When Should You Sell Your Stocks?

**Quick Update**

Hey everyone!

I know that I haven’t written a more in-depth post in a while, so I want to share with you guys about some exciting things that I’ve been working on just for you!

• Researching up on some incredible opportunities in the stock market (probably gonna do a Hackathon soon – let me know if you are interested!)
• Doing consultation calls with my GIM members discussing my handpicked high quality companies (some of them achieved incredible results!)
• Chatting with my international friends who run funds for their investors (I’m going to appear in one of their podcasts soon, stay tuned!)
• Forming deeper connections with all those who reached out to me via Instagram or email!

As many of you have shared that you learnt a lot from my last post, I have decided to do a poll on my Instagram about what I should write next so I can help all of you better! 

Most of you selected… 2!

Thus, I will share with you some of the methods that you can use to determine if it’s time to SELL your stocks!

**While this content was previously only available to my GIM community, I have decided to share it with all of you because I want you to succeed too!

All I ask is that if you find my content useful, please share it on your social media or investing WhatsApp group!**

Tempting Reasons to Sell

• The company’s share price is not moving.
  • You got tired of waiting, so you sold it. That’s almost always a recipe for disaster. Instead, focus on the fundamentals of the company. The share price will ALWAYS follow the fundamentals in the long run.
  • Now, every time you are tempted to sell when the price appears to be still or increasing at snail’s pace: imagine the pain of seeing the stock price rise dramatically after you sold it. Have some patience. 
• The price in the stock market is too high.
  • Remember, the stock market is not the company. It’s possible for your company’s share price to move up even when the market price is deemed as “high”. 
• You are trying to time the market.
  
  • You hope to sell the stock and buy it back 3 – 5 days later at a lower price. You hope it will happen. Most of the time, you will not be able to do it. When the stock price goes up further, you will find it harder to buy back. 

Now, let’s move on to proper reasons why you should sell your stocks:

1. You Made a Mistake in your Analysis

You might have assumed a growth rate that did not materialise. Here are some possible reasons:

• You expected their businesses to grow at 30%, but it grew at 10% instead.
• You expected their product launch to be successful, but it was a flop. 
  • This caused you to revise your valuations of the company materially. 
• You assumed they are able to collect their sales from huge customers quickly, but their customers delayed paying and it turned out to be a bad debt. 
  • This caused to you question whether their profits could be turned into cash flow. 

Let me illustrate this with a real life example:

Back in 2015, I purchased shares of Swiber. Swiber is a integrated offshore construction and support services provider for oil and gas field development.

While it was not a fantastic business, it was cheap. After I purchased it, I decided to do more work on the company. As I dug further, I realised that Swiber had problems collecting their sales from customers.

Looking at this table of “trade receivables past due but not impaired”, it means that out of their uncollected sales, 81% is not paid up on time and likely to be written off as bad debts. Immediately, my alarms went off!

Although I had only purchased it for one day, I sold it the next day at market price without any hesitation.

When it comes to investing, it pays to be ruthless in protecting your hard-earned money. 

Should Swiber be unable to collect their trade receivables, the value of the company would drop significantly. 

Some time after I sold, Swiber went into voluntary liquidation. 

2. When There is a Better Opportunity

Previously, I invested in a Hongkong-listed company called China Maple Leaf.

They operate elementary, middle and high-school schools providing high-quality education. China Maple Leaf is reputable and the business is defensive. On the quantitative aspect, it passed many criterias with flying colours. Compared with its peers, CML had better numbers and operational metrics too.

While I had the company in my portfolio, I continued to scout for better companies around the world. From there, I took a liking to several USA companies. 

After looking through my new list, I realised one of them is much better than China Maple Leaf.

Several important things:

• It provides an essential digitalised service (digitalised services have higher margins)
• It scales better (opening a physical school takes time)
• They are able to on-board customers quicker

Despite the second company being slightly more expensive, I made the switch. This is as I am buying a company that I feel is of higher quality.

While it might be too early to conclude if it is a right decision, my returns so far are higher with this second company. 

3. When the Valuations are Exceedingly Expensive

This is a tricky reason. Valuation tends to be the LAST reason why we should sell a company.

Quality companies are highly prized by investors because of their superior business metrics, dominant market position, and differentiated products/services. Even if a company is overvalued by 20-30%, does it warrant a sale? My answer is no!

This is as quality companies tend to surprise us on the upside with new partnerships or growth initiatives. You can never tell if the same company that is currently deemed overvalued would suddenly have a blowout quarter of incredible growth in earnings and cash flow.

While you can definitely argue that, if it is overvalued, it might come down to a fair price so you should sell now and buy back later. However, what if it does not happen and instead continues to rally further? 

You would have missed the entire rally because you wanted to buy it a few dollars cheaper. 

And even if it DOES really go down, so what? You would simply have missed the opportunity to average down your positions by a few dollars.

Putting it into perspective, which is worse? 

[A] Missing the opportunity to average down your position by a few dollars.

[B] Not owning the stock when the stock price rises by tens of dollars, should the company decide to release a new product or partnership out of the blue.

Although you may be fairly certain at the moment that this will not happen to you, let me share with you an experience that my friend went through:

One of my friends wanted to buy Shopify at a lower price in 2019. She sold it then, but the pull back did not come. She waited and thus let Shopify slip out of her hands. It was simply difficult to buy it back at a higher price.

The ability to think with clarity differentiates an average investor from an outstanding investor. 

The question is, do you want to be average or outstanding?

As they always say: “Time in the market”… not “Time the market”! 

With that said, there have been instances where companies are just enormously overvalued. 

I know, I know. 

Valuations are tricky. But regardless, there will be some instances where you would know it is simply RIDICULOUS for your company to be trading at such elevated valuations.

Deep in your bones, you know it. It’s just overvalued… it’s crazily overvalued.

That’s when you ought to consider selling some of your shares. 

(RELATED: Share Price Alone Is Meaningless)

4. When the Fundamentals Deteriorate… Badly

Because of capitalism, the world competes. The best products win. 

As investor, we must never fail to recognise that. There is never a “sure-win” company.

Some companies rise. Some companies fall. 

Inevitably, weaker companies will report lower profits in light of strong competitors in the market place.

Just like when Apple burst into the smartphone scene, Nokia’s fate was toast.

Just like when Microsoft made personal computing accessible to everyone, the demand for physical typewriters went out of the windows. 

You get my point. 

Some signs of deterioration are:

1. Lower profits
2. Lower profit margins
3. Diversification into unrelated businesses 
4. Incompetent management
5. Alarming debt levels
6. Increased competitions
7. Lack of innovation 

With that in mind, I want to stress that there is no use falling in love with your companies.

Really.

You could own shares in those companies. But the CEO does not know you. 

If the fundamentals continue to deteriorate for a prolonged period of time, and you decide that there is no returning to the good old days, it is time to sell the stock and find a better company.  

Conclusion

As I want you to succeed and have the best investing knowledge, I hope this article serves you well. You may want to print this article down and keep it for future reference.

From how I see things, investing is like a form of mental sports.

While it is possible that you may make mistakes, I want you to know that it is perfectly normal. In fact, you will improve and learn faster because of your earlier mistakes. 

(I’m not immune to mistakes too – you can read about them to avoid them for yourself in an earlier article here!)