Strategy:What should you do? - I

For the past few weeks, I have been focusing on selling some of my holdings. I exited all of Asian Hotels (@300), Bharti Airtel (@700), and Allcargo global (@ 745). Of course, I mentioned my strategy on ICSA here.

There have been many who have been very skeptical of selling stocks at loss. Some analysts somehow on hearing blur-chip names, by default, recommend a hold for long term! Well, I keep saying, “It’s ultimately your money doing the rounds”. Here’s a case for understanding.

Let’s say, you bought Infosys Technologies during the highs of 2000 at a price of Rs 1500(after adjusting bonus and split). One can see from its historical charts that it touched a low of 269 in the year 2001 and a high of 2439 during the year 2006.

Now, let’s say, in the year 2000, you decided to hold for long term as many knowledgeable analysts recommended. Let’s take the best case scenario of selling the stock at 2439 during the year 2006.

You have made a gain of 939 Rs/share in 6 years time which translates to a 10.4% annual return. Considering the dividend/share, you would have made around 11 percent annually. This would be your best case scenario. Many would probably be satisfied with this kind of return way back in 2003 when interest rates were low. Considering the levels of 2001 and the interest rate scenario then, you would have been better off investing in fixed instruments as they would have earned you the same return with surety and security!

Stock markets are all about timing. While it’s difficult to time, one needs to take a calculated judgmental call. Fundamentally, I thought Infy was fairly valued at around 700(during the year 2001). However, technically way back, it was showing no signs of bottoming out. Economic indicators too weren’t supportive to the stock. Given this, I would have probably entered the stock at approximately the same level (700) during the year 2004 as it showed strength at every lower level. Note that this price is nearly 150% higher the lows it made in 2001. At my entry price, I would have made big money (>50% returns) even if I sold at a median price of 2006!

The gist is – Don’t fear to sell just because you’re at loss. You could end up losing a lot more if you don’t sell. I have taken a top performer in this example. But, many companies as you would know wouldn’t reach their highs even after a decade. One needs to analyze fundamentals from time to time. For example, Arvind Mills used to trade around 300 during the early 90’s. Today, it is struggling to stay at double-digits and hasn’t managed to reach anywhere closer to 300 in two successful bull runs (in a 15-year span). And remember, way back in the 90’s, textiles and manufacturing was a good space to enter just as IT is today.

Again, don’t just sell at whatever price you see on the board. Look at technicals and fundamental indicators and then sell closer to the high-points. You would get adequate opportunities to re-enter the stock at lower levels. But, how does one decide on selling a stock? Do you sell everything you hold in a bear market? I would answer this in my next article. Keep watching!