Investment
Suppose an investor bought two stocks of different companies Stock A and Stock B.
Now let’s assume the buying price of both these stocks are the same i.e. Rs 100.
After couple of years “Stock A” has done fabulously well and earned return of 100% wherein “Stock B” has fallen by 50% so the prices for Stock-A and Stock-B is now Rs 200 and Rs 50 respectively.
Here the question arises in the mind of investor what he should be doing in such a situation?
Should he sell stock A and book a profit? Or Should he sell stock B and book a loss?
In our example we have seen out of the two stocks- Stock A (which went up by 100%) and stock B (which fell down by 50%), it’s quite logical to hold the performing stock and get rid of the losing one.
In reality most of the investors do the opposite and they try to book their profits by selling performing stocks and hold the losing stock in anticipation that stock will perform and they will sell at break-even point. Here one important aspect of investment they forget is time-money concept that by holding their under performing stock they are losing time and money both. However, selling the performing stock and holding the under performing stock is the wrong approach. Here, investor limits his upper profit level while increasing downside risk.
In other words, performing stocks may give upside profit of 100%, 200% or even 1000% depends upon many factors however, investor is ready to book profit at a mere 20-30% when these stocks has potential to create wealth over long term. Moreover, here the investor carries the increased risk by holding underperforming stock in his portfolio. The intelligent investor however would have sold the underperforming stock and would have invested same money into performing stocks for future gains.
For an investor booking short-term profits should never be the goal rather holding good performing stocks to build long-term wealth should be sole reason to be in the market. After all, the consistent returns should always be preferred over a one-time profit.
One should only sell performing stocks on following conditions:
- When the company’s fundamental changes and the stock is not as strong as it originally was
- When an alternative stock gives bigger opportunity and can outperform
- When in an imminent situation one needs the money.
Other than above mentioned cases one should stick with the performing stocks and let them grow to create wealth in the long term