Ever thought when was the last time when you sold a stock at the right time?
We are talking about selling stocks now not because the stock markets have fallen sharply in the last week, but because good investment decisions involve not only buying at the right price, but also selling at a 'right price'.
There are many tricky issues here, which we would place before investors.
Every stock is a sell at a 'price': It is pertinent to note that irrespective of how good the prospects of a sector or a company may be, the fact is that every stock has a buy price and a sell price.
How to decide what is the right price of the stock is a tricky issue because it is a factor of 'expectations'. Here, expectations can be a combination of both how well the company is likely to perform in the future and the general market sentiment.
As we have mentioned before, growth rates is broadly governed by how well the economy is likely to perform and, over the long-term, the growth rate of most sectors is likely to trace the GDP growth.
Say, India's economy is likely to grow at 7% per annum. This can be the very basic benchmark when it comes to determining the growth and valuing the stock. If a sector is likely to grow above/below GDP, then it warrants a premium/discount.
A bull market or a bear market does not change the fundamentals of the sector or a stock. Take the example of Maruti in the last one and half years. It is almost at the same price as it was at the beginning of this period, even as car demand has been robust.
Sell when it is 'done': There have been times when despite good performance by a company, the stock price has not risen (like 2001 to 2003) because of lack of investor confidence.
On the contrary, investors tend to 'wait' that extra-longer to sell because the markets are rising up everyday. So, if the price target is achieved and if one believes that based on the assumptions, the upside is limited, it is better to sell the stock. If it was the case, DSQ Software and Pentamedia may have never reached the price they did in 2000.
Own research is important: In bullish times, every stock market participant has a view on a stock or an event.
Ultimately, some set of the investing populace is proved right and some lose money. This is what leads to efficient price discovery of a stock. There are pink newspapers, business channels, brokers, financial websites and magazines and many more who recommend stocks.
While we are not attempting to comment on the reliability of any of these sources of stock recommendations, based on the available information, it is important to exercise one's own judgment before buying or selling stocks. It is not prudent to blame the stock markets for one's losses.
More importantly, the selling strategy also depends on what approach an investor follows. If you are a 'buy and hold for the long-term' investor (say, number of telephone connections in the country is low and therefore, would buy into a telecom stock from a ten year perspective), one-year market movement may not bother you at all.
But 'buy and hold' may not yield desired results if proper monitoring of the investment is not done. Initial investment assumptions will change as economy goes through cycles of recovery and slowdown.
Talking of cycles, cyclical stocks may not reward adequately based on the 'buy and hold' strategy. Here, timing the cycle is important. If an investor bought Tata Motors in March 1995 and held on to the stock till now, the CAGR returns is just 5% per annum over the last ten years!
While these aspects may not be the all and end of it, the intent is to highlight issues that an investor has to bear in mind to reduce the risk of losing money. Happy realisation!
Equitymaster.com is one of India's premier finance portals. The web site offers a user-friendly portfolio tracker, a weekly buy/sell recommendation service and research reports on India's top companies.
