When to Sell Your Stocks?- Return Trip is Terrible

The bloodshed in the markets especially in the growth and technology sector has made some investors’ saneness go overblown, it would further exacerbate the situation if they are on financing or borrowed funds.

As the saying goes:

“The Market moves up like climbing the stairs but comes down in an escalator”

Some of the stocks have done a return trip which is giving back all the great gains and even worse, you are underwater and in deficit. A good example will be one of Ark Investment’s favourite stocks, Teladoc. We have previously done a research article on this stock.

The feeling of letting go of a 3-4 bagger gain and making a loss is a terribly tough situation to handle emotionally.

 

4 Approaches to Sell Your Stock

In this article, we would explore the challenging topic of when to sell your holdings:

1) When the fundamentals of your company have changed or your thesis is no longer valid.

This would need you to monitor your stock financials numbers and make sure the growth is still intact and profit margins are not seeing any deterioration. Like Buffet say, the best holding period is forever.

For growth stocks investors, they would be less stringent on the fundamentals as they are looking at growth metrics and hope they would grow to match the generous valuation we would be willing to accept. It is tough to get a good growth stock using the value investor mindset of a PE of 10 and below. Also, Price to Book will be in a huge excess of 1 as most of their assets would likely be intangible.

 

2)  When Price Surpass your Valuation Price

For Benjamin Graham investors, there is always a valuation which is likely the book value if you are into deep value investing. For others, it could be a price based on their discounting cash flow model. There could also be a reference to a stock’s mean Price Earnings Ratio and Price to Book Ratio to determine its fair value.

If we stick to valuation price as our determinant to sell, the disadvantage would be we might not be able to benefit from the animal spirits. That will be defined as excess exuberance. Usually, prices overshoot both ways due to human behaviour.

However, that will be a disciplined system and not leave things to emotions which are arbitrary.

 

3) When Macro and Political Conditions change

The most prominent reason for the recent clash especially for the growth stocks is quantitative tightening. And with Quantitative Tightening being a prominent feature due to runaway inflation, it has led to the end of cheap funding that investors have been used to.

Over the past decade or so, the QT if implemented have been more transient as inflation was not an issue. The Quantitative Easing tool would be readily available if the Fed want to prop up the market to please everyone.

So with a permanent shift to QT, it would lead to investors pondering if the growth stocks valuation would be sustainable with most not having any accounting profits.

For macro conditions, we could look at 6 indicators to have a feel of the economic landscape and sentiments.

For political conditions, it is wiser to take a safer bet than invest in North Korea or countries where the government is unstable and do not respect the rules of the capital markets.

Is China Investable? 

This will trigger lots of arguments but if the interest of the higher brass is to have a vibrant economy then they would not look into ruining the stock market.

 

4) Using Technical Charts

This could be a good way to ride your profits when the price of your stock exceeds your valuation.  A simple approach would be when the price close below the 20 day moving average. If there was a parabolic rise, we could use the 10-day moving average.

The most important element would be the price must have reached your valuation so you are just trying to squeeze the most out of the human behaviour of traders.

If you are making your decision just based on charts without the input of fundamentals, then it will just be trading and not investing.

Summing Up

The Art and Science of selling a stock are never straightforward. But having a framework such as a valuation done on a stock would make the task of selling a stock easier. 

The “Buy and Hold” strategy could see tears in the current market conditions as you could be holding on to a position from great profits to a loss-making proposition now.

There is no right and wrong strategy but having a framework would assist you to manage your selling decisions better.

Given the recent crash, it further hits the point that valuation matters especially in a monetary tightening environment.

Despite the crash, value stocks could be down 15% but growth stocks fare worst and have been down by almost 70%-80% from their peak.

Thus, that is where the margin of safety becomes our shield in a perfect storm.

 

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Disclaimer:

The content here is for informational purposes only and should NOT be taken as legal, business, tax, or investment advice. It does NOT constitute an offer or solicitation to purchase any investment or a recommendation to buy or sell a security. The content is not directed to any investor or potential investor and may not be used to evaluate or make any investment. Do note that this is not financial advice. If you are in doubt as to the action you should take, please consult your stockbroker or financial advisor.