[nukkad] How To Sharpen Your Sell Strategy

["Nelson Fernandes" <>]

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How To Sharpen Your Sell Strategy
A smart investor is one who knows what stocks to buy when. But a smarter
investor is one who knows just when to sell a stock-with his profits intact.

By Shilpa Nayak

Sandeep Mathur is mad at himself. In January 2000, this middle-level
executive in a multinational company, bought 500 shares of Zee Telefilms for
about Rs 1,000 apiece. Initially, Mathur was delighted as he saw the stock's
price soar to Rs 1,200 and then Rs 1,500 in February. When it hit its first
bump in March, his broker and friends pooh-poohed the fall, and urged him to
hold on. When it lurched to another low (in April), his advisors bravely
prophesised that things couldn't get any worse. Today, Zee is quoting at
less than Rs 120. Had Mathur exited Zee when it first slid to Rs 1,215 on
March 14, 2000, he would have made a profit. Now, his chances of making any
money on Zee look very remote.

Like Mathur, a lot of investors seem to know when to buy a stock. But
knowing when to sell is an art known to few. It's easy to see why. Most
small investors buy stocks and then forget about them, unless they run into
some kind of a financial problem (need to pay the yearly insurance premium,
college fee, or adding that extra room to your two-bedroom house). Now, if
you are a small investor, it is a good idea to invest long-term. But that
doesn't mean you don't churn your portfolio to maximise the return on your
investment. Here are three rules for smart sell strategies.

Rule No.1: Sell, if you meet your price target

Investing takes a lot of self-discipline. And the hardest part usually is
calling it quits when the going is good. Let's face it, would you sell a
stock if you thought-or somebody else made you believe-that its price would
go up tomorrow, the day after that and the next? Unlikely.

Here's BT's take on this: the ''loss'' that you think you will incur by
exiting a stock ''prematurely'' is only notional. Whereas the loss you will
make in case the stock's price sank below your purchase price is very real.
To prevent this from happening, you need to do this: set yourself an
earnings target. For example, if your target is to earn double the return on
a bank deposit of 10 per cent, you should sell the stock once it has
provided you a 20 per cent (annualised) return. Agrees Krishnamurthy
Vijayan, CEO, JM Mutual Fund: ''Stick to your earning goals, and never rue
the fact that somebody else made a bigger killing than you.''

Rule No.2: Sell, if you don't meet your price target

Sounds confusing? Actually, it isn't. If you think a stock isn't moving up
the way you expected it to, within the time frame you had set for it, then
sell. A stagnant price is an indication that you either picked the wrong
stock or set an unrealistically high target. It's better to make your escape
with lower returns than wait for losses to happen. Says Mayank Desai, a
40-year-old Mumbai-based dentist: ''Everybody makes mistakes, and so do I.
But I strictly stick to the 'stop-loss' level. Following this principle, I
manage to get an annual return of 30 per cent on my portfolio, and I am
satisfied with it.''

You can tune the ''stop-loss'' level to suit your risk appetite. For
example, if your stock has sank to within 10 per cent of your purchase
level, you might want to exit. Somebody more aggressive, might bet on the
stock rebounding. In case it doesn't and only slips further closer to your
purchase price, you must sell. In case you miss this opportunity too, for
whatever reason, your next objective must be to minimise your loss. Tell
yourself that a 5 per cent loss is all that you will allow yourself.

Rule No.3: Sell, if the micro or macro picture worsens

Professional investors follow what is called a top-down approach to
investing. They first look at the economy, followed by the sector (top), and
then by companies (down) in those sectors. Software is a good example.
India's capabilities in the software sector are well known across the world.
Therefore, they would want to invest in this sector, simply because it is
growing much faster than any other sector. Within software, they will look
at the investments options; they will weigh Infosys against Wipro against
Satyam Computers against Polaris and so on. And at the least sign of
trouble, they will sell. Says Prem Khatri, Vice-President, Kothari Pioneer
Mutual Fund: ''If there are any developments in our portfolio companies that
could threaten our investments, we prefer to exit.''

There are several early warning indicators: One, the topline isn't growing,
but the EPS is, because the company has been able to cut costs. But there's
only so much flab a company can cut. Unless the topline grows, too, earnings
growth may not be sustained. Two, the company is doing well, but some key
executives are leaving. Three, new product launches are not happening, and
most of the revenue is coming from old products. That again is an indicator
of a potential drop in the topline, or lower earnings. And, four, a decline
in marketshare. The market may be growing, but the company is unable to
retain its share.

Before we end, a caveat: equity investments typically pay off over a
long-term of, say, five to eight years. The precondition to that is you must
pick stocks that are fundamentally strong. Finally, remember that
disciplined investing is Mammon's other name.

http://www.india-today.com/btoday/20010821/pfin2.html



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