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The All-important question of investing: When to sell a stock.

Sometimes I think there is a parallel between the investment guidance available to investors and the Abhimanyu story in the Mahabharata.

Just as Abhimanyu knew how to get into the Chakravyuh formation of warriors, but not how to get out of it, almost all the investment advice out there is about how to identify stock to buy. Unfortunately, not even 10% of it deals with when to sell and needless to say, you cannot book investment profits without selling.

Of course there are complicated answers to this about tracking what happens to industries companies etc but there is also a simpler rule of thumb that you can follow.

So let me answer the question: When should I sell a stock that I hold?

And the first thing is...

What not to do. Which is that don't decide when you buy a stock that I am going to sell it, if it goes up to a price of X.

Let us say, you're buying it at 50 Rupees and then you say that if it goes upto 100 or 150 or 200, I will sell.

Don't do that, because...that way you will miss out on the multibaggers.

When you are buying a Portfolio of 20 or 25 or 30 stocks, you don't know which of them is going to be a multibagger...but you hope and expect that may be one, may be two, may be three of them might be multibaggers.

Which ones are those? That you do not know in advance.

Hence, let your profits run. For example, just in the last couple of years they have been several multibaggers like Tata Elxsi, Deepak Nitrite, Alkyl Amines etc (Disclosure: we hold/ have held these in client portfolios)

What you MUST have when you go in is a pre-determined Stop-Loss level.

You decide that Stop-Loss is whatever: 20%, 25%, 30%...that is a trailing Stop - Loss, not from your purchase price.

You may have heard this term but not be clear about it. What does trailing Stop-Loss means?

That if the stock goes up from 50 to let's say 200, and you have a 25% Stop -Loss, then you will sell if it falls to 150.

You won't wait till it falls to 37.5 rupees which is 25% from the price at which you bought the stock.

Therefore, what the 25% trailing stop loss sets out is that if it falls to 200 from 150, you sell.

You might at a later stage even go back into that stock at a lower price, or even at a higher price, but that's a discussion for another time.

If you are looking for a simple rule: let profits run. But at the same time, decide on a Stop - Loss or trailing Stop - Loss and keep to it in a disciplined manner.

You get out if the stocks falls from the high by that precent.

The exception to this rule of letting profits run is, when a stock becomes an outsized part of your Portfolio.

If a single stock becomes 40, 50, 70% of your Portfolio, then you might want to trim it a bit just so that you don't have such an outsized risk to a single stock.

Hope this makes your investment journey smoother and you don't ever get caught in an investment Chakravyuh with no clear exit.

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