Recently, I met a cousin at a family-get-together. As is often the case these days, we immediately got down to talking about the stock market.

This is what he said…

‘Yash bhai, my funda is simple. I want to invest in strong dividend paying companies and then live off the dividends after I retire’.

That’s what more than a decade working for a leading private equity firm can do to you. He has a sharp investing brain. Also, he is extremely passionate about stocks.

I haven’t had a chance to look at his portfolio in detail. But I know he’s sitting on quite a few multibaggers.

And therein lies his dilemma.

He has seen a lot of his stocks fall significantly after touching multi-year highs in the past. And he’s worried this could happen again.

‘What do I do Yash bhai? I don’t want to see my stocks suffer a big correction again’.

The anxiety was evident in his tone. So I asked him this simple question…

‘Why don’t you exit the ones that you think are very overvalued’?

This was his measured reply…

‘I have considered that option. But where do I invest the proceeds after moving out of the more expensive names?

I have been holding these stocks for many years now and am well acquainted with their businesses. I am just not comfortable buying another set of stocks even though they might be better from a risk-reward perspective’.

I was ready with my response…

‘But buddy, you cannot have your cake and eat it too. If you are buying something for its dividends then you should focus more on the underlying fundamentals and the dividend paying capacity. You should not worry too much about what Mr Market is valuing the stock at’.

He understood my point. But he was clearly not comfortable with my advice.

I don’t blame him. These things are tricky in the market to be honest. It’s difficult for an investor not to get influenced by market movements.

It’s also difficult for someone to not get emotionally attached to a stock, especially when you’ve been holding it for years and it has rewarded you handsomely.

How investors evaluate such situations rationally is what separates the men from the boys.

The reason my cousin got confused was because he wasn’t firm on his sell strategy.

He entered his stocks hoping the dividends, years down the line, would be large enough to allow him to make his ends meet.

Thus, a deterioration in fundamentals or a change in dividend policy are perhaps the only reason for him to sell and move into some other stocks.

But as he saw his holdings turn into multibaggers within a few years, he was tempted to exit. This messed up his whole thought process.

The Importance of Having a Clear Sell Strategy

No matter how strong the dividends or how good the stock is fundamentally, you should always have a clear strategy as to when you’ll exit the stock.

To be honest, no such perfect solution exists as to when an investor should sell his favourite stock.

But as long as your strategy is giving you a good night’s sleep and is allowing you to earn good long-term returns, you should persist with it.

Conclusion

In conclusion, at the end of the day, investing is as much about conviction as it is about clarity.

You could be holding the bluest of bluechips or sitting on a pile of multibaggers, but if you don’t know why you own them, or when you’ll part ways, confusion is inevitable.

Your sell strategy doesn’t have to be perfect. It just has to be yours.

Because in the long run, it’s not the smartest investor who wins—it’s the one who sticks to a well-thought-out plan, through market highs and lows.

So the next time you look at your portfolio, ask yourself: Do I know my exit?

If the answer is yes, you’re already ahead of most.

Happy Investing.

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