When to be Patient and Hold a Stock?

There are two critical decisions every investor needs to make with his equity investments – first, when to sell and second, when to continue holding the stock. Selling too soon is one of the most common mistakes investors make. Holding a losing stock is the other mistake. Let’s discuss these two aspects of equity investing.

• Invest in growth stocks
  Buy growth stocks where you can project a potential price target based on earnings estimates for the next year or two and possible P/E expansion from the stock’s original base breakout. Your objective is to buy the best stock with the best earnings at the right time and to have the patience to hold.
• Go with the market
  If you make new purchases when the broader market is under distribution, topping, and starting to reverse direction, you’ll have trouble holding the stocks you’ve bought. Most breakouts will fail, and most stocks will go down, so stay in sync with the general market.
• Set a ‘sell’ and ‘stop loss’ price
  After a new purchase, draw a defensive sell line in red on a daily or weekly graph at the precise price level at which you will sell and cut your loss (8% or less below your buy point). In some instances, the sell line may be raised, but kept below the low of the first normal correction after your initial purchase. If you raise your loss-cutting sell point, don’t move it up too close to the current price. This will keep you from exiting during any normal weakness.

  You shouldn’t continue to follow a stock up by raising stop-loss orders because you will be forced to sell near the low of an inevitable, natural correction. Once your stock is 15% or more above your purchase price, you can begin to concentrate on the price where or under what rules you will sell it on the way up to nail down your profit.

  Any stock that rises close to 20% should never be allowed to drop back into the loss column. If you buy a stock at Rs 50 and it shoots up to Rs 60 (+20%) or more, even if you don’t take the profit when you have it, there’s no intelligent reason to ever let the stock drop all the way back to Rs 50 or below and create a loss.

  If you’ve already made the mistake of not taking your profit, avoid making a second mistake by letting it develop into a loss. Remember, one important objective is to keep all your losses as small as possible.

• Avoid selling too soon
  At the same time, don’t sell too soon. If you see the stock run up quickly, review the price. Find out the reasons for the steep upturn – it could be because institutions have started buying the stock, sentiment for the stock has changed, a large order received, etc. If your assessment indicates that the price will go further up, stay invested. Remember, your objective is not just to be right, but to make big money when you are right. Investors who can be right and sit tight are rare. It takes time for a stock to make a large gain.
• Know what you are investing in
  If you really know and understand a company thoroughly and its products well, you’ll have the crucial additional confidence required to sit tight through several inevitable, but normal corrections. Achieving giant profits in a stock takes time and patience and following rules.