In an article from Seeking Alpha (found here), the author writes a rebuttal to a previous article that argues that investors should always sell their investments if they are in the money in order to realize a profit. This is a poor strategy, explains the author, for three reasons.
1) Lack of Analysis: Because the price of an investment is the present value of the future earnings or cash flows, it makes no sense to base one's decision to sell based solely on the price that was originally paid; the purchase price has no effect on the current or sale price. Decisions should be made based on fundamental projected cash flow analysis, which is based on what the company plans to do IN THE FUTURE, not what they've already done. In other words, even if you've made a gain, it does not make sense to sell the investment if you expect the price to continue to increase (based on your analysis).
2) Opportunity Cost: By selling an investment simply to make a profit, you limit the amount of financial decisions you can make--you essentially eliminate the possibility of holding onto that investment or even increasing your position. If it is determined from analysis that the value of that investment will continue to appreciate, you are decreasing your maximum potential return by simply selling off that investment to realize a profit and moving on to less profitable securities.
3) External Factors: Factors like inflation and systematic risk can cause an investor to reach misguided conclusions, which in turn can lead to future bad decisions and potential losses. The two biggest external factors that are unrelated to fundamental analysis are risk and new investment opportunities. Sometimes selling a profitable investment is a sound strategy, but not because it has been profitable; in the case where selling is a smart strategy, usually it is either because it is too risky to continue to hold the security, or because there are new or different investment opportunities that will be even more profitable.
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