Want to sell your shares? Avoid this BIG mistake

Read this advice before you exit from an investment position. You'll want to avoid a common psychological trap.

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A fund manager has warned retail investors not to fall into a common trap when selling out of a stock.

According to Forager Funds chief investment officer Steve Johnson, his funds generally prefer to hold onto stocks to let them play out their thesis.

But since the COVID-19 crash in March last year, that philosophy has temporarily taken a back seat. 

"The turnover has been extremely high — relative to history — over the past 12 months," Johnson told a Forager video to clients.

Forager portfolio manager Gareth Brown said that this was because the market has been moving so rapidly in recent times.

"It's really important to understand that the turnover has been massive because of the volatility we've had this year.

"We've been buying stocks at a deep discount to where we think fair value is. It closes that gap — and then some — in a matter of weeks and months." 

Selling a share because the price is up is WRONG

Notwithstanding his funds' recent high turnover, Johnson said that they didn't exit from those companies simply because the share price went up.

And he believes retail investors need to understand this, to avoid a massive error.

"The main mistake you make is, the share price is up therefore I sell," said Johnson.

"You'll first want to ask yourself a question: Was my estimate of the value of this business right when we first bought the stock? What's changed since then — and how much do I think it is worth today?"

Therefore the potential of the business compared to the current price should be the trigger, not an arbitrary price target.

And the value of the company may well have changed up or down since you first bought into it.

"The main lesson for me out of all of this is that the value of a business — it's not a static thing," Johnson said. 

"Constantly be thinking of the value itself as something that's dynamic and where you're constantly trying to update it and get it right for what's in front of you rather than what's behind you."

Brown reminded clients that the worthiness or potential of a business isn't just dependent on hard numbers shown in the latest results.

"Recognise the power of good management, the power of the intangible element of some businesses, competitive position, and the like," he said.

"There are certain businesses you want to give more leeway to than others."

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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