So, you’ve done your research, pulled the trigger, bought a stock. Some time passed, and you actually made some decent gains.
But then, when do you sell your stock?
I’m sure some of us have had the experience of selling too early where we sell and stock rockets off without us.
Take Reuben, a 2nd year student in university. During the Covid-19 period, he saw a rise in the need for cybersecurity software due to the need to secure company data under work from home arrangements which were increased tremendously due to the lockdown.
As such, after some reading into the industry, he bought into Crowdstrike Holdings, a cloud based cybersecurity company based in the US, at USD 133.90 per share, on 24 Sept 2020.
Fortunately for him, Crowdstrike released a fantastic set of results for its 3rd Quarter on 2nd Dec 2020 and the stock eventually rose to USD 177.48 after a few days.
Satisfied with the return, Reuben decides to sell his shares in Crowdstrike. But unfortunately for him, the stock eventually rallied further, closing at USD 203.75 on 18th December 2020.
How can we minimise such mistakes then? When should we sell our stock?
Sell When the Story Has Changed
When I invest in the company, I like to look at the story, the fundamentals of the company. When picking individual companies, it’s a lot about the fundamentals. This can include:
- Revenue/Earnings Growth
- Gross/Profit Margins
- Market Share Growth
- Growth of Total Addressable Market (TAM)
For all investors, we invest in companies in the belief that the share price will rise in the future. And the share price increases, because the investors are expecting the company to make more money in the future.
This means that if the fundamentals of the company changes and the company no longer seems on track to meeting its future expectations and targets, the fundamentals can be said to have changed.
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There has been an evident dip in the market share of Intel and a corresponding rise in market share for AMD. The reversal began in 2017-2018 and the trend accelerates in 2019 and goes strong into 2020.
Hence, as if you were an Intel shareholder, would you not fear for the safety of your investment in the long run? Conversely, if you were an AMD shareholder, AMD is still gaining market share against its largest competitor, why would you sell off their stock now?
As such, it is important to understand the fundamentals of the companies that you invest into and to know to sell when the fundamentals turn bad and to hold if the fundamentals remain strong.
Sell If You Have a Better Investment
Inflation is the decrease in purchasing power of a given currency over a period of time. This plays out across all aspects of our lives, from the food we eat, the value of properties and the price of healthcare among many things.
Money that we hold today is known as fiat currency. This means that currency is only backed by the promise of its value by the government that issues it, as opposed to in the past, where dollar value was backed by gold. This also means that money can be printed by the country’s central bank when required. This increases the money supply and (theoretically) leads to increased inflation.
What this means for you, is that when you are holding a lot of cash, your money is losing value every single day to inflation.
As such, when you sell your investment in order to realise your profits from your investment, you are letting your money lose value to inflation.
Therefore, you should sell your stock only if you have an alternative asset to place it in. This can be another stock, or a different asset altogether, like a property.
One tip to help you with this would be to keep a small watchlist of stocks that you have already researched. This allows you to take action and to pull the trigger when you sell off another one of your stocks.
Let the Flowers Grow, Trim the Weeds
A common practice by many new investors is to take the profit once their investment has hit a mental target.
“Oh, 10% already, sell ah”
But at the same time, they continue to hold stocks that are down 30-40%, hoping that one day they’ll recover.
Companies usually rise for a good reason and companies that are beaten down and stay down are usually down for a good reason too. Look at IBM. IBM peaked in 2013, at around USD 210. Today, it trades at USD 144, a 32% drop from the peak.
This might be surprising to some, considering IBM’s reputation as an MNC and a household name around the world. But looking at their revenues, it is not hard to see why their stock has fallen so much. Their revenues are no longer growing, and have actually fallen almost 28% since 2011.
On the other hand, buying into good companies like Amazon, even at the peak of the 2018 rally, has netted a 67% gain since then.
This is not surprising considering Amazon’s impressive performance, having grown revenues by well over 25% annually for the last 3 years and profits by more almost 70% annually in the same period.
Ultimately, selling good companies that have risen and to continue holding companies that are always performing for the fear of realising losses is a surefire way of ending up with a portfolio of only lousy companies at the end of the day.
Photo by M. B. M. on Unsplash