What Is The Right Time To Sell Your Stock

Investors love stocks, but stocks don’t love them back. And if investors fall in love with a bad stock, it can keep sucking on their finances.

Sure enough, a quality stock that can cope with disruptions can make you wealth for a few generations if held it for a decade or two, and this post does not cover such stocks.

But others should be treated like grocery items – use and throw. Here’s a primer on how to figure out bad stocks:

A. Corporate Governance Issues

A few months back, Ricoh India was in the news because of serious corporate governance issues. The auditors had mentioned that the accounts were not true and fair. Plus, the company did not file accounts with BSE on time making the exchange shift its stock to the Z group.

Examples of corporate misgovernance can be a violation of statutory norms (Company Law Board, NCLT, SEBI) or it can be non-disclosure of the true position of finances and assets to a lender, or it can be a fraud perpetuated by the company, or any other violation of ethical norms.

The minute you sense something has happened, it’s time to dump the stock.

You should watch out for shares transferred to Z group. That will give you a clue.

B. Disruption

Business disruption can be a bitch, When computers made their entry, typewriter manufacturers were roasted; when email got popular, many small courier companies went out of business; In 2030 EVs will rule and only the most efficient automobile component makers will survive, and so on and so forth. I’m sure you get the picture.

To survive, companies must keep up to speed with technological changes. I’ll give you an example of a stock that I own – Malu Papers.  The company manufactures newsprint and packaging paper. With ebooks and smartphones dominating the scene, the demand for newsprint has fallen, and so the company is shifting focus to packaging paper, which is witnessing a boom because of increased ecommerce activities.

Likewise, you must keep tabs on the stock you own. If the management is not dynamic, and is not keeping pace with the new normal, it’s time to dump the stock.

C. Booking Reasonable Profits

Many portfolio managers are happy when they can declare a 20%-25% gain on their investments PER YEAR, but individual investors always put up a sulk even after making returns as high as 40%-50% a year.

Unless you plan to make a stock part of your long term portfolio, you should set reasonable targets and sell it when it achieves your goals.Never be greedy, be content  with reasonable returns.

Also, don’t get too happy when stocks begin to rise rapidly. Just go by your targets and if your target is achieved sooner than expected, you should dump the stock without getting emotional about its future or business model.

D. Stopping Losses

I keep saying “never love a stock” because like you, I too have loved stocks in the past and have ended up booking losses in many. Here is the trading rule that I follow, and it works beautifully for me – when it comes to maxing my profits and minimizing losses.

E. Valuation

An unreasonable (very high) PE or EV:EBITDA ratio is another sign. In 2012, JP Infra was flying high at 52 despite making losses. It was suggested as a value pick by many analysts. Investors who tag themselves as “value investors” jumped right in and tanked up on the stock. Then came the bad news and the  stock crashed to 5 (over 2012-2017). It’s now ruling at 14, with very slim chances of it regaining its old price in the near future.

To figure out your stock’s intrinsic value and its rating, use the following tools to determine if it’s holding on to them:

Intrinsic Value Calculator

Small Cap Value Calculator

F. Peer Comparison

If a stock is pricier than its peers, then there has to be a valid reason – such as expansion, rights issue, foreign collaboration, new markets, etc. If a stock is pricier than its listed peers without any valid reason, then it may be time to sell, but after thorough research.

G. Peer Comparison

If a stock is pricier than its peers, then there has to be a valid reason – such as expansion, rights issue, foreign collaboration, new markets, merger, demerger, etc. If a stock is pricier than its listed peers without any valid reason, then it may be time to sell, but after thorough research.

Also, if a stock in a sunshine sector is performing badly as compared to its peers, then it may be time to sell.

H. Better Opportunities

We are in an age of disruptions. EVs, AI, Blockchain, nano medicine, Robotics, you name it – the world is changing.

In this age, every investor must latch on to better opportunities that can multiply wealth rapidly.

Take the example of HEG, a carbon and graphite electrode company. It was languishing at 300-400 levels when it was announced that EVs ould be compulsory from 2030 on. BANG, the  stock zoomed non stop to 2000! That’s the power of disruption.

Therefore if there’s a better opportunity floating around, you should not hesitate  to jump on to that.

I. Hype

Empty vessels make a hell of a lot of noise. These days promoters use their PR firms to exploit business TV  channels to promote their stock. Minute a stock is tracked on TV, it flares up because investors that watch TV jump in.

I’m not saying that stocks recommended on TV are evil. All I’m saying is that you should not jump in. Rather you should analyze the fundamentals and technicals and then make a decision without succumbing to hype.

J. Peer Comparison

If a stock is pricier than its peers, then there has to be a valid reason – such as expansion, rights issue, foreign collaboration, new markets, etc. If a stock is pricier than its listed peers without any valid reason, then it may be time to sell, but after thorough research.

K. Low Quality Management

Here’s a guide. Use it to figure out the management quality of the stock you own. If the people behind the company don’t measure up, ditch the stock.

L. Weakening Fundamentals

An existing company can have a bad quarter or two depending on economic conditions, and a startup can have a bad year or two because of development issues. That is okay. But you really don’t expect matters to get any worse from thereon. If they do, and if there’s no recovery in sight, then it could be time to dump.

Before making a decision to sell, do analyze the Annual Report. Here’s a guide.

To Sum Up

Finally, if you know the general direction of the market and feel that you can buy the stock back at a cheaper rate, and are almost sure, then you should go ahead and sell it and keep cash in hand and wait for the fall.

Well that’s about it. If you have anything to contribute, please leave a comment and I’ll reply in time.

Whatever you do, never act emotionally. Be objective and analytical. Good luck.