The "Buy and Forget To Sell" Investor
The euphoria of the golden touch is a dangerous thing because it can make you careless.
No, I didn't get much smarter, and my stock picking skills haven't improved that much over the last year. I was simply a willing participant in the latest (cyclical) bull market. A bull market makes you feel smarter than you are (sorry) the same way a bear market makes you feel dumber than you are. Feeling smart makes you do the opposite of what you should be doing. The euphoria of the golden touch is a dangerous thing because it can make you (and me) careless. We forget about risk since we haven't seen it in a while, and instead only focus on our rewards. You have to actively make yourself aware of the four letter word – RISK!
How do you do that? My favorite way is to remind myself how "dumb" I am. I pull out an annual return report of a company on which I lost a boat-load of money, and masochistically try to read it from cover to cover, reliving my "dumbness."
We all have these stocks. The ones we lost a lot of money in because we were over-confident. We tend to forget about them during the bull market phase. But I suggest you remember them now, so you'll have fewer of those names to remember in the future. Risk is still there, it is just hiding under the joyful sentiment of the bull market. Believe me, it will show its ugly face. It is just a matter of time.
In the bull market it is easy to forget about selling discipline and then turn into a "buy and forget to sell" investor. Every time you sell a stock you look dumb because it usually goes up afterwords. I recently sold Becton Dickinson (BDX) at about $72-73, and it hit $78 today! I don't feel very smart about that decision. However, when I bought Becton Dickenson, I set a sell P/E and when it approached I quickly reviewed the stock's fundamentals - they had not changed much, so I sold the stock.
You cannot worry about marking the "top" in every sell. My objective is not to buy at the "bottom" and sell at the "top." No, my objective it to buy a great company when it is cheap and to sell it when it is fairly valued! I suggest you do the same.
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