“Knowing when to sell your stocks is as important– or even more important– than knowing when to buy them.”- Chris Lee Susanto
I have had experiences in buying stocks of good companies that quickly went to two years high price after I bought it earning me a potential 30% gain in 3 months.
I did not sell it back then because my valuation decided that it could go higher.
It did not go higher but instead, it went down to two years low price (more than 50% drop in less than 6 months time).
But of course, it rallied back up 100% in the next one year and I made a good gain out of that stock.
I know that I have made money on more than 95% of the stocks that I have bought and sold but success is a lousy teacher because it induces smart people thinking they cannot lose.
Therefore, I am aware that how good any investor is depended on how many markets crashes they have been through and still provide a stellar investing record.
That my friend, they key is knowing how to be fearful when others are greedy– therefore– knowing when to sell.
In my investing years, I have also gone through a few market sell off yes, the 2015-2016 market sell off during August 24, 2015, which was coined as the Black Monday where world market has wiped out close to all the gains made that year. The reason was due to a huge concern relating to global instability ranging from the Greek default on June 30, 2015, on an International Monetary Fund loan payment and the China stock market crash during that month too (from June 12 to August 23, the Shanghai Composite index lost 38% of its value).
I mentioned the above incident mainly to remind myself that market sell-offs do and will happen.
This is an important reminder because human being tends to forget the bad incidents and be blinded by greed in a bull/rising stock market.
That is dangerous.
These experiences cannot be learnt through theories and reading books. You could only understand it if you go through it yourselves!
I am glad I went through it and right now, I am able to appreciate the importance of buying stocks akin to buying a business.
That means that selecting stocks should be similar to how we would evaluate a business to acquire.
The key to knowing when to BUY a stock is simply to:
1) Buy a business that we can understand
2) That has favourable long-term prospects
3) Operated by honest and competent people
4) Available at a very attractive price
This specific investing methodology is widely popular now because Warren Buffett, the second-richest man in the world and the most successful investor of all time uses it.
In fact, the above 4 criteria are reflected in his 1977 annual report. And his methods has never changed since then.
When I reflect upon it, the key to buying and selling a stock might be the same. It can be the opposite reason of why we bought that particular stock in the first place!
Thus I think that the key to knowing when to SELL a stock is simply to:
1) Know when we have no longer understood the business (if there is a change in the business model etc)
2) That no longer has favourable long-term prospects (due to other factors such as environmental and political etc)
3) No longer operated by honest and competent people (fraud cases etc)
4) No longer available at a very attractive price (overvalued)
In conclusion, the key to knowing when to sell your stocks lies a lot in our skills of determining the intrinsic value of a particular stock. John Burr Williams which had set forth the equation for value in The Theory of Investment Value written over 50 years ago says: “The value of any stock, bond or business today is determined by the cash inflows and outflows– discounted at an appropriate interest rate– that can be expected to occur during the remaining life of the asset.” Thus from that, we can derive that the key for us to be a successful investor is to derive the value of stocks via facts and to have conviction in our thesis.
Revision to this post (Dated 28 March 2017)
If after you sold off a particular it rallied further, say much much further, it is perfectly normal to feel like is such a waste that you sold off too soon.
The key concept to remember here is that investing is more of an emotional game than a game of intelligence.
Thus, it is important to remind ourselves that when we sell a stock, it is because our thesis concluded that it is overvalued. Always remember to separate ourselves from the market. Even though our thesis concluded that a particular stock is overvalued but the market does not think so, there is absolutely nothing that we can do about it.
Judging ourselves via our internal scorecard rather than external one has never been more important!
Disclaimer: The information provided is for general information purposes only and is not intended to be a personalised investment or financial advice.
Important: Please read my full disclaimer.
CHRIS LEE SUSANTO
Hi, my name is Chris and I am the founder of Re-ThinkWealth. A blog that focuses on personal finance self-improvement, investments, and investor psychology.
Since early 2015, I manage money for my family and invests it in Singapore and United States equities and options achieving above market return.
I use Value Investing and Options Selling strategies used by Warren Buffett (World’s richest investor) coupled with the core theory of inversion. Inversion meaning that in every investing idea, we have to scrutinise on why it would fail.
This will result in us being more conservative, and being conservative is the key to protecting and growing wealth in the long run.
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