Proven Strategies to Sell Stocks for Maximum Profit

Image source: Mikko Lemola/www.istockphoto.com

Joel Greenblatt's 'You can be a Stock Market Genius' is a favourite book of a lot of famous value investors out there.

Even I have read the book a few years back and found it to be quite interesting.

A recent article on acquirer's multiple.com brought back memories of the book for me.

The article takes inspiration from the parts in the book that talk about selling of stocks and goes on to mention how selling is more difficult than booking.

Here's an excerpt about selling from the article which in turn has quoted the book.

• This is probably as good a time as any to discuss the other half of the investment equation-when to sell. The bad news is that selling actually makes buying look easy.
  
  Buying when it's relatively cheap, buying when there's limited downside, buying when it's undiscovered, buying when insiders are incentivized, buying when you have an edge, buying when no one else wants it-buying kind of makes sense.
  
  But selling - that's a tough one. When do you sell? The short answer is - I don't know. I do, however, have a few tips.

Hmm....so what are the selling tips that Joel Greenblatt has shared in the book?

Well, the first one is that if the stock was bought with some extraordinary event in mind i.e. a demerger or a spinoff or an acquisition, then that was the special event that created this opportunity.

Hence, once this special event is known to the public and its value starts reflecting in the share price then the stock should be sold.

Once the market has reacted, your edge goes down. Therefore, with any further upside difficult to come by, one should exit the counter.

Another selling tip is to 'trade the bad ones, invest in the good ones'.

This means that selling stocks of average companies in tough industries once their attributes become widely known, while holding onto stocks of fundamentally strong companies for longer-term investments.

I will have to agree with Joel Greenblatt on this point. However, I won't call it trade the bad ones and invest in the good ones.

Instead, I'd like to believe that most stocks have a certain intrinsic value with the difference being that these intrinsic values are either falling, staying the same or rising with time.

And if one agrees with this classification then selling becomes that much simpler if you ask me.

The thumb rule should therefore be staying away from stocks where intrinsic value is falling, having a short-term horizon of 1-2 years where intrinsic value is static, and holding on to the long term where intrinsic value is going up with time.

I am more about the second category of stocks i.e. the ones where intrinsic value stays static or inches up very slowly with time.

My goal is to recommend such stocks when they are available at a discount of a minimum 25-30% on their intrinsic value and then recommend an exit once the stock price is trading close to its intrinsic value.

If you want an example of someone who's practiced both these forms of selling, look no further than Warren Buffett.

In the early years of this career, Warren Buffett specialised in investing in stocks where the intrinsic value was static and where his modus-operandi was to buy such stocks at a 60-70% discount to their intrinsic value and then sell them once the gap is closed.

Later on, when he started investing huge sums of money, he came to prefer the other approach where he bought companies like Coca Cola and American Express.

These are world class companies, where intrinsic values go up with time. Hence, it makes sense to stay invested in them for the long term as long as the values keep rising.

The central assumption for all the recommendations I make is that the intrinsic values of these companies are fixed.

This is why I don't believe in holding on to them for more than 1-2 years. Once they achieve my targeted gains of 50%, 100%, or even 200% in some cases, I recommend a SELL and re-start my search for another fundamentally sound but beaten down stocks.

Hence, I am not only clear about the stocks that I am going to recommend a BUY on but I also have significant clarity about when I am going to recommend a SELL.

It allows me a peaceful night's sleep and takes away a lot of the stress around selling.

Happy Investing.

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter
What are the 3 main types of stock? Research Private Limited (formerly What are the 3 main types of stock? Agora Research Private Limited) (Research Analyst)