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  • Jul 28, 2023 - A Simple Rule to Navigate this All-Time High Market

A Simple Rule to Navigate this All-Time High Market podcast

Jul 28, 2023

As I record this video, the index has already gone up 16% from its March lows and there is nothing on the horizon for the time being that can stop the rally in its tracks.

This presents the classic dilemma for the average investor. Should he take advantage of this rally and exit a few stocks, or should he keep riding the bull to new highs?

Do check out in the video to know how to navigate this all-time high market.

Hello everyone. This is Rahul Shah here, trying to make investing accessible and profitable for the average investor.

To be honest, I did not think this will happen. In fact, I don't think a lot of people did.

I am talking about the market reaching all-time highs.

In March, when the Sensex was down around 10%-12% from its previous all-time high, I thought the market will fall even more.

After all, there was a lot of bad news going around.

The US economy was struggling with inflation, tech stocks were falling like nine pins and our own market was showing signs of fatigue.

And therefore, it was natural to assume that the markets would fall further.

Well, it did not.

The market took a massive U-turn and has never looked back since.

As I record this video, the index has already gone up 16%-18% from its March lows and the way it is going, it can continue to rise for some more time.

Put differently, the bull run could be here to stay.

This is a confusing situation for the average investor.

Should he take advantage of this rally and sell a few stocks, or should he continue to hold so that his portfolio keeps going up with the overall market?

Now, if he sells his stocks, especially the good quality ones, it may be a long time before he can buy them again.

On the other hand, if he doesn't sell and if the market crashes, he would have missed out on a golden selling opportunity.

Now, we are in a confused state of mind, aren't we?

As if this wasn't confusing enough, countless advice from self-proclaimed experts and financial gurus, make the whole thing even more difficult.

You see, even I used to have similar confusion in the past.

Even I used to get cold feet approaching such situations and there used to be no simple solution in sight.

However, as I spent more time in the market and read countless interviews of super successful investors, I began to realise that my approach to the whole thing was wrong to begin with.

I realised that selling was more of an art than science. And in such activities, one should not aim for precision.

In fact, I now follow the famous Warre Buffett motto: Never count on making a good sale. Have the purchase price to be so attractive that even a mediocre sale brings good results.

This means that I have flipped the whole situation upside down. I no longer worry about selling at a very good price.

I know I won't be able to have a perfect exit point. There will always be cases where either I will be an early seller or a late one. This thing is beyond my control.

What is more in my control however is trying to buy the stock at the right price and of the right quality.

As a matter of fact, it helps to divide your portfolio of stocks into two broad categories: Stocks of the highest quality that you don't mind holding on to even for the next 10 years and stocks of average quality where you move in and out based on the underlying valuation.

Talking of stocks of the highest quality, these are big wealth creators like Asian Paints, Titan, Pidilite etc.

Out of close to 7,000 listed entities, there are may be 100 or 120 such stocks that we can count on to be around 10 years from now and create new profit records in the process.

That's an extremely low percentage of 1%-2%. Put differently, 98% of the stocks out there are of mediocre or poor quality.

Now, the problem is that if you know it is a high-quality stock, most other investors also know the same and therefore, these stocks are seldom available cheap. But once you've managed to buy them at attractive valuations, hold on to them tight.

Do not sell them even if their valuations become exorbitant. These stocks should be sold only when the business quality deteriorates or there is some structural change in the industry.

Except for these reasons, you should stay invested in them for the very long term. Thus, even though market are at an all-time high, resist the temptation to SELL such stocks. HOLD on to them.

This brings me to the average quality stocks. These stocks should be bought when they are trading at low valuations and sold once they reach full valuation.

For e.g. if you think certain stock deserves an intrinsic value of Rs 100 then the idea should be to buy them at Rs 70 or lower and then move out once the price reaches full value of Rs 100.

In one of my paid services, I like to recommend stocks when they are trading below book value and sell them after they go up 50%-100% in 1-2 years. Yes, there have been cases where stocks have gone another 50% or even 100% after my SELL recommendation but as I said earlier, this no longer bothers me. I have defined my BUY and SELL limits and I try to stick within those limits.

So, here's the crux. Markets are at an all time high. And in case you are confused whether to HOLD or SELL your stocks, try to classify them based on the qualities I just discussed.

Extremely good quality stocks should not be sold if bought at attractive valuations, provided their quality is intact.

Average quality stocks should be sold if you are making your 50%-100% on them in 1-2 years.

Now, there is also the third category which I like to call speculative stocks.

They are called so because they are neither good quality nor one can assess their intrinsic value with a great degree of reliability.

These are loss making or highly leveraged companies where one is looking to make a quick buck based on some news or hot tips. Ideally, one should not be investing in such stocks at all.

But if one has just to have some fun on the side and if these stocks have gone up 40%-50% in quick time or even higher, then this is a very good time to get rid of them. For when a bear market strikes, these will fall the hardest.

So, there it is.

My views on whether you should SELL or HOLD on to your stocks in the current euphoric market.

As I said, it depends on whether the underlying stocks are of good quality, average quality or are highly speculative in nature.

Your decision to sell will depend on the kind of stocks you have in your portfolio.

Please note there is no foolproof method for selling stocks. There are only broad guidelines and thumb-rules that have shown to work in the past and this is what I have highlighted here.

They have certainly helped me a great deal in approaching the problem of selling with a clear head. I am hoping they will do the same for you.

Happy Investing.

Rahul Shah

Rahul Shah co-head of research at Equitymaster is the editor of (Research Analyst), Editor, Microcap Millionaires, Exponential Profits, Double Income, Midcap Value Alert and Momentum Profits. Rahul has over 20 years of experience in financial markets as an analyst and editor. Rahul first joined Equitymaster as a Research Analyst, fresh out of university in 2003 but left shortly after to pursue his dream job with a Swiss investment bank. However, he quickly became disillusioned working for the 'financial establishment'. He learned first-hand the greedy stereotype of an investment banker is true and became uncomfortable working for a company that put profit above everything else. In 2006, Rahul re-joined Equitymas ter to serve honest, hardworking Indians like his father, who want to take control of their financial future - and not leave it in the hands of greedy money managers. Following the investment principles of Benjamin Graham (the bestselling author of The Intelligent Investor) and Warren Buffet (considered the world's greatest living investor), Rahul has recommended some of the biggest winners in Equitymaster's history.

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