There are a lot of good reasons to sell your stock. One popular reason is when the price appreciated considerably well as per your expectations. Another reason could be underperformance or bad quarterly results of the company. The investor may also be in pressing the need for money. However, when it comes to selling the stock, the investors do not act rationally.
According to investing legends like Buffet and Phisher, good stock should never be sold ever.
1 A mistake has been made
When a mistake has been made in the original purchase and the investor realizes that the factual background of the company, he should sell his stake. To a large extent, these decisions depend on the honesty of the investor as well.
When the stock is bought by an investor it becomes dear to him and he doesn’t want to sell the stock even if the reasons that convinced him of buying the stock no more hold true. The value of the share may come down in such cases where the investor thinks of adding in more shares in order to average down in the investment. However, the investor fails to realize that he must move on and not fall in the trap of Sunk Cost Fallacy.
Such funds tied up in a particular stock can be used on some better investment decisions as every rupee will have an opportunity cost tied to it.
So its time to keep the ego aside and agree that a mistake was made. With such an agreement, the investor must move on to another investment.
I have had a similar situation when I bought 300 shares of an Oil Company in 2017 because of its low P/E ratio, good dividends, and other sound fundamentals. Later I released that the stock was not going anywhere, not because the company was unsound, but because the sector, on the whole, was doing poorly. Another reason for selling was the debt level of the company. Some investors may argue that oil companies usually have a high debt ratio, however, if your comfort level doesn’t allow you to invest in a company with high debt, irrespective of the sector, you should move on to the next investment.
Remember, more money has been lost by investors holding a stock they really did not want until they could “Break Even” than from any other single reason.
On a sideline, an investor must also maintain an investor journal that tracks the stocks you invested in and the reason it was bought in the first place. This would ensure that when that reason is no longer valid on the stock, one must sell it even if the stock becomes dear.
2 Company Growth Exhaustion:
A company after years of growth may reach a point where prospects of its market are exhausted.
In such cases, the company only progresses at about the same rate as the national economy does. In such cases, if the company has no incremental profits and doesn’t increase dividends, one can consider selling.
3 Urgent need for money
If you are nearing retirement or have an expense that you foresee, you can sell the stock. Your reason may be one of the following.
- Medical bills
- Financial/identity theft
- Car repairs/ Home repairs
- Economy crashes
- You lose your job
Investors are advised that they should invest in stocks only when safety cash for all the above items and needs are kept separately. If there is still a pressing situation to meet those expenses, then you must not think twice before selling.
However, if you are in your early thirties and have cash at hand to take care of daily needs, one must not sell a sound investment say in a fear of a bear market.
4 Better investment opportunities
AS I said above, every rupee you invest has an opportunity cost that you are letting go.
Opportunity cost is the loss of other alternatives when one alternative is chosen. Say, you have invested in company ‘A’ in which you expect 10 % return and another company ‘B’ has an ability to earn 15% return, it is clear that by investing in Company ‘A’ you are letting off the opportunity to earn that extra 5% return that you could have got in Company’ B’. If you think there are better opportunities compared to your cost, then you must sell your current stake.
5 You have achieved a specific goal
So you thought I would advise you to sell tour stocks when you have achieved your goal?
A big No! If the prospects of the company are still sound and you don’t need the money right away, why not let the stock appreciate your share value and that too tax-free. I agree people invest with goals. One can still hold on to stocks that have reached the goals and still have sound business quality. You should do it if you don’t have to realize your goal immediately.
6 Unwanted management changes
A new set of executives may not measure up to the standard. They may not have skin in the game or may be interested in the stock options or high salaries only. YOu may also encounter a case where management is clean but not qualified or able enough to handle the organization. Whenever you get such hints, consider selling your stake immediately.
However, if you feel the new management is as sound as the promoter owners of the company, you should stay put.
7 The entrance of new strong competitors
This point may be debatable. A strong competitor may not always ruin your profits, but it definitely ruins your prospects to earn more in the future. Therefore whenever you select a stock, you must make sure that there is some sort of competitive advantage revolving around it. A competitor can chase and kill the company in no time. Take e.g. of Jio. When Jio launched its telecommunication services, it was a revolution in the industry. It gave its customers offers that they couldn’t resist. A plethora of customers joined the network by switching from their old network. This ultimately led to a merger of loss-making companies while others still have their heads under the water.
However, if you feel that a company is protected by competitive advantages, then the investor can stay put. E.g. Apple still earns profits even after a lot of new phone manufacturers hit the market for the first time.