Whether you’re enjoying a stock price surge because of a bull run or suffering from losses because of price drops, one question is always certain to pop up: When’s the best time to sell your stocks?
During bullish periods, investors experiencing continuous price appreciation face the problem of “controlling” their greed. The stock price may already be up 20%, 50%, or even 100% but some traders still don’t want to sell because “I want more.”
Similarly, those already suffering from losses may still not be interested to sell because they fear the harsh reality that they have lost real money. They continue to believe that the stock price will return anyway to previous levels. That is possible but, in some cases, the loss could remain after several years or even decades.
So when’s a good time to sell?
For us, it’s a good time to sell stocks when (1) the Target Price has been reached; or (2) the expected Profit Percentage has been achieved; or (3) an acceptable level of loss has been determined. Let us explain these three scenarios.
1. Target Price reached
Many traders and investors buy stocks with a predetermined Target Price.
This Target Price value may be computed using financial valuation models (such as Dividend Discount Model, Free Cash Flow to Equity (FCFE), Free Cash Flow to the Firm (FCFF), or Price Multiples Model) and reported through equity research reports. Some investors, however, rely on rumored target prices which are abundant on Facebook or social media or relayed directly to them by brokers.
Either way, lock in the profit by selling a stock upon reaching your own Target Price.
For instance, I previously bought shares of Megaworld Corp. (MEG) at P2.00. My Target Price then was P5.00 — corresponding to a 150% increase. Upon hitting the price, I unloaded and sold the stock. MEG rose further to almost P6.00 but I did not regret it. Currently the stock is trading at around P4.00.
Some might argue that I “lost” the opportunity to make more but I discovered that the key to profitable and sustainable trades is managing expectations and managing greed.
2. Target Profit percentage met
During stock market bull runs, stock prices break out then continue to rise indefinitely. Another good time to sell stocks is when a Target Profit Percentage (vs. Target Price as explained in No. 1) is met.
For example, I previously owned DoubleDragon Properties (DD) shares which I bought for P20.00 each. My target profit upside then was 100%. This means once I’ve earned 100% return, I’m ok to sell the stock.
A few months later, the stock broke out and was trading above P40.00. My 100% target was already reached but back then, I honestly was unable to moderate my greed after seeing the price breakout. Despite already doubling my money and achieving my Target Profit Percentage, I still wanted to hold on to the stock.
DD further rose and peaked at P67.75 but weeks later, its stock price began to tumble. That’s when it hit me: I should stick to my own Target Profit Percentage. I then decided to sell DD at a lower price of P35.00, locking “only” a 75% profit. It’s below my 100% profit target, but I learned the value of discipline in the process.
3. Cutting losses
When stock prices are falling, investors usually overestimate the market by believing that prices will quickly return to previous profitable levels. That sometimes happen immediately but in most cases, it takes months or even years before prices bounce back. Investors then become ipit — stuck with a loss that they don’t want to realize.
Our advice: save yourself from misery by setting up a Stop-Loss Order or by selling a stock when your Target Loss Percentage is reached. This is actually just the reverse of No. 2 above, wherein instead of having a Target Profit Percentage, what you’re setting up is a “Target Loss Percentage.”
In my case, I bought AgriNurture Inc. (ANI) years ago at P15.50 per share. I had a Target Profit Percentage of 100%, but weeks later, the stock just kept on freefalling. At P12.50, my ANI shares already lost 20% of the value. That’s when I decided to sell ANI at a loss and to let go.
Yes, it’s tough to materialize the losses and to realize a 20% price reduction. But if you believe stock prices will not immediately return to profitable levels, it will be better to cash out and to transfer money to another stock that could make you money.
Case in point: ANI further fell to as low as P1.50 per share in 2015! That would have been a much bigger loss if I decided to hold on to the stock. ANI indeed managed to return to the P15.00 price level but only in 2018. That’s a long waiting period!
Another example: a friend of mine bought a stock right before the 1997 financial crisis. He decided to wait it out and held on to it for several years. Guess what? The stock’s price returned to its pre-crisis level only after 13 years! That’s 13 years of waiting and that’s money that could have been invested somewhere else.
In summary, to profit in stocks, one should learn when to buy but equally important is when to get out.
If you’re winning, lock in the profit and don’t look back. Do not regret if ever you sold a stock whose price still rose consistently. At least you already pocketed actual money.
When you’re losing, cut your losses and move on. Better to realize the loss so you can transfer those funds to another stock that could possibly deliver profits.
In the end, you simply need to have an Exit Strategy. That’s as important as your stock selection and buying strategy.
Do you agree? Happy smart, stock investing!