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The single largest investor in Indian stocks is thinking of booking profits. Are you?

Feb 13, 2015

In this issue:
» Will the 9 trillion US dollar denominated debt change the Fed's mind?
» Are we staring at a snowball effect in global financial crisis?
» The role that banks are playing in the crisis
» ...and more!

00:00
Interviews with top fund managers, market experts and investing gurus are laced with anecdotes about how they came across their best picks. Needless to say, the questions that these answer also revolve around what are called 'buy ideas'. To put it differently, investors typically wish to pick the brains of gurus on how to select stocks. And that job, well done, certainly assures most of the investing returns. But according to us, unless you are Buffett, and willing to hold each of your stock forever, knowing when to book profits is as important. And therefore it is as important to know, when the successful investors sell. More importantly, what are the criteria that they use to sell stocks and book profits.

However, very few investors actually track selling activities of reputed fund managers, investors and investing gurus. Let alone picking their brains about their plans to book profits. And at a time when market sentiments are buoyant, the interest around profit booking ideas is naturally low.

Now, this is not to say that you should blindly buy and sell exactly the stocks that big investors are buying and selling. For their reason to do so may be entirely different from yours. For instance, Buffett's decision to buy shares of Tesco and then offloading them within a year at 50% loss did not qualify by his own value investing principles. But the investing legend lost no admirers by admitting his 'mistake'. And fortunately for him, he could afford booking the losses, which comprised a miniscule portion of his portfolio.

Retail investors, on the other hand, need to focus on booking profits in order to safeguard their portfolio returns. Knowing when the valuations are ripe or that the earnings prospects are lagging are essential to take profit booking decisions. Now, LIC, which is the single largest Indian investor in stocks, has shown some contrarian trends in its investing activities. Apart from the fact that the insurer typically subscribes to almost all PSU disinvestments, its decision to invest and book profits in stocks are independent of government mandate. And in this context, its decision to start booking profits in 2015 seems a very pertinent takeaway for investors.

It is not the kind of stocks that LIC offloads that should interest you. For the reason and valuations at which the insurer may have bought the stock may be very different from yours. However, it certainly means that the time is ripe for you to evaluate your portfolio and weed out stocks that are overvalued and do not offer sufficient risk adjusted returns even from a long term perspective.

Are you evaluating your portfolio for profit booking opportunities? Let us know your comments or share your views in the Equitymaster Club.

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01:45
And please don't assume that we are ignoring the elephant in the room when we think of possible profit booking in Indian equities. The FIIs, which have a disproportionately big weightage amongst investors in Indian stocks, are known to be fair weather friends. And at the slightest hint of discomfort in India or more comfort in external markets, they will not hesitate to book profits. The possibility of the US Fed raising interest rates can be the biggest opportunity for FIIs to take the flight to safety.

Now, as per Bloomberg, borrowers outside the US owe as much as US$ 9 trillion dollar denominated debt. And raising US Fed rates will mean that the cost of this gargantuan leverage will go up thereby halting global recovery, if any. Hence the US Fed may want to keep delaying the rate hike. However, as and when the rate hike becomes a reality, the FIIs will join the group of profit booking investors in Indian markets. And that itself could take a toll on valuations.

02:40
  Chart of the day
With all the crisis', busts and recessions that have incessantly gripped various parts of the world since 2008, investors the world over have become a jittery lot. But as anxious as they may feel about all the funny things that are going on in various economies, today's chart shows that the stock of the world's financial assets has continued to grow through all the ups and downs during this period. It also breaks down the financial assets into stocks, bonds and government debt.

Starting from US$ 211 trillion in 2006, the grand total of the globe's financial assets now comes up to US$ 294 trillion in all. Further, while the total value of stocks constitutes US$ 69 trillion of this today, an overwhelming majority of this is not stocks but fixed income type securities like bonds, loans and sovereign debt. But what investors need to be wary about is the fact that more than 50% of total global financial assets are in bonds and loans that are unsecured and uncollateralized. All the more reason why any crisis will have snowball effect on asset prices.

World's financial assets continue to grow

03:45
With the roots of the crisis that has put much of the developed world in a tizzy finding itself in un-securitized lending, a recent Financial Times report draws attention to the need of the hour. Countries like the US and the UK must crack down on banks and financial institutions that have an important role to play in creation of the uncollateralized securities. And most of this with the intent of facilitating money laundering. Thus while the last time around, the Too Big to Fail Banks were bailed out, we wonder how long will the banks continue with their misdeeds in the hope of more bailouts.

04:30
The Indian stock markets closed on a strong note today on the back of sustained buying activity across most index heavyweights. The BSE-Sensex closed higher by almost 290 points today. Gains were largely seen in FMCG and pharma stocks, while realty stocks found themselves on the losing end today.

04:50
 Today's investing mantra
"If calculus or algebra were required to be a great investor, I'd have to go back to delivering newspapers." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee.

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