Should You Sell Stocks If It Comes Overvalued

In my previous article “Should You Invest in Indian Stock Markets Now?”, regionally focused to Indian investors, but applicable globally, I have listed some factors and how it impact the stock market valuations and stock prices. I was originally debating with readers and investors to know whether they buy or sell stock in present conditions. In the same article, I have shared information about my recent buys of two scrips. On this decision, I have got a question from a loyal reader asking whether should I sell these stocks if it comes overvalued in the future. In this post, I am debating with readers on my thoughts to not sell a fundamentally strong business (stock) if it comes overvalued in the stock market. You are welcome to share your thoughts.
In my personal opinion, stock market price volatility is certainly not a factors to sell stocks of fundamentally strong businesses. I would prove the same with an example:

Suppose a person started new cool bar near to a reputed collage which have huge business potentials in that specific location. He have spent a good amount to buy the business that able to fetch him his costs of starting this business in the future. Suppose in the next month, due to some unknown or known reasons, the business valuation for that areas have been increased and someone approached him with an offer of double amount what the current owner paid to start the business. What would the present owner do? Should he sell the business and walk off with money….?

Of course, he will not sell the business because as an intelligent business owner, he knew the business potential comparing with offered amount. However, if the person looking for temporary gains, he may sell the business thus throw all his future profits in a single moment.

Selling or holding decision on a stock would be like this: If I am buying a stock after lots of research and of a fundamentally strong business, it would be difficult for me to sell the same when the price just reach to double. Considering the Mr. Market allegory of Benjamin Graham, stock market movement related price fluctuations never impact the business fundamentals and future profits.

Macro and micro factors should be understand and considered when selling or buying a business (stocks). Take this example: Leaves of Maples trees would start falling down before the winter approaches. It would completely fall before the winter starts and only the stump and branches with no leaves there. This behavior doesn’t mean the roots of this tree have any problem. It would be healthy and strong to flourish again with more and more leaves when the winter ends.

Think another way: Leaves also would fell down completely if there is any problem with the root of that tree. Comparing it with the previous scenario, this tree don’t have any chance to gain the leaves again because the issue with its root that already decayed and the tree is near to die.

Macro and micro factors can easily explain like this: Temporary impacts to the business like strikes, temporary close down, calamities all affect the business in a macro way. However the business fundamentals are still strong and the business would be able to survive from such issues in the near future. Foolish investors thinks such behaviors are the end of the business and would sell all the stocks.

In other way, if a company have issues which is not able to resolve, like it business share lose, product issue and legal actions, government actions, bankruptcy etc, can consider as micro factors that affect the total business as well as the fundamentals of the business. For an example, recent ban on mining affect Sesa Goa very badly and the stock prices came down and it would be difficult for the company to comes to profit very soon by solving the issues. Another example is, the coal shortage really affecting the businesses of power companies in India. As an investor, valuation should not be the once due to the price increase of that business in the stock market. But, it should be done by comparing with the business potentials in the future. This is the reason I have informed the reader that I will consider the business fundamentals to sell the stock than its price in market. Also informed that if a person seek just double the money, yes it is the right time for him to sell the stocks. Think yourself and inform in what category you are? Do you consider only macro factors or micro factors to buy and sell the shares…

Sherin Dev is the founder and editor of Blog. Learn more about him here. Follow him on Twitter @Moneyhacker or be in touch with him at Facebook
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