X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
When to sell? - Lessons from Philip Fisher XI - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Mar 12, 2013

    When to sell? - Lessons from Philip Fisher XI

    In our earlier articles in the series on Philip Fisher we focused on the various facts to consider while buying a stock. But, what happens after you have put your hard earned money on the stock? When should you sell your holdings?

    Well, according to Mr Fisher there are only three reasons (barring any personal reasons) for which you should sell a stock.

    Reason 1: When you made a mistake

    In this case, you may have made a mistake in your original purchase and it has becoming increasingly clear that the future of the company you have invested in has become unfavourable. For example, if you had purchased Satyam Computers before Mr Ramalinga Raju admitted to committing a massive fraud. Or SKS Microfinance before the Andhra Pradesh regulation stalled progress in the growing industry. Admitting you are wrong is difficult, but knowing you are wrong and not doing anything about it is foolhardy. Being honest with oneself, not letting ones ego get in the way, and keeping emotions aside are lessons investors should always keep in mind.

    If you are disciplined in investing and purchase good quality stocks such mistakes should not happen too often. If mistakes are identified quickly, losses are far smaller than if the same stock were held for a longer time-frame. More importantly, the funds tied up in this undesirable investment can be used more productively. But, however small or large, losses should not be taken lightly. Much like wrong answers on a test, losses should be carefully reviewed so that a lesson is learned from each of them, and the same mistake isn't repeated.

    Reason 2: When the reasons you why bought the stock are no longer valid

    Let's say you purchased Research in Motion (now Blackberry) because you believed that it would continue to be at the cutting edge of smart phone technology for the next few years. But, then Apple and Samsung come along and quickly garnered market share with their new technology and unique design aesthetic. Now, the reason you purchased the stock is no longer valid and may warrant a revision.

    Investors should constantly be on guard and keep track on the affairs of the company whose shares they hold. When the affairs of a company deteriorate it is usually for one of two reasons, either there has been deterioration in the management quality of the company or the company cannot sustain profitability for its product or growth stagnates and shareholder returns diminish. While management deterioration is more deadly, investors should carefully watch out for all these scenarios.

    Reason 3: When you believe that you can get better returns in another stock

    This third reason should only be practiced by savvy investors who are very sure of their ground. Finding attractive investment opportunities is difficult and purchasing these at the right valuations is all the more challenging. Having surplus liquidity at the time when valuations are attractive is not always the case. If an investor believes that the growth prospect of some other company may be better than the one whose shares he already owns, he may decide to reallocate his funds. Anyway, according to ace investor Peter Lynch, holding too many stocks is not the best idea. He says "Owning stocks is like having children - don't get involved with more than you can handle."

    However, with this switching of funds there is also the possibility that some major element in the overall picture may have been overlooked. If this is the case, the new investment needs to be studied more carefully and needs to be given reasonable time (at least 3 years) to deliver.

    In conclusion…

    Once a stock is properly selected, and has borne the test of time, it's only occasionally that you will find reason to sell the stock. This basic investment principal, unfortunately only seems to be understood by a small minority of successful investors. But if you understand this fundamental principal of long term investing, you can join hands with greats like Warren Buffett, Peter Lynch and Phil Fisher. Investors also shouldn't be scared of potential bear markets or if the value of their stock goes down post purchase. If the company is really a potential star, the next bull market should see the stock making a new peak. Plus, a pure valuation based call may not make sense if the company's earnings are also growing at a fast clip. In this case, telling when exactly the company becomes over priced is difficult as is the case with companies like Page Industries, Mahindra Finance etc. Selling stocks too soon, just because they have seen a huge spurt is another mistake that investors make. Just because it has gone up, doesn't mean that it has lost most of its earning potential. Selling winner and buying stocks that haven't caught the rally may just leave investors holding onto damp squibs.

    Fisher concludes his chapter on 'when to sell' with a brilliant quote which we couldn't have put better ourselves. He says "If the job has been done correctly when a common stock is purchased, the time to sell is - almost never."

    Philip Fisher Series - Previous article | All Articles

     

     

    Equitymaster requests your view! Post a comment on "When to sell? - Lessons from Philip Fisher XI". Click here!

      
     

    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    How To Read Your Mutual Fund Account Statement Correctly (Outside View)

    Aug 17, 2017

    PersonalFN simplifies the mutual fund account statement for you.

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process) (The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    Which Gods Will Bring Down the US Empire? (Vivek Kaul's Diary)

    Aug 17, 2017

    Mr Trump is in the White House and the gods are in their heavens; what's not to like?

    Will They Haul Off Trump's Statue, Too? (Vivek Kaul's Diary)

    Aug 16, 2017

    All across the country, the old gods become devils. New, gluten-free gods take their places...

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    Proxy Plays: A Smart Way to Bet on 'Off Limits' Companies(The 5 Minute Wrapup)

    Aug 4, 2017

    The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE SENSEX


    Aug 17, 2017 (Close)

    MARKET STATS