Why You Should Not Focus On Price When You’re Thinking Of Selling Your Stocks

I had a conversation with a friend recently. The last time we spoke was about a year ago (around February 2016) and he told me back then that he was buying shares as the market was down considerably.

This time around, I asked him if he is still holding onto the stocks he had bought.

He replied: “No. I sold most of what I bought because I had made gains of between 5% and 10% on my stocks.” But he then added: “I wish I had not sold – otherwise, I would have been up 20% or more now.”

In my view, my friend’s reply clearly showed that he had focused solely on the prices of the stocks he had bought when he made his selling decisions. It’s likely that he did not even pause for a moment to think about the stocks’ underlying businesses and how they could perform in both the near-term and long-term future.

My friend is an example of the type of investor who sells when he or she sees a profit. There is also another kind of investor.

Many of you have probably heard someone say something along these lines when it comes to investing: “I sell my stocks quickly when they fall. It’s better to cut my losses before they become worse.” This type of selling is no different from what my friend did – there is no (or perhaps little) consideration given to the performance of a stock’s business.

My friend’s action and the hypothetical scenario I brought up are not uncommon. This raises the question: How should we decide if we should sell our stocks? It’s important to note that a stock’s price should never be the sole or over-riding concern. Price-based selling often leads to poor investing decisions being made.

When we buy a stock, it is like we are buying part of a business. And the thing about business is that time is often needed for growth.

As such when we are thinking about selling a stock, regardless of whether the stock is one which has climbed or declined from our purchase price, we should be forward-looking. We should consider what our expectations are from the business over the next few years. If our expectations look good and the stock’s current price is not reflective of the potential business growth, we should consider to hold on to the stock.

This idea of not using a stock’s price as a benchmark when making selling decisions can be summed up succinctly by something the famous investor Warren Buffett once said (link goes to a video; check out the 61 minute mark):

“We never buy a stock with a price target in mind. We never buy something at 30 and say ‘if it goes to 40 we’ll sell it.’… That’s just not the right way to look at a business.”

As such rather than using a stock’s price as a benchmark, we should instead look at the stock’s underlying business and determine if it can continue making money (or more money) in the future. The latter is what matters when making selling decisions with your stocks.

For more stock market updates and investing tips, sign up here for your FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock SingaporeIt will teach you how you can grow your wealth in the years ahead.

Like us on Facebook to follow our latest hot articles. The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.