This is my 3rd note in the series and is a result of emails that I got on the topic. Many readers shared their experiences of how they were once invested in some stock and missed on subsequent upmove as they sold out early due to varied reasons.
This made me introspect, relate with my own experiences and then I thought that actually a key component of When to sell is to try decide WHEN NOT TO SELL !
and hence this post…
For interested reader, here is a brief on what I had covered in the previous two notes on the subject
Part 1 – highlighting the importance of selling and how less attention it gets when compared to buying.
Part 2 – how to sell better based on what kind of a investor you are – momentum trader, pure fundamentalist, compulsive, opportunist or techno fundamentalist.
As mentioned in previous posts, key differentiator of highly successful investors is that they sell better than the others… or in the current context it would mean…
They hold it better than the most !
Stock market is unique. There are:
- too many participants – traders, investors, retail, institutions, long only funds, hedge funds etc, with varying opinions and money power; and
- too many variables – global and local politics, economy, regulations, competition, interest rates etc, that can have significant impact on stock price movements… especially in the short term.
The result –
Our greed and fear is tested all the time and most of us end up acting in haste
I have done it innumerable number of times and I am sure many of my readers have too !
Listed below are some common situations that I believe force many of us to sell in a hurry.1. Stock under performing the broader market
Nifty has moved up by 1% and your stock has not done anything. The worse, stock has declined by 1%.
The frustration builds up as the days pass by and the stock continues under performing the index.
While trying to address this, one need to keep in mind that every stock moves in pockets and it’s impossible that any stock can keep outperforming the broader markets every single day for extended periods.
There is no logical analysis to handle this and one just needs to ignore short term under performance of stocks and stick to his own investment thesis.
You should sell because of your own investing style and strategy and not because it’s under performing index for some time.2. Stock under performing your friend’s stock
This is the most common but the most difficult situation to handle.
As they say in hindi, “uski thali mein meri thali se jyaada ghee kaise?”
There is always this underlying desire to outdo peers and prove our intelligence over them. However, in the process we most of the time end up creating mess.
To handle this, the only and only way is to accept that everyone has different financial capacity and has different risk aptitude. One needs to keep a faith on own strategy and analytical abilities.
Yes, there is no harm in keeping a watch on anyone else’s portfolio and the same can definitely be used to improvise own’s analytical abilities. However, the stress to outdo peers is simply not worth in the stock markets.
Everyone needs to operate in his own circle of competence !3. Global events are making you nervous
Dot com bust, financial crisis, Brexit, US elections, Indian elections, Nuclear war with North Korea, US China Trade uncertainties, Coronavirus, Fed interest rates etc etc etc
There is always something or the other happening making us nervous.
The facts remain –
- No one can predict when the major correction will happen
- Even if they happen, major corrections don’t normally sustain for extended periods
- Most expected events either don’t happen or don’t have the expected impact on the stock markets
- Stock prices over period is a function of their earnings and rarely anything else
“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” – Peter Lynch
This in no way means that one can be complacent. One just needs to keep in mind that “you can neither catch the top nor the bottom” – irrespective of how much we may want to believe otherwise.
So the best way is to try avoid the noise and face the correction whenever it happens. Yes, there would be losses at that time but hopefully the earnings before and after would cover up much more.4. Media/ analysts are asking you to sell
In my experience that is the worst time to sell. History tell us, they have rarely been obliged by the market.
Media houses due to their reach to the retail investors can surely impact sentiments around low volume stocks for a day or two and nothing more.
Brokerage analyst’s (sell side) buy and sell is normally centered around excel sheet calculations that in turn gets significantly influenced by his own personal likes and dislikes. Buy side (who actually buys/ sells and hence influence the stock price) have their own strategy/ views around a stock and use sell side research to mainly gain information. They rarely act based on the sell side research.
Hence, most of the time you will notice that media/ sell side creates impact only in the very short term. If your underlying investment thesis continues to hold true, there is no reason to sell out.5. One bad quarter or a piece of negative news is making you doubtful about the future
Businesses neither operate in a linear predictable environment and nor are they run by robots.
They are run by humans in a highly dynamic environment. There can be an error of judgement, loss of some customer, a poor batch of production, lapse on some statutory compliance, inquiry by regulatory bodies, a star CEO deciding to leave, aggressive vision/ marketing by a competitor, etc etc etc
HDFC Bank, Kotak Bank, Infosys, TCS, Divi’s, Dmart, Jubilant Foodworks, Nestle – the best of the compounders have faced these kind of issues but have successfully come out and continued to generate wealth for the investors.
You might say that this is all in a hindsight and at that particular moment one doesn’t know – so it’s better to be safe than sorry !
I agree and nowhere I am saying that one should just ignore. Yes, one should definitely pay close attention to these kind of events. However, it’s very important to understand management’s explanation around them and then trying to figure out whether the event is one off or can lead to permanent structural damage.
One still might end up taking a wrong decision to hold or sell but then atleast it needs to be a more calculated decision.6. Sell now, buy later
Sell now to book profits and buy later at lower price when correction happens. Reasons –
- Quick profit booking; and/ or
- Stock seems overvalued;
Above is fine for traders but doesn’t work for most investors, especially for the long term fundamental buyers. Reason – no one knows the top or the bottom.
- If you were right and stock starts correcting after you sold out – it becomes difficult to buy something that is declining
- If you were wrong and stock continues increasing – it becomes impossible to buy something again at a price higher than at what you sold out
The best strategy is to sit tight on your winners and sell them only when there is a breach to your underlying investment thesis.
I am reasonably confident that all of us have experienced and can relate with the above situations.
We all have acted in haste many a times – out of fear, out of greed or being over/ under confident about ourselves.
The key is to have faith on our own strategy and ignore the NOISES.
Illustration Credit: Vecteezy.com
Thanks Nitin. These are great inputs.
very well explained Nitin
u may like to adjust the font and give a snippet on twitter.
the effort to reach a hyper-link is excites people who have never been through lessons in wealth creation through Portfolio Structuring
had it been a busy day, i might have just skipped reading this article. Even though it was a 2 min read for me… I hope i was able to communicate my opinion clearly… we can discuss though!!
well written Article. cheers!!