Investors normally buy shares or invest in shares of the companies based on its fair value. If the current price is considerably at a discount to its intrinsic value, it becomes a good buy. Based on this, most of them maintain a target price on which they may consider to sell. I normally buy shares with a target price for 3 years. Target price is fixed considering various estimates and assumptions about its future business and financial performance. If the business moves as expected, the target price will be the fair value after three years. As such, the target price will get revised upward or downward as per its quarterly and annual results and the changes in the economic and its business environment. After you buy, there are three possible scenarios which will affect your decision to hold or sell those shares.
One scenario is that the company perform as estimated and expected and grow steadily. In such case, it is highly likely that target price will be revised upward periodically – quarterly or yearly. If the share price also moves steadily, you may never have to sell those shares. Because as the price goes up steadily, the target price also get revised upward in tandem with the performance of the company. I still hold shares of Dabur India which I bought in 2006, my early days of investing in shares. It appreciated 153% since then.
Second scenario is that share price gain so quickly. If the stock price moved up sharply and reached its target so quickly before targeted years or before its target price was revised upward, you may sell it on achieving target. If you are sure that the sharp appreciation in the share price is reasonable and the company may come up with good performance and have potential unlocked, you may continue holding those shares. I sell in such cases most of the time. I bought Piramal Healthcare at 342.65 in January 2010 and I sold it at 556.23 in May 2010 on achieving its target with a gain of 49%. It achieved its target in just 4 months before revising its price target. I was right to sell as it went down later and its current price (16 DEC 2010) is 464.80.
The third scenario is that the company performance is bad and not up to the expectation. Or something wrong happened to the company or its business environment. The target price may get revised downward as the company is not performing well as anticipated. In such cases, sometimes you may have to sell even at a loss. Share price might have gone down even before you realise that the company is in serious trouble. Retail investors are the last to know such news. I also had such bad experiences. I bought Suzlon Energy at 59.90 in May 2010 and had to sell at 57.65 in November 2010. Last year it was Satyam Computer in which I lost about 85%! I should have sold it earlier with minimum loss, but was reluctant to sell until it was too late.
As long as you are confident about your company, you don’t have to worry about the day to day ups and downs in the share prices. Don’t lose your peace of mind and sound sleep over the market movement. Investing systematically in small amount (small amount is a relative term. it depends on the total amount that you have) in a regular interval (weekly/monthly) will help you to build your wealth as a partner or joint owner of a few good performing companies. Buy shares of the companies which you will be proud of to be an owner! Ensure that the business and the operation of the company adhere to your principles and values.
I know there are people who make money from stock market with huge return. And many more who lose all of their money. I consider myself in between these two extremes. And I am satisfied with it.