TO SELL OR NOT TO SELL…

Should I sell in a peaking equity market? If the answer to this question is Yes, where should you park the proceeds of your sale?

The answer to the first question, which is a classic predicament depends on two factors:

a) Your approach and time horizon

b) Your degree of conviction in the stock and by consequence, the fundamental business outlook of the company in question

If you are a long term investor and not a short-term or a day trader (Approach) with a long-term investment horizon, the idea should be more oriented towards compounding and building value in the core portfolio. Further, if you have been a vintage buyer in a pedigree stock or an opportunist buyer in a quality franchise during the March 2020 market crash, you will almost inevitably end up buying costlier as time goes by. So your cost of exit and re-entry (STT, Brokerage, STCG/LTCG, Stamp Duty, GST), notwithstanding the appreciation in the stock price itself and if we are a bit too stringent, also include the Theta (or the Time Value of money or its Opportunity Cost in the interim). The ideal instance here can be of a stock like Divi’s Laboratories or even Reliance Industries or HDFC Bank for that matter. If you thought 2200 was a lucrative price to exit after waiting for 6 months post Nov 2019, wait for it. It ratcheted up to 2500, 2800, 3500 and now scaling 3800 in Dec 2020. Reliance went up from 850 levels to 2300 before correcting and HDFC Bank, after a long, excruciatingly arduous period of stagnancy, yielded a 40%+ return post the nomination and appointment of the new MD & CEO… If you were a seller on rise on any of these stocks, you were definitely left as a part of the repentance rally post your exit… A second category of investors does this mistake and buys the stock at an elevated level and still gains and lives with that 25% odd retrospective FOMO… In either case, you’ve short-changed your average cost profile and distorted your portfolio even from a taxation standpoint with a 5% higher STCG (if you sell under a year). However, we can’t say the same about a GMM Pfaudler which went up from sub 1000 levels in 2019 to 6000 in mid-2020 and retraced to 3500 levels as swiftly, if not more… These are the ironical ways in which the equity market traps you and keeps you in the ever evolving cycle of Risk, Greed and Fear…

Now let’s move to a different aspect. What if you have decided not to re-enter that particular scrip and are very definite about an exit and booking your profits. What do you do now with the proceeds of sale (Cost + Profit). A few solutions occur to me:

The first could possibly be that you keep trimming your PROFIT ONLY and buy units of a safer asset by deploying that Profit. That way, not only does your cost of acquiring units of the safer asset become Free/Zero, but you also continue to maintain your holdings in the underlying stock at original cost, thereby still allowing its room for growth. The safer assets could include units of a Gold ETF, units of a good quality Medium Duration AAA-Rated and Sovereign Debt fund at a reasonably decent YTM. It could also include starting to build a Dollar asset via FoFs or Direct US equity at a time when the Dollar is weakening like there’s no tomorrow (thanks to the excess supply provided by the Federal Reserve and potential outflow of Dollars to EMs ex of China owing to Biden’s approach of higher taxation on Corporates and HNIs). This Dollar asset could become your cash cow over the next decade by giving you a two-pronged benefit of Stock appreciation and INR depreciation. Or you could start focusing on a good quality Balanced Advantage Fund, that over the long term, shall provide you the safety of Low Beta equity and the cushion of the AAA and Sovereign bonds combo which could end up generating an FD-beating and Debt fund beating return over a 5-year plus basis, with taxation oriented to Equity, and funds also getting freed up in a year’s time of exit load. Or, if you belong to the ultra conservative category there are Tax Free PSU/Govt Bonds, Taxable AAA-rated Bonds, Annuity or Insurance Products, Corporate FDs of AAA-rated entities, NSC, ELSS Funds or even Savings FDs for that matter.

Essentially, the idea is to build a team with good reserve strength which is adequately diversified across categories, and if I am not getting too ahead of myself, I dare say, a team akin to the Indian Test team down under :)

A situation where, whatever be the case, one asset class/category or the other, saves the day for you