This is What You Should Do When a Market Guru Sells a Stock After Recommending It - The 5 Minute WrapUp by Equitymaster
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This is What You Should Do When a Market Guru Sells a Stock After Recommending It

Jun 20, 2018

Sarvajeet Bodas, Research analyst

Has this ever happened to you?

It's a perfectly normal day. You're watching TV, reading the news, or scanning your social media account...and something catches your eye.

A market guru is promoting a stock.

  • Stock X can go up 50% in the next one year.

You're interested and continue to read/hear what he has to say.

Stock X seems to be a good opportunity. So, you do a bit of your own research.

The fundamentals of stock X look good and you're convinced.

You buy it.

But soon you realise something...the guru isn't talking about it anymore. You find out later that he changed his mind and sold out.

The guru convinced you to buy...but he did not think it was important to inform you that he sold.

Over the last one year, this is the most important question we've received from subscribers - What do we do in this situation?

Well, it's a 2-part answer.

But first, let me clarify something. I'm not criticizing all the market gurus out there.

There's good reason why they have become wealthy. It did not happen overnight and it's not because of luck.

Winning in the stock market takes patience and discipline. Thus, it only makes sense to try and emulate them.

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But that doesn't mean you should listen to everything they say.

Kunal Thanvi, the editor of Smart Money Secrets, and I, avidly track the moves of the top 40 market gurus. We call them - the super investors of India.

But we don't recommend every stock they buy.

They appear on our radar due to their bulk/block deals or because of the 1% (or more) stake they hold in various companies.

We dig deeper in to these companies and evaluate them.

Each super investor has an investing philosophy that he/she believes in and follows.

That's fine but...

You won't know the exact reason why he/she bought a stock in the first place.

So we do our own research to answer an important question...

  • Would we buy this stock if we did not know this 'guru' had already bought it?

The answer to this question is the first half of the answer to our subscribers' question.

So how do we find the answer? We use the Smart Money Score.

We use it to reject most of the stocks...more than 90% of them.

Kunal has been writing to you about the Smart Money Score and why he rejects most of the stocks the gurus invest in.

Last month, I wrote to you about the reason why Kunal and I walked out of an analyst meet of a dairy company. It was a company in which a super investor had bought a stake recently.

We don't blindly follow these gurus and neither should you.

And if that is the case...then the reverse also holds true.

Just as we don't recommend all the stocks the top 40 super investors buy, we also don't believe in automatically selling when they do.

This is the second half of the answer to our subscribers' question.

If we believe that the fundamentals of the companies we've recommended are intact, and there is more steam left in the stock, we see no reason to exit that stock...even if the super investor has done so.

These gurus may have many reasons to sell...but we don't have to agree with them.

We believe the presence of a super investor is an important reason to recommend a stock. But all the reasons to ultimately recommend selling it...are our own.

Which brings me to this month's recommendation...

We are working on a stock that could have an upside as high as 68%. In market jargon, this kind of stock is called a 'special situation'. Yes, this is the actual term used!

But it's not the Smart Money Secrets recommendation for this month because...we've found a better stock for you - an agri-based company that we've been tracking for a while now.

It was too expensive for our comfort. However, the recent correction in the small and mid-cap space has made this opportunity quite attractive.

Subscribers can expect the recommendation soon.

In case you don't have access to Smart Money Secrets, you can sign up here.

Chart of the Day

The one big thing that worked for the Modi government when it came into power was low oil prices.

Given that India largely imports most of the oil it consumes, lower prices meant the trade deficit was kept in check.

Fast forward to today...oil prices have been rising.

So has the trade deficit. But can this be entirely attributed to rising crude prices? Not really, if an article in Livemint is to be believed.

You see, oil prices have inched up in FY18. But they are still not as high as they were in FY14.

Yet, in FY14, the trade deficit was barely anything. Whereas in FY18, India is staring at a trade deficit of around US$ 53 billion.

Gold is not the culprit either. Gold imports peaked in FY12, after which they fell and have been at moderate levels.

So it's the non-oil, non-gold deficit that is the big problem today.

You may be aware, dear reader, India's export growth in the last four years has been poor. Meanwhile, imports have risen.

We seem to be staring at a structural problem. While consumption has been a big driver of GDP growth, investments in the economy have not picked up.

This is a crucial issue that must be addressed in the long-term.

The Real Culprit for India's Rising Deficit

Sarvajeet Bodas
Sarvajeet Bodas
Research Analyst, Smart Money Secrets

PS: What are India's best investors doing with their portfolios in such a volatile market? Kunal Thanvi is on a mission to reveal their top picks to you. You can follow India's top 40 super investors here.

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2 Responses to "This is What You Should Do When a Market Guru Sells a Stock After Recommending It"


Jun 21, 2018

I think the rationale behind the stock selection of the so called gurus has been explained beautifully. It is not an automatic buy or a sell. Equitymaster and team may have its own view. That is heartening for subscribers.since we are following Equitymaster and not the gurus......



Jun 21, 2018

What should be done when Dr Dang predicts doom and gloom?

Equitymaster requests your view! Post a comment on "This is What You Should Do When a Market Guru Sells a Stock After Recommending It". Click here!