When is the right time to sell?

Not long ago I had written about when is the right time to sell, at that time the market was peaking and there were quite a few stocks that were overvalued or were at least at a price that was ‘sellable’. For investors who had sold stocks at that time, right now with the blood shed in the market there are quite a few good stocks which are trading at prices which are there all time lows and because fundamentally nothing has changed in these companies they can be bought at these prices. However if investors didn’t sell at that time then there is still time for them to sell but this time unfortunately not for the reason of booking profits as was the case when I wrote the last piece but for the purpose of cutting losses.
The key at times such as this when there are heavy falls and investors end up losing a lot of money is to sit back and take stock of your portfolio. Essentially you would be able to categorise your stocks into three categories. First category stocks would be the ones that are fundamentally sound, nothing has changed in their business model and growth projections and are companies that have been in the business for years together, these are your standard blue chips. There is absolutely no sense in getting rid of these stocks in panic. These are companies that have lasted for years and are more than likely to bounce back. The second category are mid-caps and small-caps which have also done well in the past few years but don’t have a stellar track record like the blue chips or haven’t been long enough. If these have been bought by an investor at recent times and at very high prices (high P/E multiples relative to their growth rates) you may want to look at selling these stocks and cut your losses. These stocks have a tendency to be very volatile and may dent your portfolio in a matter of a few trading sessions. However if these are stocks which have been with you for a long period of time bought at decent prices, then you may want to hold on to them if nothing in their business or money making model has fundamentally changed. One such stock in my own portfolio is Dewan Housing Finance, not exactly a blue chip but a sound company which has done well over the years and which was bought at reasonable price about an year ago. I would hold on to this stock as nothing that would affect its earning ability has changed and the stock should bounce back as sanity is restored in the market. The third category is of stocks which had been bought purely on tips and the names of which you yourself had heard for the first time and which have no financial track record only promises. Get rid of them as soon as possible and cut your losses. Buying stocks without research and only on tips is the worst thing that any investor can do and better to learn from that mistake than to hold on to such stocks and make more losses. 

There would however be sure to be a few investors who had sold stocks at that time and are sitting on some cash. They could buy some bargain picks which are going around in the market right now.

One such stock which is in my portfolio right now is Infosys which has taken quite a beating and is trading at its all time low. At P/E multiples which are lower than its own guidance for the next year and certainly much lower than the P/E that it has enjoyed in the last few years or the growth rate in the last few years. The guidance for the next year is decent, the third quarter results of most IT stocks have been good and so far there has been no specific talk of slashing IT budget even though there has been a lot said about the US recession. Given this scenario Infosys looks a decent bet right now. 

 

 

Manshu Verma