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By Malcolm Stacey | Saturday 9 September 2017
Hello, Share Tasters. A famous bear who writes on this splendid website recently opined that a company with a crazily over-egged valuation can continue to grow its crazy valuation. This sounds like a ridiculous observation. Why should a share which is already far too pricey become even pricier?
It’s an obvious question. But we must never forget that Shareland is, unlike most environs, not a logical place. Therefore, gang, one of the best lessons to learn in your share-shifting career is to think long and hard about selling a share just because the balance sheet does not support a rising stock price.
This advice particularly applies to penny shares. Why? Because the people buying the shares are predominately amateurs. They are driven by greed and in most cases don’t consider the fundamentals of a company at all.
Two things happen. If the share rises day after day on no news, the amateur will buy more shares. At the same time, punters already holding shares will not feel like selling, as the rising price shows no sign of slowing down. That is why some shares which are mercilessly slammed by our ShareProphets experts continue to boom. Greed overcomes common sense.
Of course, the share will eventually run out of steam. The selling will start as the price goes down day after day and it will soon become an avalanche of dumped shares. If, acting on common sense you dumped the stock earlier, you will have the pleasure of seeing the share price fall below your selling price.
But there is also another strategy, which I follow all the time. Some of my tips have turned into multi-baggers. But I know that there comes a point when the best of recommendations become overbought and are no longer worthy of lofty price tags. But to repeat the mantra which began this piece. A share which is over-valued is quite capable of becoming even more pricey. Do you really want to quit a rising star? No, you don’t. My policy - and it’s risky - so don’t blame me if it doesn’t work for you - is to stay with a company, even if I think the shares are worth half as much.
I only get out when the fall is well underway. A loss of 15% seems reasonable. But I stay with penny winners that continue to outdo their true potential. And I do it because my fellow private investors can be very stupid. They simply can’t believe that their favourite share will not go on rising forever. Fat chance!
See you in the Punter’s Return. God bless.
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