Do you have a rationale for the stocks you hold?

June 6, 2008: I went out for dinner last week with a friend of mine from Kenya. We talked about a lot of issues and naturally, the investments topic came about. She is an active participant on the stock exchange together with her husband.

From what she told me, I have to say, I admired how they manage their investments. Every week, they sit down and analyse each of the stocks in their portfolio and each of them has to have a reason to be in the portfolio.

Each of them has to have a reason to exist. How many of us do that? How many of us sit down and think about whether the reasons why we are holding on to a share are still valid?

Peter Lynch once said that if you own shares in a company, you ought to be able to explain why, in simple language so that a fifth grader can understand, and quickly enough so that the fifth grader will not get bored.

You need to think about your reasons for being invested in a stock continuously. When the results of the company you are holding are released, have a detailed look at the financials and find out if things are going like you expected them to. If they are not, find out why.

If something has completely changed, it might be best to sell and move onto a new share, even if you are going to lose money. It has been said that there’s no shame in losing money on a stock. Everybody does it.

What is shameful is to hold on to a stock, or, worse, to buy more of it, when the fundamentals are deteriorating. Sometimes you will be right and sometimes you will be wrong.

Sometimes, it has nothing to do with the company itself. It might have something to do with the general economy. Different shares react differently to different economic scenarios.

Perhaps in your model you had forecast that the interest rates would go down but they are still rising, perhaps you had seen inflation reducing but instead it is moving up or perhaps the rise in the oil prices caught you completely by surprise. Whatever the reasons are, the new information that has come in should be incorporated into your portfolio.

It does not make sense to hold shares in an industry that is facing serious problems.

Even if the company is good, its future growth will be challenged and eventually the company will have to bow out.

Textile industries in most parts of Africa are going down and the future growth is hampered. In my trip this week, I found a company in Nigeria – Afprint which is listed on the Nigerian Stock Exchange and has found an innovative way to survive.

Its past revenue streams depended on textiles but as the road became tough, it switched to agriculture and is now returning some profits to its shareholders.There are three primary reasons why you should sell a share.

First, you should sell if the reasons for holding the share are no longer valid, secondly, you find a better investment with better returns and finally you should sell if the share price moves and the share you are holding becomes overvalued. by Eleanor Kigen