VP Chintan Baithak Goa 2017- Selling decision

Investing Strategies
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As we were setting the agenda for this years annual meet, we looked back on the topics discussed in previous meets. Even though we covered breadth of topics across various investment styles/philosophy, we realized that there was hardly any discussion around selling. All our topics/conversations revolved around stock ideas, buying strategies, investment framework for buying right and allocating capital. We seldom discussed anything related to selling. Even within group, lot of us, though adopted different styles, we had not tried to put structure around our selling decision.

As @bheeshma mentioned in his post, Mr.Vinay Parikh mentioned that it is important to have framework and process around investment decisions. Hence, we decided to devote some time during the conference to discuss this. I am attaching my presentation here on my framework for selling decision. However, the idea during the session was to use this presentation as pointer and then discuss the topic to understand that within group how folks think about selling and whether we can build some framework around this. Here is the link to my presentation

Selling Decision.pdf (195.1 KB)

We were fortunate to have discussed this topic in front of senior practitioners like Vinay Parikh and Kenneth Andrade. We tried to understand from them too as to how they think about selling. What was striking was, they kept this whole thing very simple. Both of them felt that they try to buy right and hence selling decision becomes easier.

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Hi,

I am also figuring out some strategy / framework around selling process.

Everyone has different perspective in this area, right from selling after stock goes up by 100%, 200% etc, to selling when it becomes extremely overvalued. Extreme overvaluation is again subjective in nature. I would believe that, some NBFC is overvalued at PB of >6 even it is growing at 20-30% per annum and has superior ROE but some one else would like to hold it even if it is PB of >10 based on quality of business.

My process of selling revolves around following:

“We sell in the open market when things become grossly overvalued. We are just
not that good at selling when things are moderately over priced. We also sell when
we make a mistake. Mostly we sell when our companies get taken over. Most of
our sales are not to the market. I’ve been doing this for a long time and I’ve held
securities for three years and sold them after they’ve doubled only to see them
triple over the next six months. When you don’t know what you are doing, doing
nothing is the best course of action.”

My selling approach mainly revolve around this and following tenants:

  1. Sell if the original thesis at the time of buying do not hold. (Ex: IDFC - Bought at 150 and sold at 175 when realized that this is no longer a great story)
    .

  2. Sell when stock is overpriced and factors in next 3 years growth. This has wroked very well for me in multiple cases. (Ex - CUMMINS - Bought at 370 and sold at 1000, Bajaj Corp - Bought at 230 and Sold at 500).

  3. Strategy 2 is over simplified based on estimated future EPS growth and rational PE which market should give to the said stock. In bull market, many stocks will remain overvalued and become even more over valued and that is where you may feel that you have sold early. But I stick to my selling process and do not worry much about what happens to stock price after that, as I generally move to next opportunity and focus on that rather than keep checking price of sold opportunity. This requires lot of discipline and I have successfully implemented it over long period of 5+ years.

  4. If there is another opportunity which is better than what I am currently holding. (Ex - Sold V-Mart early and shifted to Vinati Organics and that wroked well, even though V-Mart also moved up by more than 100% during IPO of D-Mart. My thesis of moving out of V-Mart was that it would face stiff competition from other brick and mortar retailers and online retailers, which may prove correct in long run.)

I still believe that, this selling framework is evolving and now I am holding stocks for much longer duration than earlier which has its pros and cons both.

Let us see. There could be many more comments on this thread which other readers may like to contribute and we can all learn from that.

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Though more or less as is explained above, but just thought of posting as below. This is a chat I had with one of the Friend on Whatsapp…

[18/01, 11:26] : Good morning, Market has broken all records and expectations, should us book partial profits though we r long term inverstor.I m bit confused about it, pl guide.

[18/01, 11:33] : Reasons to sell should be…

If one needs money in next 5 years and price has gone very high wrt financial KPIs

If what we considered as Business story n likely price post those business achievements for a particular stock is already priced in current market price

What we thought as business story while purchasing stock is faultering n not likely to play out due to various reasons.

Better stock with Business story available than currently held.

If we are losing sleep due to worry of likely market crash.

In all above reasons we should sell to the level that we get our peaceful sleep back.

[18/01, 11:35] : An Interesting read:

In cricket, when Kapil Dev scored 175 runs on 08/06/1983, everybody was of an opinion that it is a lifetime achievement and perhaps will not be broken.

But look at history.

Saurav Ganguly scored 183 runs on 26/05/1999
Sachin Tendulkar scored 186 runs on 08/11/1999 and again beat his own record by accomplishing 200 runs on 24/02/2010. Unbelievable isn’t it??

Virendra Sehwag scored 219 runs on 08/12/2011 and Rohit Sharma notched 264 runs on 13/11/2014

Hence there is nothing like a lifetime high. It goes on and will continue like this.

Moral : Stay invested or Start investing now for future high.

34000 was not n 35000 is not the end of life

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Strong logic… really nice.

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