Why Buy Shares You Used to Own?

LONDON -- There's an old stock market saying that you should never check the price of a share that you've sold. I can vouch from bitter experience that it's a very unpleasant feeling to discover that the share price has rocketed just a few days after selling my entire holding. So nowadays, having sold, I will often try to pretend that I never owned the shares.

However, there's a lot to be said for now and again checking the price of shares that you used to own. That's because you may be able to spot a bargain by drawing upon your knowledge as a former owner.

The more you know...
Which company would the typical investor know more about: one chosen at random from the FTSE 250 index, or one in which he or she owned shares for the better part of a decade before selling up last year?

Odds are that it's the latter. That's because investors accumulate a body of special knowledge about this company while they are owners, and they can draw upon in it if they ever feel that the current share price doesn't reflect its true value.

We fear change
Human nature is such that changing your mind can be difficult, because it often means admitting that you made a mistake. Buying back shares at a higher price than you received when you sold is as good as saying that you were wrong to sell them in the first place.

Many people place so much stock in "saving face" that, even when confronted with overwhelming evidence to the contrary, they will still maintain that they were right. But some people who change their minds will continue to behave outwardly as if nothing has happened. Over 20 years ago I came across a case like this, which concerned the boss of a company that was in serious trouble. He kept telling people how good its prospects were and demonstrated his belief by continuing to buy its shares right up until it collapsed.

It turned out that he made a small fortune, because the money he lost on his public share purchases was much less than the profits he made by short-selling his company's shares through a secret account, having propped up the price through his actions!

Admit you were wrong and get on with it
Many people who fell for the hype surrounding Facebook (NAS: FB) and its initial public offering will have told their friends that they were buying its shares. Some of them are now downplaying their losses, perhaps by pretending they sold when shares first rose above the offer price or saying they didn't buy any in the IPO.

Life would be quite awkward without the little white lies that ease social interactions. Just imagine the consequences of being forced to give an honest answer to a question such as, "Does my bum look big in this?" But once you start lying to yourself as an investor, you're storing up a lot of trouble for the future.

You don't need to announce to the world that you've just bought some Unilever shares for 2,040 pence, having sold them for 1,300 pence back in 2009, because you now have a much more positive opinion of the company than you did back then. Just be honest with yourself as to why you did it.

Even Buffett does it
Warren Buffett of Berkshire Hathaway (NYS: BRK.A) (NYS: BRK.B) fame has repurchased shares that he previously owned on many occasions. Back in 1985, when he did this with Capital Cities Communications, he explained his reasons for doing so in the annual report as follows:

Of course, some of you probably wonder why we are now buying Cap Cities at $172.50 per share given that your Chairman, in a characteristic burst of brilliance, sold Berkshire's holdings in the same company at $43 per share in 1978-80. Anticipating your question, I spent much of 1985 working on a snappy answer that would reconcile these acts.

A little more time, please.

Many investors do it deliberately
I've bought back into companies on several occasions, in particular Soco International (ISE: SIA.L) . Generally, this has worked more often than not, but it relies upon my knowing a lot about Soco and the market's habit of occasionally downgrading its shares for questionable reasons.

Some investors will regularly use this tactic. They maintain a core holding in a company they know well, around which they buy and sell its shares if they think Benjamin Graham's Mr. Market is in one of his manic-depressive moods, in which the share price has lost touch with reality.

This isn't something I generally do, except with Soco, because experience has taught me that I'm a bad trader. But it's worth considering if you have the knack for it.

At the moment I'm considering going back into The Walt Disney Company, having sold all of my Disney shares in 2010. While they have risen by around 35% since then, most of the sale proceeds went into topping up my holdings in shares like Union Pacific Corporation, which have done much better -- honest!

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Further investment opportunities:

At the time thisarticle was published Tony owns shares in Berkshire Hathaway, Soco International, Unilever and Union Pacific Corporation. The Motley Fool owns shares of Walt Disney, Facebook, and Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway, Unilever, and Walt Disney. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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