in the last one month; or

Take a look at this stock price chart of Asian Paints over the last 13 years. There have been several 2x rises, several 20% surges, and several corrections. But people who sold off this stock for any or all of these reasons during this journey, must be ruing their decision on seeing this chart.

Source: Yahoo Finance

It’s important to sell a stock if the business is going downhill, or if your original thesis was wrong (which will be the case many times).

David Einhorn of Greenlight Capital says…

We try not to have many investing rules, but there is one that has served us well: If we decide we were wrong about something, in terms of why we did it, we exit, period. We never invent new reasons to continue with a position when the original reasons are no longer available.

But making a selling decision with an eye just on the stock price is a bad idea.

Especially when you own a terrific company, you don’t want to sell simply because it is “fairly valued” today. That’s because the company will continue to grow, and its earnings would be materially higher 10, 15, 20 years down the line.

Josh Billings, an American humorist of the nineteenth century, said…

It ain’t ignorance causes so much trouble; it’s folks knowing so much that ain’t so.

Unfortunately, too many investors have this idea that stock prices react to gravity – if they have been rising, it must mean they are due to fall soon.

But always remember this – As long as the business remains great and you believe in its underlying fundamentals, there is no reason to sell any more than is necessary to rebalance your portfolio.

The reason to own a stock is that you want to become a partner in a great business. That’s the formulation of Buffett’s mentor, Benjamin Graham. and it is the starting point of all market wisdom. And then, you need to know what makes a business great. If you do, it will be much easier for you to determine when the business is no longer great and it’s time to sell the stock.

But please, please don’t sell stocks like Barbara Streisand as soon as you see red…even if you are Taurus the bull.

Like this article? Sign up for our free newsletter to get articles delivered to your inbox