This is the most difficult question for most investors. Decision of Selling the shares or booking profit is more difficult than buying them. I have read many books on investing, and very few have touched the topic of selling or profit booking. Moreover, it is based on individual style of investing and risk appetite. Hence, bear with me as this topic requires more than one Post to comprehensively cover the most aspects of selling.
Reasons why selling is more difficult than buying:
There are two main reasons for this behaviour :
- Unless you are speculating, the purchase price of a stock is calculated based on analysis of the company, and the % of minimum return on investment that one is looking, and when the market price goes below that, you start accumulating it
- Whereas, when it come to selling, even when the stock has achieved the target price, many of us don’t sell them assuming the stock has still potential to grow. Most of the times we forget to book profits, only to repent on our decision to not sell, at a later point in time, when the market crash and you lose all your profits, plus some.
Below are the common worries due to which people avoid selling.
- What if the prices go further high after I sell ?
- Experts on TV and Financial periodicals are telling the markets still have upper potential.
The solution for the above worries are: Its OK to sell the shares when the scenarios mentioned in below section are true, than to lose all your investments, due to inaction. And, believe me experts are ‘NOT’ always right.
Sometimes it makes sense to even sell your holding, at purchase price or even a loss, when you’re sure that the company is going through irrevocable hard times, or isn’t innovating much, or going towards bankruptcy.
Then what should be the major factors influencing sell decision?
- When the markets seems to be running on steroids, that is, when the market’s valuation stretched beyond historic highs (especially indicating an end to bull run ) ?
- Plus, Has the stock has achieved it’s target sell price ? (which would be based on ones average purchase price)
- Is there a better investment opportunity than the current one ?
- When you fell something isn’t right (gut feeling)
First point mentioned above is bit hard to predict. With Experience, keen observation on market trends will help to assess and make informed decision.
When should I stay invested?
Below are some considerations to stay invested:
- When we are just into bull market, or mind of bull market.
- If the stock price is fallen due to temporary causes like strike in facility, rumours, election results Etc., This is the time to accumulate.
- Even when the company might be going through tough time and has impacted earnings, but if the long term vision is intact. And it has good portfolio of existing and future products.
- Sometimes, fundamentally good companies will neither go up nor go down for very long time, seeing this many make mistake of selling that and loose opportunity of making multi-bagger returns. For instance See below chart of Titan Company:
I’ll explain some of the above mentioned points in coming posts in detail with examples.
That takes us to the next question: How should I go about selling, Should I offload all the shares at once or sell them in chunks?
In my next post I’ll cover the approach that I’ve followed in selling the long term investments of mine. I don’t claim this is the best way, but it has worked out well for me, giving decent profits.
I’ve captured some of the my favourite investment nuggets here