The question of when to sell an Initial Public Offering (IPO) is often asked. Indeed, the psychological biases of fear and greed hinder us also make us commit serious mistakes.
If most private investors lose money on the stock market, they often give in to their emotions.
When Guided by Fear
Let us examine the example of the subprime crisis of 2008. Many people were ruined because they gave in to fear by selling their positions in large capital losses. If they had resisted, they would have doubled their capital today. However, few people have been disciplined enough to maintain their positions. These investors should have continued to finance the best quality actions. This would have allowed them to take advantage of the strong recovery of the stock market since 2009. The stock market will always go up, but it also consists of a succession of bullish and bearish cycles. It is important to determine approximately what phase we are in to limit errors when we invest.
When Motivated by Greed
Another classic mistake is to be trapped by greed. All stock market investors have the same goal: the lure of profit. They, therefore, tend to make two recurring mistakes:
Resell too soon
Many resell their winning positions far too early for fear of losing their small gains. This happens, for example, when you enter a position and everything goes as planned when you buy quality stocks. Their prices are appreciating for good reasons (solid fundamentals, attractive valuation). After having gained a few percent, you say to yourself, “Well, I’ve already increased my value, so I’ll take my profits.” As a result, you sell, and in the weeks or months that follow, the stock continues to rise strongly. Unfortunately, you have then missed most of the increase in profit. The important thing when buying stock is to set a goal to sell and stick to it. Using valuation methods, you know the fair price of the stock. As long as that price is not reached and no other fundamentals have changed, you must stay in position.
Invest in volatile “casino” shares
If you invest in the stock market, it is because you are willing to accept some risk to grow your capital. However, this risk must be mastered. Most people are impatient to make “jackpot” winnings. It can happen, like at the casino, but remember that you do not control anything.
To quote Warren Buffet, “You only have to buy what you understand.” Many investors laughed at him when he announced that he did not want to own stocks in the Information Technology sectors. When the Internet bubble of the 2000s arrived, technological actions collapsed. Warren Buffet was the only one who could remain unphased. No one can guess how an ultra-volatile action will behave. Investing requires patience. If you cannot wait, put your money on an active management fund or Exchange-traded Fund (ETF).
The Best Time to Sell
To quote Mr. Buffet again, “The best duration of holding a share is forever.” If the fundamentals remain strong year after year, and the profits are only growing, why want to sell?
Fundamentals have deteriorated
If the basic reasons you had for initially buying the stock are no longer true, you must immediately sell. It will be necessary to look for what part of your reasoning was wrong to produce this error. Perhaps the fundamentals were good at the time of purchase but deteriorated. In this case, the first question to ask is simple, “According to the current fundamentals, if I was not already a shareholder, would I buy this stock?” If you hesitate, then the answer is no, and you must immediately sell the action in question.
The fundamentals are good, but the valuation has become too high
If the company you bought is good, but its valuation has become high, it is already good news. Or, if you bought it at a fair price, it means that you have already made a good profit. However, you are not the only one to have noticed the company, and its course has gone well above its fundamentals. It has become overvalued. Maintaining such a position would be dangerous. When it returns to its average, the fall will be strong and fast. However, it would be a shame to sell it while its price is in a full uptrend. It will, therefore, be necessary to use technical analysis to sell at the best time.
To summarize, you have to sell when:
- The fundamentals of the company have deteriorated. If the reasons you bought this stock are no longer valid, you must sell immediately.
- The fundamentals are still good, but the valuation has become much too high. You have to take advantage of the rise and not sell too early. The sell signal will be given by the technical analysis when the uptrend should end.