A successful investor knows not only when is the best time to buy shares, but also when is the best time to sell a share. In my personal experience, the second is in many cases more difficult than the first. To help you with this difficult task, in this article I will explain the 5 reasons that will tell you when to sell shares on the stock market.
The importance of knowing when to sell stocks on the stock market
El value investing It consists, on the one hand, in paying for companies a price lower than what they are actually worth, that is, paying a price lower than their intrinsic value. But also, on the other hand, it consists of selling shares that, for different reasons, are no longer suitable components of our investment portfolio.
In my case, I usually look for shares of companies in which I would not mind being a shareholder for decades. As i said André Kostolany about their investment philosophy:
“Buying securities, company stocks, taking sleeping pills for 20/30 years and when you wake up: voilà! he's a milionare"
Or as Warren Buffett puts it:
"Our favorite time frame to hold a stock is forever"
However, it is very difficult to find companies that we can keep in our portfolio forever. On many occasions, we will have to face the sale of shares for various reasons. Next I will show you the 5 most important reasons to sell a share on the stock market.
The 5 reasons to sell stocks on the stock market
The 5 reasons that tell us when to sell shares on the stock market are the following:
- Quote above its intrinsic value
- Existence of better investment opportunities
- Investment portfolio adjustments
- Increased risk in the company
- Personal needings
Next I will briefly explain each one of the causes for which to sell a share in the stock market.
Quote above intrinsic value
It often happens that over time the potential of many investments that have been profitable ends up being diluted due to the revaluation of companies in the stock market. Mister Market You may be depressed for a while, but you often end up regaining your sanity and paying stocks the price they are worth, or even a higher price. This will be the time to sell. For example, if a share that we have in our portfolio is trading at € 50 and we think that its intrinsic value is € 45, it will be time to sell.
Although this is the most common reason to sell a stock, but it is not the only one. There are other less common reasons that we also have to take into account when determining whether to sell a share.
Existence of better investment opportunities
Sometimes selling a company that is priced below its intrinsic value can be a good idea. This happens when there are investments that offer us greater potential.
This is easy to see with an example. Let's suppose that we have stocks of company “A” in our portfolio that, according to our calculations, are trading at a 20% discount to their intrinsic value, so they would be trading at a good price and, in theory, it would not be the time to sell. However, it may be the case that another company “B” is trading at a 50% discount at the same time, which would imply greater potential for revaluation. In this case, selling “A” shares, despite still being undervalued, may be a good idea if we spend this money to buy “B” shares, as these offer greater potential.
Investment portfolio adjustments
There is a case in which, despite the fact that a company continues to trade at an interesting price, it is advisable to sell part of the shares that we have in this company's portfolio and reduce our exposure to it. In the case in which a company has appreciated considerably, it is possible that it occupies a large percentage of our investment portfolio. In these cases, depending on our risk profile, it may be advisable to reduce our relative position in this company to increase our diversification.
Let us assume that companies “A” and “B”, which are part of our investment portfolio, have the same potential for appreciation. Suppose we have in our portfolio a relative position of 15% in shares of “A” and 5% in shares of “B”. We may be interested in reducing our position in “A” and increasing it in “B” to redistribute the weight of each company and minimize the risk of the portfolio.
Increased intrinsic risk in the company
It may be that the determining factor that tells us when to sell shares is related to the increased intrinsic risk of the company. This increased risk can make the company no longer attractive depending on our profile as investors and our perception of that risk.
This increased risk can be due to different factors. Among others:
- Pérdidas de competitive advantages
- Irruption of a disruptive innovation change the rules of the game
- Changes in regulation that negatively affect the company
- Signs of accounting fraud
Sell a share for personal needs
This is one of the most common reasons for deciding when to sell stocks and it is also the least recommended reason to sell. This is because the most common is that times of need coincide with periods in which stocks are trading at prices below their intrinsic value, as happened at the beginning of the current crisis, where Mr. Market offered us fantastic companies to bargain prices.
That is why I recommend investing only the money that is not going to be needed in the medium or long term and always have a reserve of cash or low volatile financial assets for emergencies, since if we are forced to sell shares in times of need, the most It is likely that we are not selling at the right time or for the right price.
Other reasons that indicate when to sell shares on the stock market
In this article I have exposed the 5 reasons that, in my opinion, indicate when to sell shares on the stock market. If you can think of any more reasons ... I hope so in your comments!