Buy it and forget it. If this is the strategy you are following to make money in stock investment, think again. Stock markets do not go up in a straight line. In between scaling new highs, the market goes down to climb up again. This is where selling a stock plays a more important role than buying a stock.
You might have heard the cliche — it is not timing the market, but the time in the market that is important. But consider the following examples.
In the US, Mr X had bought six shares of Cities Service stock at a price of $38 a share. In a few months, the stock price slumped to $27. In the fear of losing money in his first investment, Mr X held onto his stock rather than selling it out. In no time, the stock started rising again and when it reached $40, Mr X sold the stock. But the stock continued to climb to $200!
Would you say, Mr X is a stupid investor?
Now, here’s another question for you. If I tell you that the said investor is none other than the Oracle of Omaha and the most successful investor in the world, Warren Buffett, would you still think the same?
One of India’s most successful investors also had the same brush of fate when he sold his first stock of Tata Tea, which he had bought at a price of Rs 43 a share. Three months later, the stock shot up to Rs 143. Tata Tea, now Tata Consumer, is trading at Rs 812 a share after clocking Rs 889 last September. Had he done wrong by selling Tata Tea stock within three months of its purchase?
The moot point is: don’t marry a share certificate if you don’t really want to own the company.
The basic tenet of money making in any trade, including stock investment, is buying low and selling high. It is, however, no advocacy for daily trading. In fact, daily trading is a complete no-no for common investors in stock markets.
But, when it comes to stock investment, selling is more important than buying. Because, by selling a stock you realise your ‘book profits’ and you also can reduce your losses by selling a stock when the tide has turned against it. After all, the ultimate risk in stock investment is the loss that may arise from an investment, good or bad. And this risk can be minimised only by selling the stock earlier than later during the course of its fall. Won’t you agree?
Remember, the share price of any company, however good it may be, goes up following a cycle of ups and downs rather than a straight line. So, if you intermittently keep on selling and buying the same stock instead of following a ‘buy it and forget it’ strategy, you’ll be able to make more money.
Look at the chart below. It traces the Sensex, and hence, reflects the overall market movement, since its early days of late 1970s till now. While the index has moved atop 60000 points from a level of 100 points through the entire course of over four decades, it climbed up successive peaks only by climbing down intermittently.
It may sound odd, but it can be seen from the chart that money is made the most following the periods of crises!
Though it is easy to be wiser in hindsight, it teaches us a few things.
1. First, manage your fear to reduce your risks. This can be done by putting in place a rule-based method, called ‘stop loss’ at a certain percentage, say 5% or 10% below the cost price, to trigger a sell strategy.
2. Second, control your greed by selling your ‘in-the-money’ stock when it is overbought in the market and buying it again when the stock price comes down to a reasonable level. But never go for daily trading. Stick to a good stock for a long term with intermittent buying and selling in line with the above set strategies or moving onto another good company available at a reasonable price.
By being methodical as far as possible, you can tame your emotions of greed and fear — the two biggest detriments on your way to make money on stock markets.
3. Third, reap the benefit of ‘tax harvesting’ to boost your return. Now that equity investments also attract both short-term and long-term capital gains (LTCG) tax, you can reduce your tax burden by selling a stock and buying it again on the very next day and thereby lower your tax outgo by adjusting short-term and long-term losses/gains against short-term and long-term gains/losses respectively.
Invest smartly in stocks. That might involve going against the conventional wisdom “buy it and forget it”.
For customised advice regarding which stocks to sell, talk to our experts today.
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– Porichoy Gupta
