when should we sell stocks that we hold?
First, this is on the assumption that we have qualified the business in their financials, moat (competitive advantages in the industry), market outlook including total addressable market (TAM), etc
Fundamentally, the financials and market outlook should remain sound and the company on track to hit the targets that they have set. Recovery from crises like “covid” is also a good indicator of the moat. $MSFT’s market cap grew 50% in 2021 — so Microsoft definitely has demonstrated a strong moat.
You can find more details about “S Curve” in the article by Rocketsource.co.
We will also need to put the business life cycle as part of the considerations. Companies’ financials have different focuses in different parts of their life cycle. From the start to the growth stage, they could be spending much on research & development & marketing and could suffer losses at this stage. From growth to scale, there could be a CAPEX outlay but we should expect the financials to improve over time. They may need constant funding and thus, face constant stock dilution.
Personally, I prefer to invest in the company when its books have “demonstrated” net income, FCF and decreasing liabilities. I find it hard to buy, hoping that the management will deliver their promises someday.
There are companies with great solutions which did not make it as they simply run out of money. Thus, the Free Cash Flow (FCF) is an important consideration, more important than revenue or profits (net income). You can be making profits but not have the funds to run the day to day operations. In the end, the business could face bankruptcy and be forced to put up for sales.
We see some notable changes and bankruptcies from the 2 lists above. I will rather be later to invest (making lesser profits) than to invest earlier (with potentially making more losses).
After we invested in the companies, let us continue our due diligence to check on their annual and quarterly reports. These will help us to decide on buying, holding or selling.
Originally published at https://myinvestingmuse.blogspot.com on April 10, 2022.