The most difficult job for an investor is not about knowing when to buy a share, but, when to sell the same.
Some analyst recommend the Warren Buffet style of buying a share and never selling the same. If that were practical then we would never have sellers in the market.
When is the right time to sell a share?
Some investors never book profits. One wonders if that is the right strategy. In fact, one should look at the amount of profits one has made and get out of the stock. Several mid cap stocks are today quoting at very high price to earnings multiples.
Book profits when the stock become fundamentally overvalued
Some pharma stocks have doubled in the last one year. They are steeply overvalued despite several of them facing worries over US FDA warnings. If the price to earnings multiple has doubled in the last one year from 25 to 50 times, you should book profits and sell the stock. What's the point in holding onto a stock that commands a price to earnings multiple (P/E) of 40 and 50 times. Read what is p/e here
Take the recent case of SUN TV. The stock price of Sun TV has plunged from Rs 450 to Rs 267, because there are worries that the company' s television channels may not be granted a renewal of license. People sold the shares in distress, but, the stock has now recovered from 257 and is back at Rs 340.
Was it worth selling the stock on distress at Rs 260, 270 or Rs 280? Probably not. Another example is Nestle. After the recent Maggi controversy the share price fell to as low as Rs 5800, but, has now recovered to trade at Rs 6500. Those who sold in distress are probably regretting their decision.
Sell if you have made reasonable profits
If you have made 20-30 per cent profits in a year in a select stock it would be time to sell and invest the money in a stock that has the potential to generate similar returns.
Even in a market that is high you can still identify good quality stocks. For example, even when the market is at 28,000 points, we have stocks like NMDC and PSU banking stocks like Canara Bank that look undervalued.
So, you need to identify undervalued stocks and sell the ones that are overvalued.