How to avoid selling stocks at wrong time

The stock markets have been on a rampage for over a year, at least the trajectory of the momentum. Ever since, the near coordinated effort by the central bankers and the governments across the world began to deploy unprecedented amounts of currency to stimulate their economies, the asset prices have soared. Of course, we began to identify other reasons like increased productivity, pent-up demand, demand recovery and supply chain issues to correlate the market movements. Moreover, the enormous easy monetary and fiscal measures began to bear fruit with world economic growth projections being highest in over a few decades.

It's natural for investors trying to benefit out from the stock market rise as we're witnessing unparalleled participation. So, the most obvious question has been what to buy? Which stock or fund to buy especially when there's too much noise of reports being thrown out on the past 3, 6 and 12 month performances. It's become common now with people approaching with stock ideas and soliciting opinion on their picks. It's very difficult to stay disconnected and sit on the sidelines. While there's lots of information and literature available on the buy side of the trade, very little is understood on the sell side of the trade.

Historically, selling resembles the buying behaviour among the investors. Most of start to realize the need to exit from the trade by the time it's too late at losses. These could be due to the various biases and the result of an ingrained investor behaviour. We get carried away with the profits and tend to employ dubious parameters for the exit. For instance, we prefix a target price for stock to exit, would wait for that price to reach irrespective of the gain (percentage) achieved. Sometimes, there could no particular rationale to arrive at the price in the first place. This is related anchoring bias where people make a particular reference point or anchor while making decisions.

At times, this could be due to the recent news or price the stock would've reached and then retraced. Investors get fixated to this piece of information while not looking from the entire history. This is termed as recency bias where investors favour the recent events over historic ones. So, how does one approach to selling and avoid the pitfalls of exiting at wrong time incurring losses.

'Why' should one sell could be a good beginning point to understand than 'When'? The most shared reason for selling a stock is that the price began to fall and at times below the purchase price. And is selling such a stock wrong? No! But one should look from the perspective of why one bought that stock. For instance, in situations when there are changes in fundamentals like regulatory, legal and corporate governance which impacts adversely the business environment and its conduct, it's ideal to move out of that particular stock. A greater comprehension of the business, the management and the prospective assessment is required to continue to stick in such situations.

But if the price fall is due to loss in market momentum, then one need to revisit their stance. One could rely on the fundamental analysis to make a judicious decision on the exit of a stock. This is where one must classify themselves as a trader or an investor. As the name suggests, in trading one is associated with a buy or sell purely from the price point. It's clear that the opportunity lies in the pricing differentials of entry and exit. This doesn't require one to understand the business, the fundamentals, etc.

If one has categorized themselves as an investor, then it means that the stock purchase is not just buying an instrument but taking part in the ownership in the underlying business the company operates. In such a situation, every price fluctuation needn't be considered but the pace of growth, the profitability, the competition, etc. become the barometer for evaluation. Though, it's humanely impossible to assess all the possible headwinds and how would a company overcome that, the pedigree of the management helps a bit to estimate it. All these characteristics matter when one turns into an investor in a stock.

Investor behaviour is also widely influenced by the overall market conditions. In a bull phase of a market, many individuals can't distinguish their own behaviour of an investor to a trader. When the markets are rosy it's easy to feel comfortable and confident of the immediate to medium term future for an easy extrapolation. The consistent return on a stock allows one to project it as a 'multi-bagger' even as the price ascends defying the fundamentals. This could let the guard down and such situations are prone to misjudgements.

So as on to sell a stock, one should first know whether they're a trader or an investor and if so the reasons for a sale. Another suggestion to reduce missteps is to have a clear mapping of an investment to a goal. Even if a stock is bought for a trade, one should have clarity on what levels or percentage gains they want to achieve. Equally, perhaps more importantly, in such cases one needs to have a stop-loss (S/L); a price below which they don't hold the stock. This is arrived depending upon the risk ability or loss absorbing capacity of the individual on their investment. It's seen as an insurance to the investment, the gap between the bought price and S/L being the premium.

If one has branded themselves as an investor, even there they could map the holding to their goals. It could even be a long-term goal of retirement and a longer one like that of providing for an estate. That clarity of thought allows one to avoid hasty decisions where we tend to divest a stock prematurely. Thus, it's important for one recognize when not to sell, that solves a lot of problems.

(The author is a co-founder of Wealocity, a wealth management firm and could be reached at

[email protected])