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Welcome. If you like our videos, be sure to like and comment. And yes, don't forget to subscribe. You can also join our WhatsApp group to get the latest analysis updates. Your support encourages us to do this kind of work even more. So let's get started. Today we will try to find the answer to a very complex question, following the path shown by legendary investor Peter Lynch.
And that is, what is the right time to sell a stock ? This question lingers in the mind of every investor. Isn't that right ? When should I sell? After the price increases a little more or just before it decreases? Honestly, this is a cause of great tension. So in today's analysis, we will try to find a solution to this very problem.
So what is Peter Lynch's main idea? Look, he's saying something very simple. The decision to sell a stock is directly related to the reason for buying it. This means that whenever the story you bought the stock believing ends or changes, it's time for you to sell. How do we proceed in today's discussion?
Let's take a look. We will first talk about the six stock categories given by Lynch. Next, we will look at the difference between fast growers and slow growers, stable and cyclical stocks. Some special situations will also be discussed, and finally, we will conclude with a final vision of everything.
According to Lynch, there cannot be one rule for selling all stocks. Sales rules also change based on what stage a company is in its growth cycle. So your first task is to understand exactly which category the stock you are buying falls into. Look at this, from First Growth to Asset Place. These six categories are the foundation of Peter Lynch's selling framework.
But there are different rules for each department. Which we will now look at one by one. Let's start with the first two categories. These stocks can be identified primarily by the speed of their profit growth. Fast growers are those companies that grow at literally rocket speed. Their management's sole focus is to increase the company's revenue.
Only these types of stocks can bring multi-bagger returns to a portfolio. So the question is, when should you sell these fast-growing stocks ? There are two main signals. The first is when their growth speed suddenly slows down. Because the prices of these stocks are too high to be called. So even a slight slowdown in growth can lead to a major collapse in prices.
And the second reason is when the stock becomes much more expensive than its growth. But how do you know if a stock has become too expensive ? Here is a master stroke by Peter Lens. He used a great tool called the Peg Ratio. What does it do? This means a company's P /E ratio is its price divided by its earnings times the company's growth rate.
Lynch's rule of thumb was that if the PEG ratio went above two, it meant the stock was probably a little overpriced. Let's look at a real life example. Look at this table. Google's PE ratio is 19 and the growth rate is 15%. This means the PEG ratio stands at 1.3. This is pretty good. On the other hand, Apple's P28 has a growth rate of only 11 percent.
As a result, the PEG ratio is becoming 2.6. According to Lynch's formula, this is a potential cell signal. Now let 's talk about slow growers. These are the old and reliable players in the market. They may not grow at rocket speed, but they provide stability and pay regular dividends. Their management's main focus is on returning money to shareholders through dividends or buybacks.
So when should you sell a slow grower? There are two main reasons here too. The first is if they cut dividends or stop buybacks. Because you bought the stock for that return, right? And the second reason is that if they start losing their place in the market to a new company, it means that their business is at risk of a long decline.
Let's move on to the next two categories. These two are distinguished mainly based on how they perform during economic ups and downs. Stalwarts are companies whose brands people have a deep trust in. Just imagine, even during an economic recession, the demand for their products does n't decrease much.
In bad times, investors look to these types of stocks for hope. There can be two reasons for selling such stocks. First, when it becomes too expensive. For example, Costco is a great company. But when its PE ratio gets close to 60, it's a matter of concern. Secondly, when the company's fundamentals, meaning revenue growth or profit margins, begin to weaken.
And cyclicals have their fate directly tied to the economic cycle. When the economy is doing well, their businesses also flourish. And when the economy is bad, their profits also decrease. For example, car companies or airlines. Lins' advice on selling cyclical stocks is quite surprising. He says the biggest mistake is to sell when everything looks bad.
Rather, the right time to sell is when the economy is at its peak, company profits are rocketing, and everyone in the market is very optimistic. Because you have to understand that these good times won't last forever and you have to get out before the recession hits. Let's now look at the last two special categories.
These are investment opportunities that are quite unique, meaning they are based on a special event. Turnarounds are companies that are going through a bad time but are trying hard to turn around. The right time to exit such stocks is when the company's comeback is successful and that good news is fully reflected in the stock price.
Lynch said, "Don't fall in love with a turn-around story." When the work is done, come out with a profit. Asset Play is a company whose core business may not be doing well, but it has some hidden assets whose true value is unknown to many. For example, take a very expensive land or patent. The time to sell these stocks will come when the market realizes the value of that hidden asset and the stock price increases.
The opportunity here is not in the company's long-term growth due to mispricing of assets. So we discussed six categories. Now it's time to bring all of this together to arrive at a strong main point. And this is the most important lesson of Lynch's entire framework. It's time to sell a stock when the reason you bought it no longer applies.
What do you mean ? If you bought for fast growth, sell only when growth slows down. If you are buying for dividends, consider selling when the dividend is cut. It's that simple. So what is the main takeaway from today's discussion? The decision to sell should not be made emotionally or based on market rumors.
This must be taken with logic. Just ask yourself what I bought, why I bought it, and whenever you realize that that reason no longer exists, make a cold-headed decision to sell. Before ending this discussion, I leave you with a question. Take a look at the stocks in your portfolio. And ask yourself, is the story you bought these believing still true?
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