Is it time to Sell a stock?

Mon, 28 Mar Pre-Open

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An important aspect of investing is to pick the right stock. One should invest in companies that are fundamentally sound, have an excellent management and are available at cheap valuations. Once one buys such a company then the idea is to hold on to the investment for a long term to maximize returns. But a question that burns in any investor's mind is "how long do I hold on to the stock?" Or in other words "When do I 'Sell'?" There is no right time to sell a stock as it is not possible to time the market correctly. Though there are quantitative experts who do call the markets correctly. But then everyone is not a genius. So it is important to highlight that there are certain situations where selling a stock makes more sense than to hold on to it. A few such situations are:

1. Fundamental changes: The company has undergone major business changes. And the fundamentals no longer remain sound. Such a situation definitely warrants a sell on the stock. Examples of business changes could be a foolish acquisition by the company that would hamper its growth. Changes in the top management and questionable decisions by the new management. New competitive threats to the business. The company's focus and growth is fading or crippled.

2. Valuations: Sometimes the stock prices run up quite soon. And the valuations start to get stretched. One can hold on to the stock if one feels that such stretched valuations are justified. But this is rarely the case. Therefore, another situation that warrants a Sell would be when the valuations of the stock get stretched. It is better to sell it at such times. One may think of re-entering the stock when the valuations become cheap again. It is good to remember that thanks to the erratic nature of Mr. Market, such opportunities do keep coming up time and again.

3. Wrong thesis: "To err is human". As human beings we are prone to making mistakes. A key thing one should remember is that there is a possibility that one's analysis is wrong. At such times, rather than sticking on to the stock like gum, it is better to accept one's mistake and sell the stock instead. If one thinks that one's rationale for buying the stock is wrong, or that the valuation expectations were too optimistic or that one did not foresee the risks correctly. Under such circumstances it is better to Sell the stock and get out.

These are just some cases where selling a stock is better than holding it. It is important to note that "fear" should never be the reason to sell. Markets will go up and markets will go down. But there is no reason to panic and sell just because others are doing so. As a wise investor once said that "investing is not for the faint-hearted".