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.

ASX miners crash opportunity broker buy asx shares represented by investor throwing hands up towards icons of buy and sell broker upgrade buy

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

More on How to invest

Man puts arm around woman and kisses her cheek outside their new home
How to invest

How to build a $100,000 ASX share portfolio from scratch

You may be surprised how quickly you could reach this goal.

Read more »

asx share price fall represented by investor with head in hands
How to invest

Should you sell you ASX shares if you think a stock market crash is coming?

Can we ever predict a market crash?

Read more »

A happy young couple lie on a wooden deck using a skateboard for a pillow.
How to invest

How to build wealth with ASX shares without taking big risks

Many investors believe they need to chase high-risk, speculative ASX shares to grow their wealth quickly. But in reality, most…

Read more »

Happy man holding Australian dollar notes, representing dividends.
How to invest

How $500 a month in ASX shares could become $1 million

It might not be as hard as you think to become a millionaire through the share market.

Read more »

Man pointing an upward line on a bar graph symbolising a rising share price.
How to invest

How to invest when the ASX hits a record high

Worried about buying at today's prices? Here's why you shouldn't be concerned.

Read more »

A man wearing glasses sits back in his desk chair with his hands behind his head staring smiling at his computer screens as the ASX share prices keep rising
How to invest

Lessons from a self-made ASX millionaire

Here's how he did it.

Read more »

A couple cheers as they sit on their lounge looking at their laptop and reading about the rising Redbubble share price
How to invest

$20,000 in savings? Here's how to target $1,000 of passive income each month

This could be the easiest way to build a meaningful passive income from the share market.

Read more »

Three happy office workers cheer as they read about good financial news on a laptop.
How to invest

The 3 rules new ASX share investors should always follow

These rules could help you generate wealth in the share market.

Read more »