PFF Panel 4
Seedly PFF 2019
Asked on 02 Mar 2019
When to sell a stock, is only when the fundamentals of the business has changed from your intial investment thesis. If everything else stays intact and you still foresee a long runway ahead, you should actually not look to sell that stock (or rather business), unless to the absolute point where the valuation is way higher than what you forecasted.
For selling of stock, well it really depends on what's the reason you decided to buy the stock. Is it because it has a strong business potential and you see a positive future earnings for it? Or did you purchase for a "quick buck" and it turned the other way? If it's the latter, I would say once it goes 20% down, it's time to sell.
A million dollar question! I think more money has been 'lost' in gains than in losses cause of this!
Head back to the fundamentals and compare it against the watchlist you have on hand.
I recently cut a 1/3 position with a 15% loss without hesitation as i felt that the companies on my hand are of much higher quality. No right no wrong.
I recommend you read this book The Art of execution by Lee Freeman-Shor on the execution part of stocks.
I doubled down on a huge position of mine after it dived 50% cause of this book and now its up 35%.
I would sell a stock on the following conditions (note that these are purely my own reasons and I don't encourage anyone to mimic it)
Fundamentals have declined
Profit is in the double digits percentage and valuation is still lagging behind price (I will sell a portion and wait to re enter)
Profits are at least 3 years of expected dividends
My cut loss limit has been hit (which is usually 10% below purchase)
10 day MA cuts under 200 day MA if the stock is range bound (for stocks that are meant for trading)
These scenarios warrant a sell trade for me.
When should you sell a stock?
Only sell when fundamental of the busness deteriorating.
There are ups and downs in every business, do not judge it by quarterly. Give them sometime to execute.
Before selling, always go back to your investment thesis. Does it still stand. If not, cut it off.
If stock price drop due to temporary noise, dont sell! Rather you should buy more!
Let me start of with the loss part.
This is a question of risk tolerance and your own strategy. What does your strategy tell you?
If you are a day trader/technical analysis trader, then you need to evaluate whether the current analysis is still valid. Let's say you buy on the analysis that it is uptrending stock. An example cut loss situation would be when the stock is unable to break new highs and breaks below the previous support low.
If you are fundamentals investor, then check your analysis of the company. Was there any change in the financials that require you to re-evaluate if this is a good company to invest in.
I would prefer to keep holding on till the analysis is no longer valid as well. If you are a funamental analysis investor, long term investor, then just hold on collect dividends or lock in your capital gains when you analysed that the stock is way overpriced.
I understand that it sounds logical to go with a percentage made and percentage loss basis. But that's not what usually happens.
Most grab small % of profits and only surrender when its huge % of losses.
There are many trading philosophies but I have a scenario for you to think through. Imagine you owned this stock Best World.
If you check up the recent prices, the original % projection to take profit and sell would have been blown out of the window simply with volatility and a gap in price movements. How to react then??
For long term investing from a portfolio perspecive, I've an answer in this video sharing "When to sell from equities"
I would think that knowing the reason to why you bought the stock and what investment strategy you have adopted is quite important also. Once, the "why" is there, I believe that answering the "when" is a lot easier, since your decisions are guided by your underlying investment principles, risk profile and reasons / thesis for buying the stock.
Although most people (including myself), would not want an answer that starts with "it depends...", i feel that this kind of response is better rather than giving some hard and fast number on when you should buy and sell. Personally, I feel that numbers are just representing sentiments, which are tied to events going on in reality. Finding out the reasons which drives those numbers to me seems more important than just fixing a number and then playing hard and fast with it.
You can check out this article also!
You should sell based on the methodology that you used to buy that stock in the first place.
Eg. if you bought it cos of its dividend yield, then it might be good to sell when the yield drops or when you foresee the company running into financial troubles ahead which would make them unable to continue their dividend payments. example to look at: Starhub.
If you bought because it was undervalued, then you should sell at fair value or when prices are overvalued.
If you bought because it was a growth stock you have confidence in, then why sell? Unless the growth has stopped, or you made a mistake in the first place.
Also sell when your original thesis is no longer valid, or when you discover a mistake.