In 2018, the mid-cap and the small-cap segment fell by 24.2% and 23.7%. Some investor-favorite stocks had fallen more than 50 percent from their all-time highs in 2018. Many in the list are the names that saw massive run in 2017.
We often wish we’d sold the stocks while staring at the losses.
Investors, despite spending many years in the market, do not have a well-defined exit plan or do not know about it. This shortcoming leads to incorrect timing for selling stock.
One of the biggest reason that prevents investors from selling is the thought that says what if the stock rises further after I sell?
This fear is the most significant pain for investors.
How do you fix this?
You need to change your perception regarding stocks and capital market. Please understand, it is not the buying price alone that decides the quantum of profit or loss at the time of exit. Investors tend to sit on tonnes of money as they become greedy.
They end up holding the stocks for a very long time. A long holding period does not necessarily result in capital appreciation, but may lead to huge losses.
Following are some of the names that never rebounded in multiple years –
In your management education or even investing career, you are always taught of conducting a fundamental analysis of stocks. It is always mentioned that good quality stocks generate healthy returns for long term investments.
But seldom you will see any assurance of returns offered even if you hold for a decade.
Consider previous names. If you had invested in Suzlon or Reliance Communications in 2007-08 and if you are still holding all you can do is buy diapers by selling those shares as there’s no value.
These are the same names that were once considered to be bluechip companies and found a place in a few benchmark indices.
If you go back in history, you will find a similar situation of not knowing the exit strategy costed Abhimanyu his life. For the novice readers, Abhimanyu was the son of Arjun and lost his life to Kauravas during the Chakravyuh in the story of Mahabharata.
So, if you want to make a career in the market, you need to be like Arjun whereby you know how to enter and exit. Market experts or maybe the web platforms only tell when to enter. Rarely does anyone talk about the exit. And a naive investor continues to hold and thus ends up losing capital.
How can you be the Arjun of the market?
Allow me to share with you a few strategies you may consider implementing if you wish to exit a stock. These strategies can be applied to both profitable and nonprofitable investments.
Your sell decision should be based on any one of the following factors –
Remember sectors become fancy likes waves. For example, 2014 was the Modi era, 2004 was Manmohan era. Similarly, 2003 to 2008 was infrastructure era, or maybe 2009 to 2016 was the pharmaceutical era.
In this era, a sector grows massively and becomes the center stage for the investors if not the economy.
Due to heightened interest, the price an investor is willing to spend for owning one share of a company in a sector that is being fancied now increases. This phenomenon leads to price growth for the stocks in that sector. In other words, the premium for the sector determined by the Price to Earnings ratio (P/E ratio) increases rapidly even without any substantial gain in the earnings momentum.
So, if you bought an infra name, for example, Hindustan Construction Company you would have accumulated sizeable wealth during the period.
Investors generally hold on to these names considering they would exit with a profit. But that may not be the case. Human behavior is usually to hold on the loss-making stocks for some unknown reasons.
Also, you will see that humans tend to react to positive shares far quicker than the loss-making stocks. What investors’ don’t realize is that holding a loss-making investment for long-term may not even generate yield let aside positive yield.
Without getting into the dynamics of the company now or the merits and demerits of the sector, let me take you through the period after 2008 for the infrastructure sector.
If you see the chart, it is very evident that the price corrected significantly and currently it is nowhere closer to the initial price point.
The important point here is, to understand that no sector remains fancy forever and also once a sector losses its fancy, it typically takes very long-time (probably decades) to make a comeback.
Today when Sensex is touching an all-time high, infra stocks are not contributing much. In fact, you would find a lot of infra names trading at sub 5% level of their peak currently. An investor should see if the index is rising all this while and the stock ain’t making any movement, all it does is create frustration.
Amidst this, the best situation is to exit the moment.
While it may be difficult to zero down on the fact that a sector has lost its fancy, but the moment you get a hunch, you should sell the investment without any further delay.
One of the ways of identifying that the sector has lost its fancy is the moment when the stocks stop touching 52-week high for the sector. Also, if you see companies correcting as much as one-third of its peak value without any significant change in the thesis, it indicates profit booking in the sector and that the sector has lost its fancy.
Company’s fundamentals start showing fatigue
Investor love companies that report growth. Your brows should raise if a growing company suddenly stops reporting growth for two consecutive quarters. In this case, you should go back to the drawing board and see what made the growth stop.
Following are the two names that have generated healthy returns over time on the back of strong fundamentals and sustained performance.
Corporate governance issue
Ace investors have a shallow tolerance level when it comes to concerns about governance. The moment you see any negative reports surrounding the governance of a company, you should explore exiting.
For these scrips, it is unlikely that they will reach their previous highs any sooner. Ordinary investors tend to ignore the corporate aspect and continue to hope that the stock will get back earlier levels.
In many cases, investors are adventurous and buy more shares as the stock declines considering it to be an excellent buying opportunity but re-assess the stocks before doing so and try to avoid governance aspect.
Now the golden rule,
Never look at the price after selling
Does this make sense? Not really. It is just a waste and doing so will only make you sad if the price has increased.
When I am covering this, let me share a personal experience. My father is an ace investor who has been investing for 30 years now. He always says – ‘Regret after selling. Not after you suffer losses’.
I don’t look at the stock price once I have sold the share at least for 1-2 quarters provided there is no significant development.
Assume there is a news in second month itself after you sold, instead of checking the current price and comparing with your selling price doesn’t make sense as you can’t undo your execution even if you wanted to. You should assess the stock as if you are looking for investing for the first time.
Many times you will see the price rising after you sold, but that doesn’t make you a bad investor. You can always re-enter but remember when you re-enter you are assessing the company and fundamentals without any bias and without getting influenced by your past purchase price.
To conclude, you should follow the above pointers rigorously. But don’t blindly depend on these four, keep reading and keep improving your skills of scouting an investment. If you are aiming to buy low and sell high always, it isn’t possible. One doesn’t climb a mountain straight; a backfoot is still necessary. So be open to short-term setback but keep the vision intact while investing.
I shall leave you with the golden mantra of the market –
“Profit booked is more important than book profit.”
Disclaimer: the views expressed here are of the author and do not reflect those of Groww.
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