. Firstly, it could lead you holding onto your losers for far longer than necessary. If you hold onto a share as it worsens and worsens you could be anchoring your expectations to your purchase price, not the reality of the situation.

Second, ‘sell high’ is saying that you should sell your winners. Imagine selling Altium Limited (ASX: ALU) or a2 Milk Company Ltd (ASX: A2M) a couple of years ago after making 100% on your initial purchase. Doubling your money is a good achievement, but think of all the potential lost gains by selling earlier.

Selling a winner also has other consequences such as brokerage costs, taxes on gains and the risk of choosing a dud share with the proceeds.

Sometimes best thing to do is the easiest, do nothing. The management of the business and all its employees are trying to do a good job and grow profit. Unless the business is in structural decline there’s every chance that the business will keep growing nicely.

Foolish takeaway

Of course, in some circumstances it might make sense to sell shares. If you think a share is wildly overvalued or is a quarter of your portfolio then it could be worth selling some. Otherwise, it’s likely best to just hold on for the ride.

If I owned this top share I definitely wouldn’t want to sell, in-fact I’d want to buy even more shares because it has such a promising future for the next few years.

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Motley Fool contributor Tristan Harrison owns shares of Altium. The Motley Fool Australia owns shares of A2 Milk and Altium. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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