The generations past us had a lot of lack of information.
This lack was visible in every aspect of his life, but when it comes to the stock market, the lack of information was even more visible.
Our fathers and grandfathers had relatively little participation in the stock market when they were young.
And we can't blame them for the hesitation
Because there was little media coverage of financial markets, companies' reporting wasn't very transparent, and there was no Internet.
So having access to the market is the biggest competitive advantage for any investor or trader.
But in the last 20-25 years with the help of technology, market regulators, and media, this story has been reversed.
Today the information flow is very fast.
Today you can access the filings of any listed company and check the portfolio of any mutual fund for free.
The reason for today's youth is very aware of the market. But it is like a double-edged sword.
Because there is access to information but there is also a lot of excess information.
There are more than 5000 stocks listed in the country,
and I can say with a lot of confidence that in the last month itself, at least 1000 stocks will be recommended if not more,
on different YouTube channels, TV channels, and in research reports.
So there is a lot of discussion on 'what to buy' and 'when to buy',
but very little discussion on 'when to sell' and the advice is very general.
For me, the only factor that separates a successful investor from an average investor in the market today is knowing when to exit a stock.
So this is a very difficult question. And what's hard is where there's less competition, and there's a greater chance of supernatural returns from your efforts.
Hello, my name is Kunal Sehgal,
Today we will try to answer the toughest question in the world of investing i.e. 'How to know when is the best time to sell or exit a stock'.
And the best way to answer any difficult, complex question is to break it down into smaller questions.
Let's say you bought a stock 2 years back. Today that stock will be in any one of the 3 conditions only.
Yes, you will be in loss, in profit, or no profit, no loss.
In all three situations, your question may be 'Should I sell this stock today'?
If there is a profit then should I take profit,
or if there is a loss then should I reduce my loss or wait for it to come in profit and then sell,
If there is no change in share price then what is it?
So let me give you a practical and actionable checklist,
by following this, you will be able to easily decide whether now is the right time to sell a stock in your portfolio or not.
Continue with the same example in which you bought a stock 2 years ago.
So the very first question in your framework should be on what basis did you buy this stock 2 years back?
In this, most people believe that you should invest in the shares of a company by relying on research.
But in real life, not all retail investors do this.
Many people go by stock recommendations that come on TV, someone is advised by a friend or a relative, or a colleague.
So how to answer this question in this case?
I think you should make sure that the recommendation you are following should be a reliable source, like a SEBI registered analyst or brokerage.
But when you don't want to accept the advice of friends, friends, or relatives, then this condition cannot be fulfilled.
This means if your father has recommended any stock to you, then you won't tell him 'Go first complete the course in SEBI then come back'.
So what to do in such a situation?
In such a situation, you have to see how much trust you have in this recommendation source.
And for that, you must see the past success record of this person or organization.
It should be seen what is the success rate of its recommendations.
If the source is credible then there is no problem in acting on the recommendation.
This is the kind of advice that no one else will tell you on YouTube but this rule applies very well in real life.
But remember that when you are following someone's recommendation, follow it completely, not just while buying.
Sell triggers are even more important in a recommendation, be it a target price or a stop loss.
Another case could be that you had invested in a stock based on your fundamental research.
And if you are in profit from this stock then also there can be a dilemma, and if you are in loss then also there can be a dilemma.
In both cases fear and greed - that is, fear and greed - can work on your risk-adjusted return.
So in this case your original research and original investment thesis will be useful for you.
Remember the basis on which you had taken entry in this stock.
No matter how long an investment thesis is, it can be described in 1-2 lines.
For example, The company had announced capacity expansion.
the company has placed a big order or onboarded a project.
Acquired a competitor.
The company entered a new geography or product category.
Is there any favorable change in rules which can benefit the company?
Generally, this company is in a cyclical industry and you have taken this stock in the hope that we are at the bottom of the cycle and now there is the hope of further recovery
You may have taken shares in a company that was going through bad times at that time but you were expecting its restructuring.
Whatever your reason for buying this stock, there is only one question you need to answer today:
'Did my investment thesis play out? Did what I felt happen or is happening?
Pay attention to the level of fundamentals of the company, not the stock movement.
Remember we are only talking about company fundamentals; Not the technicalities of the stock.
Let's go back to our thesis and find answers.
Has the capacity expansion that was announced increased the topline and profitability?
The new orders that came, the company was able to deliver?
The acquisition that was done has been integrated in time and the company is getting the expected benefits.
Is the new geography or product expansion that was planned on track and growing profitably?
Has the company been able to take advantage of regulatory changes?
Do you expect an uptrend in cycles if that scenario is playing out?
Or has the restructuring based on which you expected change been successful or is expected to be?
If you answered 'yes' to these questions, then congratulations, your thesis was correct,
but all you have to do is move on to the next step of the framework before making a Buy/Sell/Hold decision.
But if your answer is 'no' then sorry either your thesis was not correct or the management did not do a good job, you should exit.
Cut your losses, or book your profits if you are somehow lucky despite being wrong.
If you answered 'yes' to the questions in the previous step, you find that your original thesis has been fully taken off or some runways left.
Well, maybe you've got a new reason to feel optimistic about this company.
Remember we are only talking about company fundamentals like product, market, business model, financials, operations, and management;
Not the technicalities of the stock.
If you feel that your original thesis has been outdone and your company can't find some fundamentally new compelling reason to do so,
then you must exit.
But if your thesis is not fully realized, you've got some new and fundamentally strong reason to hold this stock or put in more money.
But before investing more money in this case, consider the next step in my framework.
In this last case, you should not leave it, we have understood it - but stay or buy more?
Should you keep your money or follow it, that is the question.
To get the answer, you are now looking at the valuation evolution of this company.
And you have to do this valuation evolution analysis intra-company and inter-company.
Intra-company means you have to see what was the valuation multiple when you bought this stock and at what multiple it is trading today.
And inter-company means you have to do the same valuation analysis for the peers of this company as well.
And lastly, the same valuation analysis is done for the broader index as well.
One more thing to keep in mind is that you should look at different valuation multiples for different industries and business models.
For example, for a bank, price-to-book-value is more important than P/E multiple.
Similarly, in the case of a growth-stage software company, EV/EBITDA will be more useful to you than P/E.
If your stock's valuation has run faster than its peers and you are unable to figure out why, then you should exit the stock.
If the growth or decline in its multiples is in line with the growth or decline in the multiples of the competition and the index, you can hold.
And if multiples of your stock compete against or multiples of the index underperform, you can buy more shares of this company.
Remember that this is all based on the fact that you feel that your original thesis has not been fully realized
or that you have found another fundamentally positive reason to belong to this company.
it is clear to you that the exit strategy will largely depend on whether you entered the stocks based on your research or recommendation.
And you must have got an idea whether in both cases you have to exit or not based on different situations.
But, there may be some other cases in which the fundamentals of your company are looking good but still, you should sell its shares.
Let us have a look at 4 such scenarios.
The first scenario is quite common and very simple to implement.
Suppose you have some stocks in your portfolio which are currently running at a loss.
But it's an unrealized loss, i.e, you haven't just sold these shares at a loss, and you're fundamentally happy with these shares, i.e, you want to hold onto them.
And let us assume that you have already booked some profits in some other stocks in this financial year.
So whether it is a realized gain, you will have to pay tax on capital gains.
If there is long-term capital gain i.e. LTCG then a 10% tax will be paid and if there is short-term capital gain i.e. LTCG then a 15% tax will be paid.
But you can sell your currently loss-making shares to realize the loss and reduce your capital gains tax liability.
You can buy those shares again and add them back to your portfolio because you originally liked these stocks, didn't you?
So in this way, you can retain those shares in your portfolio and also reduce your tax liability. This is called tax-loss harvesting.
But before implementing it remember 3 precautionary things:
The first is that this is tax-loss harvesting, you ideally only do it in stocks that are currently in losses but you are overall bull on those stocks.
Because ideally, you have to return these stocks back.
The second is that you should do it only if you book some profit in this financial year.
If you have made only losses in this financial year, then you will not get any benefit by doing tax-loss harvesting.
On the other hand, you will increase your loss by selling your favorite stocks at a loss.
Third, remember that you can use long-term capital loss only to offset LTCG.
While you can use your short-term capital loss to offset both LTCG and STCG.
The second scenario would be where you bought stock to meet some of your personal goals.
Personal goals are usually time-based, such as buying a house after years, funding children's education, getting a new car, etc.
I do not think that retail investors should invest directly in individual stocks to achieve such goals.
For this, you can invest in index funds, mutual funds, or debt instruments,
as investing in individual stocks can be quite volatile.
Diversification is very important for goal-oriented investing, to protect against your downside risk.
But even then, if this is the second scenario playing out in your case - meaning you bought some shares for some time-based target achievement,
and the time has come for us to realize the target, then you sell these shares
However, even if you're fundamentally positive on this stock.
Yes, if you have the capital otherwise available to meet this target, then you need not sell these shares.
The third scenario could be that you like the fundamentals of your investee company but you like the fundamentals of one of its competitors even better.
Like you own shares of a leading car manufacturer but this company manufactures cars that run on petrol and diesel,
and on the other hand there is a competing company that has successfully launched EV cars and you see growth in the EV sector.
Your research may turn out that it should allocate capital to this new EV maker to exit the company that makes cars with internal combustion engines.
Yes, then you may keep monitoring the company in which you have invested,
it may come out in your research that some other level company in its value chain can do more growth.
Take the example of this car company, you may have shares of an electric car manufacturer,
but your research revealed that there is only one company that supplies battery components to all EV manufacturers in India,
which is is more profitable than this car manufacturer
then it may be more profitable for you to exit this EV manufacturer and switch to this component supplier.
A fourth scenario could be that you invest in other asset classes, not just equity, such as bonds, FDs, real estate, gold, etc.
And as per your research, some other asset classes may give higher returns in equity in the next 1-2 years,
so it may be a good idea to exit your preferred stocks completely or partially and invest in other asset classes to Get better returns.
If you follow the fixed asset allocation strategy that you want, then your equity exposure should not exceed 70%,
and equity weightage in your overall portfolio should be 80% as your existing stocks, then you can still partially sell your stock.
But let me first tell you that such switch ideas - be it within equity or across asset classes - are not an easy task and be convinced of.
This takes a lot of experience and research.
So, if you are new to the world of investing or have only been in it for 2-4 years, I have 3 tips for you
that will not only help you with your "when to sell stocks" decision but will also help you in making a better and smarter investor.
At the beginning of your investment journey, there is no harm in booking partial profits if your original fundamental thesis is even partially realized.
Partial profit booking means if you have 100 shares of a company on which let's say you are making a profit of Rs 100 per share,
but you still have faith in this stock that this stock will still go higher,
you sell half or less of 100 shares can make you realize some profit, especially if you are new to the stock market.
What will happen from this? Starting this will boost your confidence and level of confidence in your next investment.
Will last, only then will move forward.
Let us see the next point. My next suggestion would be to keep it simple.
Your every stock idea should be such that you are not buying a few shares in this company, buying the whole company.
This is my next suggestion... ie, think like a private equity owner.
Private equity companies are those that invest their investors' money in often unlisted companies, manage and develop those companies,
and eventually conduct an IPO and sell to someone to earn capital gains and dividends.
These are similar to venture capital firms, but where venture capital firms invest in startups, PE firms are more mature and invest in profitable companies.
Private equity firms typically take 100% or majority ownership in their portfolio companies.
But those companies do due diligence for many months, sometimes even years, before making an acquisition.
Their investment thesis 'Why to Buy', 'How to Grow' and 'When to Exit' is clear on Day-1 itself.
Of course, private equity firms have lots of smart analysts helping them make these investment decisions day and night,
and because these firms are majority shareholders in their portfolio companies, they have the power to change a company's direction.
But you can build a PE firm if you have a mindset like it.
There is a system in place where you have answers to 'why to buy', 'what to expect', and 'when to sell' on day one.
And let me tell you, as a public market equity investor, you have what even PE firms don't - liquidity to sell at any time.
PE firms have no option but to exit when their investment thesis fails.
That's all - here's my complete outline of 'how and when to sell' and some tips.
I'm sure some of you are thinking 'Man, this is going to be hard, it's a lot of hard work!' No problem, I have a solution for you too.
Look, not everyone has the interest or ability to invest that much time in the stock market,
and that's okay - in this case, your best bet is mutual funds, where you hire a professional fund manager to invest your money.
You can grow your money peacefully by paying a nominal fee.
then you can invest in index funds and let economic growth and the stock market do their work.
Due to this, you get good sleep at night. Take only as much risk as you can tolerate.
I hope this video gives you a lot of clarity - not just about the question of 'when to sell',
also about the overall direction of your investment journey in general.
Let us know your appreciation, criticism, and suggestions by writing them in the comments;
If you liked the video, then like this video and share it with your fellow investors.
Keep on learning, earning will automatically increase. Namashkar