Personal Finance: How To Sharpen Your Sell Strategy

PERSONAL FINANCE
How To Sharpen Your Sell Strategy

A smart investor is one who knows what stocks to buy when. But a smarter investor is one who knows just when to sell a stock-with his profits intact.

By Shilpa Nayak

Sandeep Mathur is mad at himself. In January 2000, this middle-level executive in a multinational company, bought 500 shares of Zee Telefilms for about Rs 1,000 apiece. Initially, Mathur was delighted as he saw the stock's price soar to Rs 1,200 and then Rs 1,500 in February. When it hit its first bump in March, his broker and friends pooh-poohed the fall, and urged him to hold on. When it lurched to another low (in April), his advisors bravely prophesised that things couldn't get any worse. Today, Zee is quoting at less than Rs 120. Had Mathur exited Zee when it first slid to Rs 1,215 on March 14, 2000, he would have made a profit. Now, his chances of making any money on Zee look very remote.

Like Mathur, a lot of investors seem to know when to buy a stock. But knowing when to sell is an art known to few. It's easy to see why. Most small investors buy stocks and then forget about them, unless they run into some kind of a financial problem (need to pay the yearly insurance premium, college fee, or adding that extra room to your two-bedroom house). Now, if you are a small investor, it is a good idea to invest long-term. But that doesn't mean you don't churn your portfolio to maximise the return on your investment. Here are three rules for smart sell strategies.

Rule No.1: Sell, if you meet your price target

Investing takes a lot of self-discipline. And the hardest part usually is calling it quits when the going is good. Let's face it, would you sell a stock if you thought-or somebody else made you believe-that its price would go up tomorrow, the day after that and the next? Unlikely.

Here's BT's take on this: the ''loss'' that you think you will incur by exiting a stock ''prematurely'' is only notional. Whereas the loss you will make in case the stock's price sank below your purchase price is very real. To prevent this from happening, you need to do this: set yourself an earnings target. For example, if your target is to earn double the return on a bank deposit of 10 per cent, you should sell the stock once it has provided you a 20 per cent (annualised) return. Agrees Krishnamurthy Vijayan, CEO, JM Mutual Fund: ''Stick to your earning goals, and never rue the fact that somebody else made a bigger killing than you.''

Rule No.2: Sell, if you don't meet your price target

Sounds confusing? Actually, it isn't. If you think a stock isn't moving up the way you expected it to, within the time frame you had set for it, then sell. A stagnant price is an indication that you either picked the wrong stock or set an unrealistically high target. It's better to make your escape with lower returns than wait for losses to happen. Says Mayank Desai, a 40-year-old Mumbai-based dentist: ''Everybody makes mistakes, and so do I. But I strictly stick to the 'stop-loss' level. Following this principle, I manage to get an annual return of 30 per cent on my portfolio, and I am satisfied with it.''

You can tune the ''stop-loss'' level to suit your risk appetite. For example, if your stock has sank to within 10 per cent of your purchase level, you might want to exit. Somebody more aggressive, might bet on the stock rebounding. In case it doesn't and only slips further closer to your purchase price, you must sell. In case you miss this opportunity too, for whatever reason, your next objective must be to minimise your loss. Tell yourself that a 5 per cent loss is all that you will allow yourself.

Rule No.3: Sell, if the micro or macro picture worsens

Professional investors follow what is called a top-down approach to investing. They first look at the economy, followed by the sector (top), and then by companies (down) in those sectors. Software is a good example. India's capabilities in the software sector are well known across the world. Therefore, they would want to invest in this sector, simply because it is growing much faster than any other sector. Within software, they will look at the investments options; they will weigh Infosys against Wipro against Satyam Computers against Polaris and so on. And at the least sign of trouble, they will sell. Says Prem Khatri, Vice-President, Kothari Pioneer Mutual Fund: ''If there are any developments in our portfolio companies that could threaten our investments, we prefer to exit.''

There are several early warning indicators: One, the topline isn't growing, but the EPS is, because the company has been able to cut costs. But there's only so much flab a company can cut. Unless the topline grows, too, earnings growth may not be sustained. Two, the company is doing well, but some key executives are leaving. Three, new product launches are not happening, and most of the revenue is coming from old products. That again is an indicator of a potential drop in the topline, or lower earnings. And, four, a decline in marketshare. The market may be growing, but the company is unable to retain its share.

Before we end, a caveat: equity investments typically pay off over a long-term of, say, five to eight years. The precondition to that is you must pick stocks that are fundamentally strong. Finally, remember that disciplined investing is Mammon's other name.

SNIPPETS

Posts, Profits, And The Gilt Complex

First it was the IDBI-Principal AMC, then came the SBI Mutual Funds; and, now it's the turn of Prudential ICICI AMC to tie up with the sleepy financial powerhouse, the Indian Posts. Analysts say the tie up will help Pru-ICICI to leverage Indian Posts' vast network, in turn, while, the department would get a chance to rake in some revenues. Currently, the department is making huge losses, thanks to its portfolio of subsidised services. According to data available for the year 1999-2000, total cumulative deposits in post office savings bank were at Rs 63,027.71 crore.

The Rs 1,200-crore Alliance Liquid Income scheme would now be known as Alliance Income Fund. The flagship open-end debt scheme of Alliance Capital has 100 per cent of its investments in a portfolio of debt and money market securities. According to the company, the objective behind renaming its largest scheme was that the word 'liquid' in the scheme's name was misleading. The word is generally associated with short-term debt or money market schemes while Alliance Liquid Income was a medium-term debt scheme.

No guilt over gilt, that's been the scene so far, what with the gilt funds posting an average return of 20 per cent in a year that otherwise was dismal for the markets. And now with HDFC Mutual Fund also launching an open-ended income scheme, HDFC Gilt Fund, investors can't be blamed if they make a beeline for gilts. But market pundits throw in a word of caution. Attributing the performance of gilts to the RBI's frequent cuts in interest rates, they point out that the interest cuts jacked up the prices of bonds, and that in turn got reflected in the NAVs of the gilts. However, the trend may not continue. The signals emanating from the RBI indicate that there won't be more cuts in rates in the near future. Our advice: look before you leap for the sovereign debt.

Stock Holding Corp Eyes Retail Investors

The Stock Holding Corporation of India (SHCIL) is sprucing up its strategy with a new focus: enhance volumes by targeting retail investors. Currently, SHCIL's main clients are corporates and financial institutions. SHCIL has chalked out a two-pronged strategy of retention and acquisition to bring back its business volume, and is planning to come out with more products. In its move to target a cross section of retail clients, SHCIL has set up a cell for high net worth individuals (HNI), apart from the existing NRI cell. Also, SHCIL plans geographical tariff customisation that implies differential tariffs across various cities. This means investors in a city with a low number of HNIs or low per capita income would be charged less.

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