Do You Know When To Sell Stocks?

By Louis H-P on August 30, 2020

There are many reasons when to sell stocks, with fundamental research often providing you with warning of slower profits ahead. Yet for those learning to invest a stock portfolio there are other reasons to be aware of. Reducing your downside risk is an example. These circumstances, when they appear should encourage you to look with a closer eye. 

Why should you consider selling?

With today’s stock market increasingly driven by retail investors momentum trading big technology names they recognise from day to day life, valuations has risen to levels rarely seen before. This should encourage investors to question when to sell stocks? The only way is up should only be applied to TOWIE.

Although selling outright may be extreme, reducing your (successful) positions and banking some profits is sensible. This is consistent with a disciplined approach where strongly performing investments are capitalised. The proceeds are then re-invested into new opportunities.

Rewarded for your curiosity…

Strange as it sounds, not losing any of your capital should be considered a victory. Hot stocks may appear wonderful when they go up, but not when they go down. Therefore monitor your investments, especially the most volatile stocks. If a story appears in the press about a conflict within a firm whose shares you own, find out why. Anyone who has followed Dominoe’s Pizza over the past couple of years would of noticed something is wrong. It also helps when you actually get stuck in and interact with the company, especially if you confirm something which the company is denying. It pays to be curious and being cynical when investing. 

Your own experience can be enlightening. 

Yours truly was seriously fed up when trying to order a Domino’s pizza one evening. I was transferred back and forth 3 times between 2 branches who said they could not serve me because my address was in the wrong area. It turned out the 2 branches were from different franchises with clearly allocated geographical boundaries and I just happened to be on the boundary. So much for customer service.

Although Dominoe’s share price has suffered little, one has to wonder what would of happened if Covid-19 had not forced people to stay at home and order take-away pizza.

Forensic accounting

Fundamentally there is no substitute when investing than reading a firms financial statements and annual report. This will reveal important information such as if the margin is increasing or are debts increasing? Firms will also detail their expectations for the coming year. If these are unrealistic, this may be a reason to sell.

It is also useful to understand what is the key driver of the business. Shell is an oil major, as a result its profits are affected by the oil price.

When this dropped substantially in early 2020, Shell’s share price reacted accordingly:

The world does not stand still

With the world constantly evolving, business need to evolve too. Businesses which do not will lose out and may even disappear. Today’s world is increasingly shopping online which has led to a string of bankruptcies for traditional street-based businesses.

If a trend is working against you, then it can become obvious when to sell stocks. Indeed don’t forget, the first cut (sell at a loss) is always the cheapest. Debenhams was once a stalwart of the high street, but failed to adapt and its shares are now worthless.

Insider trading assistance

Regular unexplained selling by directors of a company should be treated with suspicion. A company doing well will rarely have its directors selling their shares, unless for specific reasons such as a divorce, as has happened.

Concerted buying by management after a profit warning should usually be ignored. This is usually a PR stunt to give a vote of confidence to the shares. Occasionally a company’s share price drops due to non financially related matters. This is often a chance to buy in at a discount, but make you understand why the shares have dropped and why the market has got it wrong.

Conclusion

It may be a little peculiar to be rewarded with… nothing!? In today’s world, we expect some form of return for everything we do. Yet what about not losing what you have in the first place? Those of you who take the time to do the work, may avoid losing less money than those who don’t.

Although riding a market rally may seem attractive, you should be “fearful when others are greedy, and greedy when others are fearful.” Although I am not suggesting that being a contrarian investor at every turn is the way forward, knowing when to sell stocks may help you avoid a sell off and be ready to take advantage of it!

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Louis H-P

Louis is a portfolio manager and a trader who brings a wealth of experience in private banking to The Lazy Trader. A fundamentalist and a trouble-shooter, Louis makes a firm contribution to the trading team.

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