Majority of individual investors sell shares of companies they own, when the stock price hits ’52 week high’. The general belief is, the stock may find it difficult to rise any further. There is also a constant urge to book and keep the profits.
In complete contrast, there are many new investors who try to buy stocks of companies that are near ’52 week low’. These are considered to be cheap.
But this could be one of the biggest mistakes that investors do, because more often than not, companies that hit ’52 week low’ continue to test new lows and those that are hitting ’52 week high’ will go upwards to hit new highs.
Here are some reasons:
- A stock hitting a new ’52 week high’ shows the strength of the company’s fundamentals. Technically too it’s a positive.
- Rise in price is due to buying demand and positive sentiments. The company has to be doing something right if there is more demand to buy and less supply to sell.
- Sometimes a stock could be hitting new highs way before some good news related to the company is out. The upcoming quarterly results could be very strong too. Big investors and insiders know a lot more than retail investors like you and me.
- Keep an eye out for companies whose stocks are hitting 52-week highs or falling lesser than other companies in a bear market. Most of them are strong companies that should do very well in the next few years.
- There’s always a reason why some companies are expensive and get higher valuation than others companies in the same sector. They are industry leaders, are growing fast or have excellent management.
Let’s assume you bought Bajaj Finance exactly a year ago on 28 October 2018. The stock price was around 2380. From that day, the stock has hit new highs several times and continues to do so as of today (October 2019). The results have been excellent too.
Have a look at the chart below, if you sold early you’d have lost all the gains:
Another example of a Tata company called Trent (they run West Side and a few other stores). The stock has been hitting new highs in a tough market in the last two years. It has almost given 70% returns in one year.
To sum up, good companies that are fundamentally strong will climb upwards and set new peaks quite often. Experience in the market will teach you to hold on to these companies. If you are too quick to sell, you might find it difficult to buy them in the future.
That does not mean you should never sell good companies, because like everything else in life, the market is also a cycle of extreme highs and lows.
When to sell good companies is also an art that can only be learnt with time in the market. A combination of technical and fundamental analysis, along with experience can help you sell in the early stages of a downward trend. More on that soon.