“Buy low and sell high” is often touted as a simple strategy to make money in the stock market. This strategy is simple in theory but hard to practice. The fact is that ‘lows’ and ‘highs’ will be known only in hindsight. Markets have a tendency to overreact, both on the upside and downside. In a bull market, exuberance takes prices to unrealistically high levels. Similarly, in a bear market, pessimism looms large and when investors panic and exit from the market, prices crash to unrealistically low levels. So, buying at the bottom and selling at the top would be difficult to practice.
But, it is possible to buy when valuations are attractive and sell when valuations are excessive. In other words an investor need not buy at the bottom and sell at the top. When fundamentals warrant buying, stocks can be bought and when valuations are hard to justify, selling may be considered.
Now, with markets at record highs and valuations excessive, many investors are raising a relevant question: Is this the time to sell?
This question is pertinent since Nifty is up around130 percent from the March 2020 lows and investors are sitting on handsome profits. Those who invested after the March crash are sitting on bumper profits. Taking some money off the table is always a good idea. However, whether an investor should sell, hold or buy would depend on many factors, most importantly, on the financial goals of the investor. Let me explain.
Sell to realise your goals
Suppose you have been investing in the market with some specific goals like raising part of the money to buy a house or buying a car. If your investment has grown to meet your goals, it is perfectly fine to sell. If the goal is buying a house, sell your investment to raise the money for down payment and go for a home loan now available at around 6.5 percent to realise your goal. The same logic applies for an investment made to buy a car or a similar financial goal. Sell and realise your goal. After all, money is a means to an end, not the end in itself!
Selling prematurely for extravagance may not be good strategy
It is important to make a difference between realization of a financial goal and fulfillment of a desire. An investor might say that that he/she made a particular investment to buy an expensive car/ studded jewellery and that he/she is selling now for the fulfillment of that desire. This is perfectly fine from the investor’s perspective. But it may not be good investment strategy. Many investors have regretted premature selling for fulfillment of desires.
Let’s take another example. Suppose you are an investor who has been planning for retirement through SIPs in equity mutual funds. If your retirement is, say, five years away, you need not rush-in to sell now. We will have many corrections in the market, going forward, but the market would be much higher after five years than where they are now. So, the right strategy would be to remain invested and continue to invest systematically.
Remain invested for wealth creation
Now, let’s come to perhaps the most important financial goal. If your goal is to participate in the wealth creation through the stock market, the strategy should be to remain invested and even buy systematically. It is important to remember that the biggest wealth creation is happening through the stock market. Stock market legends like Warren Buffet made their fortune through a strategy of ‘buy and hold.’ Buffet once remarked that his favorite holding period was ‘for ever’. He went on to add that “if you are not comfortable holding a stock for 10 years, you should not hold it for 10 minutes.” It is important to understand that fortunes are made in the stock market by holding good quality stocks for long periods, during which time, they become multi-baggers.
In India, the Sensex (1979=100) has multiplied 580 times during the last 42 years giving a CAGR of more than 15 percent, beating all other asset classes by a wide margin. This outperformance will continue in future too. Therefore, to participate in wealth creation, it is important to remain invested and to invest systematically, irrespective of whether the Sensex is at 56000 or 58000 or above 60000. Disciplined systematic investment is the key to wealth creation.