When to Sell a Stock?

This article was written by James Yeo and first appeared on Investor-One.

No matter how much time, effort, energy and money you put into buying a stock, it will all come to naught if you don’t have a pre-determined exit strategy (especially when things go south).

Although exit strategies vary from investor to investor depending on their method and system, it's generally a bad idea to sell a stock simply because the share price increased or decreased.

This is because you are selling based on your emotional mood swings instead of following a methodical approach.

“I know where I’m getting out before I get in.” **
_- Bruce Kovner, Chairman of Caxton Associates (macro hedge fund)**_

Below, we highlight 3 good reasons that justify selling a stock.

Wrong initial investment thesis

It is common to make a lot of mistakes during one’s investment journey, especially when you are trying to dip into the markets to test out how it feels like at the start.

One of my more memorable mistakes is to invest in a company named FerroChina (now delisted) because they were showing remarkable sales growth over the past few years.

However, to my horror, I realized much later on that the sales mainly come from fake invoices to fake customers and their debt position was horrible.

I didn’t know what to do back then and just held on to this losing stock, hoping for a rebound. In the end, it turned out to be a fraud and my money was all gone. Hence, in hindsight, buying the stock was a mistake in the first place.

Company facing disruptive headwinds

Investors usually turn to earnings reports and various financial metrics to see how well a company is doing fundamentally.

However, while the numbers are important, it is also crucial to pay attention to upcoming disruptive threats. If a company is underestimating those threats or failing to protect itself against them, then it could be time to sell.

One local example would be the mm2 Asia’s acquisition of Cathay Cinemas using a heavy debt load. If mm2 Asia can foresee the rising threats of streaming companies like Netflix and Disney+, this would probably be a deal-breaker.

Change in Personal Circumstances

An investor should look at stocks investing as a means to better your life instead of having to follow any investment approach religiously with no regards for your life stages.

Simply put, it's smart to gradually tweak your portfolio's stock holdings in favour of safer investments such as dividend stocks or bonds for someone getting close to retirement.

Another scenario is where an investor has a low risk profile and is unable to sleep soundly after investing in the volatile crypto-currencies. In this instance, it wouldn’t make sense for the investment because it is affecting his health indirectly.

Conclusion

Most people focus all their energy on how they can buy a good stock and lax on considering the ‘when to sell’ part.

As mentioned above, investors should always monitor their holdings for ongoing developments. This is because buying a stock at a right price is only one part of a successful investment, knowing when to sell will help you be the successful investor in the long run.

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