Last year I followed the recommendation by Commsec (video) that investors should sell underperforming shares to offset gains earned by high performing shares and so I sold my shares in Woolworths. but by October Woolworths share price had risen 23%.
I own two stocks and each of them are about 10% below what he bought them for back in April. I don’t know what to do? I don’t want to miss out again!
That was an email I received last Friday from a distraught Mr Thompson (not his real name).
“As the cost per trade falls [from $30 to $8 per trade] there is increasing pressure on staff to get customers to trade more often!”
That was what Tom (not his real name), who is employed at one of the large online share brokerage firms, told me.
‘Lock in your losses at tax time’ or “Tax Loss Share Selling’ is a common message heard at this time of year as the financial year draws to a close.
Institutional investors will sell their losers at the end of the financial to make their numbers or referred to as ‘window dressing’ the numbers, but you the individual investor do not need to follow this practice.
But your online broker doesn’t want you to know this, as the more you trade the more they earn.
‘They also take advantage of the media to spread their message, by posing as “the expert” in media interviews.’ Tom
The four big banks love getting in front of the camera.
Mr Thompson (who is now a premium member), doesn’t waste time watching Commsec videos, instead, he is studying the business landscape. A few questions he now asks himself are: Have I lost confidence in management’s ability? Are returns on capital earned by core operations still high? If the answer is yes to these questions, and if the business also meets the extensive criteria set out in the Knowledge Hub, it will then present a great opportunity to buy more shares, thus earning a higher rate of return and decreasing his possibility of loss.
As I explained to Mr Thompson, what individual investors miss out on by selling a stock for the purposes of offsetting tax gains, are the chances of:
- Earning a higher dividend yield,
- dollar cost averaging down,
- the benefits of compound interest.
Just because a stock you own fell due to the irrational motivations of Institutional Investors doesn’t imply that there is anything wrong with the underlying business!
Remember Buffett advice to ‘be greedy when others are fearful (irrational) and be fearful when others are greedy.
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