The Loneliness Of The Long Term Stock Holder
A brief examination of the dilemma facing every stock holder who has to make a decision to either keep or sell.
The title of my article is culled from the 1960's book and seminal movie "The loneliness of the long distance runner". In the movie the main character has to make a decision to conform to the way society would wish him to behave or to stand alone and not to "sell out". He chooses the latter. The film doesn't continue much further beyond the making of his decision and so we don't get to see how this decision characterises the rest of his life, if at all.
In a way there is a "life" in stock holding terms also and this was brought home to me a few years ago when I ran into a guy at the railway station who I had not seen for some time. We chatted as we waited for the train and eventually the conversation drifted towards finance. He had seen some of my scribblings in local newspapers about stock investing and he enquired "You know I have some holdings and they've been okay but recently they've fallen. Do you think I should sell?"
Like the character in the film above, this is a decision only you as the holder can take. There are those investors who set a "fall level" for each stock they purchase and when the stock falls to that level, they sell regardless of the reasons. In fact many large institutions have computers programmed in exactly that way and the fall to the pre-arranged level instigates an automatic computer "sell submission". I think for the Pension Funds, Investment Trusts and the like, this is probably no bad thing, since though there could be legitimate reasons for the fall, a flight into cash though possibly the incorrect decision, should always be the safe choice.
But for the private investor it could be totally wrong. To use a hypothetical situation for example, there have been oblique threats by Iran to close the Straits of Hormuz through which the major part of oil from the Middle East passes on its journey to the West. If this ever happened, the fall in a wide range of stocks would be dramatic. Computers all over the World would be signalling "Sell! Sell! Sell!" but would that be the best thing for the private investor. Probably not. He or she may wish to hold on pending a resolution of the dispute believing that eventually prices will re-assert themselves. A shrewd investor may wish to buy even more shares, figuring that recovery over the short term was highly likely. In this way the dollar/pound cost average of his holdings would fall and this is clearly no bad thing.
On the other hand, I believe shares do reach a point where saying goodbye is the right decision but in my experience this is not usually brought about by crisis events but rather by a medium to long term decline. This may be due to a number of different external situations which change or threaten to change the trading prospects, For example, if we look at how the management of Fuji, the camera equipment and film company reacted strategically to the new digital age and compare it with how the management of Eastman-Kodak dealt with similar issues, we see the clear difference. Fuji correctly predicted the speed and integration of the digital camera but Kodak was very slow to realise this crucial fact. Eastman-Kodak filed for bankruptcy protection earlier this year whereas Fuji continues to trade profitably. In these difficult times, the correct strategy and market positioning is everything.
If you were holding Kodak shares and watched as the price fell over successive months, what would your reaction have been? To begin with you could be forgiven for thinking the fall was just a temporary blip, after all the company had been around for years and was basically an institutionalised name. But as time went on, you would begin to feel uneasy. You would read why this decline was thought to be happening and if there were any plans to reverse it. Then, believing your best interests were not being served, decide to sell.
This is obviously a simple and clear example. Most are not and it will take a deal of reading on your part to discover the reason(s) why basically the stock is falling. Also your interpretation (and that of serious experts sometimes) could be wrong and the stock may simply be behaving cyclically (i.e. in a pattern). However, if after reading carefully you cannot see any reason for the fall, or the reasons you have discovered are not being addressed, you should sell immediately since the market may well know something you do not. Never fall in love with your stocks.
These days unfortunately though, short termism is prevalent, popular and stylish. Holdings are kept by their owners on average less than one year; spectacular gains are expected in a very short time. This is not so much strategy as fashion. It is happening now in almost every phase of life. People become stars on TV overnight, shine brightly for a very short time and then like so many super novas, are extinguished. A football manager must show results very quickly and if he does not after five or six games, his job is at risk and his future actively discussed in the sporting pages. Our whole system feeds and survives on bad news, since good news has become a contradiction in terms. It just isn't news at all.
Short termism can also be costly in transaction fees, takes constant management time and so on.
So before ditching any stock, think long and hard, do your research and don't act from gut feelings. Also, never think that guys in the business such as myself can provide the answer over a coffee. Pundits are just as likely to disagree as agree. And that brings me back to my encounter and the response I gave to the question of whether my old friend should sell. I enquired if he was still in the motor trade. "Just about", he answered, as at that time during 2008, the market had sunk. "So let me ask you" I continued, "Last week I noticed while driving my car that the temperature gauge had gone over the middle mark it normally settles at. Do you think I should sell it? "How would I know?" he responded, there could be many reasons for that.
And this is exactly the point. In the end, unless you are going to pay someone a considerable amount to make a detailed assessment for you, this is a question you will largely have to answer for yourself. A lonely decision not to be made lightly and hopefully not one to be made in similar circumstances to the guy in the movie which I mention at the beginning of this article. I didn't tell you but at the time he made his decision, he was in jail!
The title of my article is culled from the 1960's book and seminal movie "The loneliness of the long distance runner". In the movie the main character has to make a decision to conform to the way society would wish him to behave or to stand alone and not to "sell out". He chooses the latter. The film doesn't continue much further beyond the making of his decision and so we don't get to see how this decision characterises the rest of his life, if at all.
In a way there is a "life" in stock holding terms also and this was brought home to me a few years ago when I ran into a guy at the railway station who I had not seen for some time. We chatted as we waited for the train and eventually the conversation drifted towards finance. He had seen some of my scribblings in local newspapers about stock investing and he enquired "You know I have some holdings and they've been okay but recently they've fallen. Do you think I should sell?"
Like the character in the film above, this is a decision only you as the holder can take. There are those investors who set a "fall level" for each stock they purchase and when the stock falls to that level, they sell regardless of the reasons. In fact many large institutions have computers programmed in exactly that way and the fall to the pre-arranged level instigates an automatic computer "sell submission". I think for the Pension Funds, Investment Trusts and the like, this is probably no bad thing, since though there could be legitimate reasons for the fall, a flight into cash though possibly the incorrect decision, should always be the safe choice.
But for the private investor it could be totally wrong. To use a hypothetical situation for example, there have been oblique threats by Iran to close the Straits of Hormuz through which the major part of oil from the Middle East passes on its journey to the West. If this ever happened, the fall in a wide range of stocks would be dramatic. Computers all over the World would be signalling "Sell! Sell! Sell!" but would that be the best thing for the private investor. Probably not. He or she may wish to hold on pending a resolution of the dispute believing that eventually prices will re-assert themselves. A shrewd investor may wish to buy even more shares, figuring that recovery over the short term was highly likely. In this way the dollar/pound cost average of his holdings would fall and this is clearly no bad thing.
On the other hand, I believe shares do reach a point where saying goodbye is the right decision but in my experience this is not usually brought about by crisis events but rather by a medium to long term decline. This may be due to a number of different external situations which change or threaten to change the trading prospects, For example, if we look at how the management of Fuji, the camera equipment and film company reacted strategically to the new digital age and compare it with how the management of Eastman-Kodak dealt with similar issues, we see the clear difference. Fuji correctly predicted the speed and integration of the digital camera but Kodak was very slow to realise this crucial fact. Eastman-Kodak filed for bankruptcy protection earlier this year whereas Fuji continues to trade profitably. In these difficult times, the correct strategy and market positioning is everything.
If you were holding Kodak shares and watched as the price fell over successive months, what would your reaction have been? To begin with you could be forgiven for thinking the fall was just a temporary blip, after all the company had been around for years and was basically an institutionalised name. But as time went on, you would begin to feel uneasy. You would read why this decline was thought to be happening and if there were any plans to reverse it. Then, believing your best interests were not being served, decide to sell.
This is obviously a simple and clear example. Most are not and it will take a deal of reading on your part to discover the reason(s) why basically the stock is falling. Also your interpretation (and that of serious experts sometimes) could be wrong and the stock may simply be behaving cyclically (i.e. in a pattern). However, if after reading carefully you cannot see any reason for the fall, or the reasons you have discovered are not being addressed, you should sell immediately since the market may well know something you do not. Never fall in love with your stocks.
These days unfortunately though, short termism is prevalent, popular and stylish. Holdings are kept by their owners on average less than one year; spectacular gains are expected in a very short time. This is not so much strategy as fashion. It is happening now in almost every phase of life. People become stars on TV overnight, shine brightly for a very short time and then like so many super novas, are extinguished. A football manager must show results very quickly and if he does not after five or six games, his job is at risk and his future actively discussed in the sporting pages. Our whole system feeds and survives on bad news, since good news has become a contradiction in terms. It just isn't news at all.
Short termism can also be costly in transaction fees, takes constant management time and so on.
So before ditching any stock, think long and hard, do your research and don't act from gut feelings. Also, never think that guys in the business such as myself can provide the answer over a coffee. Pundits are just as likely to disagree as agree. And that brings me back to my encounter and the response I gave to the question of whether my old friend should sell. I enquired if he was still in the motor trade. "Just about", he answered, as at that time during 2008, the market had sunk. "So let me ask you" I continued, "Last week I noticed while driving my car that the temperature gauge had gone over the middle mark it normally settles at. Do you think I should sell it? "How would I know?" he responded, there could be many reasons for that.
And this is exactly the point. In the end, unless you are going to pay someone a considerable amount to make a detailed assessment for you, this is a question you will largely have to answer for yourself. A lonely decision not to be made lightly and hopefully not one to be made in similar circumstances to the guy in the movie which I mention at the beginning of this article. I didn't tell you but at the time he made his decision, he was in jail!
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