When should I exit my stock investment?

Investing Strategies
1

As a budding value investor, I have never thought about stock targets. Some of my investments have given good returns and I don’t know how long I should remain invested. There are extensive strategies on buying but none I have found on selling (apart from the never sell your stock investment :stuck_out_tongue: )

When does one start selling shares of a company they are invested in assuming no negative news has come during the time? What should be the average holding time?

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2

Selling is by far one of the toughest activities in investing because there is no “right” way. The policy I follow is-

  • Sell when valuation is above comfort zone
  • Get a better stock to invest in
  • When the thesis for investing in the company has played out (for opportunistic bets)
  • When the business deteoriation or management does something stupid
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3

Agree to each Point mentioned by Abhishek.

In addition to it, I would like to add a Couple from my end as well.

  1. When you have made some Multiples (Our favorably & well known term -X Times) of your Initial Capital Deployed, I preferably check whether Valuations have become exorbitant & if thts the case, I would take out at least my Initial Capital, out of table, without any second thought, accompanied with some profits & leave the remaining to grow, so as to not have any regret bias, if company continues to grow at a same pace in future as well, because fundamentals are intact.
  2. If future predictability of earnings still exists & Company is still following growth trajectory, but you have got a Business which is offering you more platter on the table, be in terms of Div Yield, Scalabilty, Opportunity Size, Opportunity Cost Bias, it will be a wiser decision, to pull out some money of the table & let remaining grow & compound.

For me this is working pretty much till now.

Regards,
Bharat

5 Likes
4

When I buy a stock, I write down the most important reason why I bought the stock in a one-liner comment. As long as that reason is still valid, I keep holding the stock. Following is typical list of reasons to buy and the sell triggers

  1. Strong growth - Stocks with strong earnings momentum. sell when growth is not expected to strong for the foreseeable future.
  2. Undervalued - Priced lower than intrinsic value based on the growth, quality etc. This one is easy. Sell when it is no longer undervalued.
  3. Turnaround candidate - Company going through a bad patch that is getting it’s act together. Sell when stock has turned around
  4. Cyclical upturn - Cyclical company in a cyclical industry that appears to be near the bottom of the cycle. Sell when stock reaches cyclical high
  5. High dividend - Slow growth company paying high proportion of profits as dividends. This is typically a parking lot while you keep looking for better opportunities. Sell when dividend yield drops below your target level.

I also have a 1 year patience window. If the stock is not performing up to expectation within this timeframe, then I sell it. The only other time I sell a stock is when I find another one that is even more interesting.

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Alongside @basumallick dada’s nutshell summary, following could also help to decide -

  • If you know Why you bought?, you would know when to sell.
  • Liquidity considerations : For some stocks, depth of market as well as quoted price plays an important role.
6

it is advisable to foc in a stock ( free on capital)

7

Thank you for your response.

Just a follow up question. What valuation is above comfort zone for you?

8

That depends from stock to stock. For a long term stable compounder a PE of 40 or PB of 4 is very close to the upper limit. For opportunistic bets, it depends on the industry. The other determinant of PE or PB is interest rates. The lower the interest rates, the higher PE/PB a stock can get.

I think this concept of foc is applicable more to traders than investors. If I correlate to real estate, if the price of one’s property doubles, does one sell half the property and make it free of cost?? :slight_smile:

Portfolio selling should to be considered as a portfolio allocation decision.

1 Like
9

I don’t know whether this is an accepted practice… What I do is I take small profit bookings based on technical observations which reflects the market condition/news flows etc. When I do this I keep two things in mind 1. avoid short term capital gain 2. capital of each stock should not to go below a predetermined level. This strategy helps me as I am an SIP investor with availability of funds only through salary. This way I have funds round the year for new opportunities and follow SIP route. This I do for all my stocks including core pf. I agree with all the sell strategies mentioned earlier. In such scenarios I exit completely. In my earlier phase, I had great difficulty in parting with any stock. Some how “buy stock for life and never sell” got stuck with me. Now I have got over that since coming to this forum.

10

Perfect. This makes a lot of sense.

I have started pruning my allocations. For example: If my initial investment in the stock 5% of PF and it has become 12% now, I just bring it under control by getting it to say 10% of PF and investing the remaining in a new bet. Acceptable?

1 Like
11

Most of the scenarios has already been covered in the previous posts. So I am going to look at the question from a different angle.

Exit like Entry is dependent on ones temperament and ones Investing Framework/Strategy/Process

e.g.

  1. Deep value investors buy at a discount of around 50% to Intrinsic value and sell as soon as stock trades up to intrinsic value.
  2. Fundamental momentum guys sell when the fundamental momentum starts to slow down
  3. Price momentum guys sell when the price momentum started to dissipate.

But the bedrock of an exit strategy is ones Investing Framework/Strategy/Process. One can use multiple strategy (Deep value, Momentum, Techno-Funda, Opportunistic, etc ) but a stock should be linked to ONE strategy at the time of entry and exit criteria should be set based on the entry strategy.

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12

Cannot stress writing down why you are buying a stock enough !! Most important thing I have learnt in my last 8 years of value investing. I maintain a folder with each company I track with news clipping, quarterly results updates, my thoughts, sector upates etc. Occasionally I read through them – it reinforces my views, what management said earlier and how they performed etc. We should be able to state our investment thesis in a simple, one-line comment.

6 Likes
13

if you have met your initial investment goal there is no point in holding your investment further,so exit is also based on your initial investment goal

14

it is my style of investing. to be more safe method and defensive approach. lest the the 2008 year is happen, the entirely vanish your wealth. unlike reality, stock market unpreductable

15

Just few more point here: I sell when i need money, 2nd when i think i have made a mistake.