The art of knowing when to sell

A FRIEND told me that he had bought a book on investment for his son's Christmas present. A good idea. No doubt it, like so many others, gives guidance about how and why to buy. But does it give enough advice on selling?

Most such books say too little about that and do not prepare people for the fact that selling is more mentally and emotionally demanding than buying. The purchasing process is reasonably straightforward - and usually pleasurable. The investor, at any rate during most of the last decade, has simply had to choose between various rising stocks. Once the deal is done the individual feels a sense of satisfaction and adventure. He is the proud part owner of Tiddleywinks Products plc. The difficulty comes when Tiddleywinks hits a bad patch - or perhaps the whole market is falling.

The investor agonises. He argues with himself that Tiddleywinks - or the market in general - are bound to recover eventually. He does not like to admit that he made a mistake. Or it may be the happier prospect of a capital gains liability which makes him hesitate. And if he does sell, of course, he knows he will to have to make a further judgment about where to park his money or what alternative stocks he should buy. Decisions, decisions...

So he, as he thinks, postpones a decision. But markets are never static. The fact is that not selling at any given moment, for whatever reason, is an investment decision no less important than buying - and just as important to one's wealth. This may sound obvious. But there are legions of small investors who stick with stocks through thick and thin because they cannot bring themselves to sell. It can even be true of some pension funds where the trustees talk of ' postponing' decisions about the balance of their portfolios as if that was not an investment judgment in itself.

It is an old stock market adage that you cannot expect to buy at the bottom and sell at the top. Equally true, you can never get rich if you aren't as ready to sell as you are to buy.