Q. I have a range of shares in my SMSF that I bought for different reasons; some for growth and some for their dividends.  Some shares have capital gains and others I would be selling now at a loss.

Should I bite the bullet and take a substantial loss by selling shares in companies which are down by up to 91%,  in order to free up capital to invest in better companies.

A. Benjamin Graham (who taught Warren Buffett) wrote “in the short term, the Stock market behaves like a voting machine, but in the long term it acts like a weighing machine.”   Share prices in the short term may be determined by the popularity of a business or a sector but a company’s true value will in the long run be reflected in its share price.

The Stock market should not be considered the arbiter of a company’s worth.  You need to revisit why you bought the particular shares.  Has anything changed?  Do the companies have a long term competitive advantage?  Are they market leaders in their industry?  How do they manage debt? Are they or will they be profitable? Is the share price cheap or expensive? Are there better opportunities elsewhere?

Once you have considered these questions then you are in a position to evaluate whether to sell or not.

If there are better companies to invest in, common sense would be to sell poorer quality prospects and buy the better opportunity.  Better companies should be bought when they are at a discount to their intrinsic value. A good company may not be a good investment if they are too expensive.

To quote Graham again “ the investor should profit from the from market’s folly rather than participate in it.”


Follow Andrew on Twitter @AndrewHeavenFP.  This article was originally published in The Australian.