In this weekly series titled JUST ASK, we invite readers to send in questions on stock investing, and personal finance. We will ask an expert (or experts) to provide answers. Below is a question from a reader on a topic which must be playing on a lot of investors' minds. It is answered by ghchua, a value investor and a long-term investor who is well-known among some investing websites. His investment holding period is unusually long (for retail investors), which makes his views all the more intriguing. Read on!
Reader: Stocks have been on a rollercoaster, which have made me question the wisdom of a buy-and-hold strategy.
It is painful to watch paper profits vanish - and even turn into paper losses.
Seems like it's better to just take a decent profit (even for stocks that appear to be still undervalued) when it becomes available.
Then, just hope we can buy back the stocks cheaper later. Doesn't this approach make more sense?
What do some expert investors say?
Personally, I seldom sell a stock as I invest based on a portfolio view. Most of my "sell trades" are actually because of general offers or delisting of companies that I held.
I think two of my top holdings currently are good examples - namely Noble Group and Raffles Education Corp.
Both stocks I had held them for so many years that I forgot my entry price. But they have rewarded me not only with capital gains, but bonus issues, dividends etc throughout the years.
I started with unit trust investing and basically cultivated this long-term investing mindset, as unit trusts are not trading instruments.
I have also observed how some of these unit trust fund managers managed their funds and concluded that long-term investing is for me as it suits my personal outlook in life as well - which is slow and steady wins the race. :)
Benjamin Graham, the father of value investing, once said: "In the short run, the market is a voting machine, but in the long run it is a weighing machine."
That means in the long run, the weight of a company's fundamentals will be reflected in its stock price - just ignore the erratic daily movements.
The wisdom of a buy-and-hold strategy is really to ignore short term market noises and have an investment plan to invest for long term.
One should consistently invest spare cash plus dividends back into the market and reap the rewards of long term investing.
I have a portfolio of many stocks, and my top 30 Singapore stocks are listed in the table (on the right). Many more other stocks are listed in my blog.
By taking profits and hoping to buy back later at a cheaper price, one might miss out the opportunity of riding on a good stock if the share price keeps on moving higher.
Also, there is an opportunity cost incurred when waiting at the sidelines while hoping that the share price gets cheaper. What if it doesn't? And what is cheap?
If you sell a stock at $1 and it goes down to 50 cts, will you buy it? What if after you bought the stock, its share price drops further to 30cts? Will you still buy more?
Do not be focused on the share price alone. Rather, do your research and determine the intrinsic value of the stock that you are buying.
Do take note that frequent buying and selling will incur extra brokerage costs, which will eat up your portfolio return.
ghchua, B.Eng(EEE)(Hons), Dip(Elect & Comm) works as a Senior Test Development Engineer in a Computer Software MNC. An Electrical Engineer by training, he is a self-learned private investor managing his own personal investment portfolio for more than 8 years. He contributes regularly at an independent online financial portal, http://www.sgfunds.com as a moderator. He also likes to write regularly on investment matters at his own personal blog, http://ghchua.blogspot.com.