There is an old saying in the investment business, “Be careful you don’t pick your flowers and water your weeds”. This refers to some investors’ hair trigger eagerness to take profits but steadfast reluctance to sell any investment for a loss. After all, you didn’t make the investment with the expectation that you would lose money. The reality is that all investment ideas won’t work out and a few will even result in losses. You will likely make more profitable investments than unprofitable ones, but it is unrealistic to think that you will never strike out. Unfortunately, some people will hold onto a bad investment for years hoping it becomes profitable, all the while missing out on the many great ideas into which those dollars could have been re-deployed.
A corollary phrase I hear a lot is “You’ll never go broke taking a profit.” I think some unscrupulous sales person came up with this line decades ago to motivate a hesitant client into action and, unfortunately, it has been incorporated into many investors’ vernacular. There is a flaw in that mentality and we should not always be so eager to take our profits. This is not to suggest that we shouldn’t reduce exposure to positions that become too large. However, some of the all-time best investments became profitable early on and selling them completely would have proven to be a major mistake.
If you are unwilling to let go of an idea that didn’t work out and part only with your money-making investments, then over time, you will wind up “picking your flowers and watering your weeds”. Do this long enough and you will have a nicely cultivated garden full of weeds. You can eventually weed out your financial garden, but that won’t replace the perfectly good flowers you uprooted unnecessarily.
An intelligent and successful investment program requires a certain detached objectivity. It will not be dependent upon every idea working out and will actually anticipate mediocre returns from some ideas and negative returns from others. It will be broadly diversified, tax-efficient and low-cost. It will not be a game of buying the latest hot tip or fad, but it will be the efficient execution of a prudently designed financial plan that can be monitored through time with modifications and adjustments as your personal situation changes. Investing should not be the goal, but the means to an end that can only be defined, pursued and monitored through the planning process.
Successful investing is actually very simple, but there is nothing easy about it.