When should you ‘Exit’ a stock ?

People always talk about which stocks to buy, at what price to buy, Valuations, P/E, P/B and what not! A lot of so called ‘Fundamental Analysis’ is done in the background. (By browsing various websites like Moneycontrol.com & Screener.com to name a few (BullShit)

But, wait a moment! Just think, the amount of research you do while entering a stock, do you do it while exiting? Or do you book profits when a stock is up 60–70% or at its 52 week high?

Let’s find out!

Imagine a scenario…

You bought 10 stocks of a company at price Rs1000 today. Further, let’s also assume that you have done a good research and the stock is fundamentally very strong.

Next morning, the stock price zooms to Rs. 1100 (+10%). What will you do? Will you sell the stock and exit?

Now, let’s move to day two. The stock price now rose to Rs.1210 (Wow! +10% again!).

What will be your next move?

In general, as per Investment Psychology, when prices of a stock rise like this, ‘greed & fear’ takes charge of your actions. Here, you might think that let’s book some profit as you have already gained Rs. 210 per share (+20%). What if the stock prices fell tomorrow? It’s better to book some profit and will enter again in the stock when the price is low.

But, while doing so you are missing out few points. Let me highlight them:

1. You have researched the stock carefully and the stock has the potential to give huge returns. It might become a multi-bagger in the future. Why do you want to book a profit of +20%, when you can get +1000% profit?

2. You might also be thinking that you will enter the stock again when the price is low. What if the stock price never comes down? I mean, the company is fundamentally strong, and might give brilliant results in future. Why do you want to jump from the running train and catch it again?

3. Let’s imagine the scenario that you re-entered the stock. Do you know in such scenario you have to give 4 times the brokerage and other charges? I mean, 2 times when you first bought and sold the stock. And next 2x, when you re-enter and sell in future. Total 4 times brokerage. (Ok I know this will not hurt you much if you have a discount broker (zero brokerage) on Equity Delivery.

4. Lastly, do you know that you have to pay capital gain tax of +15% for short term gains?

Overall, it’s not logical to sell the stocks if fundamentals are strong just to book some short term profit. Look at the bigger picture. Haven’t you ever wondered why great investors like Warren Buffet, Rakesh Jhunjhunwala always invest for long term?

Next, you might say that the above case is a typical situation. Chill! I didn’t explain when to sell the stock yet!

Here are three cases when you should actually sell the stock.

1. When the fundamental of the stock changes: For example, the company starts underperforming quarter-by-quarter, the non-performing assets (NPA) of banking companies starts increasing at high rate, etc.

2. When you find a better stock: If you find a company with better fundamentals, better performance and you do not have extra money to invest in your budget, then you should sell that stock and grab the better opportunity.

3. When you need the money: Do not sell the stocks just to keep the money in your saving account. Sell the stocks when you need the money like paying for a new house, new car, your kids’tuition fee etc.

Overall however, keep this in mind that the holding period of a good stock is ‘forever’.

Invest for long term and enjoy the ride!

The ‘good feeling’ that you get if you are holding a MRF or Eicher Motors share will make your life longer by say 5 years! Just kidding. Bad Joke!

Cheers!

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