Do you book profit or book loss?
You have bought the shares of ABC Ltd at a rate of Rs.100 per share. The current market price is Rs.150 per share. Also you have bought the shares of XYZ Ltd at a rate of Rs.200 and the current market price is Rs.125.
Do you book profits by selling ABC or book losses by selling XYZ.
Warren Buffett said, “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”
This quote from Warren Buffet is the essence of selling loss making investments as a part of wealth management. However to the contrary most of us tend to sell those investments that makes us money and prefers to hold on to those that is already making losses. It is just probably a feeling that we could not have gone wrong and the investment would revive, or on the other hand a feeling that we have been fooled and do not want to be fooled again and do not want to take action.
What to do with loss making investments?
It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong. - George Soros
I recollected this saying when an investor told me that he always invested in right investments at the right time. I acknowledged his prudent nature, but felt that he and many other financially prudent persons needed to know that they also required to regularly reviewing their investments to eliminate non-productive one for productive and paying ones. Wealth management was all about making money work best for you.
George Soros’s lessons of prudent wealth management lies not allowing your investment to depreciate. This involves being ready to leave your comfort zone and revise your investment decision with the right attitude of being proud of the right investment and at the same time not being disgraced or regretful in making revisions or corrections in decisions already made.
Review your investments with the current outlook:
Most of us make investments that are based on the information available to us then. But it is important to know that with times the profitability or loss of an investment could change. It definitely proves useful to review and revise our decision when we find that we are holding on to something that no one would buy or invest in now. It is right that it is human to make mistakes, but holding on to a mistake just for emotional reasons cannot be pardoned. Subsequent events might alter the attractiveness of the investment.
Should we be possessive in our attachment to those investments for which the outlook has changed now? So I would say that if you need to create wealth and manage it, there is nothing wrong in being a fair weather friend; investments have to work for you and not accomplishing this goal means getting out these investments for better avenues.
Do I need to book loss when the market is falling?
However I wish to be excused when I say it is not good to sell when the prices on the whole have fallen down. However it is again important to believe that poor stock would surely be losing more than good ones; fall in price just does not indicate a downturn, it is a combination of various factors like production, sales and profits also, so poor stocks or small companies may find it difficult to recoup even when we experience favorable times in the market.
Again during the fall in the market it is common for us to see that even good stocks like HDFC may be selling at a discount. I would say such times are ideal to liquidate poor performing stocks that are not doing well and avail of purchase of these good stocks.
Why should you book loss?
Booking losses from the poor performing investments has got some advantages. So as to quit the poor performing investments, you are forced to quit your ego and admit that “I have made a wrong investment decision”. As you admit your mistake, you learn a lesson. As you have learnt a lesson you will not take similar wrong investment decisions in the future.
The advantage of booking loss is you will be moving out of poor performing investments and moving into better performing investments. So you will be able to recover your losses faster.
I would like to end on the note that to ere is human, but to refuse to rise is foolish. So just get into action in the down market and redo the mistakes that you committed in the high market and you would surely emerge wealthy with these wealth management strategies.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at firstname.lastname@example.org.