What others are doing means nothing.
As a long term investor in the stock markets, researching stocks and buying the ones that meet your investment criteria is often only half the story. The other half is about knowing when to sell your stocks, book your profits (or losses) and reinvest the proceeds. And although the majority of long term investors struggle with the second half, the process for both of them is surprisingly similar. Yet, investors cling on to their holdings, even when selling them and reinvesting the proceeds into other promising opportunities which are staring them in the face clearly make more sense. There is a psychological aspect to this.
First of all, no investor wants to accept that he/she was wrong by booking losses. This emotion comes into play for loss making holdings. In such cases patiently waiting on loss making holdings becomes the default strategy. I am not saying here this is wrong. This strategy may be advocated when the original reasons for making the investment are still valid and all that is needed is a patient wait for a change of technical momentum in the stock. In such cases, waiting for the market to recover and in fact even buying more at lower levels makes eminent sense. In other words, patiently waiting on your loss making holdings makes sense when the underlying business remains fundamentally strong and has a sustainable competitive advantage in the marketplace.
Secondly, in the case when the holding is in a profit position, investors are averse to closing their position and booking their profit in the fear that they may lose out on further future gains. This may not be entirely the wrong thing to do either. This approach is advocated only when the original reasons for making the investment are still valid and no other better opportunity is visible on the horizon.
Here are some questions that will help you determine if and when to sell your stock holding.
1. Do you need the money? If you need the money to cover an unforeseen expense then the choice is clear – you have to sell your position. This is the easiest decision for selling your stock.
2. Have the latest quarterly results been in line with expectations? After the announcement of the latest quarterly results, does the stock still meet your original investment criteria? If so, hold it. If not sell it and re-invest the proceeds in the next best available opportunity.
3. Has there been a recent event that makes a material impact on the business? Has the company admitted publicly to accounting fraud? Has any promoter of the company got involved in scandal that affects the company’s image and its brand? These types of material events are rare but they still occur once in a while. As an investor, when you don’t know the extent of the unknown, it is best to exit your position if you can. Bad news is highly viral and can depreciate the stock’s value so quickly that you may not be in a position to sell your holding at all, because of lack of buyers.
4. Are there better opportunities out there? The business world is a competitive place. Existing businesses who are leaders in their space have to fight hard every day to retain their place. Despite this other upstart businesses are born everyday who either challenge the leaders in existing categories or establish a whole new category altogether. Smart Investors should always be on the lookout for such upstarts and invest in them when they are still affordable, at the cost of selling some of their current holdings.
What to Do?
One thing is clear – in today’s day and age long term investors cannot afford to buy and hold any more. This strategy does not work very well in the Internet age any more, where upstart businesses challenge existing leaders every day. What is required instead is periodic monitoring of your portfolio and constant scouting for better opportunities. If you have the time, inclination and aptitude for doing this on your own, by all means go ahead take the challenge and prepare yourself to do this task on your own. If not, consider engaging the services of a SEBI Registered Investment Adviser (RIA) who can perform this activity on your behalf.