Why do you Sell and When?

Taking profit

Profit should be realised from sales of stocks in the following situations:
(I) when the stock is obviously overpriced, or
(II) when the sale of the stock frees the capital to be reinvested into another stock with potentially better return.

Not taking profit in the above situations can harm your portfolio and compromise its returns. In other circumstances, let the winners run.

Underperforming stocks should also be sold early. Hanging onto underperforming stocks is costly too. There is the opportunity cost that the capital can be better employed for higher return. Also, hanging onto these lack-lustre stocks reduces the overall return of your portfolio.


Reducing serious loss

When the fundamentals of a stock have deteriorated, sell to protect your portfolio. This decision should be make quickly based on the facts and situations, in order to keep your losses small.

Always buy, hold or sell based on fundamentals.

To summarise:

We should buy, hold or sell based on fundamentals.

The basic premise behind our "buy" strategy - over the long term, investors gravitate toward stocks with strong fundamentals because those are the strongest companies, and that causes those stocks' prices to rise over time.

If you're buying stocks based on the above basic premise, that is, they have strong fundamentals, and 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.

It's time to sell and replace the stock with another stock that does meet your criteria (and one that thereby has better prospects of rising in value), if the stock's fundamentals have slipped, so that it no longer meets the criteria you used to buy it. Also consider selling, if the stock is grossly overpriced, not justifiable even by the good fundamentals of the company.


Price should always be related to the fundamentals.

We should NOT buy, hold or sell based solely on the price is low or high or rising or falling


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.


Because the goal is always:

• look closely at what to hold and what to sell now
• to maximize return on capital and
• to take advantage of the time value of money,

One must look forward at future prospects rather than backward at now-irrelevant old (higher or lower) prices.

Also read:
To guide you on holding or selling a stock in your portfolio.
To guide you in re-balancing and re-weighting of your portfolio.
Weathering a Panic
Stock Selling Guide - Gain/Loss Worksheet (Part 1 of 5)
Stock Sale Considerations (Part 2 of 5)
Evaluating Changing Fundamentals (Part 3 of 5)
To Sell or to Hold Checklist (Part 4 of 5)
Selling and Holding mistakes Checklist (Part 5 of 5)

Why we sell? Because of the fundamentals

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

If the stock's fundamentals have slipped, however, so that it no longer meets the criteria you used to buy it, it's time to sell and replace it with another stock that does meet your criteria(and one that thereby has better prospects of rising in value).



Your selling is based on ongoing re-evaluation of portfolio at regular intervals

The selling assessment is thus an ongoing re-evaluation of where a stock stands right now. You must continually reassess what the stock's prospects are going forward - not what they were a month ago, six months ago, or whenever you bought it.

On average, using monthly rebalancing period produce the highest raw return.

The important point here, whether you use a one-month rebalancing or a different time frame that works for you, is this - you need to re-examine your portfolio at set intervals, to assess how your holdings stand relative to the reasons you bought them. If they no longer meet the criteria you used to pick them, you should consider replacing them with new stocks that do make the grade.

By sticking to a firm rebalancing and reweighting plan, you keep emotion and hype from impacting your selling decisions. You sell at regular intervals, and you sell based on fundamentals. Just as with buying stocks, there's no place for hunch-playing or knee-jerk reactions here.



Price matters in how it is related to fundamentals

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 investors 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.




When stock should be sold immediately

There are a couple rare occasions, however, when you should sell a stock without waiting for the rebalancing date to arrive.

• If a firm is involved or allegedly involved in a major accounting or earnings scandal, you should sell the stock immediately, because you can no longer trust its publicly disclosed financial data.
  
• In addition, if a firm has become a serious bankruptcy risk since the last rebalancing, you should also sell its stock immediately.

So with all of these challenges, how do you stave off emotion and make good, sensible "sell" decisions? The same way that you keep emotion at bay when deciding what stocks to buy: By using a disciplined system that makes sell decisions based on cold, hard fundamentals - not emotion-driven hunches, or arbitrary price targets.

Making good sell decisions is another reason for better returns in your investment portfolio.


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.

My strategies for buying and selling (KISS version)

Strategies for buying and selling.

For buying (ABC):

A.  Assess Quality, Management and Valuation (QMV)

B.  Buy good quality stocks.

C.  Buy these stocks at a discount (Margin of Safety)

(If you select your stocks carefully, often one can hold them for long periods. The idea is to allow compounding over the long period to work in your favour.)


For selling (1,2,3,4):

1. If you need cash for emergency. (But then, hopefully, you will have separate money for such emergencies. The cash invested into the market should be separate.)

2. You will need to sell URGENTLY (QUICKLY) if there is something wrong with the fundamental of your stock (example: fraudulent accounting, etc). At other instances, you do have the time to SELL at leisure.

3. Your stock has gone up too high. By your assessment, at that price the upside return is less, but the downside risk is more, then you may wish to sell to REINVEST INTO ANOTHER STOCK WITH MORE FAVOURABLE UPSIDE REWARD/DOWNSIDE RISK RATIO.

4. On occasions, you have identified a very good BARGAIN, you may wish to sell some of your stocks to REINVEST into these stocks to capture a higher upside/downside reward risk ratio that these stocks offer.

Defensive Portfolio Management = 2.
This is to prevent harm to the portfolio.
Urgent attention needed.

Offensive Portfolio Management = 3 & 4.
This is to optimise returns of the portfolio.
Have the time to sell at leisure.


BB
"Investing should be fun and not a game."


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QMV
Quality = Points 1 to 6
Management = Point 7
Valuation = Point 8






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Additional Related Notes:

Why do you Sell and When?

Reducing serious loss

When the fundamentals of a stock have deteriorated, sell to protect your portfolio. This decision should be make quickly based on the facts and situations, in order to keep your losses small.


Taking profit

Profit should be realised from sales of stocks in the following situations:
(I) when the stock is obviously overpriced, or
(II) when the sale of the stock frees the capital to be reinvested into another stock with potentially better return.

Not taking profit in the above situations can harm your portfolio and compromise its returns. In other circumstances, let the winners run.

Underperforming stocks should also be sold early. Hanging onto underperforming stocks is costly too. There is the opportunity cost that the capital can be better employed for higher return. Also, hanging onto these lack-lustre stocks reduces the overall return of your portfolio.
http://myinvestingnotes.blogspot.com/2011/02/why-do-you-sell-and-when.html

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Related:

The Time to Sell: How Warren Determines It is Time To Sell

• The first is when you need money to make an investment in an even better company at a better price, which occasionally happens. 
• The second is when the company looks like it is going to lose it durable competitive advantage.  A questionable competitive advantage is not where you want to keep your money long-term. (An example:  Nokia's Cautionary Tale)
• The third is during bull markets when the stock market, in an insane buying frenzy, sends the prices of these fantastic businesses through the ceiling. 

When to Sell?  The QVM Approach to Selling Stocks