6. When to sell your Stocks
You have done all the hard work in trying to find a suitable stock to invest in your portfolio. Supposed you have bought the stock and it has appreciated 15% in 3 months. Is it time to sell? Or should you wait for the stock to appreciate further? On the other hand, if the stock that you bought has dropped in value by about 10% for example, should you sell it immediately for fear of incurring further losses? Or should you hold on to it with the hope of it appreciating back? These are essential questions which many investors have been struggling with at various stages of their investment. This chapter aims to explain the best time to sell a stock to maximize your profits and minimize your losses.
First, before we attempt to answer the question of when is a good time to sell, we
must first ascertain the reason you bought the stock in the first place. It could be
that the company is generating huge profits with a healthy balance sheet and even
though its PE might be higher than its competitors, it more than compensates for it
with a much higher growth story as shown in its PEG ratio. Therefore, the time to
sell this fast grower is when growth starts to slow down and valuations such as PE
still remain high and expensive.>/p>
Another example why you bought a particular stock could be because it has a relatively healthy financial strength and its PE and PEG are relatively low compared to the industry. Therefore, when its PE or PEG becomes much higher, it means that the performance of its earnings is not keeping up to the increase in stock price and it might be time to sell the stock. Also, if the balance sheet suddenly becomes more risky, such as the company taking on a huge amount of debt all of a sudden or if its current ratio drops below a healthy margin, it might be time to consider letting go of this stock.
As you can see, there is not only one reason to sell a stock. It really depends on the reasons that you bought them in the first place. That is why the valuation table earlier in which you summarized your analysis comes in handy. If things start to change negatively, this table when updated helps to pick some of these problems up. Therefore, the key to knowing when to sell is by keeping update on the performances of the company through analyzing its quarterly financial statements and comparing this new analysis to your original or previous one. In doing so, you will be able to identify negative changes to the original business that you bought. If these negative changes, such as a drop in growth, persist for a few quarters to a year, it will be probably time to sell the stock before more people start to realize this trend and sell off their stock as well, pushing the stock price down. However, if the positive growth story continues to persist, stick with it even though the stock price may not be performing as well as you might have expected. It is because the market values stocks in the short run from consumer sentiments, which are based on opinions that may be incorrect, but fundamentals determine the stock's price in the long run.
To summarize, sell a stock when its story has changed negatively from the last time that you analyzed it. If positive signals continue to persist, hold on to this stock and do not sell it even though it may have already gained 15 to 20%. An undervalued stock with a great underlying company has the potential to give you a much higher return and these do not come very often. The key is to be disciplined and update your analysis whenever the quarterly statements are released to stay abreast of the company's latest performance, thereby enabling you to make a much better investment decision.
The last chapter of the tutorial talks about how to Manage Your Stock Portfolio.
Follow my analysis of stocks in the market. This includes my personal
opinion of stocks which are either already in my portfolio or those which
are currently in my watchlists.