The other day I was reading a newspaper article about ISAs. ISAs, or Individual Savings Accounts, are a (relatively) tax efficient means of investing in the UK, and there is an annual allowance you can invest every tax year.
With the tax year ending shortly after the article was published (April 5th) they had written 86 different tips for investing in ISAs.
This was quite a substantial article so, like any reasonably substantial piece on investing, they included Warren Buffet in it (the world’s greatest, and richest, investor, if you haven’t heard of him).
Also, like so many articles that mention Warren Buffet, it seems this was done more to boost the legitimacy of the article. Although there were quite a few decent enough tips (including the one that mentioned Buffet by name), one did stick out for being pretty much contrary to Buffet’s investing methodology.
This was the tip to rebalance your ISA portfolio of shares (or funds, if it was invested in funds). If one share had done very well, it should be sold in order to rebalance your portfolio, so it isn’t as exposed to one share. Take that money and invest it in other shares instead.
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This is not how Buffet invests. He doesn’t simply sell a share merely because it has gone up in value. He’s more likely to sell one for going down than up – and only if he believes the company is not a good investment, not simply because the market has dipped.
Warren Buffet has bought and kept shares for decades. That’s one of the reasons why he’s the world’s richest investor – he doesn’t sell shares as often as other people do.
The advice being given in this tip is, essentially, sell your winners and keep your losers. The opposite is a better idea.
Yes, there can be times you want to sell a share that has gone up in value, but it shouldn’t be simply because it has gone up. You may want to take out your initial investment, so that you are basically playing with “house money” as you have your original investment back – that’s a better reason (it’s still not one Buffet tends to use though). If the company is a good investment, it should still be a good investment after the price of its shares has increased.
If you’re going to namedrop Warren Buffet in an article, make sure you actually know what his investment philosophy actually is first.