What is the toughest part about investing in stocks? A few months ago, I would have said 'cherry picking', 'bearing volatility' or quoted an equally complicated and fancy term. Today, as a member of the investors' club, I know the correct answer: selling a stock. It seems a rather lame pick. Why should it be difficult to off-load something that you don't want? My dilemma is best explained by the stock I want to exit: Britannia. After my research, which, I dare say, was extensive, one would have thought that clicking on the 'sell' icon in my online demat account would be a nonevent.
As it turns out, the decision is loaded with emotional and statistical conflicts. Consider my attempt number five during lunch break at office today. Britannia was trading at Rs 1,650.80, just 2.4% lower than my buying price, Rs 1,690.95. One doesn't need an expert to see that the fall is marginal and the figures give no indication that Britannia's future is bleak. What if the stock turns a small profit in a few days, making it a sweet experience for me? Should I give the stock some more time to recover?
Also, is it possible that a good monsoon will benefit the company immensely in the medium term, making a case for holding the stock for some more weeks? 20th May Re-reading my previous diary entry, I suddenly realised why I was reluctant to part with Britannia-investor ego. It explained the strong need to pocket a profit, however meagre, to validate my stock selection. Not that I am wrong in wanting it. After all, the business of stock picking is about making money. In addition, it has led me to ponder over the most difficult problem till date-formulating a strategy for exiting stocks. I consider it the toughest because there are so many issues that need to be considered simultaneously. The Net is choc-a-bloc with articles on identifying 7/3/10 signs for the best time to sell a stock. Some propagate a profit of 40% as an ideal cue, while others fall back on the undefined 'long term' as the period for holding a stock.
As always, I have a list of questions to help me navigate through the sea of information: -What should be the weightage assigned to the stock price at the time of selling? What is the role of market trends? -Should I abide by the view of the majority of brokerage reports? -Is it better to fix a target price and a stop-loss price for each stock? -How will I know if the fall in stock price is temporary?
Each stock to its own. This is the only takeaway that has emerged from my water-cooler conversations with veteran stock investors and a long tete-a-tete with Professor Calculus on selling stocks. It is impossible, and incorrect, to develop a set of parameters that can be used to screen out bad picks regularly.
The closest I came to formulating a strategy was by narrowing down the triggers for re-evaluating stocks. Brokerage reports are not a trigger. It isn't because their accuracy is questionable, but because these reports are not aligned to my investment horizon. In the grand scheme of 10-15 years, a bad performance over six months is insignificant.
This is why even though analysts were sceptical about Tata Steel's performance this year, I continue to hold it. In theory, fixing a target price and a stop-loss limit is the most definitive method for exiting stocks. However, its execution is riddled with uncertainty. For instance, if the stock price has grown by the target amount, I will always wonder if waiting for some more time will bring in a bigger bonanza. To avoid such confusion in the future, I have decided to concentrate on three factors: my need for the money, fundamental changes in the companies whose stocks I own and the opportunity cost of investment. More on these three after completing office work.
Free of deadlines for a couple of days, it's time to flesh out my 'selling philosophy', as I call it. The first trigger is obviously the need for money. Under normal circumstances, it should be close to the time of the goal for which I buy stocks. However, in a desperate situation, I can book losses to meet an immediate requirement for cash. Also, if a company undergoes a major change, its stock must be reviewed. It is difficult to list what qualifies as a major change, but the Net offered a valuable tip.
If the reasons for buying a stock continue to hold, then there is no need to review/sell it. Therefore, if a company has taken over another, revamped its management, or has a huge debt, it may be time to bid the company adieu.
Finally, if a stock has been delivering returns lower than those of its peers in the same industry, or underperforming the Sensex for 2-3 years, it indicates that the reasons for buying the stock may be incorrect. There is an opportunity cost to the money tied up with a stock equal to the extra income that can be earned by investing it in another company. Britannia fits the second and third criteria-it is not innovating as per expectations and there are other stocks that can generate higher profits within my investment horizon. Dilly-dallying to avoid a small loss will be counter-productive, so I must re-direct investments to another stock immediately.
Confession: I asked my sister to sell Britannia. And yes, I am trying to tame my investor ego.
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