The conversation between father-son in the above story, is quite familiar. Quite often, many investors in the Indian stock market are not ready to let go their stocks on account of:
- Emotional attachment to the stock
- Reliance on hearsays and rumours that the stock will rebound
- Not ready to sell the stocks at a loss
- Blind trust on hearsays / rumours / stock market tips
- Greed to earn more profits
Considering the above-mentioned elements due to which an investor is not ready to part with a loss-making stock, the essential question is, “Should you hold or sell the stock which is offering to you nothing but a loss?”
By identifying why a stock has undergone significant price erosion, an investor can be better equipped to decide whether it is time to exit from that stock position or whether it is an opportunity to accumulate more at lower prices. It is not a straightforward decision and few parameters need to be evaluated before taking a call.
- Deterioration in the fundamentals: The fundamentals of a company speak a thousand words about the company’s growth potential. The loss-making stocks need to be scrutinized to check for the shift in the fundamentals of a company. If the fundamentals of a company remain unaltered and stock dip is within the range of ~3-6% on account of interim market correction, then one should hold onto such stocks.
- Avoid taking actions in the heat of a moment: Selling any stock on the basis of the negative news, media hype, and transient market corrections can backfire an investor.
- Liberate yourself from the emotions while investing in stocks: Over the years, our brain has been fortunately or unfortunately coached to take decisions based on the emotions such as anger, shame, greed, fear, hate, etc. This holds true even while investing in stock market. If the stock is not performing well and is plummeting the value of your portfolio to a sizeable extent, it is time to split-up with the stock. The same applies in case of interim market correction, do not take swift selling decisions.
- Deal in what you know: Many times, investor purchase stocks without understanding the business model of a stock market. Awareness about the know-how of the stock and business dynamics will help you to detect the reason behind its losses. And once you are able to pinpoint the reason, the action should be not a tough part.
- Diversification. Diversification. Diversification: Lastly, to hedge yourself against unsystematic risks, do not commit all to one boat. A smart investor builds a smart portfolio by investing in various assets and sectors and circumventing heavy exposure to a particular industry/stock.
"You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets."- Peter Lynch