Sunday, August 10, 2008

The Art of Selling, Part I

There are countless books written on what to buy. If you go to business school, they will teach you how to value a company, you will have a pretty good idea of what to buy and how much you should be paying for a business. However, there are very little books written about when to sell. I must say, the true art of investing is SELLING!

Selling too early or too late will affect your return dramatically. Amateur tends to sell out too early especially after they hold on to a stock too long. The moment a stock breakout, they will dump share quickly as they are afraid of their profit evaporate very quickly. Unfortunately, after they sold out, the stock will continue to run - 20, 30, 50 even 100% up. They will really kicking themselves........looking back at my own experience, I did commit this kind of silly mistake when I first started investing.

Fortunately, I keep a diary. I reflect and learn pretty quickly not to repeat my mistake. I learn the hard way after forgo almost RM 10,000 profit, I swear I will never again make this mistake -- I tell you the pain was really unbearable, more painful than losing money on bad investment decision.

The pro says you must let your winners run. Agree, the begging question is how long should you let your winners run? How do you know your winners run of gas? Let's take crude oil for example.

By looking at the chart, the run started in 2003 and by 2004, it has taken out the all time high of US $ 40 per barrel. For the sake of the argument, let say you have a position at US $ 40. Will you continue to let it run to US $ 80 / barrel. Will you be selling out when it has a violent correction of 40% in 2006? If you did, you must be regretting because it went straight up to US $ 147? Assuming you have not sold at the top, will you be selling now?

If you were to listen to Jim Roger, the theory seems to be solid, so is his prediction.

"The bull market in crude oil started in 1999, and in the last nine-years the oil market has gone down over 40% three times. Was that the end of the bull market?" asked famed investor Jim Rogers on July 29th. In a world of limited resources, the world's population is expected to double over the next 40-years, with more than 95% of the increase in demand concentrated in developing countries.

When do you abandon your predictions and follow the action of the market?

Jesse Livermore, the world's greatest trader used to say, "Remember, the market is designed to fool most of the people most of the time. Sometimes, the market will go contrary to what speculators have predicted. At these times, speculators must abandon their predictions and follow the action of the market. Never argue with the tape. Markets are never wrong, but opinions often are. I only try to react to what the market is telling me by its behavior," he said.

To be continued ...................

No comments: