Friday, September 10, 2010

Profit Realization – Disadvantages of Selling Early

Equity investment itself is a risky proposition and how about the factors that are adding fuel to it? For lack of better terminology I just do not know how to describe the reduced profit realization due to the early sale of stocks. Some might refer it as notional loss but I think notional loss is something which we do not realize but is on paper. I am talking about the profit we realized already but could have gained more if we waited a bit. Irrespective of what terminology one comes up with, the essence of this article is to describe my personal experience regarding how the stocks I sold ran up to newer highs on almost daily basis within few days / weeks of the sale transaction and how that impacted my profit realization.

Why I sold Stocks?

Having proclaimed myself as a long term investor, what made me to sell the stocks within a year of buying? The idea was to take advantage of the sideways moving market. Because the market was moving up and down and my overall portfolio value was dancing to the market tunes. I waited for few ups and downs and this scenario happened again and again. So, I thought of selling my portfolio when the market reached 17500 and wanted to buy them back when the market comes down again. You know what, this time the scenario I was talking about did not happen and I do not know if it will happen soon. Only scenario that happens constantly is Murphy’s Law. Market has been going up and up and more importantly Indian Market has been so resilient in the recent months. Even a 200 point decline in Dow Jones Industrial Average (USA) did not impact significantly (Once it did). I will give the specific examples after giving my opinion about why Indian Market has been so resilient.

Why the Indian Market is so resilient?

For the last two years we have seen the SENSEX behaving in line with Dow Index because the Foreign Institutional Investors (FII’s), Mutual Funds and Hedge Funds in USA were forced to exit Indian market due to domestic redemption of equity mutual funds. But more than two years have passed since the start of the recession and all the investors in USA (Most of them through 401 K Plans) have been sitting with Cash without any appreciation in the value. Banks give no interest and real estate is in shambles. So they are left with no option but to look for greener pastures. They understand the fact that growth in Western Economies is a past story and developing economies like India, China and Brazil hold the edge. The fear for equities that they developed during the market mayhem last year is eased out due to the fact that Indian companies have mostly shown positive results throughout this recession phase. Foreign Investors can’t sit idle for a long time and they have to make the money work and they see Indian equities as a better option than all possible domestic investment option. So, the fund flow into India is steady and it seems even a crash in Dow Index won’t impact SENSEX significantly. I do not have exact facts and figures to support my assertion but this is the opinion I have got and if the readers think of any other reasons, they are most welcome to share.

Profit Realization – Example 1: Parekh Aluminex

I believe I am one of the guys who spotted this gem early when it was Rs.50 last year. Even though I spotted it at Rs. 50, I started buying only when it reached Rs.65 and since then I had been slowly accumulating the stock till it reached Rs.135. This stock was in Rs.100 and Rs.135 range for about 6-7 months and I had the ultimate confidence all this while and suddenly it started moved up to Rs.160 and again came down to Rs.130. Then the stock reached Rs.340 and again came down to Rs.240. I did hold it all this time. But when it reached Rs. 300 again, I thought of selling it and buy it back again . So I sold it at Rs.300 with more than 120% return. But within 3 weeks of selling it, the stock moved up crazily in the past few days almost on daily basis and the present value is Rs.500. Though one can’t take all the profits and need to leave something for others, this is something that we need to be very careful about if we are very serious about making very good returns. Had I waited for a month, I could have got 300% return. My belief that the market would come down this time from 17400 levels did not materialize and that reduced my profit realization.

Example 2: Everonn Education

The same scenario happened again and I will just mention only the cost price and exit price. I bought it when it was Rs.375 and sold it at Rs. 530 thinking that I would be able to buy it back at a lower price again but that was not to be the case. It moved up and up and the present price is Rs.634.

Example 3: Mahindra Finance

Again this is one of the stocks that I have specifically mentioned for long term investment in one of my previous articles as part of Financial Stocks and bought it at Rs.410 and sold it at Rs.460. Present price is Rs.630.


Example 4: Usher Agro

I have already mentioned what happened with this stock as part of the Short Term trading article. I bought it at Rs.40 and sold it at Rs.45. Present Price is Rs.90.

The situations like the ones I have mentioned above happened with many other stocks as well and now I know why the investors hold good stocks for a long time irrespective of the short term blips. Previously I knew this too but you learn the lesson very well when you experience it firsthand and I got the point now.

The point is "HOLD" on to the fundamentally good stocks for a long period of time and do not book profit thinking that you can buy it back again at lower levels. This will not happen when you sell it (Happens when you hold on to it).


Kumaran Seenivasan

www.stockanalysisonline.com

10 comments:

Venkat September 11, 2010 at 12:56 AM  

Kumaran... yet again a nice article. Even I too make this costly mistakes over n over again which effects are profit realization. :)

Long term statergy on gaining scrip is such a difficult and pain staking efforts esp when we have mouth watering profits in-hand. I guess thats the thin-line difference we and hugely successful value investors have, that they have 'irrational over-confidence in exciting growth companies and from the fact that they generate pleasures & pride from owing the growth stock over a long period of time'.

Regards
Venkat

Jagadeesh,  September 11, 2010 at 2:17 AM  

Hi Kumaran,
A very nice article and good points to think about...I follow your blog regularly for new articles....one good thing about your articles is they are very simple and yet effective.....

Selling out entire holding may not be a good option, but may be one should think about partial profit booking to take advantage of market fluctuations....I am still trying to hold my nerve to hold stocks for long term....

Nannu,  September 11, 2010 at 9:22 AM  

Kumaran,

Very nice article. Same experience with me also. I sold Parekh when it was at 300 few weeks back. The reason I sold the stock was since the stock had appreciated so much so short time I wanted to book profit. I think one of the biggest learning for me was to be patient though it is easier said than done.

This is your 50th great article. Personally for me it was a great reading experience all the way long.

Thanks and Regards,
Nannu

Marshal,  September 11, 2010 at 11:16 AM  

I totally agree with you, and it happened with me as well exited tata motors at 850/-(now 1050/-), trent at 600/-(now 1150/-), shoppers stop at 500/- (now 650/-)..
i also learned hard way, good stocks are something one should HOLD JUST HOLD.
now i have airtel, t.steel, acc, beml.. i will hold just hold...

Cheers
Marshal

doctorgeeta September 12, 2010 at 1:29 AM  

I am a regular reader of your blog and have profited by yr advice.

However, I beg to difer with u on this.

U see, it is not always possible to sell at the highest point. I hb lost a lot of money by thinking that I wl reap a;; the proft n sell ONLY at the top.

As the saying goes, don't try to be greedy and wait n wait and wait.

Book yr profit early n make money early instead of sitting on Notional gains.

Moreover, the idea is to invest in another stock instead of hatching the egg forever.

Yes, it is painful to sell at 300 (and book profit early) and see the stop climb to 500 than to wait forever and regret later.

To each, his own

Shabu's September 12, 2010 at 9:57 AM  

Dear Kumaran,

Nice again and realistic thoughts..

I applies some other practice in such occassions.. Whether take out the capital or profit whichever is
greater.. and I am experienced..it works...

regards

Kumaran September 12, 2010 at 2:05 PM  

Dear All,

Very good comments and suggestions. I welcome it.

Rgds,
Kumaran.

KK September 12, 2010 at 11:32 PM  

Dear Kumaran,

I do not think there are too many analysts out there who have got the guts to place in public the analysis of their (so called) failure to make the most of their investments. You are brave enough to do that in the interest of your followers. I salute you.

I am a business partner to the premium food-products brand Kalinga Kitchens and I invest (longterm) in shares to create wealth for my business. I do short-term investments to cater to my working capital and franchisee fee needs. So, I have seen both the sides of the story - holding long and holding short. Both work fine to some extent and the judicial blend | trade off is more important in the long run. Thank you so much again for your absolutely great articles.

Regards,
KK

Shrishail September 13, 2010 at 4:28 AM  

Hi Kumaran,
I have been a regular follower of your blog and have gained some great insights from your views. However, I do not completely buy your point this time. Investments, if well planned give good results. The planning includes why, what, how long and how much. As you can never catch the market at the highest or lowest, its best to stick to your plan. If you have made profits as per the plan, exit. If you think the stock will go even up, sell partially and risk the other half. I am glad I sold SBI at 2500 (having bought at 1900, current price 3100+) and not wait holding Educomp which went up to 690 and came down again to 570 (buying price 570)

Rgds,
Shrishail

Kumaran September 13, 2010 at 9:23 AM  

Dear Shrishail and others,

Good that you took time to comment. What I want to clarify here is that I sold stocks within a year of buying. One year is not a long enough time to get the real appreciation for a quality stock. If stock price increases in a 1 year period, that is more to do with assumptions and speculations.So, I booked the profit that came via speculation and assumption. But if you wait for a long time (Not blindly though), you can reap the rewards of real "Growth" profit. Rakesh Jhunjhunwala has not sold Karur Vysya Bank since 1991 and he got the 21 CAGR after 19 yrs.Had he sold thinking that he got his planned profit, then he would not have become RJ. Even I sold all my stocks thinking that I would buy back again when the market comes down but sometimes things do not go as per plan. But I still have another plan A.

Rgds,
Kumaran.

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