Opinion – Grain in Grain: Understand why knowing how to sell is more important than buying shares

Beginners and even some intermediate-level investors worry a lot about the wrong question when they think about trading stocks. Most ask themselves: is it time to buy this stock? Undoubtedly, buying a stock well is a necessary condition to make money in the financial market. But, it is not a sufficient condition. I explain below the right question to ask when you evaluate a company.

The Ibovespa rose 4.28% this year, until June 8th. Although this appreciation is lower than the CDI, many would argue that investors should not be concerned, as it is positive.

However, make no mistake. Several investors have suffered big losses in the year. More than half of the shares that make up the Ibovespa are negative in this first semester.

The extremes of oscillation in the year are between 60% of appreciation (Cielo) to 60% of devaluation (Banco Inter).

Those traders at the top of the range above the swing may be happy today, but they face the same flaw as those at the bottom end of the swing.

Most do not know what the fundamental question is.

I will illustrate this with an example. Magazine Luiza’s share was already at the top until last year.

Anyone who invested in its stock at any time from mid-2018 to mid-2020 could say they bought it well. For many, this is already the only condition of making a profit. One would assume that profit was guaranteed for these investors. But this is not true.

Buying well is not a sufficient condition for you to make a profit.

All those investors, if they didn’t know how to sell, are suffering losses. The stock trades today at a lower price than in the first half of 2018.

Knowing how to sell is more important than knowing how to buy.

The basic question you should ask before buying a stock is: at what price should I sell this stock?

Also, after buying the stock, you should ask yourself the same question every time.

If you know how to answer this question, automatically, the traditional question of whether the stock is cheap is answered. Additionally, you’ll know what to do right after you buy.

A stock can be a good buy, as it has the potential to go up 10% in a month, or 40% in a year, but if you don’t know how to sell, all your profit can turn into a loss.

Maybe you bought well considering a certain scenario. However, if this scenario has changed, it is possible that the price you should sell is now lower than the purchase price. In this case, there is no reason to keep the asset. Sticking with the stock just because you don’t want to “take a loss” is a bad investment decision.

The reason most investors lose money and become frustrated with the stock market is not because they made a mistake when buying, but because they didn’t know how to sell. Either way, they either don’t know how to sell when they make a profit, because they think they’re going to earn more, or they don’t recognize that they have to sell at a loss, because they wait to recover the loss.

To know when to buy and, especially when to sell, it is necessary to have an investment strategy that directs you.

Michael Viriato is an investment advisor and founding partner of Investor’s House

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