When Is the Right Time to Sell Stocks That Have Seen Massive Growth
Is it time to cash in on Tesla?
Is it time to cash in on Tesla?
In the same week that protesters stormed the U.S. Capitol Hill, Tesla stock continued its upward price momentum. It added a further 24% in only a few days of trading in 2021. You would think it’s time to break out the champagne and celebrate. But not quite. This surge in price introduces a dilemma. Should people sell or hold on for more gains?
Is a surge in price a valid reason to sell your stocks?
Wrong Reasons To Sell
1. Predicted Market direction
No-one can predict the short-term market direction with any regularity. Beware of those who have been right occasionally; even a broken clock is right twice a day. All you need to do is make enough predictions, and you will be right now and then.
People might call you a genius the few times you predict right, but your wrong predictions will cost you big. Just spare a thought for those who sold Tesla in March 2020, at $96 predicting doomsday, now it’s $880 and climbing higher.
2. Taking out your Initial Investment
As a psychological hack, some advise taking out your initial investment and leaving the rest.
“When the price exploded, I took out my initial investment. Now all I have invested is the upside, so I couldn’t give two hoots if it goes to zero like the doomsayers predict.” — Tim Denning.
For its pros, this approach also has it’s cons, It limits your upside potential and creates extra headaches. You still need to find alternative places to invest that initial investment. Those other investments, then have to perform better than Tesla in this case.
Right Reasons To Sell
1. Your investment thesis was mistaken
You are not going to be 100% correct all the time. I once invested in Fossil, a maker of analogue watches. I underestimated the disruption from smartwatches. In retrospect, I can now see that Apple watch and co were here to stay. In those scenarios, just cut your losses and sell.
You are to expect mistakes. Even the very best still make them. Scott Galloway, a Prof Marketing @NYUStern in October 2019, said: “Tesla doesn’t have the scale to compete in a well-run, low-margin business — auto”.
2. Your investment thesis was spot on
Whenever you invest, you should have targets that you intend for the company to achieve. Your targets should follow the company’s Key Performance Indicators (KPIs).
For Tesla, I track the number of vehicles produced each year. My target for Tesla is for them to make 20 million vehicles by 2030. As they have only made 500,000 vehicles in 2020, there is no reason to sell.
You should avoid making stock price targets. In the short-term, stock price movements are unpredictable, but they follow the KPIs in the long-term. If Tesla makes 20 million cars, there stock price will increase from its present levels.
3. Fundamental changes
Events might occur that force you to reconsider your original thesis. These include mergers, change of company direction, macro-economic events etc.
Go pro, a company that developed and sold cameras decided to get into the drone business in 2015. That same year, Chipotle had an e-Coli outbreak. These are significant changes that warrant a re-evaluation of your original investing thesis.
You do not necessarily have to sell, but don’t hesitate if you are uncomfortable with the new reality.
Warren Buffet himself sold all his positions in Airlines due to Covid-19.
4. You need to spend the money
As 2020 has reminded us, life is too short not to enjoy your capital gains. The point of investing is to grow your money to use in the future. So, go ahead and spent on that vacation, house extension, car purchase, wedding etc.
Please do not invest money you need in the next 5–10 years. Ask yourself whether your standard of living will be affected if your investments went to zero. I say again, do not invest money you need for your necessities.
5. Better opportunities
You might sell if you have found a better opportunity elsewhere. To invest in Tesla initially, I had to pull money from other investments.
The danger here is that you end up continually jumping in and out of investments. A practice that will increase the likelihood of you missing the best days in the stock Market.
To miss just 10 best days over a 20 year period from Jan. 1, 1999, to Dec. 31, 2018, would have halved your returns.
Conclusion
“Our favourite holding period is forever.” — Warren Buffett
Great wealth is created mostly by doing nothing, just buy and hold for the long term. Yet for the five reasons detailed above, sometimes you have to sell. I especially like reason 4, don’t forget to enjoy the gains.
Lessons From a Novice Stock Investor | by Flex Mauto | ILLUMINATION | Nov, 2020 | Medium