When to sell a stock | Exit strategy in stock market | When to book profit and loss in stock

Hey everyone, in the stock market, one of the most difficult decisions is when to sell a stock. And you face this question in two situations. First when the stock has rallied a lot and you are sitting on a very good profit. And second, when the stock has corrected significantly and you are sitting on losses. Now at this point in time, when Nifty is hovering near the levels of 20,000, a lot of stocks have generated huge returns. And many of you would be confused whether to sell and book profit from the top performers from the portfolio and what to do with the poor performers. So in this video, I have shared my thought process of when to exit from the stock. Again, there is no perfect strategy when it comes to exit from the stock. Just because if you are selling a stock, there is someone who is buying it from you with a hope to make money. Likewise, when you are buying a stock, there is someone selling it. And of course, you have two sets of people in the stock market, traders and investors. Traders' job is to keep buying and selling stocks. But this video is only for investors who have a job or business and don't have time to track the stock on an hourly basis. This video is only for investors who have invested in the stock market to create wealth in the long term. I am sure many of you watching this video would have your own exit strategy. So my only request is, I would welcome all the comments and feedback, but please respect everyone's opinion and be gentle and humble with your comments. And this video is only for educational purposes. Alright, let's get started. As mentioned earlier, there are two scenarios when you can face the dilemma of exit. First is, the stocks have generated great returns. And second is, when the stocks have corrected significantly. So when to exit from winners and book profit and when to exit from losers and book loss. Let's first discuss the exit strategy for stocks that have generated great returns. As a long-term fundamental investor, I always try to look at the bigger picture in the next 5-10 years. And when I invest in a stock, I consider myself a part owner in the business. And you don't sell a business just because you have fetched 10-20% returns or even higher. So percentage return is not the criteria for me to sell a stock. The biggest criteria to book profit is growth prospects and valuation. So when I fetch great profits, I ask a simple question. How is the future growth prospect of the company? And how is the valuation? If the future growth prospects are brighter and the valuation is still not super expensive, then I don't sell this stock. Let me give you a few examples from my own portfolio. So I invested in Polycap at levels of around 981 and I bought 100 shares. Now when Polycap's share price kept on rising to 1500, 2000, 2400, 3000, I always asked one question. How is the growth prospect? And the answer was simple. For Indian economy to grow, infrastructure would play a very crucial role. And for that, you would need wires and cables. And Polycap being the leader in Indian wires and cables sector is bound to grow. Moreover, Polycap has also put it into FMEG's business with fans, lights, solar panels etc. And that is a more profitable business. So the company would not only grow in terms of business, there is also a good scope for margin expansion. On top of that, Polycap's PE ratio never crossed levels of 50. So valuation was never too crazy. Fast forward today, Polycap is at levels of 4600 and I am sitting on almost 4.5 times profit. At current levels, Polycap's PE ratio is around 45-46. Compared to that, if you look at Havels, which is a pure play FMEG player, Havels command a PE ratio of 75. Although it is not a direct Apple to Apple comparison, but since Polycap is also into FMEG segment, we can consider Havels for comparison. Now at this point, I have two options. Either book partial profit or hold it for long term. Now if I book partial profit, the biggest question is where to deploy that money. And ideally, I want to have exposure in wires and cables segment to ride on this infrastructure theme. Now from current levels, Polycap might correct 5-10% here and there as the sharers rallied a lot. But considering the immense growth potential in an economy and infrastructure sector, Polycap still has a long way to go. It can even grow 10-15 times from here in the next 5-10 years. So if I book partial profit, will I get the opportunity to re-enter at lower levels? Well, yes and no. Because when the shares fall, sometimes we keep waiting for a better entry point and just miss the buying opportunity. So when the share has generated a very good return, but valuations are still not that absurd, like in case of Polycap, you can always consider partial profit booking or hold it for long term. But what if the stock price has jumped significantly and the valuations have also become expensive? In that case, you can certainly sell this share and book profit. For example, in my case, I invested in Tata Elixir at levels of around 2500 and the share zoomed to levels of 10,000. At that point, Tata Elixir valuations were crazy high at a PE of 110. So I sold half of my share at levels of around 9500 and booked profits. Likewise, I invested in KPI at levels of 398 and the share price touched a high of 1160 and the valuations were also crazy high at PE of 80. Yet, I did not sell KPIT because I knew that there can be 15-20% correction here and there in the near term in KPIT, but there is a growth potential of 10-20 times or even higher in KPIT. So my simple thought is, if I sell KPIT today, I might not have the courage to re-enter and I could miss the long term growth potential. Similarly, I invested in Happiest Mind at levels of around 350 and it touched a high of 1500. At 1500, I knew that the valuations were crazy high, but I did not sell it and it crashed from those levels to 760. Again, it has recovered to currently at 930. So in the hindsight, I could have sold Happiest Mind at 1500 and bought it at bottom of 760, but it is only possible in hindsight. In reality, you don't know the exact high and low. Again, for long term, I know that Happiest Mind can grow 20-30 times or even higher from current levels. So if I conclude, the exit strategy for booking profit and winners is simple. You got to look at the growth prospects and valuation. If the valuations are too high, you can book partial profit. Or if you find better investment opportunity, then also you can book partial profits. But I strongly feel that you should not sell your winners completely unless there is a change in fundamentals and growth prospects. Another reason to sell a stock and book profit is when you really need the money for your financial goal. Then of course, you can sell this stock because you invested in the company to fulfill your financial goals. So your financial goal should be your priority. Now let us look at other side of the picture when the stock price has fallen. In that case, when to book loss and exit. In stock market, you can't always have the winners. You will always have few stocks in your portfolio that would be in loss. In that case, what should be your strategy? Now this is very interesting. Because if the stock has good potential and the share price has corrected, then it could be an opportunity to accumulate it. So personally, I only consider selling a stock loss making company if the fundamentals of the company has deteriorated over time. When the company posts poor quarterly results, my biggest question is what is the root cause of that poor result? Is it due to external events like high inflation, increase in raw material price, fall in demand, increase in competition, or due to internal factors like poor management decision, unethical business practice, frequent change in leadership, or lack of corporate governance? If the answer is external event, then I might even utilize the opportunity to increase my stake. And if it is internal factor, then it is a sell for me. Let me give you a few examples from my own experience. So I invested in CAMS at an average price of around 2730. It was during the bull run when CAMS share price touched the high of 4000 and when it corrected to levels of below 3000, I utilized the opportunity to accumulate it. But today CAMS is at levels of around 2300. So I am in loss in CAMS. But I haven't sold it. The simple reason is because CAMS is a leader in RTA segment with 65-70% market share. And I know one thing, it is just the beginning of mutual fund investment journey of Indians. And no matter which mutual fund you invest in, CAMS has 65-70% market share with all top mutual fund houses as its clients. So CAMS is bound to grow big time and that for me is an opportunity to accumulate it for long term. By the way, if you are new to this channel, I have already covered the fundamentals of CAMS and many companies in the past. I am sure you will find these videos very insightful. And some people also ask me to share my own portfolio detail. So let me inform you that I have already discussed my latest portfolio on my weekly video series. It's available on my website and I have provided the details in the pinned comment. Now coming back, there are a few stocks from chemical sector where I am in loss currently. For instance, in Tata Chemical, my average buying is 1019 and currently it is at levels of 990. So slight loss. Likewise, I have slight loss in Galaxy Surfactant and Gujarat Floro. But fundamentally, I don't see any problem with the chemical sector. We all know that chemical sector share price zoomed exponentially during covid and it's been almost 2 years since the share price has corrected nearly 50-70%. Yet I strongly believe that Indian chemical sector is bound to grow in the future. Fundamentally, there is no problem with the chemical companies. In fact, this correction has made these chemical companies very attractive. Today, Tata Chemical is trading at a PE ratio of 11. Yes, I know that currently it is mainly into basic chemical but remember that it has also poured into your material science, nutritional science and has good exposure in agrochemical. And I have strong faith in Tata Group. Likewise, today Galaxy Surfactant is trading at a PE of 25, Gujarat Floro is trading at a PE of 22. That for me is an opportunity to accumulate the stock rather than selling it. Having said this, I have also made a few mistakes. One of them was SUBEX. I got carried away and invested in it during the bull run but it was a big disappointment. Hence, I sold it at loss. Apart from this, I have been rewarded big time for keeping patience and even accumulating stocks when they were falling. For instance, I invested in NUGEN software during 2021 bull run but the share price tanked Since I knew that there is no change in fundamentals, I actually utilized the opportunity to add more and my average price became 414. Now I was in loss for a very long period but fast forward today, I am sitting on nearly 100% profit. Likewise, IDFC first, my average price was 46, it fell down to 30 and I kept patience and today it is at around levels of 82. And there are many more examples like Tanla platform, MapMyIndia, Motherson, Divis, Dixon where I invested in downfall and today I am getting very good profit. So if I conclude, my exit strategy in loss making companies is when there is a significant change in fundamentals of the company or the sector is highly disrupted by competition or government regulation. Now I am sure you would have your own set of stocks where you would be confused about whether to book profit or sell stocks on loss but at the end of the day, knowledge is the key. If you understand the business and its future prospect, you can take the decision of buy and sell. And as far as current market scenario is concerned, I have already created a video recently where I discussed whether it is a bull run or a bear market. Do watch this video if you haven't seen it. I strongly believe that it is just the beginning of another bull rally in India. Yes, there can be correction here and there but the next 5-10 years are the golden period of Indian economy. If you stay invested in great businesses, you can generate great amount of wealth. Yes, at this moment, when the stock market is a bit heated, there are lesser opportunity but still there are sectors and specific stocks that are looking attractive. For instance, chemical sector is in a downtrend and can be a potential opportunity. Likewise we have pharma sector, then we have IT sector which is facing a difficult time due to slowdown in US. So again fundamentally, there is no problem with IT companies. Eventually, when the US economy will recover, IT companies will post good results and in the long term, IT sector will continue to be a wealth creator. Alright, let me close this video here. I hope this video will give you a decent perspective on profit booking. Like I said before, there is no fixed formula. Profit booking will depend from person to person. If you have generated great returns and the valuations are looking expensive, you can always consider partial profit booking. And on selling or loss, I sell only if there is a change in fundamentals or the growth prospects have reduced due to competition or government regulation or due to any other factor. Otherwise, if the company is fundamentally strong, it's a buying opportunity. Now let me know what is your strategy for booking profit. And if you find this video useful, do share it with your friends. I'll see you in the next video, till then take care.