When to sell your stock?

There are a plethora of books trying to explain the art of buying stocks but very few that delve into when to sell? This despite the fact that selling is as important or may be even more, than buying a stock. Perhaps it has to do with the whole psychology of investing. The very fact that it so hard to decide when to press the exit button has perhaps made many an author stay away from openly discussing it.

But this does not mean that an investor would never be able to master the art of selling. He certainly can we believe given enough experience and feedback mechanism. Like how the famous professor of finance, Aswath Damodaran, managed to do so in the case of one of his favourite holdings. Mr Damodaran opined that he decided to pull the plug on the stock under consideration on account of three major factors. These were the stock becoming a momentum play, becoming an institutional favourite and lastly, becoming a clientele of dividend seeking investors.

It is obvious that Mr Damodaran believes that when a stock becomes a momentum play, the link between intrinsic value and price gets broken. Thus, value investors should stay away from it. Also, since institutional investors also mostly tend to be momentum buyers, long term investors should exercise caution once a stock becomes the favourite of institutional investors. Lastly, a stock should stick to its policy of being a dividend paying or a high growth pursuing stock. If it breaks away from this trend, then it starts attracting both types of investors. And this ends up pulling the management of the company in both directions, thus creating confusion.

Thus, as we saw, it is not necessary that one always has a target price in mind when deciding to sell a stock. Subtle hints that Mr Damodaran used so effectively can also become the reasons you choose to sell the stock.