Remember how that song Paper Roses by Marie Osmond described a perfect love that never was? Well, stock market profits are sometimes pretty much like that – with a little twist of course
I have an officemate who was grumbling about a large sum of money (in terms of us mortals who do not own half the world’s businesses) that they lost because his wife disagreed with his decision to sell their stocks at a time when he thought the price of said stocks can no longer go up.
They have a quarter of a million shares of a stock that already appreciated by at least 4 bucks per share. That’s a cool one million bucks of profit. My officemate was already dreaming of what beautiful things he and his family can do with the money. But when he talked to his wife prior to giving their broker the sell order, his wife flatly refused to sell.
She was as equally elated as her husband that this investment had a really good run, but she thinks that if this particular stock can give them 4 bucks a piece, it can give them more. She is in the medical field and does not know that much about fundamentals, but she knows that the price of this stock did nothing but go up since they bought it. She cannot comprehend why her husband wanted so much to sell the winning shares.
The husband tried to explain why he thinks its price can no longer go up any further. He talked about the company’s nearly saturated market, a number of years of continued winning streak and the introduction of new technologies, etc. But his wife couldn’t see beyond the rosy pictures that their computer screen is showing them.
There is money there. Their decision to buy that stock has earned them that money and that money, for all intents and purposes, is theirs.
Well, it WAS theirs. Had they sold their shares when its price was at the peak (or somewhere near it), that money would be theirs forever – or at least, until they spend it. But the profits that their stocks earned will just be a paper gain (like the paper roses) until they lock them in by selling the shares.
Somehow, some people have the mistaken notion that since they can already see the profits by computing their buying price against the present price, multiplied by the number of shares, they automatically get an inviolable title on the profits. This, of course, is not true. The money only become truly theirs once they sell the shares. But many wouldn’t think of selling for want of bigger profits.
The situation however reverses when what they are seeing are losses (actually, paper losses). Rather than wait for their share prices to recover, the immediate predisposition is to sell – locking in their losses in the process.
Waiting for the stocks to continue to increase in value is not necessarily a bad thing. In fact, many investors consider buying and holding as the only way to go in investing. However, there are times when a decision has to be made to sell even your favorite stocks. And this is what my officemate thought happened to theirs.
The wife’s refusal to sell has turned their rosy future plans to a bunch of rosy papers as they see their profit begin to dwindle. My officemate’s observation was being proven correct, but the shrinking profit further galvanized his wife’s stance not to sell – until that particular investment turned crimson red.
There’s no doubt that the price of that stock will eventually go up again someday. But nobody knows for sure when. But for the moment, they lost an opportunity to sell – at a profit.
The trick therefore is to know when to cast the magic spell to turn those paper gains into the real thing.
The good news is, there’s nothing magical about it at all. All that is needed is a little bit of knowledge of the fundamentals and a good judgment call.
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