The Art of Selling

Investing involves three activities: Buying, waiting and selling. Personally, I have found buying to be the easiest, followed by waiting and then selling. And after talking to a lot of investors, I realize selling at the right time is a problem all of us have faced. This blog will aim to tackle this problem and explain how we can maximize gains with peace on an investment.

So when does this problem of selling arise?

As an investor, the problem can arise on two occasions: Over valuation and better opportunity.

As a trader, the problem arises on two occasions as well: Stop Loss being triggered and better opportunity. Both approaches I think are wrong, the answer lies in combining the two approaches.

What goes wrong when both are used in isolation?

On June 4 2024, I witnessed the biggest fall in my investing career, and if I was a trader: I would have sold everything because all supports and trend lines were broken(temporarily at least). I would come out of the day sad but content I did the right thing until the next few days where I see everyone recovering the losses and making some more. It would take me the rest of the year to make back those gains(that too maybe) . As an investor, I would have stood the fall and bought more,but would sell at the first signs of overvaluation and miss out on the biggest gains that would happen. It's a big problem.

My approach to selling

Let’s be clear, I will surely sell if my thesis gets proven wrong: I am not going to hold a stock to sell it my buying price or for a profit even though I know I am wrong. You cut such investments mercilessly.

However, what happens if my thesis is right? A lot of the time the thesis being proven right means a decent/bad business turning good: and that leads to rerating and momentum. Purely as an investor, I would miss out on these gains of momentum and PE rerating.

And this is when technicals come into play.

This is the chart of KEI industries. No way anyone thought this could rerate to 75 pe. What if you had sold at a fair valuation of 30 PE? Well, that was at 1500. You missed out on 3x capital gains

This is Elecon engineering, My dad invested in this one because it was in my hometown and he know of what it could do. My dad is not an investor and hence asked me decide when to sell, I was a novice and sold at what I thought was the fair valuation of 20PE. And well, I still hear taunts from my dad because we missed out on 4X gains!

This is VBL, it trades at 95 PE multiple. What do you have to say about that? It just keeps delivering despite high valuations.

Some other examples which are in momentum but overvalued

Dixon technologies

Trent

RVNL

You get the point, discarding momentum can lead to immense loss of gains. Technical analysis allows you to ride the momentum without much concern as the sell criterias are already clear. You are not in as an investor anymore because it's a sell call for you but you are here as a trend rider. I ride the trend using 20 weekly EMA. 

EMA stands for exponential moving average which calculates the average of the price movement of the time period(in this case 20) and follows the price. All you have to do is, if the price falls below that line, sell. Price falling below that line means there are high chances that momentum is exhausting and it might be a good call to book profits. You can change the number if you like. Keeping a number high like 30-40 or so means you are fine with letting the prices move around a little. And a number below 20 would mean you  are keeping a very tight leash on the price fluctuations. It all depends on personal preference and the nature of the stock price.

Lets look at businesses where they were overvalued and EMA helped give an exit

Birlasoft triggered a sell at 730, well above its ideal valuation( in personal opinion)

Deepak nitrite, the sell call saved you from three years of no gains.

Laurus Labs, saves you a lot of pain, doesnt it?

Apart from these, check all the railway stocks and how it helped using EMA, check multiple platform businesses like CDSL, IEX, BSE etc. look at IT and pharma businesses! Technicals have been helpful in all. Its all about knowing when to use them.

This is my final checklist to make it easy.

Final checklist

• Exit if your thesis is proven wrong, regardless of what technicals say

• Only use technicals when your fundamental analysis says it's overbought and is overvalued.

• Use 20 weekly EMA(or whatever suits you) at that point and ride the trend until it breaks the line.

Hence

• Sell if overvalued? NO

• Sell if valuations are right but technicals say sell? NO

• Sell if overvalued and price breaches weekly EMA? YES

If a thesis is right and I am trying to sell on the basis of valuations, I will let technicals decide it for me. Investing can never be perfect, so you can never consistently pick the bottom or the top. But investing helps you pick the right price to buy and technicals help you pick the price to sell!

Let me know if you have any doubts.