It is not easy to trade in the stock market and sell to get the maximum return. For years I followed how the pros sell their stock, but I found that selling their stock for profit was made possible because of the price they purchased that stock in initially.
There is no perfect time to sell stock. You cannot predict exactly when the stock hit its highest before selling. However, in general, the stock should be sold when that stock becomes extremely overprice, when the company fundamentals have changed, or when there is a better investment opportunity that makes sense to take your money out.
1- Selling when stock becomes overprice
The stock market is unpredictable, and it is impossible to know when the stock hits its highest or lowest. The best you can do is focus on buying a company its earnings increase over the years and a company you understand. If you purchase that company at an attractive margin of safety, you can sell the stock when it hits its intrinsic value (True value).
The intelligent investor always looks for a company that has:
- Moat: to defend itself against competitors.
- High growth rates: that has an increasing trend.
- Excellent management: that takes care of its shareholders.
To make a profit in a company, the purchase must be when the price is on sale (Margin of Safety). The ability to buy a stock at a sale price is possible because the market can sometimes overprice or underprice a stock, and it does not give you the actual value. You should never buy a stock at full price because you will end up selling at a loss.
Treat the stock market the same way as Phil town does (The Rule 1 investor). He treats the stock the same way he buys a car – If you purchase a car on sale, you can make a profit when you sell.
2-Selling when the company fundamentals have changed
The company can change its fundamentals. Not all companies can stay the same. Some changes can be obvious such as deteriorating business, getting acquired by another company, or it’s losing the competitive advantage that makes it lose market share. In those situations, selling the stock is permitted due to the unpredictability of the company.
Other fundamentals are not so obvious and do not necessarily look bad such as a company diversifying and acquiring a new company, or the management has changed. In any case, a change in company fundamentals means that the company is different to when you originally bought the stock. The best course of action is to re-evaluate the business or sell the stock if changes are severe that you no longer can understand the business.
In general, companies at some point can either be losing or booming. It is easy to spot a losing business. However, more than usual, it is difficult to identify a change in fundamentals. The following comprises of change of fundamentals that you should worry about, re-evaluate the business, or possibly sell:
1- Diworsification: a booming business that decided to diversify and get into different industries. For example, a Tech company decide to get into the food industry.
2- Merger of two companies: it might sound good on the news, but this means the birth of a new company.
3- Change in company type: for example, a fast-growing company that develops new products every year, suddenly becomes a slow grower and stop producing new products.
4- Change in Management: buying companies depends on the management performance. If a company change its management, then you should re-evaluate the business. Management decides how the company operate. Therefore, you should research if the new management is acting for the benefit of the shareholders.
3-Sell for a better investment opportunity
If you are selling the stock for another opportunity, you admit that this business is not worth your money. There is always a better opportunity in the market, if you decide to put your money in a different company you must ask yourself the following:
- Have you got everything you want from this current company?
- What advantage the new company has that this company do not?
- Are you buying the new company at an attractive price?
Active investors can fall into the trap of rotating their money in different businesses in a short time. Therefore, it is best to sit on cash and not fully invest all your money. It is better than having to take 10% or 20% from an existing company that you like. Or worse, you invest money that you need to use in few months.
For the best way to manage your portfolio when a new opportunity arises:
- Have spare cash that you do not need and not invested in the stock market ready for a hot new opportunity. Cash as low as $5000 can be a good start.
- Have some cash invested in an ETFs (Exchange trade fund) or short term bonds that you can manage to liquidate a percentage of the full amount quickly.
Worst case: if you do not have any free money to invest, then it is time to go through your portfolio. Chose who you think are the least successful.
When not to sell a stock?
Selling stock means that you stop being an owner of that company. The long-term investor buys a business, not a stock that will keep around in the next ten years. If you decide to sell a stock just for the sake of freeing some capital because you need the money, then you might be getting out of the market at the wrong time. Selling at need does not guarantee that you will be able to get back to that company again soon.
Selling when the price goes down.
Selling when the price is going down is admitting defeat. If you have purchased the stock believing in the company fundamentals – it will not go bankrupt – and it is not facing financial difficulties. The price drop could be because of the market volatility, which drives stock down or up frequently. In that case, it is best to be patient, if a company has increased earnings, the stock price follows the profit, and eventually, the market will give the stock its right value.
