When is a 'good time' to sell a stock?

In this issue:
» Rich world may drag emerging markets down
» Krugman thinks ECB should go the US way
» How does a weaker Euro impact India?
» Blame infra for India's slowdown
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00:00

We talk a lot on what kind of stocks to buy. The answer to this is a simple one. Buy companies that are fundamentally sound. Have a management that has an excellent track record. And most importantly the companies should be available at a discount in terms of valuations. But a question that is equally important is when should one sell a stock? Is there a prescribed good time for this?

Well the answer to this is simpler that to the first question. One should not sell a stock for any reason except for valuations. Let us try and elaborate this further. Owning a stock should be like owning the entire business itself. And when one is the business owner, one really does not look at the market prices. Whether prices go up or down, it is irrelevant. What is relevant is how the business is performing. And if the business performance is not up to the mark then the point to be thought about is are corrective actions being taken to rectify the same?

As an investor too one needs to follow the same philosophy. True if the company's fundamentals are deteriorating and the management is not taking any corrective action, then one should definitely sell the stock. But if this is not the case, then the only other reason to sell the stock would be that the prices no longer justify the underlying fundamentals. When this happens it means that Mr Market is assigning a price that is way too high. And eventually the price will have to fall to start reflecting the stock's intrinsic value. This is a clear indicator to sell the stock. While the stock may continue to go up even after the sale but it is wiser to be careful rather than being sorry. Because when the tides turn, these overvalued stocks are the first in line to nosedive.

When do you think is a good time to sell a stock? Share your comments with us or post your views on our Facebook page.

01:10		Chart of the day

Woes for India's power sector do not appear to be settling down. The sector has been battling low tariffs, land acquisition norms as well as scarcity of fuel. As a result, the sector has been unable to operate at the capacity that it had hoped to achieve. As reported by a leading daily, the achieved power capacity from April to July 2011, for both state as well as private plants, is still below the target. The total power capacity achieved is 6,369 MW as compared to the target of 9,091 MW. As a result of its inability to achieve target capacity, the power sector may end up defaulting on its loans. And the default will not be small. It is estimated to be around Rs 1,350 bn as per the Reserve Bank of India.

Data source: Economic Times
* Data for private & state plants. Data from April to July 2011

01:30

The threat of the economic crisis in the rich world seems to be getting bigger. Now it is not just the US and Europe that are far from economic recovery. Even the likes of China, India and other high growth developing nations run the risk of being dragged into a recession. Neither the stimulus plan in the US nor the austerity plans in Europe have given investors any hope of seeing better employment or higher growth rates in those regions. Add to that the fact that entities like the International Monetary Fund (IMF) fear shortage of funds for economic aid.

This can put immense pressure on the developing economies to sustain growth. But if China and India do not take care of their own fiscal position, a rating downgrade for them too is around the corner. Rating agencies have already warned China of a downgrade in credit rating within two years due to the large debt loads of the country's banks. There is no reason why lack of improvement in India's fiscal deficit situation cannot attract the same penalty. We thus remain conservative about India's long term GDP growth prospects and suggest that investors keep their return expectations moderated.

02:10

Even Nobel Laureates can commit monumental blunders. Nobody could be a bigger proof of this phenomenon currently than the noted economist Paul Krugman. In an Op-Ed in the New York Times, Krugman has argued that the European Central Bank should go the way of the US Fed. In other words, it should start printing money so that Government debts of troubled nations such as Spain and Italy can be bought and their interest rates lowered. A failure to do so, opines Krugman, would make things come apart in the Euro region in a matter of days. Is Krugman right on this one? We don't think so.

We believe that had money printing been the solution to avoiding an economic downturn, Zimbabwe would have been the richest nation on earth. Instead, what happened in Zimbabwe was inflation ran rampant, going as high as few thousand percent or may be even more. Furthermore, money printing also did not yield any fruitful results for the US economy which has already given QE1 and QE2 a fair shot. For an economy to grow, people making productive investments need to know what the right interest rates are. Lowering the same for a temporary period by indulging in money printing leads to malinvestments and nothing else. A fresh round of genuine recovery begins only when these malinvestments are liquidated or purged out of the system. Providing more paper money ends up making matters worse and prolongs the problem. People like Krugman though would have none of it. They somehow want to short circuit the process of correction and go straight to good old days of robust economic growth again. As outlined earlier, this looks next to impossible.

02:50

The fact that euro is depreciating against the dollar comes as no surprise given the perilous state of affairs in the Eurozone. But the rupee has also been depreciating against the dollar. Thus, if the euro depreciates further, will the rupee follow euro's footsteps or will it follow its own fundamentals? Euro's decline seems imminent given the crisis that its member nations are facing. The debt woes in countries such as Greece, Ireland, Portugal, Spain and Italy have no immediate solution at present. The rising cost of debt in indebted Eurozone countries, coupled with high interest rates and lack of investor support is hurting these economies. What is more, countries such as Germany and France are facing some tough times themselves and hence are not keen to bail out their less fortunate peers. India, on the other hand, does not have the kind of sovereign debt that Eurozone has and is set to grow at a much faster pace than the latter. Hence, there is no reason why the rupee has to follow the same path charted by the euro. Having said that, India does have the burden of a high fiscal deficit and an inability by the government to reduce it in the coming years is likely to put pressure on the Indian currency.

03:35

India's GDP growth rate has come down to 7.7% in June quarter from 8.8% in the same period last year. This is being attributed to the drastic fall in construction activities. Construction grew by a meager 1.2% as compared to a growth of 7.7% in the previous year. It is important to note here what actually constitutes construction. Contrary to normal belief, it is not just real estate. Construction includes sea ports, highways, railways and housing. The real estate companies are blaming the players in other construction activities. Since construction means both real estate and other activities, we believe that it will be unfair to put the blame on only one of these services. Real estate is seeing slowdown and so is the construction of highways and other infrastructure.

In the short term, seasonal factors may have resulted in slowing down of activities especially because there were heavy rains all across the country. After the monsoons, the infrastructure projects may get back on track. However, there are bottlenecks in the path of growth. We all know that in India, infrastructure is taken care of by both the private players and the government. On one hand, higher interest rates dissuade the private companies from investing in these activities. On the other, government's laidback attitude in executing reforms results in slower development of infrastructure. The quarterly growth number is just one of the indicators of the current state of affairs of the economy. But if the investment in infrastructure does not pick up, this number may become the trend in the days to come.

04:20

China was the biggest contributor to world growth last year. However in light of a weakening US economy and the European debt crisis, can the economy sustain its momentum this year? Well, as per latest stats, China's imports jumped 30% and it also saw a rebound in domestic lending. Plus, its policymakers have been successful in controlling the onslaught of inflation. Inflation in the country has eased to a 6.2% YoY pace, which is now at manageable levels. All these positive signs help confirm that the economy remains robust. However, weakness in the global economy may cause export growth to slow by some measure.

04:40

In the meanwhile, Indian stock markethave continued to extend their losses. At the time of writing, the benchmark BSE Sensex was down by 423 points (2.5%). All the major sectoral indices were facing selling pressure with stocks in the metals sector leading the losses. All the major stock markets in Asia closed in the red as well with Hong Kong leading the pack of losers. Europe has opened the day in the red as well.

04:56

Today's investing mantra

"A market is the combined behavior of thousands of people responding to information, misinformation and whim" - Kenneth Chang