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  1. Why you must finalise your exit strategy before buying a stock

Why you must finalise your exit strategy before buying a stock

Money is not made in buying but in selling at profit ! Another common trait is that the investor does not have any strategy when the indices do not move in the direction anticipated by him.

By: | Published: February 27, 2018 3:25 AM
indian markets, stock prices, buying stock, mutual fund What did you do in early February when the markets fell over 5%? Did you rush to sell or did you buy more stocks? (Reuters)

What did you do in early February when the markets fell over 5%? Did you rush to sell or did you buy more stocks?
One of the commonly observed traits in investing is that one buys stocks and then does the analysis. You buy on tips, buy what your peers and friends buy and then you do not know when to sell. Money is not made in buying but in selling at profit ! Another common trait is that the investor does not have any strategy when the indices do not move in the direction anticipated by him. For instance, as an investor, you had bought a stock in late December 2017, expecting prices to go up. However, the stock prices went southward and you are sitting on a 25% loss. What is the strategy you have in this case? Will you hold on? Will you try to average the price by buying more? Will you sell the stock at the current price and exit with a loss?

Look at allocation

As the Indian markets rose by over 27% in in 2017, strategies and processes were given a miss. As the mid-cap and small-cap stock prices were witnessing double-digit growth and even triple-digit rise in in some cases, asset allocation, processes and risks were ignored. Greed took over.
The first thing to remember before buying a stock is that you should have a strategy to exit also. What it means is that you should think about drawdown scenarios, even when you are buying the stock. This will ensure that you have a process in place and the volatility in the stock prices will not affect your investing process or result in a knee-jerk reaction. This is elementary and should be de facto for an investor. But this elementary rule is ignored and is more of an exception rather than a rule. Incorporating this method can definitely improve your success ratio. Annie Duke in her pathbreaking book, Thinking in Bets, terms decision-making as bets. Also, we make decisions based on our beliefs. And if the beliefs are prejudiced, then our decision-making can go wrong, which in turn can affect our success ratio. In the coming days, markets will be volatile. So if you do not have a strategy in your investing process, you are setting up yourself for disappointments and knee jerk reactive behaviour.

Past data on returns has displayed that over a multi-time frame horizon, an investor has made money inspite of multiple drawdowns and volatility. An investment amount of Rs 1 lakh invested in early 2007 in a large cap mutual fund has delivered an annualised return close to 15%, with the corpus growing to close to Rs 4.5 lakh, more than 4.5 times the original corpus amount. So do not park your short-term liquidity needs into volatile asset class. Also do not park your long-term liquidity needs into short-term funds. Having the process and knowing yourself is one of the the most important elements in your investing journey.  End of the day, it is our behaviour which determines the path of success. A reactive approach in decision-making is not the course to be adopted. Having a strategy in place at all times is the approach.

The writer is managing partner,
BellWether Advisors LLP

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