Ask Colin

What do you think of the idea of selling some of a holding to cover the purchase price and letting the rest ride for nothing?

My personal opinion is that this is one of the main mistakes people make. I discussed it at some length in Building Wealth in the Stock Market and in Think Like the Great Investors under the heading of The Market’s Money (page 17).

My view is based on the idea that you are investing YOUR money. THE MARKET is not a person and it does not trade or invest, so it cannot have any money. It is YOUR money that you are risking, whether it is your initial invested amount or paper profits that you have not yet realised. In the book I explain this at some length using an example. Here is another attempt to explain it:

The idea that your profits are not yours is a psychological crutch that allows you to avoid responsibility for your decisions.

If you invest $7,000 and sell out for $6,000, you have lost $1,000 of YOUR money. I am sure you will agree with this.

If, on the other hand, you invest $5,000 and your shares increase in value to $7,000 and then fall to $6,000 before you take your profits, you have lost $1,000 of YOUR money, not somebody’s money called THE MARKET. If you had sold at $7,000, that additional $1,000 would have been YOURS. If, instead, you had sold at $7,000, would you consider that you should send a $1,000 cheque to the market, because it was not your money, but the market’s money?

The whole idea that unrealised profits are somehow free money that you can take risks with and not have to take responsibility for giving back is a very dangerous mindset to have. You will be a much better investor once you get this idea right out of your vocabulary and start to take total responsibility for running the same risks with every dollar of capital, whether it is in the bank or is an unrealised profit in the market.

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