When is the right time to sell stocks? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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When is the right time to sell stocks? 

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In this issue:
» India's edge in industrial production
» Promotion of gold coins gathers steam
» FIIs continued to be enthused about India
» A change in fortunes for Indian IT
» ...and more!


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00:00
 
Do you know the most common reason why companies fail? Well, we guess it might have to do with debt. Either they don't get it when required or they take on so much that when demand for their product falls, they find it hard to repay it and hence, fall into a debt trap getting out of which could take years. Thus, if the most imperfect stock has the qualities we just described, it is obvious that the most perfect stock would have qualities, which are exactly the opposite. A perfect stock would be the one where the underlying company has neither taken debt for years nor has it raised equity but has still grown its net profits at a pretty decent rate and has also continued to pay handsome dividends. If one draws a circle around such stocks and considers a long-term period of say 8-10 years, we are pretty sure that these stocks would have outperformed most stocks that are listed on the bourses.

Of course, one has to buy such stocks at prices that are reasonable enough. And when should we sell them? Well, if the stock continues to do well and keeps growing its profits as well as dividends, the idea of selling it should not even enter one's mind. This is because all the returns that the investor is expecting from the stock could be met from dividends itself. As the legendary Warren Buffett says, if the homework is done right while purchasing a stock, the time to sell it is never.

01:08  Chart of the day
There has been considerable optimism about India and China breaking away from the developed nations in terms of reporting decent growth even when growth for the global economy is expected to be tepid in 2009 as well as 2010. And the latest figures released with respect to industrial production probably lend credence to this buoyancy. As today's chart of the day shows, with respect to growth in industrial production in August 2009, India and China are far ahead of the US, Europe and its BRIC peers. While China's industrial production grew by 12% YoY, for India that number stood at 10%. For India, this comes as a relief, especially at a time when monsoons have played truant and have hampered growth in agriculture. Thus, if industrial production sustains its growth momentum in the coming months as well, achieving a 6% growth for the fiscal may not be as difficult as originally envisaged.

Data Source: The Economist

01:49
 
Goldman Sachs' famous BRIC report showed a large chunk of Indian population in the group that they called 'aspirers'. But India Inc is not leaving any stone unturned to cater to not just the aspirers but also the ones that can barely afford to 'aspire'.

It took close to 300 engineers around four years to develop the iconic Tata Nano. Indian engineers today are doing a lot more of the 'out of the box' thinking to tap one the largest untapped markets. The idea is to go beyond the 'sachet revolution' of the 1980s when Unilever and other consumer-goods companies realized they could sell lots more of their shampoo, toothpaste and snacks just by selling them in tiny packets. This time, Indian engineers are reinventing products to cut costs and reach the hundreds of millions of people who live on less than $2 a day. The market is so lucrative that not just start ups but also well established conglomerates have set up new business divisions with focused attention on low cost products. The Tata Group is certainly leading this pack. And while profit margins may be slim, companies are counting on higher volume to compensate. Many also hope to tap into other poor markets in Asia and Africa eventually.

02:31
 
Do you know what the hottest commodity in India is these days? If one were to go by a report in a leading news portal, it is the 'gold coin'. And what is more, banks, brokerage houses and post offices across India are promoting the sale of gold coins, thanks to customers' new-found fascination for the same. The report quotes a bullion trader saying that one of the main reasons for people buying gold coins is that they are safe to handle. Also, gold coins do not attract making charges thereby luring people to buy them.

With expert after expert predicting gold prices to touch record highs - and this includes some of the world's most renowned experts - the gold coin certainly is not losing its shine anytime soon!

03:02
 
'Good growth' and 'strong fundamentals' are two terms that seem to perfectly roundup FIIs' perception of India post the credit crisis. The scope for long term growth, and India's resilience during the global financial crisis has tremendously increased its investment quotient in the eyes of FIIs who have really started putting their money where their mouth is in the last few months. FIIs have made net investments of Rs 635 bn in the last twelve months in India and most expect them to continue this buying spree in light of the above mentioned factors. The only thing that can probably take away from this otherwise rosy picture could be stretched valuations with some companies really beginning to show very high prices in relation to their earnings and assets.

03:43
 
At the time of the last stock market rally, equal if not more attention was given to crude oil prices. After all, it was well on its way to its all-time high. This time around too, while the stock markets are marching ahead, the black commodity is making moves of its own. Fuelled by a weakening US dollar and expectations that demand will return as economies recover, crude oil has risen over the US$ 80 per barrel mark. At a time when the commodity was plummeting earlier this year, we had said that the long term trend for crude oil is upwards given how incremental demand will far outstrip incremental supply in the long term. That view is based on rational considerations of demand and supply. We also believe that just like equity markets, commodity prices can also get too far ahead of themselves especially when truckloads of liquidity starts chasing them. It would not be a surprise if we head into another crude oil spike.

04:11
 
The Indian IT industry is displaying signs of revival in a number of ways. The recent financial performance and strengthening deal-pipe line is a primary evidence of this. The other major indicator is the recruitment scenario in the IT job market. During last year, IT majors saw a deep cut in IT spending from clients forcing them to retrench employees and defer recruitment plans. It appears that things have changed for the good for this human resource intensive sector. In order to prepare themselves for the recovery, IT companies, big as well as small have started hiring not only from the top engineering colleges but also from mid-tier colleges. Moreover, academia and industry are joining hands to prepare job-ready professionals to reduce costs on training. Thus, this appears to be a win-win situation for all, colleges, IT graduates and the IT industry.

04:48
 
After trading in the positive in the morning session, profit booking took its toll as the BSE-Sensex was languishing in the red (down 86 points) at the time of writing. While select auto and IT stocks were finding favour, losses were seen in telecom and banking stocks. At the time of writing, the Asian markets were trading mixed. Europe began the day on a negative note.

04:58  Today's investing mantra
"Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid. " - Warren Buffett
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10 Responses to "When is the right time to sell stocks?"

Nag

Oct 21, 2009

Hi Riyaskhan,

I'm also a reader like you. I feel Ajit has given the answer from the following statement "Well, if the stock continues to do well and keeps growing its profits as well as dividends, the idea of selling it should not even enter one's mind". Just apply negation to the above statement and think for a while. You will get an answer and that's the time to sell the stock.

Like 

jb agrawal

Oct 21, 2009

some core sector stocks are even good so far as revival of economy is consired Your views in this regard are also recquired

Like 

rajan

Oct 21, 2009

must sell in large quantity

Like 

KUMARASWAMY

Oct 21, 2009

very interesting and useful article. full day events are accounted nicely with useful and thought provoking quotes.

Like 

Riyaskhan

Oct 20, 2009

Your topic on 20th Oct 2009 "When is the right time to sell stocks?" does not tell the answer in the detail message. I guess most of your title in the 5minutes wrapup emails are pretty attractive but when look at the details, you will not find the answer for the title question that shown in the 5 minutes wrapup.

Please make sure that you have given proper title for the 5 minutes wrap, or make sure that you have included the detail information for the question you asked. Dont give title only for the sake of attracting people to read your email.

Thanks,
Riyaskhan

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k.s.mohan

Oct 20, 2009


Interesting to note the contents of your wrap-up. However it would be more enlightening to giving your view on select sectors which would perform well in the coming months.

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narayanan

Oct 20, 2009

Well written articles. Haven been an investor in stocks since 80's, but these days the risks are more as FII behaviour is very hard to predict.

Like 

Mathews

Oct 20, 2009

I think the market is over heated and sensex scaled very fast to a higher lever. It is better to sell part of the investment and wait for a correction which is approximate 1500-2000 points, expected in the near future

Like 

dpp

Oct 20, 2009

d banking stocks. At the time of writing, the Asian markets were trading mixed. Europe began the day on a negative note.

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NIRUPAM BARUAH

Oct 20, 2009

Thanks for the issue.

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