Warren Buffet says his favourite time frame for holding a stock is forever. Unfortunately, we are not Buffet. In fact, he also sells and experiences the pain of either selling too soon or holding on for too long. And our own big bull, Rakesh Jhunjhunwala, says hold on to a stock only if it will give returns and do not become emotionally attached to it. Let me share my own experiences that I hope will resonate with you.
Case study 1 – I bought DVR of a leading auto company at Rs.200, and within a year, it doubled. I did not sell. It started falling. I told myself this is great company. It fell below my cost of acquisition. I held on. Then when it fell to Rs.100, I sold.
Case study 2 – I bought shares of a leading liquor company at Rs.200. It shot up to Rs.300. I had learnt my auto company DVR lesson and I booked profits. Only to see it cross Rs.500.
Case study 3 – I bought shares of a leading MNC FMCG company. For many years it remained at my acquisition cost. One fine day, a product controversy hit it. It fell sharply and then it started rising. I did not sell and now I proudly tell everyone how I identified and held on that stock.
Case study 4 – I bought shares of an automotive and industrial lubricant company. I held for many years and last year I sold. Even after dividends, I did not beat FD returns.
Case study 5 – In the last mad IT bull run, which took place in 1999 and 2000, I cursed myself for selling too early. Whatever I did not sell became 0. You did not read it wrong. Satyam proved otherwise for some time but then it fell in line.
What I am trying to tell you? There is no right answer in stock markets only right questions.
What are the hacks I use for selling? I do not borrow and invest and, therefore I do not have the pressure of margin calls. Having said that, I tell myself, I am buying this company for the long term. I have used a mental model of 1 year because of lower capital gains tax. If I don’t get the confidence of holding for 1 year, I avoid buying. This helps me to avoid short term trading mentality and dependence on latest market gossip and tips.
I have many stocks, which I am holding for years. I don’t look to optimize every stock, and I don’t think it is worth the time and effort. I am not a professional fund manager and retail investors should ideally not waste their time trying to optimize the portfolio. There will be duds and vice versa, some stars. The key is to emerge fine on an overall portfolio basis.
I have sold shares when I need money to do something in the real world, which in my case, was real estate. If you don’t need to break the portfolio, please don’t.
I have sold shares when I needed to sell X to buy Y. At that time, I evaluate all stocks, and pick ones to sell, which in my opinion, will not do as well as the new entrant. I am not an active churner; this exercise happens rarely.
I have sold shares when stocks are given returns beyond my imagination, which has happened this year. This is a new feeling for me because most stocks in my portfolio move slowly. This year, some of my stocks have risen vertically, so I have booked profits. I use a mental model, which is not very scientific, so don’t waste time trying to poke holes. Develop your own rule of thumb that makes you happy. I tell myself, sell 50% of the stocks, so remaining stocks left are free. This I learnt from my friend HM who used an acronym SHAD – Sell Half at Double – and let rest run.
If I have sold any stock at profit, I tell myself not to crib about loss of profit. This is a passing the parcel game. You cannot buy at bottom and sell at top, so pass the parcel and move on. Of course, I am also human and hence crib to my Relationship Manager that I sold that liquor company stock too early. My wife gets angry if I crib. Find someone to crib. Trust me, it will make you feel nice.
How to identify, which stocks to sell is a challenge. I have divided my portfolio into stocks which have potential to compound over time, like pharma or FMCG and those stocks I don’t sell. Over time, this works out even if you own some stocks under-performers. The other bucket of stocks are financial services, which I believe in a country like India will do well.
Then you have cyclical or commodity stocks. Or you have sectors like technology, which have a tail-wind at this point. I sell them when I have made what I feel are adequate returns. I have a mental price and once that is hit I exit. My current trade in metals falls in this bucket. I also have PSU Banks in my portfolio, which has been under-performing. I got the macro call on economic recovery and NPAs wrong, but I am holding on because I have a theory and will to wait for it to play out.
Unlike my other scientific friends, who write down why they have bought XYZ stock, I have a reason in my mind. If my assumptions are proven wrong, I exit. I have paid a heavy price for holding on to my assumptions even when they were clearly wrong. I have learnt my lessons. For now, don’t ask me why then I am holding to PSU Banks.
I also invest in mutual funds. Since I invest across capitalization, I have made a portfolio of various caps. Once a year I do a simple analysis if the weights have changed. So far, I have done nothing, and I hold them virtually for ever. If the fund manager changes, then I do some research and since I invest in large fund houses, I mostly don’t do anything. In sector funds like tech, I have a price appreciation target, and once that is hit, I book.
My simple message for dear readers is, if you don’t have any desperate need for funds, then don’t do anything. Check your asset allocation on the due date, and if it is fine, don’t do anything. Inactivity is also a virtue for the prudent investor.
This blog by Mr. R Venkataraman, Chairman, IIFL Securities Ltd was published in ET on May 11, 2021