The internet is flooded with material on what to buy and when. However, you will do justice to all that research, if you’re able to sell on time.
Sell too early and you lose on your potential upside. Sell too late, and you may book a lower profit.
How do you then decide on when to sell?
In the most simplistic form, a stock’s share price is a combination of the company’s performance (Sales, EBITDA, Earnings, Book Value) and valuation (Price-to-Sales, EV/EBITDA, Price-to-Earnings, Price-to-Book-Value)
You could either sell when the company’s performance starts to falter or deviate from the expected
Or you could sell when the valuations get so high that they can’t go higher, or when they’re so high that any shock can send the price tumbling down
1. Deteriorating Fundamentals 📉
You buy a stock when you expect a strong performance from the company over your time horizon. This drives higher earnings and better shareholder returns
Moreover, when the company’s performance improves or accelerates, more people want a share of the pie; and they’re also willing to pay a higher price for each rupee the company earns. In short, better valuations. This drives the stock price further up
However, when things start going south, earnings and valuations both get impacted, sending the stock into a downward spiral
Ideally, you’d want to get rid of your holding and book a profit before such an event. Sometimes though, when deterioration is short-lived, and the damage is near-term, investors tend to look beyond it and valuations hold up
💡 Sell a stock when you feel the company’s fundamentals are going to see deterioration for a period that will be beyond the market’s comfort and forgiveness!
2. Peak Valuations 🌋
Simply, valuations are what investors are collectively willing to pay for what the company will earn in the future
When the company’s earnings go materially higher from now, and at a rate that’s higher than in the past (and/or compared with peers), valuations tend to go higher as well. However, when performance peaks, valuations tend to peak as well. And if performance deteriorates, valuations can be pretty unforgiving
Even if valuations peak (and don’t really fall), the upside in your stock gets hinged on earnings growth. In a way, you’re running on a gear lower than you ideally can
💡 Sell a stock when you feel there’s a risk to valuations, or when the valuations are so high that any nudge to the company can send them lower
3. Taking Losses Like a Champ 💪
A lot of times, selling isn't just about making a profit. But it’s also about accepting that you’ve gone wrong and taking a loss
Often, people wait for a loss-making investment to at least break even before selling. However, there’s more wisdom in taking the hit (especially if you know you’ve gone wrong), and investing that money elsewhere - a place where it has a higher potential for growth
💡 Sell if you’ve gone wrong, take the hit and move on; instead of waiting for the universe to align with your wishes of breaking even
The fact is that there comes a time when every deal must be closed. When investing, selling is as critical as buying.
If you take a methodical approach to invest, like the ones we've discussed above, you'll be able to take better decisions.
However, it's not simple to monitor everything that's going on, especially if you are no expert. The good news is that you can hire specialists to do it for you!
💡 Just visit Rupeeting. Invest in one of our carefully crafted thematic portfolios! These are rebalanced quarterly, relieving you of cumbersome tasks like timely profit booking.