Staying faithful can net you big returns.
Call me old-fashioned but good stocking picking should be like choosing a life partner: take your time, choose wisely and hold for the long term. There will inevitably be ups and downs, but if you've chosen wisely you'll benefit over the long term.
Of course, you have to have confidence in your selection and the only way to be confident is to leave no stone unturned in an effort to find good shares and then look for their weak points. Critical analysis is very important as it's too easy to delude yourself that you've chosen wisely.
Shares I should have sold
The problem with not analysing shares properly is that you inevitably end up with lots of duds. For most of the poor share selections I've made, it certainly did make sense to sell them as soon as they'd gone up 50-100%. Rage and Motionposter are both names from the past that I should have sold once I'd doubled my money. But I got greedy.
I don't believe that markets properly value shares in the short term. As Warren Buffett has written the market is often like a 'manic-depressive' seldom seeing something in an objective manner but driven by emotion to excessive swings in valuation.
Of course, you can attempt to play this game as a day trader but with brokerage fees and the huge variation in bid-offer spreads, particularly for AIM stocks, you lose a lot of money if you are constantly dipping in and out. Not to mention the time and mental effort involved.
However, with quality long-term plays it really does make sense to hold and hold them. Of course, you'll only have the nerve to do so if you're absolutely convinced that they are good value.
Valuing a share
Of course, establishing the value of a business is the tricky part, although the theory is simple enough. Experts attempt to evaluate the true worth of a company based on projected future cash flows and various ratios. You essentially want a business that is undervalued and that will produce good long-term return on its equity.
It isn't an exact science but if you do your homework, you'll have a rough idea of a share's 'intrinsic value' as opposed to its price should be. If you then buy at a price way below this, you've built in a 'safety margin' to cover any errors in your analysis.
Even as I write this I realise that, while it sounds so easy, very few people have actually mastered the technique of actually applying this knowledge -- Warren Buffett is obviously one.
If you are evaluating growth stocks, the PEG ratio is useful in trying to assess the P/E ratio in relation to the company's growth rate. If it's below one it could be good value. If it is highly cash generative and has low debt levels, so much the better.
Then, over the long term, if you've chosen wisely and chosen a share whose return on equity is consistently good, it should appreciate in price. Warren Buffett has often quoted Ben Graham's statement about the stock market: "In the short run it's a voting machine, but in the long run it's a weighing machine."
Shares investors should have kept
Anyone who bought stocks such as Microsoft, Tesco (LSE: TSCO) and Diageo (LSE: DGE) twenty years ago should have kept them as long-term holds rather than selling for a short-term profit.
I myself regret selling BAE Systems (LSE: BA) a few years ago, although at the time my idea of a long-term hold was six months -- I'd been thoroughly spoilt by the dot-com boom. I lost a lot in terms of capital appreciation and dividend payments investing it in what turned out to be an AIM dud that is no longer with us.
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