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WHEN TO SELL A STOCK?

April 21, 2024
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Being in the red is no reason to sell a business, but there are some valid reasons to sell.

 

FUNDAMENTALS GONE

I often say I know when I am going to sell a stock, the moment I hit the buy button. If the fundamental reason why you invested in the stock is no longer there, you need to move on. Sometimes you might think that the moat of the company is very strong, but after youve invested, it becomes apparent that you made a mistake. Cut your losses as soon as possible or take your gains as soon as possible. Holding onto something you do not believe in completely will turn investing into a painful experience.

 

Part of my fundamental analysis includes studying the management of the business. If there are significant management changes I cannot live with, I would also consider selling.

 

If the business performs below my expectations, meaning growth slows down significantly, something in my fundamental analysis was wrong. I would re-evaluate my hold position.

 

FRAUD

If I can't trust management, I can't trust the numbers. And If I cant trust the numbers, I cannot invest in the business. External auditors place great reliance on management information. Unethical leaders will deceive auditors. It is not worth the risk.

 

ACQUISITIONS/MERGERS

Many companies grow through acquisitions. This is an amazing way to grow, but you need to evaluate each acquisition and determine if it is value-adding or whether it will destroy value. I do not pay much attention to small acquisitions, but if the business I am invested in buys a larger company I do not like or believe in, I will consider selling my position.

 

Also take note if management acquires entities that creates synergies and makes business sense. A large acquisition with no synergies with the current business can distract management from the core business and you might end up with an investment you would never have bought in the first place.

 

YOUR COMPANY GETS ACQUIRED

This one is tricky. Elon Musk made an offer of $54.20 per share of Twitter. Currently the share trades at $41.58. It would make sense to wait for Elon to pay you $54.20. There are so many nuances to takeovers. Twitter is probably the extreme. You need to look at the offer price and also the quality of the organization buying your business. I tend to lean towards selling when take-over talks start taking place, but they are tricky, as I mentioned.

 

TRIMMING

If a stocks value increases exponentially and it becomes a very large portion of my portfolio, I would trim that position. Personally, I use this as a risk management tool. It doesnt mean that there is anything wrong with the business, I would rather take profits than watch one stock sink my portfolio should the share price fall significantly.

 

OPPORTUNITY COST

Investors are human and it often happens that we lose interest in something or something shinier comes along. There is no harm in taking a deep look at your portfolio and ensuring that your money is invested in the best possible place. Be very careful of doing this regularly, but it will happen during your investing life that something better comes along. Always take the tax implications into account.

 

I NEED THE MONEY

There is no shame in selling if you need the money and your emergency fund is empty. This should not happen more than on the odd occasion, but if I need cash for an emergency, I sell and rebuild.

 

TAX-LOSS HARVESTING

Just like SARS will tax you on profits, they will give you a refund for realised losses. If I want to lower my tax in a specific year and I have a losing stock in my portfolio, I sell the stock and claim a percentage of my loss back from SARS, (depending on the tax bracket you are in). If I still love the stock, I buy it back at the lower price and hold.

 

Watch this

https://www.tiktok.com/@soulfairy3/video/7134332624851455237?is_from_webapp=1&sender_device=pc&web_id=7117144334160643589

 

Disclaimer: Nothing in this article should be seen as financial advice. Everything stated is for educational purposes only. Always do your own due diligence.

 


 


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