Saturday, July 23, 2011

I Am Not Wrong So Why Should I Sell My Stock?

There are so many reasons to sell a stock.

Yes, even Warren Buffett does sell his stocks.

And there is no sin in selling a stock either and I, for one, feels that stocks should be bought and sold for the correct reasoning. From the investing perspective, there are many valid reasons to sell their stock and one of the best single advice ever given is:

  • A stock that begins to show decaying fundamentals, such as lower profit margins or lower return on invested capital should be sold.
The decaying fundamentals would suggest that company that we had invested isn't the same anymore. It used to be good but the decaying fundamentals/business economics could turn the company to a poor company and the longer we hold on to the stock, the greater the chances the market could punish our mistake for thinking that the company is still a great company. And we know how the market is always very unforgiving to the investor holding on to such stocks. And yes sometimes stubbornly holding on to a stock for all the wrong reasoning could wipe the investor out of the game.

Having said that, knowing what needs to be done and actually doing it is rather difficult..

Yes, it's easier said than done.

For this is where it gets extremely tricky.

Why?

The Es comes to play.

E as in emotions. Ms. Emotion. All of us have different emotions and for many of us, emotions is a deadly hindrance in the stock market for it prevents the investor of doing what needs to be done, which is acknowledging and rectifying the mistake(s) made in the investment(s).

How could one do what is needed to be done, like selling the stock, when one does not want to admit that perhaps they are wrong in their reasoning, their stock selection?

And then there is the other E. The Mr. Ego who is never ever wrong.

I am never wrong.

My decision to buy the stock is correct!

The company is owned by Mr. So and Mr. So. How could I go wrong?

Or one buys a stock because it's a growth stock. But if the growth ends, then what comes may of one's investment? To hold on to the stock, one reverts to the growth issue and declares that there's still value in the stock. Of course there's always some sort of value in any stock.

See how the reasoning to invest in the stock had changed? From growth investing to value investing. And some would correctly point out that the great Warren Buffett has said that growth is an integral part of value, hence they should not sell.

However, Buffett's insistence on growth is an integral part of value,  for how could a company be considered a great company if it has no growth?

Ah... see the difference? Without the growth, how then would you define a company with declining profitability? Would it still be a great company? If no... then...?

And yes, needless to say  that Mr. Pasar views strongly against company with declining profitability. Have we not seen how a 'growth' company like Hai-O traded very much lower once the growth story ended? ( posted on March 2011: Looking Back At Hai-O Then And Now. ) Or the recent decline of the rubber glove stocks.

But the greatest obstacle in selling is Mr. P or Mr. Price.

Price in my opinion is the greatest hindrance to an investor.

The investor could easily reason out what's happening to their investment and they could clearly see the decaying fundamentals but once they look at Mr. P, all logic goes out of the window.

Which is why, there's one teaching where one should try to leave out Mr.P when one buys or sells a stock!

Oooh... that sounds rather crazy but the reasoning in this is by leaving out the price, the decision to buy or sell a stock is based solely on the investing reasoning or the fundamentals of the stock. For example, if the stock begins to show decaying fundamentals, such as lower profit margins or lower return on invested capital, the stock should be sold right there and then, in regardless of the traded price.

1 comments:

Khek Yang said...

So very guilty of making many investments and pulling out too early or even letting myself staying in for longer than it should be because I by "hope" and "chance" that things will change for the better :(

Emotions are much better left on the sidelines for stock investments