Terry Bond argues that in investment matters the head should always rule the heart.

I’m nothing if not loyal. For a dozen years the old lady had been a good and faithful servant to our family, so when the whispers started – past her sell-by date, becoming unreliable, not as nimble as she used to be – I would have none of it.

Even when the quiet grumbles turned to loud comments, often in front of her, I refused to listen. So she drank too much, maybe on occasions she whiffed a bit and her constant coughing did get on your nerves. Nevertheless, I was adamant that she had become part of our everyday lives, one of the family, and it was our duty to look after her in her dotage.

Everything has its price
That was before Gordon came up with his idea of paying a transfer fee for her. Two thousand pounds, no questions asked. When filthy lucre rears its ugly head, loyalty goes out of the window. We bade a sad farewell to the old Mercedes 280 Sport and handed her over to the government under the Car Scrappage Scheme. I didn’t like to think what Mr Brown had in store for her – probably used her for body parts, an ignominious end for an aristocratic old dear. A brand new mini, complete with fancy bells and whistles, stands on the drive now.

I told this tale to members of the Frantoio Investment Club, named after the lovely little Italian restaurant in the Kings Road, Chelsea, which is the venue for our meetings. (Every month in this column I give honourable mention to the Frantoio yet the proprietor has never even offered me so much as a free beer. I will keep hoping.)

I wanted to illustrate to my fellow Frantoioians that we humans often fall irrationally in love with inanimate objects. Cars, clothes, mobile phones – we cherish and hang on to them, often way beyond the point when it would have been kinder to dispatch them to the dustbin or the charity shop. I guess part of the motivation must be that when we bought them in the first place it was because we desired them above all their peers.

Knowing when to exit
The same applies to shares. Essentially, we buy a share because we believe it is going to go up in price, but there is usually much more to it than that. We understand the business the company is in, we can see its future potential, we have had an informed nod from a reliable source that something good is going to happen. Whatever the reasons, we buy it because we like the overall look of the stock. It is our new baby, we welcome it into the family portfolio and we love it.

The problem is that love is blind. There is a distinct danger that we are so taken with our stock purchases that we will ignore their little failings and defend them through thick and thin. So what if the promised commercial order is not received? Does it really matter that profit forecasts were not met this time? We chose our shares carefully, made our decisions rationally – we wouldn’t dream of selling them. It would seem almost disloyal and they are sure to come good in the end.

Wrong. When an investment club votes to buy a share, the secretary should be instructed to note in the meeting minutes the exact reasons for the purchase and a target percentage increase for three months hence. Each month there should be an agenda item ‘Investment Review’ and the reasons for each purchase should be re-examined with the benefit of hindsight. If the expected milestones have not been achieved, there must be no sentiment – the share should be sold and replaced with another potential winner.