A good investor who does regular trades has his finger on the trigger. When the mood of the market is unpredictable, as it stands presently, the use of the trigger will have to be made often but with discretion. When the trigger is pulled, the ‘bullet’ is released from the weapon, and it will not come back. Either it hits the target or goes waste. One of the common mistakes committed by an investor is, lot of attention is paid to the art of buying and not much importance is given to the other equally import art–selling!
An intelligent investor makes profits both by buying and selling. Any stock bought without the plan for selling is not a good trade, including the long-term investments.
At what junctures an investor needs to be “trigger happy!”
- The failed logic: When you buy a stock, you buy it with a plan, with some convincing logic. After the lapse of some period, you notice that the stock has begun to underperform. Your immediate reaction is—I must sell this. You have reached the stop loss level of the share. Take a last look at the merit of the stock, do some extra research and try to know why the stock is no longer doing well. It could be a temporary setback for the segment of the industry as a whole and the stock still retains the intrinsic strength to recoup its original health. Judge all the factors and then only release the trigger.
- Changes of substance in the product line: In this era of fast technological innovations, certain products of a particular segment of industry may no longer interest the consumers. You might have given a strong footing in your portfolio to a particular group of industries. In the changed circumstances you feel that a drastic overhauling of your portfolio is necessary and as such you pull the trigger to sell stocks of some of the companies to cash on other opportunities in the market.
- The particular scenario is no more seen: While buying a particular stock, you had high hopes on it, based on your own assumptions and market opinion. Due to adverse developments, the opportunity is no more there, and you now have the fear of losing the original investment. For example, this happened with the ‘tree plantation’ companies. A scene of excellent returns was created, many investors succumbed to the offer, and analysis-wise it was thought to be a good investment even by the experts. Suddenly everything went haywire due to RBI restrictions and other factors. An investor has no option but to sell the shares and recover as much capital as is possible.
- The breakdown of the psychology route: You were a confident investor when you bought the stock. You have lost that confidence and you are confused. Do not trade further and take a temporary break. Confused mind is not an ideal state to pull the trigger.
- Personal strategy: As a matter of policy you pull the sell trigger when the stock price stands reduced by 8%. This policy is commonly followed by the discerned investors.
- Management: If a company’s management changes, you may take a decision to sell the stock, due to lack of trust in the new setup.
- Decline in earnings: If you see consistent decline in the earnings of the company, do not go deep in to the explanations offered by the company for poor earnings. Do some research and take a quick decision to sell, if you feel that the company is making an effort to whitewash the real shortcomings.
- Debts: If you see the mounting debts and the company is still making efforts to take further loans, perhaps the company is in real trouble. Have a look at the turnover and the inventory. If you see problems there, don’t linger on; sell the shares.
- Mergers: Merger and takeover announcements are generally with an attractive premium. Avail such an opportunity to sell, as the price that you get is much more than the market price.
- Arrival of competitors: New competitors have arrived on the scene and your company is fast losing the market share. This is the time to sell.
- Discretion: Discretion is better part of valor. Don’t panic at the first sign of trouble. Companies go through difficult times for genuine reasons. Review the fundamentals and seize the issue. If it is a short term problem, selling is not warranted.
- Genuine reasons: These are unrelated to the performance of the stocks. You wish to take advantage of the proceeds of the stocks for the purpose for which they were invested–buy a house, education expenses of children, marriage etc.