When Selling at Profits could be your Worst Investment Decision Ever

Nov 14, 2015

In this issue:
» India's energy demand to rise the fastest!
» Market roundup..
» ... and more!

In investing, only one thing is more difficult than what and when to Buy: when to Sell the stock of an outstanding business...the businesses whose stocks have been the most rewarding...with the spectacular run that may make you wonder if it is time to sell.

One of the common reasons for selling a winner is to switch the gains to an even better stock. But before you act, ask yourself if you know all the 'knowns' and 'unknowns' about the new stock. Good stocks are hard to find. And they are unlikely to be mispriced opportunities.

If your original stock selection was good, a reason to sell will be rare.

If a bear market prompts you to sell, unless you desperately need the money in the short time, it may be wise to keep the stock. An outstanding business is likely to touch another high in the next bull market. Trying to predict the direction of a stock in the short term is a game most people lose. An exit-entry strategy based on your guess about near-term price trends may not work well.

It is interesting how some investors 'fix' their percentage return or 'Sell' levels at the time of buying. As and when the stock offers it to them, they close their position. While this may seem like a disciplined approach, in the case of some stocks, it is a sure way of losing future profits.

But shouldn't you Sell the stock if it is overpriced?

Well, if a business has the potential to expand earnings, higher valuations compared to peers (or historically) might be well deserved. For a great business with good management and growth potential, one can hardly be precise at the quantum and timing of the growth - and hence with the right valuation multiple. Mathematics should not drive the decision to Sell such businesses.

At Equitymaster, some of our best decisions include not coming up with a Sell recommendation for outstanding and growing businesses when they met the initial target price or purely on the basis of valuations. It is by letting our winners run that we can claim to have open positions that offer gains more than 2500% and 4000%.

I would like to leave you with the words of the legendary investor Philip Fisher:

'If the job has been correctly done when a common stock is purchased, the time to sell it is almost never.' Have you ever regretted selling the winners in your portfolio? What were your reasons to Sell? Let us know your comments or share your views in the Equitymaster Club.

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 Chart of the day
India today imports around 70% of the oil that it consumes. Thus, it goes without saying that in the longer term, India needs to focus on becoming self reliant as far as its energy needs are concerned. But is the country anywhere close to this goal? Probably not. As reported in the Mint, India's energy consumption is set to double from current levels by 2040. In other words, India will topple China to see the fastest growth in energy demand during this period. The International Energy Agency (IEA) expects India's oil demand to rise by 6 million barrels per day to 9.8 million barrels per day in 2040. Further, it opines that oil production will fall behind demand. Thus, oil import dependence will rise above 90% by 2040. Coal will continue to account for a larger chunk of India's energy mix. Increasing import dependence does not bode well for India in the longer term as there could be constant pressure on the Indian rupee and could have major implications in terms of managing trade balances. It will be interesting to see how the government tackles this particular issue in the coming years.

India to Lead the Growth in Oil Usage (2014-2040)

Barring stock markets in Japan (up 1.7%), major global markets closed the week on a weak note. Stock indices in Europe witnessed maximum brunt, with stock markets in UK (down 3.7%) and France (3.6%) being the top losers in the pack. The recent data released indicated that Eurozone's GDP growth for the September quarter rose at a slower pace than expected. German exports, too, showed a weak trend.

The US stock markets also closed on a disappointing note. Lackluster retail data and uninspiring results spooked the market rally. The US markets closed down by 3.4% for the week, posting the worst weekly loss since August.

The dull performance was on the back of rising worries about slowing global growth and concerns over increase in interest rates by US Fed. These factors impacted Asian indices.

Back home, the Indian markets closed the second consecutive week on a dull note. BSE-Sensex closed down by 2.5%. Both micro and macro factors weakened the demand for equities. On the domestic front, the outcome of Bihar elections and weak global cues pushed Indian indices lower for the week.

Among the sectoral indices, barring a few, all sectors ended the week on a negative note. Stocks from the pharma and oil and gas sectors were the biggest losers for the week.

Performance during the week ended 13th November, 2015

 Weekend investing mantra
"If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes."- Warren Buffett

This edition of The 5 Minute WrapUp is authored by Richa Agarwal (Research Analyst).

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4 Responses to "When Selling at Profits could be your Worst Investment Decision Ever"

Pankaj Varma

Nov 16, 2015

A few stocks in my portfolio have done spectacularly well and continue to do well. But in the process my portfolio has become lopsided with these 2-3 stocks accounting for almost 70%. Many people tell me that I should sell off a portion and diversify my portfolio but I have not done that so far. What do you suggest should be my approach.


NMR Shreedhar

Nov 15, 2015

If the initial buying choice has been based on sound fundamnetals , the reasons to sell should be either of the following--a)there is a pressing need for the money b)there has been a drastic change in the fundamentals, or c)there is an opportunity offering higher returns.
I think this is what Buffet also means when he opines to hold stocks forever.



Nov 15, 2015

My approach is to make turnover with the limited capital available. If we could book the profit @ 10% in a 3 month we can make the turnover in 4 times in a year and possibility of 40% in a year.
So Five year 200 % even though there was mistake in stock selection...............



Nov 14, 2015

Pretty good coverage and nicely focused on the appropriate events.

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