When is the Right Time to Exit a Stock? 1. When Management takes Rash Decision. 2. When Business Environment isn’t Stable. 3. Other Better Investment Opportunity +3 more
Ask any experienced investor – Which is a more difficult decision – Buying or selling. Most of them will tell you it’s the latter.
As an investor, when you are buying, you are full of hope. You are multiplying numbers. When selling, you don’t want to shatter the same.
The market is above everyone. Just because we have bought, doesn’t mean the stock should rise and vice versa.
So how can an investor know when is the right time to exit a stock.
When is not the Right Time to Exit a Stock?
Before we get into the right time to exit a stock, let us understand when it is not the right time to exit a share in the first place.
1. Never based on PE Multiples
Never invests like a mathematician. Investment decisions aren’t to be based on any mathematical numbers or PE multiples.
The first step is to know the right stocks and one can do that by Investment Checklist and Fundamental Analysis.
Once the stock qualifies the above checklist and analysis, analyze the business.
Then comes the understanding the technical analysis based on price action which gives us the right price.
So if never invested based on PE multiple or peer valuation, why should exit strategy be based on PE Multiples?
2. Now When the Stock has Gone Up
Because you are making profits doesn’t mean it is time to book them.
For my portfolio, I get this question often if I am holding my most profitable of investment which is Pidilite Industries and Divis Lab. My answer is YES. Just because I am making a handsome amount of return in them doesn’t mean the business will start deteriorating from here on.
3. Not even when RSI and MACD or any other Parameter Indicates a Sell
I got this quote in a WhatsApp group
You are fighting with the institutions on the opposite side who have billions of dollars with world-class technology, humans resources from IIT, IIM, Stanford and Harvard. Hence don’t expect your RSI and Moving Average formulas to make millions.
If you expect some sell signal by any random mathematical formula can help you sell at the right time, you are to be a trader, not an investor.
When is the Right Time to Exit a Stock?
So finally when is the right time to exit a stock?
I am no investment guru, but I will share when I find it good to exit my investments. Most of the time even when I am wrong, I don’t mind because it suggests my investment is always in the right stocks.
1. When Management takes Rash Decision
The most important of all decision for me to exit in a stock is when management makes some random decision that isn’t in favor of the minority shareholders.
As shareholders, we aren’t able to deal in the day to day activity of the business. So we rely on the management for the same. If I can’t trust them, I will not remain invested in the company irrespective of any other parameters.
The recent example on this line is my investment in Jubilant LifeScience. The management’s decision to ask for a royalty payment for using the “Jubilant” as the name of the company.
Come on; your company will have a name you choose. Now you want to charge a fee for it.
The day it was announced, I am done with the Jubilant Group stocks. Finally, the management backtracked it when they saw the reaction in the market wasn’t pleasing, but it doesn’t make me an investor in them for the rest of my life.
2. When Business Environment isn’t Stable
The geopolitical environment keeps changing. So it can impact businesses.
If you don’t want to remain invested in a business where the environment isn’t stable, it can be a reason to exit a stock.
Like for example, in 2016, on the day of Brexit, I was out of Tata Steel because I thought European Union Geopolitical environment wouldn’t be stable for the foreseeable future and so I should not remain invested in the company where it is one of the key markets.
So, when the business environment isn’t stable and if the company has a problem that you don’t want to remain associated with, it is time to exit as well.
3. Other Better Investment Opportunity
You don’t need to sell your house to invest in stocks. You can sell your investment to invest in the next opportunity.
Currently, I am booking out of my trading account to invest in Page Industries because I think it is an excellent investment opportunity around the 20k Mark.
It is one of the better ways to churn the portfolio. Remember, you should not book out of profitable opportunities. Wise investors cut on the loss-making investments more than the profitable ones.
4. Story no longer Holds True
If you invested in a company based on some story that is no longer valid and the company is moving in a different direction.
As Warren Buffet puts it, the best time to invest in a company is
A great investment opportunity occurs when a marvelous business encounters a one-time huge, but solvable problem. – Warren Buffett
Similarly, if you happen to find the problem is not solvable or it is not a one-time problem. So on and so forth.
Anything that points to the fact that initial investment based on a story is no longer valid.
I booked out of Ashok Leyland way too early but the view at the time of my investment was, it will lead the EV implementation for commercial vehicles in India which I doubted as things moved along.
5. You Think You made a Mistake
There are certain investments where I sold off in a few months because I thought I made a mistake of investing in them.
I was wrong in deciding to book out but remember one thing, whatever you do, there will be more occasions when the market proves you wrong. It is unavoidable.
If you thought you made a mistake, you should always book out even when the market proves it otherwise.
In most of my 2016 portfolio, the market has proved me wrong and that too by significant margins. After I sold, each of the following stock doubled
- Jubilant Foodworks
- Tata Steel
- Britannia Industries
- Larsen & Toubro
- Ashok Leyland
On top of that, I also invested in a stock that has halved like Force Motors.
Still, one has to respect the market and take decisions when one finds he has made a mistake.
If you ask me now, do you regret the decisions any of the above stocks, I will say not all but Britannia Industries? The reason I out because I was angry at my investment in investing too little.
6. You Need Money
Finally, your investments are for you to enjoy life. We invest with a goal in mind. And if you need cash, no rule can defy you from selling.
Just remember one point because the amount invested in stocks and to the extent in the mutual fund is as liquid as cash, it doesn’t mean it should be the first choice to sell.
Take the decision wisely. Consider equity investment as the last option to sell because it is the only investment that can help you build wealth.
Great article – thanks for sharing your experience. I would appreciate if you can also do a blog on how you track the latest news about companies that you have invested in to remain current including economic and other fundamental updates. For example, do you follow the reporting updates to stock exchanges (NSE/BSE) or have you subscribed to a specific news feed channel. How do you remain current?
Shabbir Bhimani says
Alok, I have shared it here https://shabbir.in/watch-companies/
I like to keep the process as simple as possible with as little time as needed from my end. Let me know if it helps and if you still have some query, let me know and I will write an article about it.
Mukesh Kumar says
Thanks Shabbir Sir! Above mentioned points are really very helpful to make a mind. If I have a reason to invest, If at any point of time that reason is broken then I believe that will be time to exit. Sir, this is my understanding but still Amaraja I bought 107@778, in DEC2017, it went high 900+ and now down 650-. It becomes difficult to come out with huge loss and it becomes a little heart touching. I have a eyesight in range of 5Yrs+. Thanks Sir and Niraj too to put light on Amaraja.
Shabbir Bhimani says
True but when your view is long-term things can take a pause for sometime.
I have been following your blog for past few years and it has been really enlightening yet again. I really found some of your exits in those stock strange.
So now my main question is, don’t you think Amara Raja Batteries management didn’t inform about JC leaving the merger well in advance and doesn’t this qualify as rash decision of the management to let investors know the day it happened and not when it was coming?
Shabbir Bhimani says
Niraj, good to see you are following things and I am glad you asked this question as well.
Actually, I don’t see the things as they are reported by the news channels for Amara Raja batteries.
So it is reported in the news with headlines, Amara Raja Batteries break ties with JC controls.
Whereas the reality of the matter is, JC control has sold off its power generation business to Brookfield. Amara Raja was part of that investment. The way I see it is, management has increased their stake by 2% in the company.
Again, the reporting of the deal of JC as reported by Amara Raja can be doubted but again, it is the parent company which has sold and they aren’t bound to report all the activities in the parent company. As an example, HUL will not report all activities of Uniliver.
It could have reported but they aren’t bound to report. Or it could be that they were not suppose to report.