Buying stocks is easy, but do you have stock selling strategies? Do you consider your exit strategy prior to buying a company? The exit strategy is just as important as the entry strategy. The entry strategy is something everyone considers, but when do you sell? Do you hold forever like Buffett? For the average investor, holding forever isn’t very practical.
Here are my reasons for stock selling in no particular order:
I believe this to be one of the key psychological barriers that an investor has to break in order to be successful. You have to be honest with yourself and remember your mistakes. Nobody wants to admit they are wrong, but as human beings, we are wrong quite often.
Too often, investors know they’ve made a bad decision but choose to hang onto the losers until they can at least break even or come out with a tiny gain. This usually leads to a larger loss. If that stock is able to break even and we sell at that point, our mind does not recognize this as a shock. This bad decision eventually gets swept away only to be re-enacted at a later time.
If we know that a mistake has been made, sell.
This is pretty self explanatory. If a fashion company decides to start expanding or change its business to the agriculture industry, then we have a problem. Sell.
An investment is defined as
The investing of money or capital in order to gain profitable returns, as interest, income, or appreciation in value. – dictionary
If the reason we are investing is to obtain profitable returns, doesn’t it make sense to sell a current investment in order to invest in a better, more profitable opportunity?
This is not just limited to stocks. You could find better value in real estate, bonds, coins, cars, antiques etc.
Better value knocking on your door? Sell.
Life brings all sorts of situations. If you are in need of emergency cash, there is no real reason to visit a loan shark or bank to borrow money that you may already have.
This is a hard situation to call, but if this emergency is extremely urgent, sell.
Intelligent investors monitor their companies, not the stock symbol. We understand that all companies have an intrinsic value. If you bought a great company at a discounted price and the price has now reached the intrinsic value, you could sell or hang onto it because you can fairly expect to receive a certain rate of return from your intrinsic value analysis and discount rate.
But due to Mr Market’s craziness, say the price of the company shoots beyond the intrinsic value. Selling in this type of scenario is also psychological. Your greed is nudging you, grinning and nodding, telling you “you know it’s going up further”. If this ever comes around, halt, and reread or rethink your analysis and get back to basics. Price follows value, and if the price is pushed up due to speculation and hype, price will eventually meet value.
One example I provide is AAPL. Sorry for picking on AAPL, but not selling when the price hit $200 was to me, ignoring your calculations and going with your gut. The value of AAPL being greater than $200 will probably happen someday, but if that happened today, I think it’s overpriced.
You would be crazy to not sell a house in a bum neighbourhood if someone offered you $1,000,000. You may think you could get more, but when the dust settles, price follows value.
A quick scenario.
Say we need emergency cash and need to sell. We have the option of selling either stock A or B. A is up 20% and B is down 20%. Which one would you sell?
Most people will sell A which is up 20%. Why is it that we hold our losing stocks far too long and sell our winning stocks too early?
This is because we view A and B differently. We evaluate the selling price in terms of gains or losses. Regarding loser stocks, we don’t want to close our mental state by selling and accepting a loss. This leaves our mind in an uncomfortable state we do not want to acknowledge. However, selling at 20% is done without a thought. Why? Because we happily close our mental state on a stock with a gain.
But how about this. If B is down 20%, it could be from a misjudgment in purchase or company or because the company isn’t doing as you expected. Then, why not sell B at a 20% loss, and let A who is up 20% (for a reason) continue to do its good things to give you a greater gain?
Remember, if a company is down 50%, the price has to increase 100% before you break even.
Know when to sell because stock selling strategies is vital to the health of your portfolio.