Sell when something something…

An inordinate amount of material exists on ‘what to buy’, ‘when to buy’, ‘how to buy’ etc. but very little material is written on ‘when/how/what to sell’. Research indicates (rather ‘pro-forma’ research or in plain English, ‘completely made-up’ research) indicates that the act of Selling rather than buying generates most of the returns (unless of course you are the chosen and select few to only buy HDFC Bank, Asian Paints in your portfolio for a long time).

Of course, this is not a blog post on ‘when/how/what to sell’. This blogpost is about the reasons often quoted on ‘when/how/what to sell’.

1) ‘Sell when your thesis is wrong’: This is the mother (in these income tax days, we can also say grandfather) of all reasons. The first reason that’s quoted in most articles – from fool.com to hedge fund letters.

Here’s what’s wrong with it. Our thesis are generally partially and most times completely bull and very very flaky. They are either earnings momentum driven or price driven. We are of the firm belief that if the prices of the stocks we buy go up, then our thesis is right. Else, management something something. Many examples that come flying to land on this point.

• Avanti Feeds was bought on ‘shrimp expansion/global market share gaining/TUF investing’ etc. The real returns of Avanti Feeds came in because raw material prices dropped precipitously and investors extrapolated that to infinity. The thesis of ‘shrimp expansion/global market share gaining/TUF investing’ still holds true, but is anyone interested in buying Avanti Feeds now? Not really.

• All chemical stories – from Excel Industries to Excel Crop Care to Vinati/Aarti (nowadays). Our thesis is right as long as the price is moving up and to the right. Once the price hits a 20% circuit down, our thesis falls off and we sell (or more critically, we hold and become a long term investor)

• All NBFCs. ‘ours is a credit-hungry nation, you know’, ‘millenial something something’. Large opportunity. Earnings momentum slows / price drops – all of this thesis is out of the window. ‘Earnings momentum’ is the justification given for others. For now. Till the price drops or momentum slows that is.

• Some classic stories – Mayur Uniquoters, Poly Medicure, PI Industries (till the price moved up recently) – some fantastic managements, large opportunity. Every thesis stays. But if the price doesn’t move up, we exit

• Graphite stocks. Haha. The next big commodity. Needle coke. Electric cars. Something something.

And many others. I am sure the market of Jan 2018 – Aug 2018 has given enough experience to know most of our returns have been lucky (80%) and thesis driven (20%). So this ‘sell when your thesis is wrong’ is so nuts – it confounds me.

2) ‘Sell when you find a better idea’ – We are under so many notions of our investing prowess, there is no limit to our ignorance. What’s the basis for a better idea? What constitutes a better idea? Do we even know and understand our current portfolio stocks enough to determine what a ‘better idea’ is? (see point 1). A ‘better idea’ for most of us means that ‘my stock is stagnant, that stock can give me better returns as the price is/may move up more than mine’. We all laugh at ‘bhala, uska kameez mere kameez se safed kaise’. We do this everyday.

All of us make mistakes (well, again pro-forma/completely made-up research indicates Buffett has only 60% hit ratio, so we are mere mortals). But this ‘better idea; concept is drilled into our heads (remember, ‘move your portfolio quality upwards in every market’). Portfolio quality is a sign of the times. Say, consumer stocks were and are of high quality (cashflows, ‘large opportunity’, good dividend payouts, something something…which indicates quality). But if you had invested in ‘consumer stocks’ in 2002-2008, your neighbor would have laughed so hard at you, even ex-LS MP couldn’t match it if she tried. If you have invested in capital goods in 2013-2018, well, my neighbours are still laughing at me. And evidence indicates most of our top quality capital goods companies are not very cyclical as they are made out to be.

So, what is a better idea? Flawed again.

3) ‘Sell when you need to rebalance your portfolio’: Hahaha! Rebalance, you said? You mean, I need to sell Vinati Organics and Aarti Industries which are going great guns and constitute 30% of my portfolio to invest in what? Capital goods? NBFCs? Didn’t you see there were a lot of defaults in NBFCs? Haven’t you heard the capex cycle will not take off for the next 2-3 years given most of our Banks (shh..PSBs) are under water? You say NMDC which is cheap, great dividend yield, lowest cost producer and something something? Are you nuts – haven’t you heard that the Govt. is wiping all the cash clean from all PSBs? I don’t want to take any such risks. Aarti/Vinati for life.

Rebalance it seems. This is like Bangladesh cricket team being called Tigers. Absolute bonkers you are. I am happy with my 30% of portfolio – who knows – can become like RJ’s CRISIL and Titan. Haven’t you heard of the maxim…only 2-4 stocks in your lifetime will give pushto-pushto returns? Rebalance my portfolio it seems. Rebalance your life dude.

4) ‘Sell when you need the money’: One of the better reasons to sell actually. The hitch though is, outside of emergencies, I need money all the time man! I have a Facebook account and an Instagram account. I can’t post photos about eating vada-pav at Agarwal-ji’s dabba. 2 foreign vacations a year, 1 new mobile a year. I also hear there is a real estate boom that’s about to take off magically in many parts of India – (don’t ask why man…still you ask..ok ok…demographics, more nuclear families, higher employment by selling samosas, something something). So, I need money all the time.

But you say opportunity cost? Now, what is this bloody thing called ‘opportunity cost’. Do we even know and understand what’s opportunity cost? Well, opportunity cost is 15% because historically Indian stock markets have given these returns..because something something. Well, you change the start period and end period, and voila, that can become 5% returns. Every asset class – gold, land, real estate, stocks, bonds – irrespective of asset class – you can change the start period and end period and one can argue endlessly about which asset class generates more returns.

I am Stanley Druckenmiller-like you say? I can invest and timely shift my portfolios across asset classes you say? Maybe ‘arts & painting’ is a higher opportunity cost bet you say? Of course. So, why do you need money for anything at all? Also, you should be on Twitter – there are many Stanley Druckenmillers out there who can get in the bottom, and get out at the top..in every single asset class…asset class no bar. You will need to hit the bar everytime you read their tweets.

5) ‘If the stock is overvalued, then one needs to sell’: If point 1 is grandfather, point 5 is grandmother (also can be mother sister, if you get the drift). First of all, what is overvalued?

• Is Symphony and Page at 100PE over-valued? Of course, you’d say. One must be crazy to buy even consumer stories at 100PE. Why? See their price action over the last couple of years.

• Is DMart over-valued at 80PE? Are you kidding? Did you see their earnings momentum? We are still in the infancy of the retail boom for lower capital people and look at demographics something something. But but, Walmart (‘every day low prices since 1975’ – yes that one!) had earnings growth for 25 years and stock hasn’t moved by much because of over-valuation back in the day, you say? Ah. Oh. Well, America old country, Trump, Bush, you know.

• Is Bajaj Finance at 100PE over-valued? Of course, not. Are you out of your mind? Look at the earnings growth. Look at Sanjiv Bajaj’s profile pic and prophetic statements around data science, data lake and data ocean. Look at the beauty of the balance sheet. Look at something something. Look at the earnings momentum and with a 30% growth (nah, let’s make that 40% because according to pro-forma research, millennials something something, with increased per capital something something, the pace of credit will only accelerate) over next 5 years, it is quoting at just 18.59PE. One must be nuts selling Bajaj Finance at 100PE.

• Is Aarti Industries/Vinati Organics overvalued at 35-40PE? Is Divis Laboratories overvalued at 50PE? Man, you are not following me. I just justified 80-100PE above. And now you are asking me about a cheaper PE. Follow me, listen to me. Carefully. These are the next big stocks – (why? because China something something) – they will get into Index. I will buy a Pali hill bungalow by selling these shares and then give an interview 10 years later regretting selling these shares. Have the vision to buy, courage to hold and goti to not sell etc.

• All these growth stocks give ‘plenty of time’ to exit, you know. One quarter bad result, I will trim. Once the earning momentum slows for 2 quarters, then I will exit. Plenty of time. Well, ask Pantaloon. Also, too many behavioral problems with that. Also, convergence of this idea has bad implications.

Every bull market, you’ll hear ‘zyaada khareedna tha’, ‘should have concentrated more’. Every bear market, you’ll hear ‘should have sold at the top’ etc. Given this post is about selling, and every investor has become wise post this bear market – these days, every investor is like ‘bech dunga, 15-20% neeche from top is my stop loss, will completely sell, will never make the mistake of holding on if it corrects by more than 15-20% etc. something something so that I protect my returns’. As if, every other investor is not thinking the same (and its race to the bottom). But boss, I just told you I am a smart investor..not like the retail something panic something dumb investor.

Yes dude. You are Stanley Druckenmiller. You should definitely be on Twitter.

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P.S: Summary: Sab bhaav ke khiladi hai. Courtesy: Manu Manek.