Investing goal – trader or investor

After over 47 years in the investment business and working with all kinds of people, I’ve seen a lot in the markets. When it comes to investing, are you a long-term investor or a trader? There’s a big difference. Long-term investing is certainly a good idea and a noble goal. But when people say they will hold an investment forever, most will either make infinity or zero. I’ve never heard of a stock going to infinity, so ultimately, what happens is that they make zero.

Today, we’re talking about taking profits and locking in gains. There is no shame whatsoever in taking profits. You sell it, you pay your taxes, and you move on to the next trade. If you are in a trade where it is frowned upon to take profits (like Bitcoin or maybe AI), then you are not in a trade; you are in a cult. I’m being serious. If you are in a trade where there is social pressure to stay long, that is what I would call an investment cult. Get out while you can.

I don’t post on Twitter (now called X). But if a few years ago I tweeted, “I sold my Bitcoin,” I would have ended up at the bottom of a giant dogpile. (I didn’t own any Bitcoin then, but I own a very small amount now.) If today I tweeted, “I sold my Walmart,” nobody would care. Walmart is not an investment cult. Bitcoin is, along with GameStop and AMC. That’s not to say that investment cults can’t be profitable, but to make money off them, you need to be a heretic and get out. (Please note that I’m just using these as examples and not suggesting you should buy or sell any of these stocks.)

Have you ever heard of “FOMO”? It is a common human behavior – “Fear of Missing Out.” The main reason people do not sell investments is because they have FOMO. We could also call it “Fear of future regret.” They are afraid they will miss out on future gains. Sometimes, I sell a stock simply because I have made enough money, which is a good reason to sell a stock. I don’t need to make a million dollars on every trade. If I make $100,000 and it is satisfactory, I will get out.

I’m sure many of you can think of stories where someone bought Apple or Amazon or some stock like that which turned into millions of dollars. But those stories are few and far between and the chances of that happening are slim. There are far more stories about people who rode the rocket up, never sold, and then rode it down.

So what do I do next? I find another trade! I see people fall into the trap where they think one stock or ETF is the key to riches, and it is the only one, as though they will never find another trade like it. That’s nonsense. There is always a bull market somewhere, as people are fond of saying. And if nothing is immediately available, you put the cash in a money market fund and wait.

Another reason that people don’t sell stocks is because they don’t want to pay taxes. I completely understand the desire not to pay taxes because nobody wants to give money to the government if you don’t have to. But the alternative to taxes is losses. In most cases, if you hang on to the stock long enough, it will eventually turn lower, and you will have losses. But you won’t have to pay taxes! Losses are worse.

Long-term capital gains taxes aren’t that high for the time being, so sell the stock and pay your 20% or whatever. We can’t all be Warren Buffett, who famously holds on to things forever, so he doesn’t have to pay taxes. Yes, taxes can eat into your investment returns a lot. They are also pretty much inevitable.

Another reason people don’t sell their stocks is because they become emotionally attached to them. It’s called the endowment effect. Stocks are a weird thing to get emotionally attached to, but people do. They’re just a jumble of letters on your computer screen. They say, “This stock has been so good to me.” There was a time when Walmart was that kind of stock. You don’t owe the stock anything. But there is a certain familiarity in opening your brokerage account and seeing your favorite stock there. It would be sad if you had to sell it. It’s like selling a member of the family, although I can think of a few cases where that might not be such a bad idea.

Look, emotions shouldn’t factor into trading or investing. It seems there is a certain inertia about selling stocks. It takes so much effort to press the button and sell it when, really, you are just moving your mouse.

What is worse: Selling too early or selling too late? I think selling too late is worse. Let’s look at the following scenario. You have XYZ stock, which is trading at $80 per share. It goes up to $100. You think you should sell it, but you don’t because it might go higher. It goes back to $80. Then you say to yourself, “Well, I will sell it when it gets back up to the highs.” But it doesn’t, and it goes down to $60. Then you say, “Well, I will just sell it on an uptick back to $80.” But it never gets to $80, and it keeps going lower. Sound familiar? Selling into strength is a lot easier than selling into weakness, but people get FOMO. Go figure.

Now is probably a good time to be thinking about selling some stocks. Just saying. Thanks for reading.