Professional
mountaineers tell you that it easier climbing a mountain than getting off one.
Something similar seems to be the case with equity investing as well. Seasoned
investors say identifying a good stock to buy is not as hard; the tougher part
is to figure out the right time to sell it.
What
is a warning sign to keep an eye out for ? If overvaluation
becomes substantial, and however you try to justify it but cannot, then it is
time to sell.
When a one starts justifying same thing in
different ways repeatedly, there is something fishy. The other sell
signals are changes in the fundamentals of the company , hints of corporate
governance issues and ill-planned capital allocation, which are to be considered as a red
flag.The loss of the company’s competitive edge over its rivals should be a worry to the investor.
A
broker’s favorite (time to sell) is when cycle turns, but one should also focus
on capital erosion. It is rare for Indian companies to allocate capital sensibly
for over 4-5 years. There were not more than 50 companies in BSE 500 which have
allocated capital sensibly.
Investors
should not be worried about whether the market is rising or falling, as long as
they are invested in the right businesses.
The ace
investor Warren Buffet is a staunch believer in ‘investing for life’ approach
to equity investment.
But the notion of buying and holding for a long
time, let alone for life, is challenging. It is difficult to find Indian
companies that give returns for a long period of time.
A
common point is that if something looks
too good to be true, then it is actually not true. An investor can learn filtering
bad stocks only with experience and judgment. One needs to be a critical
observer to find the minute discrepancies.
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