A Bird in Hand is Worth Two in the Bush

You have heard of the phrase, "A bird in hand is worth two in the bush". What does it mean to you as an investor who puts your money into stocks and shares as part of your strategy towards beating inflation and moving towards financial freedom?

Investing is not a guaranteed thing
In my limited experience of investing in stocks and shares (equities), I have realised that the term bandied about in investment forums, "expect the unexpected" really rings true. Those of you who believe in the random walk theory of stock prices will know that the price of a stock reflects all the available information about its future earnings, prospects and possibilities at a point in time. Market players will take positions to buy, sell or do nothing in response to what is happening or not at any point in time.

When you buy a stock of a company on a quoted exchange, you would like the company to do well and have more earnings so that it's future stock price will go up thereby allowing you to make a capital gain. In addition, if the stock you invest in pays a dividend, you would also like to partake in that return. However, in reality, how many times can you time the market perfectly that the stock price will go UP from the price you buy or it will go DOWN from the price you sell?

PG's personal style of investment
My own approach to stock investing has been to achieve a rate of return from realised/unrealised capital gains of at least double the higher of inflation rate or treasury bills risk-free rate. Given that inflation will be around 5%, that means trying to hit a return of 10%. This is challenging given the low savings and treasury bills yields (around 2%) and hence, equities provide a realistic but risky way to achieve that type of returns.

Deciding when to sell some of your stocks at a particular point in time is one of the most challenging things you will find in investing. Our human nature makes us want to sell at the highest of the highs while buying at the lowest of the lows. Hence, when the market is volatile, one is tempted to hold on to losers to avoid realised capital losses and also hold on to winners to realised the maximum of realised capital gains.

If you have strong holding power and believe in the Warren Buffet style of investing, then you will hold very long term and not cash out. In reality, most of you would need periodic cash payments for big ticket items or for certain lifestyle expenditures at some points in your journey towards financial freedom. You may have to sell some stocks. Should you sell your winners or should you sell your losers?

I recently chose to sell one of my winners because it had already achieved net 7% return (annualised 25%). I would have loved to keep holding it because it was in the money and it was a fundamentally strong counter. But faced with taking realised losses by selling my losers, I decided that this bird in my hand was worth two in the bush and hence sold it to lock in capital gains and also to free up some cash that I wanted.

Realised vs unrealised gains
The stock market unpredictable. Even big boys can get it wrong, what more retail investors like you and I? When you lock in realised gains, it is real and present. Something that literally adds money back into your bank account on T+3. When you continue to hold it, the market and the price of your stock can go up or it can go down. If you chose fundamentally sound companies, if you have holding power, you can ride out market fluctuations so long as the overall trend of your company's stock is up.

I choose to realise profits periodically partly because the market can be volatile as the last quarter of 2007 has shown and that when you can take money off the table, it's good to do so selectively. I aim to have at least 10% of my investments in risk-free assets such as treasury bills or relatively risk-free assets such as fixed deposits or money market instruments.

Your money, your style
Investing your own money is a reflection of your own personality and approach towards the risk-return continuum. I know that I cannot time the market at the peaks and the troughs. But what I know I can do is to lock in some realised profits and to periodically reallocate my portfolio to always have some risk-free assets to help mitigate the risks of the market.

Understand your own style and play up to your strengths but be aware of your weaknesses.

Be well and prosper!