Wednesday, 24 June 2009

Why we hold? Because of the fundamentals

When you're building your portfolio, then, you want to pick the stocks that have the best fundamentals - because (sorry to repeat) over the long run, investors gravitate toward stocks with strong fundamentals because they are the strongest companies.

If you're buying stocks because they have strong fundamentals, and (everyone now), over the long term, stocks with strong fundamentals tend to rise, you should hold on to a stock as long as it continues to meet the fundamental criteria you used to select it.

Whether the stock price has dropped sharply since you bought it or whether it has skyrocketed is no matter; what matters is where the stock's fundamentals stand right now.

Price - just as with buying - matters only in terms of how it relates to the fundamentals (what the stock's PE or P/S ratios are, for example). Many invetors will sell a stock because its price has fallen and they think they need to cut their losses, or because the price has risen and they think the "smart" thing to do is to take the profits rather than risk the stock coming back down. But those are arbitrary, emotional decisions.

Remember, you bought the stock because its strong fundamentals made it a good bet to gain value; if its fundamentals are still strong, why wouldn't it still be a good bet to gain more value?

Related posts:
Why we buy? Because of the fundamentals
Why we hold? Because of the fundamentals
Why we sell? Because of the fundamentals
Always buy, hold or sell based on fundamentals.

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