November 20, 2015

When to sell a stock (fundamental view)

Most investment gurus tend to find selling much harder than buying. As Sanjoy Bhattacharya, the founding CIO of HDFC Mutual Fund, says in Chapter 1 of my book, Gurus of Chaos, 'Selling is well and truly the dark continent of investing.' So, I thought I would take a stab at how I, as a broker, identify high-conviction sells.

Let's now turn to the more effective selling rules. Firstly, it makes sense to sell a stock when you can see that the competitive moat around that company is eroding. For example, for more than a decade after Maruti entered the Indian market, Hindustan Motors, the manufacturer of the now obsolete Ambassador car, was a Sensex company. Even after the opening up of the Indian economy in 1991, investors did not figure out that this company's moat was going to be eroded by economic liberalisation. I reckon investors face a similar risk in Indian banking, housing finance and NBFC stocks, given that the RBI is now whacking out new banking licences by the dozen.

Secondly, it makes sense to sell, I believe, when a company's capital allocation is deteriorating.


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