When should I buy or sell stocks

When to Sell a Stock

For several years now, the stock exchanges have only known the upward direction. Although it is certain that we will eventually get into a correction phase, it is by no means foreseeable whether this will be the case this year, five years from now or even later. Nevertheless, from an emotional point of view, it is understandable that the nervousness of investors is increasing.

Even if the emotional urge is great to liquidate your portfolio in whole or in part with the supposedly increasing maturity of the stock market cycle, it is advisable to reflect on the actual purpose of the investments. The aim of a value-oriented investment is to invest in very good company to invest and long term to benefit from their potential.

Very good companies remain very good companies even in a correction phase and a long-term investment approach not only increases your chance of exploiting the full development potential of a company, but above all solves the problem of estimating entry and exit points (timing). All in all, a long-term investment in a quality company is the key to success. Last but not least, this is one of the core philosophies of star investor Warren Buffett:

“Our favorite holding period is infinite. If you're not comfortable holding a stock for 10 years, then you shouldn't own it for 10 minutes. "

So, if you feel uneasy or have an emotional urge to sell your stocks, first check the following list for hard facts to sell. Or you may find that you have just surrendered to an affective impulse.

Let's start with the reasons why there is no way you shouldn't sell a stock:

1. The share price has multiplied since purchase.

Objectively speaking, the historical price development cannot be an indicator of the future development of a share price. Rather, it depends on the development of sales and earnings. Only our emotions lead us to believe that the increased course carries the risk of correction. But the stock doesn't care what the price did in time. However, an increased price can also have increased the valuation of the stock. This is another fact that is very relevant (see point 8).

2. The share price has risen significantly in the past few weeks.

People value short-term gains very much and often neglect long-term opportunities. For example, many would prefer € 1,000 today to € 1,300 in a year. As in point 1, a short-term price increase is not an indicator of how a company is valued and certainly not of the movement in the share price in the future. But this foresight alone is decisive. Here, too, reference is made to point 8, which addresses the appropriate question to actually be asked.

3. I think the stock price will fall and come back in lower.

The principle of hope is rarely a good advisor on the stock market and experience shows very clearly that attempts to anticipate the market are based on pure luck and cannot be converted into a permanently functioning process. Trying to trade such fluctuations will be put into perspective because you will likely not be able to hit entry and exit points perfectly. In addition, you will experience higher taxes, transaction fees, additional overhead and a certain amount of stress on your nerves. Sometimes the easy way is better.

4. I want to secure profits before prices fall.

Here, too, emotionality plays a trick on us. You don't know today whether you will get out too early or too late because you don't know what the exchanges will do in the future. It would not make sense to secure profits if the price continues to rise in a row. You'd also get annoyed if you were heavily invested in a good company that is set to do well in the years to come. The professional perspective: If the price should actually fall, the market gives you the gift of being able to buy additional shares from a good company at a lower price.

Even if you generally strive for a very long-term investment horizon, situations naturally arise in which an originally made decision should be reconsidered and corrected. These cases are covered by the following points:

5. The reasons you bought the stock turn out to be wrong.

Even if the aim is of course not to make any mistakes when selecting stocks, there will always be cases in which one has made a selective mistake. Investing in stocks involves making decisions based on incomplete information. New information can always emerge that was not previously known. It is all the more important to always be up to date with equity investments - not regarding the share price, but regarding the company. So if new information appears that contradicts the previous reasons, a sale should be considered.

6. The company's fundamentals have changed.

There are cases in which companies do not develop in the way that was originally expected. Such effects can exert an influence that changes the fundamental situation of a company. If the original goals are then no longer achievable or the risk situation shifts to your disadvantage, a sale should also be made.

7. You will find a better opportunity.

Should you come across a stock with a long-term potential that is higher than that of a current position, there is of course the possibility of an exchange. But beware! Ask yourself whether the new opportunity is actually a better long-term decision or whether it is just an urge for short-term price gains.

All 7 points come together in one question that clarifies whether a share should be sold or not:

8. Is the stock overvalued?

The only thing that should really get you into selling a good company is an overly expensive valuation. The best company is of no use to you if you pay too high a price for it. The background is that sooner or later prices will normalize, that is, share prices will fall. When the time comes, high ratings are a risk as they will drop back to "normal" levels.

It is the same with stocks as with any other asset. Imagine, due to a very hot summer, the demand for fans increases so much that prices rise from € 100 to € 500 and maybe even climb to € 1,000 over the summer. At some point a pain threshold is reached in which fans are no longer useful compared to the high price. People would look for alternatives and increase e.g. B. to ice baths to cool off. The demand and thus the prices for fans would drop drastically. The bubble bursts. Good for those who avoided the high rating levels of fan manufacturers at an early stage and invested in pool manufacturers.

Please note the difference between the points above, which attempts to anticipate prices based on past data, and the previous point, which includes the fundamental aspect of valuation, but does not provide a forecast of future price development. Only the shift in risk in the course of the valuation expansion is looked at and this is adjusted.

This difference is significant and stands for the separation between speculating and investing - and thus in many cases between long-term success and failure.

Conclusion

There are things that we can control and things that we cannot control. Stock market prices do not belong in our control area, which is why there is little point in trying to forecast them. We have to accept fluctuations in exchange rates for granted. But we can influence what kind of companies we hold in the portfolio and can influence the probabilities with which we hold companies in the portfolio that have a promising future ahead of them.

We can also influence valuation risk. We can calculate how highly a stock is valued and make the decision whether or not to be invested. That is what we should focus on. On the other hand, we should try to control the emotional influence of our brain as much as possible, since this does not necessarily result in the best long-term decisions.

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Alpha Star Management GmbH

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Interested in more details about that Alpha Star equity strategy, personally declared by Fund manager Felix Gode? We are happy to offer you current monthly updates:

Now exclusively for you:
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and videos of fund management

  • Alpha Star Magazine per month
  • Video reports of the fund management
  • Important depot updates occasionally

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