What steps have you taken to ensure that – “it’s the right time to sell the stocks?”
If you can’t answer this question, now’s the time to take a step back and reassess your situation. Conversely, even if you’ve taken some action, there’s still a good chance that there are still improvements that you can make.
In the past, I’ve discussed many topics like analyzing, books, portfolio optimization etc.
But I never touched this topic – How to determine the right time to drop a stock in your stock portfolio.
Today, I’m going to make my point through 7 situations that might be the right time to drop a stock in your portfolio.
And at the end – I’m also going to talk about the filthy emotions that stops you (and me) to sell any stock (even if the above 7 situations happens).
Stock Market is a really, really a wild place. Many steps in, many steps out but the market remain intact forever.
That is why, there is need to understand every in and out of the stock in your portfolio. Most importantly, you need to perfectly determine when to sell a stock to reduce the risk of losing your money.
And I bet, it need a great amount of emotional discipline. I’ll make my point at the end – for now, just take out the crux.
Here’s 7 SITUATIONS that makes me drop stocks from my portfolio:
- Stock is going to drop down.
- Stock is Saturated.
- Stock is no more useful.
- You found much better opportunity (and you’re out of funds).
- You are not certain about the company’s future.
- Your portfolio is too too too too much diversified.
- You’re gone bankrupt.
And here’s the explanation:
#1) Stock is going to drop down (even if the long-term underlying business remains intact).
Sometimes possibilities are high that the stock is going to drop down in next few day or weeks like in the recent case of ICICI Bank.
ICICI Bank delivering deflated profits due to high NPA’s. First quarter result was about to get aired.
It was highly certain that the Bank is again going to deliver deflated profits. (Mark the word “highly certain” – everything works on decreasing the chances of not getting wrong – more on this later).
But on the other hands, talks of ICICI prudential kept murmuring all over the net.
Again, it’s highly certain that the company is going to benefits from this IPO because of high amount of capital infusion and long-term sustainable float generating business – “Prudential IPO”.
Side note: Get more on Float Generating Buz here.
SO here’s the conclusion deducted from above 2 controversial shits:
Chances are high (due to high NPA’s) that the ICICI bank is going to drop down but still due to Prudential IPO – long term company’s underlying business remain intact.
Simple deduction: SO it’s good to sell it before it goes down (due to bad quarters) and buys it again after perfect reflection of downfall on its low prices (as long term economy remain intact).
And here’s my moves:
I already have ICICI Bank at cost price – INR 216. Then further sold it at 260 (before quarter results) and again bought it after it dropped down to 240. CMP is +270 (due to IPO exposure).
The main emphasis is on selling out before others smell out that (most probably) the stock is going to drop down further.
So despite price range of 216 to 270, I gained out more than the difference oh the range (minus short term 15% tax on gains).
Yes! consider taxation on short-term gain before you take any steps. I was in overall gain even after the taxation (of 15% on short-term gains).
“Sowmay, so you also trade for a short run?”
Yes, I do, if the profits are certain. I mean “highly certain”.
Mark the word – It’s impossible to perfectly predict the future stock prices. Many analysts just estimate…….. but higher the relevant probabilities, more profitable your moves will be.
“Then what if the stock (ICICI Bank) hiked up further after I sold it?”
That’s why – always keep few wallet-out opportunities. I had few stocks on my watch list in which I was interested in investing (but actually, I was not able to – because of low funds availability).
If the stock (ICICI Bank) hiked up (instead of estimation of dropping down), I would have invested the capitals in next best available bargain bets.
So always keep another opportunity ready – in case you’re pulling funds from any stock (because what if the stock hiked up after you sell it) or else don’t do this. Just don’t disturb your portfolio stocks.
#2) Stock is Saturated.
That’s something everybody knows.
Book the profits when the stock is at its peak, right?
But the real question is – How to estimate the right peak/saturated price?
That’s something difficult. Estimating the target price is terribly a hard task.
I’m just amazed why experts keep tipping out about stocks to ordinary investors with “perfect target price”.
It’s something impossible.
I had explained the thing in one of my previous answer for – What is the best time to book profits in share market? (Answer is fully copied below – in case you don’t have time to go through above link).
There is no yardstick criterias for “right time to book profits”
If you’re a person who intent to get profited out of price fluctuations in short run – without giving a shit to fundamentals – then you should look over the charts and figure out the graph trend.
However, in case of fundamentals – predicting the right time is quite cumbersome.
Fundamentals changes from time to time. And a fundamental investor will always seek to book profit when the market price matches with the underlying fundamental of the company.
…..but with the outcome of product from a tough competitor, fundamental drop down (like in case of Airtel and Jio).
…..and Incorporating an assisting branch (to the prime company) in market, fundamentals shoot up (like IPO of ICICI pru will assist ICICI bank to get more funds).
Fundamental changes, so do the target price.
Best practice here you can do is to control your emotion and keep a restriction on your selling behavior. Like I’ll sell this stock after I gained 30% (even if the market is bullish on that stock).
This behaviour will help you to keep yourself disciplined and protect you from unwanted risk of losing money.
Have you noticed the bold text :- “Fundamental changes, so do the target price”
In short, there are 2 ways to find out saturation point of any bullshit stock:
- Time to time review stock’s fundamentals like:
- Had company’s underlying business changed due to any unwanted moves?
- How sustainable are company’s top and bottom lines?
- What will be the impact of competitor move on the stock?
- Is Industry facing any drawback?
- et cetera.
- (In case you don’t time to do above all bullshits) Keeeeep a conservative behavior and limit your target limit with great Margin of Safety on actual Target price.
- “Keeeeep a conservative behavior” – don’t get flooded away by market sentiments. Sell the stock even if the market, experts, analysts, your goddamn inner soul/your grand grand grand father is bullish on the stock.
- “target limit” – Like: I’ll sell the stock after it gained 20% or I’ll sell it after 3 months regardless of the price or I’ll sell it after my overall portfolio gain exides x%. In short, restrict yourself.
- “Margin of Safety on actual Target price” – whenever you buy a stock, estimate a target price which perfectly reflects the company’s underlying business and then keep a target selling price bit less (like 20% below) to maintain an MOS which eventually absorb the losses – if the fundamentals deteriorate.
#3) Stock is no more useful.
This is where most of the unsavvy Investors fails and lose a lot of money.
There are some instances which make the stock nothing more than a crap. It can be anything – company indulged in any scam or product of the company is infected or whatever.
In this situation, you should take you moves as fast as possible – because there will be a heavy sell off when the general public get aware of the problem.
So always be the early bird and be ahead of others to get yourself on the safer side.
I’ve some examples:
This company have partnership with Salman Khan brand – Being Human which help them to maintain high margins but……
LC after LC.
Recently, due to tiff between their contract the stock lost its 80% of the value.
However, everything settled right now.
That’s a known fact that the company is going through a bad time.
We also had a heavy discussion of this stock in our facebook group too.
Due to the row with Target company, this company lost almost more than 50% of market value.
However, to me – now it looks like a good opportunity at CMP (it’s not a advice).
Here, don’t underestimate the other side. A tiff creates uncertainty – uncertainty creates fear – fear create heavy sell-off AND if the heavy sell-off went far beyond than what it should be = Bingo! Undervalued stocks.
Even a crap have its own value.
But it needs good amount of understanding of the company, industry and market so don’t try to indulge in this type of stock investing.
4) You found much better opportunity (and you’re out of funds).
This is also one of the reason when I sell my stock which I not intent to. Just because I found much better opportunity.
We don’t have much funds like Rakesh Jhunjhunwala or any big investors have.
That is why, as a rational investor – we should consistently switch off our funds from one stock to another – whenever one finds any good opportunity than existing one – to get most out of your funds.
A few months back, I was highly bullish on NMDC since it had announced its buyback offer and still I’m but unintentionally, I had to sell the stocks out of my portfolio.
Because I found much better bet opportunity.
I bought the stock at 90 and hold it till went up to 102:
That’s a stellar return of 12% in couple of months and it have potential to touch 120 but still have to sell it because of much better bargain opportunity.
Additionally, my biased decision of not holding government stocks also worked a bit here.
Disc: don’t construct it as stock advice.
#5) You are not certain about the company’s future.
Even after a long time since I started investing, I solely depends on market gigs of analysts on stock and infuse my funds in the stock.
Yes! I do understand a bit about stock on the basis of what analysts are saying but later on I discovered that it’s not the right way for investment.
I may invest the right price, will not able to know the target price just on the basis of analysts views because it changes with the change in economic value.
That’s where the time to sell the stock even if the profit is low or flat.
Because I was not assure about the company’s future so how will I determine the perfect price to sell it.so how will I determine the perfect price to sell it.
In simple words, define your “Circle of Competence”
I’ve tracked many stock portfolios (including Nemish shah, Bakshi, Jhunjhunwala) and one thing in common I found in every portfolio is -there were no common stocks (very rare) in their portfolios.
They all know there areas of competence and they just stay inside it. That’s the secret of their wealth.
So you need to be certain about the company future in which you’re investing your money or else sell your stock now and find any other stock that matches your circle of competence.
#6) Your portfolio is too too too too much diversified.
Do you know a secret of Great Investors for getting most out of their portfolio?
However, it’s not going to be remain secret anymore because I’m going to reveal it now.
In fact, it will not sound cool but Yes! still you had to read it because you had no other choice.
Finally, I’m revealing it – Are you ready?
Let me cut the crap and directly hit the nail:
“They keep things simple”
I already said – that’s not going to sound cool. But you had to accept the reality.
What does it mean in context of stock investing?
You need to keep your portfolio simple and conservative.
Keep less but quality stock. Quantity doesn’t matter, quality do. Because not all the stock outperform your portfolio.
Not all the answers on Quora are boomed up trendy.
What the heck was this?
A quick example.
I joined Quora around 8 months back – wrote over 490 answers (dated – 25) and governed over 1 million views on those goddamn answers.
Not all the answers helped me to get that 1 & six O views.
If you look over my first 100 answers, there were hardly any answer which joined the club of 1k (that doesn’t even constitute 1% of the overall views).
And this answer alone got me more than 10% of my overall views.
The whole reason for dictating this trash is not to brag or to publicly announcing myself, instead – here, I want to make a point.
Not every stock outperform the market.
That is why you need to keep your funds concentrated on the stock which are most likely to give a stunning results instead of many stocks which are or are not promising to give good results.
Even if you have 100 excellent stock portfolio – selection based on excellent value criterias or even if (jokingly) they are certified by Warren Buffett still you should reduce the count of stocks in your portfolio.
Because you need to make your funds work in a way that they give more returns with less diversification.
I had reviewed dozens of retail investors portfolios (of course, for a fee) and almost 80% of them got a wide remark in their report – “Your portfolio is too much diversified. Make it concentrated. Shall start by selling x, y, z…… stocks”
Have a peek into Jhunjhunwala portfolio stocks (top holdings):
Image source: Livemint
It’s easy to deduct that not every stock outperform the Jhunjhunwala portfolio returns.
He had combination of stocks 2 stocks:
- Stock with stunning results.
- Stocks with less or no profit.
But he hardly have any exception of losing stocks (one in above image).
Because he had invested in excellent group of stocks.
(Again) not every stocks outperform the portfolio.
That is why keep a portfolio with low stocks AKA hurray! it’s time to sell the stocks – if case you have an aggressive amount of stocks in your portfolio.
#7) You’re bankrupt.
By default, everybody knows what one should do in such a situation.
No need of further explaination. Just added to make the title with odd number. Because you know eyes get attracted to lists, especially articles promising an odd number of insights.
Ohhh! One more situation I forget to state above – Sell stocks if your Wife went for shopping…… jk.
EMOTIONS are our enemy.
They stop us from selling stocks (even if the above 7 situations happens).
Buying is not terribly hard as selling – You all might have faced these 2 feeling while selling a red/green stocks:
- Feeling of losing money (in case of red stock).
- Feeling of Greed (in case of green stock).
A uncle of mine once bought a huge amount of shares of Jaiprakash Associates. He bought it 3 year back when it was quoted above 100 INR and now its trailing around 8.
Why didn’t he sold out it stocks when he found it going down?
Interviewing him a bit gave me a good conclusion. Here comes a emotional phenomena…. step by step.
- When stock goes down to 75 from 100. The though came in his mind was – “I’ll wait until it again get recovered”
- When stock goes down to 50 from 75. The thought came to his mind was – “I’ll wait until it again gets recovered, otherwise my 50% investment will get lost”
- When stock goes down to 25 from 50. The thought came to his mind was – “I’ll wait until it again gets recovered. I already lost 50%, let’s bet other 50 too. May be possible that it may go up”
- Now when stock is trailing around 8. He may be thinking – “What the heck will I get by selling this crap? let me retain them and wait for any miracle”
At every downside of stock, his “emotions of losing money” and “hoping that stock may go high” conquer his decision. Instead of relying on a vicious circle of advisers, brokers, pro investors etc, he would have relied on financial data of the company.
Its not only his position, it happens with all of us, driven my emotions. You can easily locate it out by seeing many trending questions on Quora: Q&A.
- What should I do to overcome loss in stock market?
- Is there any chance that my portfolio could recover money or should I sell everything now?
- How do I cover my loss of 100000 INR this year in the stock market?
This behavior is termed as loss aversion, well explained by Robert Hagstrom in his book “The Warren Buffett Way” :-
“The downside of an investment (a loss) has a greater emotional impact than the upside. This fundamental bit of human psychology is known as asymmetric loss aversion. applied to the stock market, this means that investors feels twice as bad about losing money as they feel about picking a winner”
I would also like to share one of my mistakes I made by betting stock of Tree House (Most of time I make mistakes).
I bought this stock @76. Now it’s hovering around 33:
My luck! here’s a good news. Guess what? I sold it when it was quoted 58. This decline in price came after Morgan Stanley Asia pull back its fund from Tree House…
Same thing occurs in opposite direction also – when stock price hike up. Just the emotion changes from fear (in above case) to Greed.
Control your emotions and sell your stock of you ever confronted above 7 situations.