I bought a scrip at 10 which is now trading at 6. Should I buy (more and average) / hold (for how long) / sell (to prevent further loss) ?
This is a question raised by many retail participants in the market. If an investor follows the principles of value investing, he rarely finds himself in a position to ask this query because the buy / hold and sell decisions are made while critically evaluating the stock much before the actual buy happens in the first instance.
Some individuals limit their profit or losses to a certain percentage. They say "If the stock moves up 20%, I will sell and book profits". Statements such as these limit your chances of a greater profit which you deserve for hour hard earned money, considering the risk you are taking in the financial markets.
The decision to buy, hold and sell should be based on the actual valuation of the company compared to the price offered by it in the market. The best single number to suggest a fair valuation is the PE ratio. As the PE ratio increases, the stock becomes more expensive and vice versa.
Here is a simple guide to decide on how to buy / sell / hold depending on the previous movements of the Indian market in the recent years.
The PE ratio of the market (http://www.nseindia.com/products/content/equities/indices/historical_pepb.htm) is an equally important consideration, because a cheap stock should ideally be bought in a cheap market and a expensive stock sold in an expensive market.
The PE of the market should take precedence over the PE of the individual stocks.
For example
If LIC housing is trading at a PE ratio of 9.9 when the PE of the market is at 17, what do you do?
Buy
Stock PE 28 Market 22
Preferably stay out
Stock PE 15 Market 25.5
Never enter the counter
Stock PE 3 Market PE 21
Buy with extreme caution
Stock PE 8 Market PE 13
No better opportunity to buy
Thus according to this principle, one should rarely have an individual stock with PE over 25 in his portfolio and should never own a stock at all when the market PE is above 25.
Remember that these recommendations hold true only if the basic principles of stock selection good management, steady performance, adequate market cap etc. are followed and it is just a guide that can help you in timing a buy, hold or sell in co-relation with the market.
