The Term Deposit Investing Model

It's been a while, so here's another thought experiment.

Suppose that a bank occasionally offered term deposit accounts at extraordinarily good interest rates - say 20% (for ever).  Suppose also, that they only did so very rarely - once every 5-10 years.  The catch is of course that it's very difficult to get money into this term deposit, as they only accept small denominations, so you have to manually keep filling out application forms so that you can get as much money in as possible, and you have to do so for the limited time that the bank will accept the applications.



You manage to get a good amount of money into this term deposit.  It doesn't matter how much, but let's just say $20,000.  If you want to imagine another amount, then feel free to do so.

Here's the dilemma.  One week after you've put this money into the term deposit, the bank come back with a counter-offer.  They'll double your money if you take it out today.  That's right, you can get a $40,000 cheque from the bank today if you accept their offer.

What do you do?

Doubling your money in a week would be pretty temping, however it is not the most profitable thing to do.  Mathematically, 20% p.a. is doubling your money every 4 years, whereas accepting the banks offer is doubling your money every 7.5 years.

And now to the point that I'm trying to make...

If a portion of your funds are allocated to a great company, and you bought in at a great price, then you should never sell - at any price (almost).  The only exceptions are a) when you have no cash reserves, and there is an every better long term quality presented to you, and b) when the company ceases to become a quality company, and hence the fundamentals have changed.

Exceptions aside, this is the rule. The capital should be considered "allocated", and left to grow in it's own little snowball, rather than take quick profits.  You want to have as much of your capital allocated to snowballs as you can.