When Is It The Right Time For You To Sell A Share?

Shipping firm Neptune Orient Lines (SGX: N03) has recently been placed under stock exchange operator Singapore Exchange’s watch-list for shares that have just suffered three consecutive years of pre-tax losses. Is it time to sell?

Elsewhere, the utilities and marine engineering outfit Sembcorp Industries (SGX: U96), at its current price of S$5.35 a share, is trading around its 52-week high of S$5.50. Is now the time to bail?

For investors, knowing the right time to sell can be a real challenge. There’s always the fear that a stock would continue to rally after you’ve sold it and thus lose the chance to ever buy it back at a lower price. In other instances, there’s also the fear that a stock might just begin its long-term decline after you’ve decided not to sell it, thus losing the chance to maximize your profits.

However, focusing on subsequent price movements would mean you missing out on what’s really important when it comes to thinking about before selling your stake in a company.

Deterioration of Fundamentals

One of the main reasons for selling shares in a company might be because its underlying business fundamentals were not what you had expected it to be; instead of seeing improved fundamentals, you see deteriorating ones instead.

And by that, we mean negative structural changes the company is facing that would cause it to lose its long-term advantages and relevance in the commercial world. It should not be confused with a cyclical downturn however, as such a slowdown will only be temporary.

An example of a company facing structural headwinds could be one that manufactures compact discs for the music or software industries. With the internet, digital music revolution, and the burgeoning of cloud-based computing, usage of compact discs would likely never turn back up again and the fundamentals for a compact disc manufacturer might no longer be as bright as it used to be.

Better Opportunity

It is necessary to ask yourself: What should I do with all that cash I’ll receive from the sale of shares? If you do not require the money for your living expenses, or lack anything else to invest in after the sale, you might end up sitting on cash that depreciates in value constantly due to inflation. That’s not as desirable as having your cash be invested in a business that has the potential to earn more and more every year.

But in the event where you do come across other opportunity sets that are more attractive than your current investments, that can be a good reason for you to sell.

When not to sell

Understanding when not to sell might actually be more beneficial for you as an investor; it can prevent you from making unnecessary mistakes due to fear.

Let’s consider the following scenario: You’re invested in a company with fundamentals that are unchanged and an investment thesis that still rings true, yet its shares keep getting cheaper and cheaper. In such a scenario, the fact that the company’s fundamentals and investment thesis has held steady might be a sign to reassure you that selling is a bad idea as the value of the investment hasn’t changed – only its price has.

In addition, it also does not mean we have to sell a company just because its shares are on a tear and attains new highs periodically; that’s because it could have improving fundamentals and a much better business value compared to when you’ve first invested in it due to factors like new product launches or management changes for the better.

All told, this reminds me of a piece of sage advice from legendary investor Philip Fisher: “The stock market is filled with individuals who know the price of everything, but the value of nothing.”

It will be wiser for us not to get caught with the crowds and keep our eyes peeled for what’s really important when it comes to determining when to sell – the value of a business, and not the price of a share.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.