Isn't it the most difficult decision? You invested in some stock which is giving you great profits now, so should you book your profits and exit? You invested in some stock which is giving you big loss now, so should you book your loss and exit? You invested in some stock which is going nowhere, so should you exit and invest somewhere else?
Well fortunately the answer is quiet easy. "No" for all the three cases.
The answer to your exit strategy lies in your entry strategy. Why did you invest in a particular stock? Maybe because the management is top quality, or the products are superior, or the brand value is great or the market share is monopolistic, or the company policies are shareholder friendly, or the dividend payout is high or the future plans are game changing for the company. If you know why you invested in a particular stock then you should stick to your investments as long as the reason for your investment holds true and is not violated in any way.
Fundamental violations for possible exit
For example management change putting someone stupid in charge of the company or brand destruction beyond repair due to some unfortunate event for example case of food poisoning after consuming something from a food company or a report exposing unhygienic manufacturing practices leading to loss of trust or data manipulation in a research company or bad customer support leading to customer loss in a service company, or reputation damage due to fraud charges on company officials or loss of market monopoly due to competition from new entrants, or product failure or unfavorable macro environment like severe drought condition for agri-sector stocks or restrictive government policies for power sector stocks and so on.
Noise vs actionable events
Stock market is a dynamic place and stock prices keep fluctuating due to daily market conditions, news flows and pure trading activity. That is all noise. If you are a long term value investor then there is no reason for you to monitor this noise and increase your blood pressure. All you need to monitor is that the fundamental reason why you invested in a particular stock, is it still valid or has been violated.
Simple Profitable Exit Strategy
If the fundamental reason for your investment is still valid, you need to stay invested irrespective of whether the stock price has gone up or down or nowhere. If the basic reason why you invested in the stock has been violated, then there is no reason to stay invested in the stock irrespective of whether you are making profit or loss or nothing in it. simple. Buy carelessly if your conviction holds, sell mercilessly if it does not.
Show the right exit to the unlucky ones
Keep this one simple thing in mind and I promise you next time a person comes to you lamenting that he sold the stock and it went up or he bought a stock and it went down and his luck & life is miserable, you will smile to yourself knowing that you have left these worries far far behind. Don't forget to show your miserable friend the right exit though!
Well fortunately the answer is quiet easy. "No" for all the three cases.
The answer to your exit strategy lies in your entry strategy. Why did you invest in a particular stock? Maybe because the management is top quality, or the products are superior, or the brand value is great or the market share is monopolistic, or the company policies are shareholder friendly, or the dividend payout is high or the future plans are game changing for the company. If you know why you invested in a particular stock then you should stick to your investments as long as the reason for your investment holds true and is not violated in any way.
Fundamental violations for possible exit
For example management change putting someone stupid in charge of the company or brand destruction beyond repair due to some unfortunate event for example case of food poisoning after consuming something from a food company or a report exposing unhygienic manufacturing practices leading to loss of trust or data manipulation in a research company or bad customer support leading to customer loss in a service company, or reputation damage due to fraud charges on company officials or loss of market monopoly due to competition from new entrants, or product failure or unfavorable macro environment like severe drought condition for agri-sector stocks or restrictive government policies for power sector stocks and so on.
Noise vs actionable events
Stock market is a dynamic place and stock prices keep fluctuating due to daily market conditions, news flows and pure trading activity. That is all noise. If you are a long term value investor then there is no reason for you to monitor this noise and increase your blood pressure. All you need to monitor is that the fundamental reason why you invested in a particular stock, is it still valid or has been violated.
Simple Profitable Exit Strategy
If the fundamental reason for your investment is still valid, you need to stay invested irrespective of whether the stock price has gone up or down or nowhere. If the basic reason why you invested in the stock has been violated, then there is no reason to stay invested in the stock irrespective of whether you are making profit or loss or nothing in it. simple. Buy carelessly if your conviction holds, sell mercilessly if it does not.
Show the right exit to the unlucky ones
Keep this one simple thing in mind and I promise you next time a person comes to you lamenting that he sold the stock and it went up or he bought a stock and it went down and his luck & life is miserable, you will smile to yourself knowing that you have left these worries far far behind. Don't forget to show your miserable friend the right exit though!
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