One of the most common questions I often come across from investors is “When should I sell my stocks?”
To discuss that, we first need to talk about the worst reasons to sell a stock. And unfortunately, these are most commonly implemented by investors.
Being in an advisory business for the last 9 years, many investors have I have personally come across who sell stocks for all the wrong reasons.
Let’s take a detailed look at the top 3 worst reasons for selling a stock.
Reason 1: “Because the stock went up”
It is undoubtedly challenging to hold a stock if it is on an upward movement. And when the stock price rockets, the first thing many investors think of is booking profits. In our view, one should do it only if the original reason behind buying the stock is no longer valid, i.e. it is too overvalued, or the fundamentals have deteriorated. In simple terms, if you think that the current market price is too high to justify the value of the stock.
If we go by the history, many companies have delivered 50-100-500 and even 1000 times returns in the past few years such as Wipro, Infosys, Page Industries, Eicher Motors and Maruti to name a few. Now, there would be few investors who might have secured 50-100% gain, but those who remained invested created fortunes.
Reason 2: “Because the stock went down”
Rather than looking at market corrections as opportunities, many investors view it as a time to abandon a sinking ship. Ideally, one should never sell a stock when the stock price has fallen. If you feel your research is robust and exhaustive, and you believe that the XYZ stock is worth at least Rs. 100, you should not be worried even if the stock price falls to Rs. 50. Of course, this holds valid only if the fundamentals are intact. If you think the fundamentals haven’t changed, then a falling stock price should be seen as a great buying opportunity rather than a reason to part away with the stock.
Let me give you an example of L&T here. On 28th May 2019, the stock price of the Indian multinational conglomerate touched a 52 week high of Rs. 1607. However, due to weak market sentiments in the last two months post the FPI surcharge announced in the budget, the stock corrected heavily and touched Rs. 1,307 on 13th Aug 2019, a decline of 22.95%.
Now just because this stock is down by 22.95%, it does not mean that it is time to sell this stock. If fundamentally nothing has changed,
Reason 3: “Because the business is facing temporary headwinds”.
The moment there is a temporary headwind, the first thing few investors think of is to sell and exit.
Talking about the headwinds, it can be an exit of a top-level person from the management team or a temporary slowdown.
Stock markets rise on account of positive news and vice-a-versa. However, as a long-term investor, it is vital to understand whether the news would have a long-term impact or if it’s just a temporary hiccup.
Having talked about few worst reason to sell a stock, many investors would have this question: So which are the good reasons to sell a stock?
One should only sell a stock if there’s a change in fundamental and the investment thesis no longer remain the same or if one needs money or if there are more lucrative opportunities available. The other reason, which we feel depends from individual to individual is portfolio rebalancing. Definitely, a change in stock price should not be a reason to sell a stock.