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MARKET COMMENT
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Many private investors hang onto shares in duff companies way too long, usually refusing to a) admit to their mistake in buying the company in the first instance, or b) take a loss. That investor behaviour can ultimately be described simply as fear! They say that, in the short term, fear and greed are the main drivers of share price movement. Over the longer term however, inertia and denial are just as destructive for private investors as fear and greed. We have recently seen a stock market gripped by fear. Many fund managers have been selling shares, whether through fear themselves or because of investor redemptions. Many insurance companies have been selling shares, forced sellers due to the regulations surrounding their solvency levels. But many private investors have been sitting on the sidelines, not selling, but not buying either. They've been too scared - too scared to take a loss and too over-confident, or even arrogant, to sell because they made an investing mistake. Here at the Motley Fool, we've long promoted long-term share ownership. The past statistics back up that stance - over the long-term, through the periodic bear markets and market crashes, the stock market has proven to be the best form of investment. But, 'long-term share ownership' and 'long-term buy and forget' are two distinctly different strategies. To my mind, the first one encourages investors to invest regularly in the stock market, usually through a vehicle such as an index tracking fund, and keep investing and keep holding that fund over the long-term. The latter strategy encourages investors to buy great companies with long-term competitive advantages, and simply forget about them for a long long time. The problem with the latter strategy is that 'great companies with long-term competitive advantages' are notoriously difficult to identify. The stock market is littered with fallen 'great company' angels, the most infamous of which is arguably Marconi (LSE: MONI), the former GEC. 'Great companies are also notoriously fully or often over-valued, making it difficult to buy them at a price that will provide attractive long-term returns. The stock market is also littered with over-valued 'great companies', Vodafone (LSE: VOD) at almost 400p in early 2000 being an excellent example. The mobile phone giant is now trading at about 100p. Ouch! The 'long-term buy and forget' strategy is not for most private investors. The pitfalls are too great. Yet many practice this strategy. Even more dangerously, many sub-consciously practice this strategy with their actively managed portfolios. They do it because, through inertia and denial, they don't sell their duff companies. Marconi is a classic example. For a long time investors should have realised the company was going to the wall. Yet they lived in a land of inertia and denial and refused to sell the shares. Today they are virtually worthless. Selling should not be that difficult. These golden rules should help you hone your selling strategy. The only selling strategy that consistently works is when it is based on the underlying company's value. Unless your strategy is strictly a passive one of 'long-term share ownership', it's time to get yourself a robust selling strategy. Next: Sign up to the Fool's daily, weekly and monthly e-mails to get the best of the Fool delivered straight to your inbox.