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This is a dilemma faced by most investors. Greed and Fear make it difficult for investors to take a rational decision.

Before we get into whether to sell and when to sell, here are some real-life examples of investor behavior: 

  • A leading consumer durable NBFC, has been a multi-bagger over the last 5 years. An investor saw his investment become 15x in 5 years and then saw it retrace back to 10x and in fear sold it off. The business continues to be robust. This stock would have been 18x, had he held onto his investment.
  • A mid sized pharma company that is a leader in antimalarials, was bought by another investor about 4 years ago.  This investment is about 4x, for him. Through the journey, in the last 4 years, the stock has consolidated several times.  However, he was convinced of the story and added to the holdings on every decline. Today, that patience/tolerance, has been rewarded.
  • A large housing finance company, known for it’s aggression and paying hefty dividends, was bought by an investor, about 3 year’s ago. The stock was a multi-bagger for him. He did not sell the stock, though the valuations seemed a little stretched if judged on quality parameters. Subsequently, the government crackdown on NPAs and the consequent slowdown in the financials, affected the business. The company faced some corporate governance issues too. Today, the company still survives, but, the investor stares at losses. He failed to see the weaknesses in the company, due to the euphoria surrounding it during good times.
  • A large FMCG company which has traditionally been quoting at a valuation of 35-40x PER, today is at a PER of 65x. The stock has given him 3x returns over the last 5 years. He bought the stock when one of the company’s key products faced quality issues. In the current year, the stock is underperforming.. The company may grow at 15% CAGR, over the next 3 years. He is still holding onto the stock, though not very comfortable with the valuations. He has been wondering if he could switch to another better option, on a growth adjusted basis
  • A small cap manufacturing speciality chemicals, that are used by pharmaceutical and agrochemical companies, amongst others, was bought by an investor, a little over 2 years ago. The stock did very well for him and has been a 3 bagger for him. The company has been re-rated from 12xPER to 22xPER, over the period, due solid performance and high quality of management. The outlook continues to be promising. The investor has been wondering if a sectoral rotation could impact the market performance of the company. As of now he holds on.

As is evident from the above examples, it has relatively been easy to buy the stock, with due diligence. However several investors either end up selling too early or too late, result, leading to curtailed profits or large losses. Selling is always more difficult than buying, for quality companies.

John Bogle, the founder of Vanguard has famously said: “In the long run, investing is not about the markets at all. Investing is about enjoying the returns earned by businesses”.

The desire to sell emanates usually  for investors watching the prices actively and are not very strong on their convictions.

Before one starts thinking on when to sell, one needs to decide whether to sell. If the company that one is invested in, adheres to the following criteria, it may be worthwhile to continue to hold onto the company. There have been times when a stock underperforms for a while due to short term over-valuation, such stocks tend to start performing after a brief period of consolidation.

 Criteria:

  1. High quality of promoters/management
  2. Clear visibility of growth
  3. Recurring demand for the company’s products
  4. Leadership in it’s area of operation
  5. Strong balance sheet and profitability
  6. Low or no leverage
  7. Clearly laid out dividend payout policy
  8. Strong corporate governance
  9. High entry barriers
  10. Ability to manage the business/regulatory environment
  11. Low or consolidating competition
  12. Extreme over-valuation, e.g. more than 2x the peer average

If there is dilution in any of the above criteria(except 12), amongst others, there may be a case for exiting the position, after appropriate scrutiny. Any dilution in the quality of management, is a non-negotiable characteristic and the investment needs to be exited. Extreme over-valuation, as mentioned in point 12 above, as an indication, may b a sign to exit the position. Alternatively, if the investor has a better investment option, in that case again the investment can be switched to the better option.

In today’s world, buying and forgetting an investment, could prove detrimental to the portfolio, largely due to the dynamic environment we live in. Fundamentals could change very rapidly if one is not responsive to the external environment proactively. However, the age old wisdom of investing for the long term holds true, today as well!!

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4 comments on “Selling A Stock Investment: Whether & When

  1. Dear Paras,
    Congratulations! Wonderful start. You blog is to the point. In simple good, simple to understand language. I liked the critical analytical reviews on each examples & does indicates to which stock you might be referring to.
    Do keep you writing, I have very interesting and informative.
    Very nice initiative taken.
    Thank you.

    Best wishes always!

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