Stock Shastra #13: 3 Signs that tell you “Sell your Stock”

In Stock Shastra #12, we told you that the right price to buy a stock is at/below 50% discount to its MRP. We also said that we need to sell, once it crosses MRP provided you get 20% CAGR. Since no one can time the market, knowing when to sell is one of the toughest decisions, especially since greed usually takes over and you always hope for a higher price.

In theory, the perfect business to buy is, one we never have to sell. That’s our ultimate objective: To buy a company so wonderful and at a price so attractive, that we never sell it. Of course, this rarely happens in reality. Wondering why? Because not all companies stay wonderful forever. Also, the market at some point tends to grossly overvalue these companies, giving a sell opportunity.

At Moneyworks4me, we buy and sell on the following guideline -  Buy at/close to Discount Price and sell once it crosses its MRP, provided you get 20% CAGR. But, what if the company ceases to be wonderful before the stock price crosses its MRP. Or the market has grossly overvalued the company! There are many such considerations you need to keep in mind, and they will guide you to figure out the right time to sell the stock. Let’s see them:
While taking a decision to retire from your stock, you can be in 2 situations. Either the stock price is

1) Well above MRP – If the current stock price is well above its current MRP i.e. 20%+ above MRP – consider selling the stock, as the market is overvaluing the stock irrationally above its earning capacity.

In some cases, you may want to hold on to the company, as it has an increasing MRP, with the potential to grow and be a winner for the future. Considering that the market has overvalued the company right now, there are chances that it will correct in the future. In such a case it would be a great opportunity to sell the stock now, book great profits and later, wait till it is available at a good discount again. This time you can wait for a slightly lower MOS, (probably 30-40%), considering by now you have confidence that the company is a sure-shot winner in the future.

2) Just above MRP – If the current stock price is just above the stock’s current MRP ( 0-20% above), you need to ask yourself –

a) Has the company ceased to be wonderful? : If the company’s MRP is stagnating and it is not a short-term trouble, most likely the company has ceased to be wonderful. In such a situation consider selling. This means that the company has ceased to have the sustainable competitive advantage, that earlier guaranteed great growth and is no longer attractive with a long-term perspective.

This will usually show up in the form of a poor performance in  its financial track record. If the financial track record is no longer good enough to warrant holding on to the company/business, sell it.  In such a case this will reflect in a stagnant or reducing MRP, due to our reduction in expectations of earnings capacity.

However, if the company is wonderful with an increasing MRP q-o-q, consider holding the company till the market really overvalues it i.e. (20%+ above MRP)

b)       Is there a better opportunity available?: If you have found a better company, where the probability of growth and returns is higher and this company is available at an attractive discount. In such a case consider selling of your earlier investment, if you are sure there is a better opportunity available.

c)       Are you are in requirement of funds? – If you are in need of funds, it is always better to sell off a stock that has crossed its right value (MRP), rather than selling one which yet has scope for appreciation in stock price

3) The company has ceased to be wonderful, before reaching its MRP – If there has been a sudden change in circumstance or you have received new information, that changes your opinion about the company that you once believed was wonderful, consider selling the stock; even though its current price may not have touched its MRP

At MoneyWorks4me.com we provide our subscribers with a feature- 5 Companies Above MRP , every month. These are 5 well-researched stocks, which are right now overvalued in the market and should be considered for selling.

You should also read the following:

1. Stock Shastra #1: Stock Investing is not Rocket Science!
2. Stock Shastra #11 – Before investing, find the right value of each stock – Its MRP
3. Stock Shastra #12: Buy at 50% discount to minimize risk and get fantastic returns
4. Stock Shastra #16: Information, like antibiotics, works best when consumed in the right dosage
5. Stock Shastra #17: Don’t forecast future stock prices, Analyze a Company’s ability to earn future profits