When to buy and sell?

In the previous story, we discussed how to assign weights to each company in your portfolio.

How do you decide whether to add a new company to your portfolio or sell an existing one? Is the share price the best way to judge your portfolio? These are the things we will discuss in this section.

Adding to what you already own
Most people underappreciate the advantage of adding to what they already own. As you are likely to be well aware of the companies you own, it is often a great use of funds to add to them. A good time to add is when there has been an improvement in profits or prospects of the company but the market has not recognised it yet.

Adding a new company to your portfolio
Buying opportunities can come up when the overall market is in the doldrums, when some sectors see a drawdown and/or when some companies become attractive either in terms of valuation or future prospects or both. What should you do?

You should judge the new company against what you already own, as that is the benchmark to beat. Compare the future growth prospects of this new company with that of your overall portfolio. If the new company is not better than what you already own, then it will not improve your portfolio. So, you should not consider buying it.

If this new company will improve your portfolio, then don't try to time the market. Remember that a great business at a fair price is superior to a fair business at a great price.

Selling an existing company
When it comes to selling an existing company, you should think along the same lines. If a company is becoming weaker and worsening your portfolio, then you should get rid of it. However, you should not sell at the first sign of trouble. Every company goes through tough times. On the other hand, if you spot a better investment opportunity, you can consider selling the existing one.

Nevertheless, the only way you will be able to make the right call is by keeping track of the company after you have bought it. These are subjective decisions and you may not have all the information.

Don't fall for the "I'll just hold it till I recoup my purchase price" logic. It only delays the inevitable.

How to judge your portfolio's performance?
Share price movement is certainly one measure but it does have a weakness. In the short term, many factors move the price. This could lead you to become shortsighted and you would end up making poor decisions.

To avoid such a fate, use operating performance (or fundamentals) to judge the portfolio. This would give you a better perspective of reality than short-term price movements. However, price is important in the long term. Good performance almost always gets reflected in the share price in the long term.

Also, see your portfolio's overall performance rather than that of individual outperformers and underperformers. Any portfolio will have those but what matters more is the aggregate, not outliers.

Also in the series:

How many stocks should you own?
Which investing style is the best?
What is the right market-cap mix?
How should you research stocks?
What sort of businesses to prefer?
Should you invest in PSUs?
How much to own what?