Selling stocks in the market is trickier. We as humans usually judge an investment with a rear view. This is a psychological bias.
After we sell the shares -
· If the stock price goes down, we get a feeling of our smartness
· If the stock price goes up, we regret that we missed it
· If the stock prices remain stagnant, then the mind starts playing a game of envy.
We as long-term investors need to have clear strategies and discipline to follow them.
I could think, of the following three reasons for selling in the stock market -
1. Thesis of Buy and Hold broken
2. Over-valued – Irrational
3. Better opportunity
Let’s dig further into them to understand.
Thesis broken: In our investment framework we study which stock, which price, and how much. Similarly, we need to be clear about when to sell. This clarity comes with the strength of the framework. The thesis could be broken for many reasons. One, the company losing business, and no clarity on reversal. Two, Management started doing it against the interest of shareholders. Third, the market scenario has changed (‘disruptions’).
Over-valued: The stock market could swing higher and higher in a bubble territory because of too much optimism. The share prices carried away then, it is a possible candidate for ‘sell’. Other scenarios could be the market valuation looks stretched because of a temporary issue with a company that made revenue and profit to fall.
Better opportunities: if we come across an opportunity that gives a longer runway to grow and better business, and a shortage of capital to invest, then we might consider of selling. The relativity of opportunity that counts here.
Having a clear framework and emotional stability does much good. We would be in control and not carried away with our surroundings. We do not feel regret.
Investment is a game played long term and what matters is to stay in the game. Have fun.
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