A Safal Niveshak Special Report

How to Know

When to Sell
Your Stock
Vishal Khandelwal (Tribesman, Safal Niveshak)
www.safalniveshak.com

How to Know When to Sell Your Stock

How to Know When to Sell Your Stock

Most investing discussions revolve around when to buy a stock. Which stock should I buy? is the first question that comes to your mind when you think about your investment. But equally important is the question Which of my stocks should I sell? Sadly, there arent any 10 Immutable Laws of Selling. In fact, the answer to this question is often as difficult and individual as deciding when to buy a stock. But there are some things to consider and some general situations when selling might be a good idea. And believe me, an exit strategy that works for you not only makes you a more comfortable investor but also helps you beat the market.

3 Simple Reasons to Sell

Philip Fisher, in his seminal book Common Stocks and Uncommon Profits writes, If the job has been correctly done when a common stock is purchased, the time to sell it is almost never. But then, there are times when the job is not done correctly and we realise later that the stock purchase was a mistake. It is then that a stock must be sold. Anyways, Fisher suggests three reasons a stock must be sold. Lets discuss them now. # 1 Reason to Sell When a mistake has been made This is the most obvious reason to sell a stock when you realise that it was a mistake to buy it in the first place. When you realise that the actual background (business, performance) of the company is less favourable by a significant margin
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than what you had thought when you had bought the stock, it makes utmost senses to sell it. Also, while an investor must sell his stock if he realise that a mistake has been made, the losses from that sales must never cause self-disgust. And neither should these losses be passed over lightly. You need to review these losses as that you learn a lesson out of the same, and do not repeat the same mistake in the future. # 2 Reason to Sell When a stock does not qualify to be held anymore While this reason might sound similar to the first reason to sell a stock, it isnt. Instead, here we are talking about the good stocks in your portfolio. You must sell such stocks when, because of passage of time and due to fundamental changes in the companies, these stocks no longer qualify to be held anymore.
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How to Know When to Sell Your Stock

That is the reason you must run your investment checklist on your stock portfolio after a certain interval, say six months or a year. If you realise that a companys business has changed for the worse, like on any of the following factors, you must sell its stock. 1. The company is facing increased competition and has thus lowered the prices of its products or services; The company is seeing a deterioration in its profit margins and/or cash flows; The management has made a wrong decision like entering an unrelated business that will could negatively impact the company in the future;

The stocks that you might decide to sell might still be good. But then the newly identified stock might be even better. Its like selling a stock where you expect annual average returns of 15% (which is good in absolute terms) to buy a stock where expected returns are around 20%. But when you are looking to switch to a better company, return must be just one of your criteria. The new company must also pass your investment checklist.

2.

Never sell your stocks if

You think a big stock market correction is round the corner, and that you must book profits on your stocks before the correction takes place. This is ridiculous. Like purchase of good quality stocks must not depend on what the general markets are going to do next, the decision to sell bad stocks must not be driven by this reason as well. The stock has become expensive. Well, this seems a logical reason on the face of it. But wait before you make any hasty conclusions. First answer, what is overpriced or expensive? Wont a good stock almost always sell at higher P/E valuations than a stock that has stable earnings that are not expanding? We hear the talking heads on business channel reciting their predictions for a companys earnings for two years hence. And
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3.

There could be other reasons to sell a stock, but these are the most common and obvious ones. If you find any of your stocks to be facing any of these situations, it will always pay to get out of the same. # 3 Reason to Sell When a better opportunity is identified If you have made the right decisions while buying your stocks, this reason for selling stocks does not arise often. But in case you were to find a better opportunity in another stock than you find in any of your holdings, and you dont have additional funds to deploy, it is a good idea to sell some of your existing stocks to reinvest in that better opportunity.
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How to Know When to Sell Your Stock

the confidence in their voice suggests that they are sure that their predictions will come true. But this is the case till the next quarter comes, and the earnings projections are revised, either up or down. And the same cycle of predictions begins. If the company has the potential to grow strongly that its earnings quadruple in another ten or twenty years, is it really of such great concern whether the stock is currently selling 30-35% overpriced? The stock has moved up sharply and that it cannot go up much further up. This reasoning seems right unless of course you are talking about an Infosys. Anyone who bought Infosyss stock in 1993 and sold it after it doubled or tripled, must be ruing now. This is because the stock has multiplied almost 3,500 times (yes, thats the right number!) since its listing. See, its difficult to predict which stocks will go up ten-fold or twenty-fold. So it is good to stick with good stocks as long as the story is intact. To repeat Fishers words, If the job has been correctly done when a common stock is purchased, the time to sell it is almost never.

Buy and hold Buy and forget

The most successful investors go into an investment with an exit strategy in mind. While buying an investment, they have a clear answer to the question When will I sell this investment? Warren Buffett once said, Our favourite holding period is forever. But given what Buffett has done over the years, perhaps what he meant was, Our favourite holding period is foreverbut, in practice, we will sell if any of a number of conditions is met. You see, buying a good stock and holding it for 5-10 years is a great idea. In fact, most books on sensible investing have advised this strategy for long. In essence, I think it is good advice. But I think it can be misinterpreted to mean buy and holdand forgetand never sell. The results of such interpretational error can be disastrous for investors. To avoid such disasters, it is important that you must periodically review

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How to Know When to Sell Your Stock

The bottom line

As youve probably gathered from the above discussion, selling a stock is in many ways more art than science. Its an art you have to master in order to be a successful investor. I discourage you from ever thinking about selling as a fearful, isolated dilemma that you must face with your stocks. Instead, think of selling as a run-up to smart buying a necessary step as you work towards improving your stock portfolios long term performance. You have my best wishes!

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