Investors and gamblers have much in common. Both apply their skills and hunches in search of gains, but often suffer losses instead. But one of the most difficult dilemmas they face is not where to place their bets, but what to do in the face of good fortune. When a bet or investment is showing major gains, the decision to Hold or Fold can be the most difficult of all. I was recently reminded of an incident from the 1970’s that shed light on this oft faced dilemma.
My father was a trust and estate attorney who managed investment portfolios on behalf of clients, along with a long standing family friend who was a professional broker and money manager (what we would call “wealth management” today). Together, they would scrutinize markets, analyze companies, and pore over financial statements every day, looking for good opportunities and avoiding bad ones on behalf of their clients. On balance, they were fairly successful, and clients were generally grateful and loyal.
As I entered my teenage years, I took an interest in my father’s work, and was the dutiful student of all his expertise. “Never invest in anything that eats” was one memorable maxim, which basically led him to shun investments in horses and real estate for example.
One year, my father and his broker friend hit on a particularly good stock. They bought it at $10 a share and it quickly rose to $30 and then $40. At this point, they liquidated their positions and pocketed a tidy profit. Shortly thereafter, however, the stock went up to $50. And then it hit $60.
Around this time, my grandfather hosted a family dinner at a local waterfront restaurant, and my father’s broker friend and his family were also invited. All during dinner, the two men lamented the fact that they had panicked and sold their shares too soon.
“Could have had double!!” they moaned.
After dinner, we all took a walk on the docks of the marina in front of the restaurant. My father and his friend continued their anguished laments. Finally, my grandfather could stand it no more.
“You see all those nice yachts out there in the harbor?”, he interjected loudly. “They are all owned by people who sold too soon! Not one of them is owned by someone who sold too late!”
The point is that it is always better to walk away ahead than to end up behind. And my father ultimately did buy a boat.