Whenever we choose a good company or share to invest in, we hope to get a good return from that investment. Say if you choose a good company which gave you a return of 50%,100% or 150%. The biggest question here is how will you know when is the right time to sell this share?
It’s important to know the point you should sell the share at, because its important to choose a good company but more important is to know when to exit it. Every investor has his own thesis, investment criteria behind it
according to which he chooses a company. Say if he feels a particular industry is going to do well, a particular company’s market share is really good here, has performed financially well in the past years and feels the company can perform well in the future as well or he felt the management is good, with all these thoughts he might have thought to invest in a company Say if he has allocated 20% of his portfolio to this company, it gave a return of 50% and more in a year or two. Another investor asked him on why is he not selling his shares as he already received a 50% return. The investor said that he had a thesis in mind when he was planning on investing in this share
I had a thought regarding this company that it will perform well in the future. This company gave me a 50% return, my particular parameter or thesis are still asking me to stay in it. Now if you really feel confident about your investment thesis on the basis of which you made your investment. In that scenario, you should never look at the return and exit it.
Say if you invested in a good company which gave you a return of 50% or 100% or more. You can stay invested in this for the long term until you feel that the company is performing according to your financial parameters. If you look at any big investor, say Warren Buffet, he has the Coke and Apple share since a long time, how much ever return he has made in it, he hasn’t exited it because he feels that the company will expand further. Now you understood the importance of thesis in choosing a good company. These thesis and parameters are important when you want to exit the company. If you invested in a company which had a market share of 30% to 40% in the market in the past some time you can see the market share going down for this company and you can see its competitors are performing better now because of which this company has started going down thus. Whenever you feel that a company’s market share is going down swiftly and the company is not able to justify. The reason behind it, in that scenario you should think of exiting from the company.
The second reason, you choose a company because it sold a product which had a high demand in the market. You feel that the product quality has gone down in recent time but if you are watching its competitors, then their product quality is improving and your company’s product quality is getting worse. Thus you should see product-wise as well on what are the products, its quality, its demand, its market perception beause it is possible that many users used to use a product at a time and had a good word of mouth but from the time, its quality has decreased and the users are preferring other companies over this one. In this case, if the product quality is depleting and this product was a criterion while investing in this company, then in this case also you must think of exiting from this company.
At last, I will talk about the company’s management, as every investor feels, that the management plays a big role in a company’s growth. You invested in a company seeing its strong management team, its past track record. Its good corporate governance in the past and it utilized all its resources well to expand. Say you had a lot of trust in the management but you see the management has completely changed in the past some time. Old management has been replaced with a new one, you should rethink in this case on why this new management and why was the old management got replaced all at once? You should think again on how much it impacts your management thesis and investment parameters. While investing how much weightage did you give to the company’s management?
If you had actually placed a high weightage here and the management has been completely replaced, You should definitely think of exiting in such a scenario. After investment thesis, lets talk about Portfolio Rebalancing. It has two parameters under which you can think of selling off your shares. The first parameter, say if you invested in a stock which gave you a really good return. You invested Rs 100 in 10 different shares and 1 stock gave you a return from Rs 10 to Rs 100. In that case, in your portfolio, this one stock will have a high overall weightage. Many people try to keep their portfolio diversified and they want their risk in one share to not increase by much proportionally. If you are thinking of rebalancing, say if one stock gave you very heavy return your portfolio is skewing towards that share a lot, in that case, you can think of selling off that share so that you can rebalance your portfolio. I am asking you to not think of selling a share on the basis of returns.
Here the reason is stock diversification in your portfolio. If one stock has given a really good return and has performed well in the past sometime. Now if you see the stock weightage getting higher in your portfolio as the stock performed very well. In order to rebalance your portfolio again, you can think of rebalancing your portfolio. The second important parameter is related to your age, If you subtract 100 from your age, the no. left should be your exposure to the equity in your portfolio. Say if you are 30 years then 100 minus 30 is 70, 70% exposure should be on equity, 30% on debt. If an investor created a portfolio and he had allocated 70:30 allocation according to his age
30% on Debt and 70% on Equity. Now he is 50 years old according to this rule, he should reduce the allocation in Equity and the increase in Debt because your risk-taking appetite decreases with age thus if you ever want to rebalance your overall portfolio and reduce your stock exposure, you may think of selling off your shares in a company.
If you have free money for which you want a return, you have invested this amount in a good company. This stock increases by 10% to 20% which is a good no. If you take off your money from that stock and keep it idle, this money won’t make you any money in the future till the time you invest it further. We derive our Third Criteria from here!
Say if you invested in a share which was giving you a CAGR return of 8% but now you feel that you have found a better company which can give you a return of 10% to 15%, in this scenario you can take your money off from the other stock and invest here. You should be double sure that this asset would give you a better return than the share you invested in before. If you have a better opportunity, you feel a new asset can make you more profit then you should go-ahead.
At last, I would like to give you a small tip. These parameters on when you should think of selling off a share. Other than the mentioned parameters, you should check at the company’s quarterly results, annual performance. You should read its Profit & Loss statement, its objectives. If you see any deviation from these. You should do a deeper analysis and think on whether you want to take your money out of here and invest somewhere better. This blog is completely on educational purposes. We always ask you to invest on the basis of your thesis, risk-taking capacity and your parameters. Choose a good company and invest for long term, But if you see any problems within your invested company, you should exit at the right time because if investing is important, it is more important to exit from a bad share.