INVESTMENT: NO PAIN NO GAIN: Why a love affair with a penny dreadful
I AM accused of being soft. It seems I hang on to loss-making shares for far too long. Instead I should be much more brutal - unceremoniously kicking them out of the no pain, no gain portfolio as soon as it becomes apparent my hopes are not being fulfilled.
There is little doubt that many small investors fall in love with their shares. It can be a fatal attraction. I suspect that in portfolios up and down the land there lurks a multitude of penny dreadfuls - shares that should have been ditched long ago. But their owners just held on - and held on - until the value of the shareholding dwindled to such a modest amount that there seemed little point in selling. Indeed, with the sale cost outweighing the value, I believe many smaller shareholders may only be stirred into action by the prospect of offsetting capital gains.
I accept that investment is a rough, tough business with no place for sentiment. Although I find it easy to understand the feeling that it is better to hang on than accept a loss, it is, of course, foolish to let a share's value slip to virtually zero. But many do. I have been guilty of such stupidity. There is little doubt that once a loss is allowed to loom large it becomes much more difficult to sell even if a share continues to lose ground. I bet many small shareholders are still in Marconi, despite its dramatic fall. Bite the bullet and get out before losses escalate, is never bad advice.
One way with to deal with such misfortune is to adopt the stop- loss system under which a share is sold if it breaks through a pre- set level. For example, a 20 per cent fall from the buying price or even subsequent peak, can trigger a sale. As I have explained in the past I am not a devotee of the stop-loss formula. I believe it to be too restrictive. After all a gut feeling can be important in the investment game.
And it is, I must admit, instinct rather than hard facts that scream sell that has so far prevented me from elbowing the clear laggard of the portfolio, Profile Media. Since I discussed the share a few weeks ago it has shown further weakness, although a few buyers have latterly appeared. Profile is trying my patience, but I am prepared to stick with the share for now. One reason for my reluctance to sell is I feel the shares have been heavily oversold. I realise many investors have regretted such charity.
It is, of course, impossible to get every investment decision right. Clearly I was far too tolerant (perhaps too soft?)
I think it all underlines the simple fact that investment is not a foolproof exercise. There are few hard and fast rules. And mistakes will be made. The best that can be expected is to get rather more winners than losers.....
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