Should you be married to a stock or not?

Ravi bought a share about a year back. In the course of time, the share has performed quite well and the price has doubled. Ravi has a double-bagger in his hand and he is sitting on 100% profits.

To decide on the future course of action - (a) whether as a prudent investor he should sell the share and book profits or (b) alternatively should he continue to hold as the markets still have steam left - Ravi seeks advice from some of the experts in the stock markets.

Conflicting advice

Unfortunately, he receives conflicting opinions, which does nothing to solve his dilemma - to sell or to hold.

One set of experts advise that one should regularly keep booking profits. One should not be emotionally attached to a stock. As soon a reasonable level of appreciation is achieved, one should sell the stock and book the profits. This will ensure regular build up of corpus and protect oneself against downturns in the market.

On the other hand, there a set of experts who are of the opinion that if one were to sell the stock the moment it gave say 30% return (or some other level one may decide), one will never have a multi-bagger in his portfolio, one will never create wealth. They advise that one should buy businesses not stocks. And once a long-term call has been taken on the business, one should forget about the short-term appreciation (or depreciation). In other words one should remain married to the stocks.   

Solution to the dilemma

Let's try and use the basics on investing and see if we can arrive at a consistent answer to this dilemma.

Why do we invest? We invest to make money. We don't want our cash to lie idle.

Why do we want money? We have certain aspirations (say a car, a house) or needs (child's education, marriage), which the money can fulfill.
 
Hence, if we have a need today, then the question of holding on does not arise. We have to sell the stock and fulfill the need.

However, if we have no immediate need of the money, then we have to remain invested - the question then arises whether to book profits in the current stock and move on to a new stock or to continue to remain invested in the current stock?

Now the answer to our dilemma becomes quite simple. If there is another opportunity, which is expected to perform better than the current one, then switching makes sense. We should be guided purely by the future growth potential of the stock vis-à-vis other options. If there is sufficient growth still available in the business and the company (even though it may have already appreciated), selling the stock would defeat the very purpose investing. Companies with good management have continued to perform and grow consistently over long periods of time. And this has reflected in performance of their stock. Just because a stock has doubled does not mean that it cannot double again.

On the contrary there have been bluechip companies, which were deteriorated over the years - reasons could be many - poor management, change in business environment, technological obsolescence, etc. Therefore, again just because the stock has doubled doesn't mean that it will continue to perform well in future too.

'Critical analysis of the Future prospects' of the company, and not how much the stock has appreciated, should be our touchstone in deciding whether the stock is still gold or not.

The author is Vice President Nabriya Financial Services, Pune. He can be reached at smatai@hotmail.com .