Views on Life & on Equity Investing

Wonder, Wealth & Abundance

When to sell / 90 degree flipped bell curve / Hour glass

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For an Active investor,

Good reasons:

  • When the stock trades at significantly higher valuations compared to peers or its own history (historic / relative valuation)
  • When a better idea is available in the market (opportunity cost)
  • When original thesis has been proven wrong and your are playing an ostrich or engaging in mental accounting, loss aversion bias etc.
  • Fraud by management
  • When you need money for change in personal circumstances (big expenses / retirement)
  • When the stock is overbought
  • When the industry future does not look favourable
  • When the stock has become significantly overweight in the portfolio (40% for some or 15% for others) even if its cheap/attractive (portfolio concentration risk), this was the stock that became 5 bagger in a year on 10% portfolio weight
  • You bought for relative cheapness by you don’t really understand the company business model that intimately and/or industry that well
  • You had no idea why you bought the stock, buy low sell high
  • Fundamentals are changing
  • Company has decided to invest money into an unrelated business
  • Massive expansion planned that could make the company very indebted
  • Sell in blocks, be reluctant to sell stocks with a promising growth story ahead
  • When the industry has caught on mania and all stocks are selling at 100 PE+ in that industry (crypto/.com/clean tech/algae based energy/biotech/AI/Robotics etc)
  • Your stock has become the buzz and is in media everyday
  • Selling a hot growth stock much before the growth slows down (PE contraction slap)
  • Portfolio rebalancing
  • You are following a system but making an exception in this case, hard to tell if you are emotional or not

 

Bad reasons:

  • Its dropped in value
  • Market, Economy, Industry is bearish (if that was the original thesis.)
  • Panic selling by institutions or public for any reason (such as out of 100-200-500 / industry index)
  • Selling for tax reasons
  • Dividend has been eliminated – without investigating the reasons
  • Transaction costs

 

In short, you need to make the portfolio stronger, improve its quality, character and diversification, your portfolio should become a hardy survivor cockroach over time.

Two illustrations

Rotated Bell Curve

If you have generated financial wealth, gained and applied right sort of knowledge then in most cases the portfolio should resemble the graph below.

  1. More stocks as an amateur (that is the right model, most people start with single stock)
  2. Fewer stocks when you are experienced
  3. More stocks when you have more than enough money than you need

FullSizeRender

To appeal to your lustier and more imaginative side, another illustration is the hourglass figure like silhouette of well shaped girl. You can complete the other bits in this image, here is the outline. You remember an Ad (I am unable to find in which the mountain hiker asks for a bottle of coke by gesturing the shape of a bottle, her father thought this chap is asking for a girl). Found a similar one.

 

Here is the illustration:

IMG_0461

Disclosure: Have vested interest in the companies mentioned. Views are personal notions and do not represent any organisation or company. Investment in stock market can (and many a times do) result in loss of principal capital.

http://www.elevendimension-funds.com

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Written by amitdipsite

October 12, 2017 at 6:33 pm

Posted in Uncategorized

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