Once you have bought a share, you’ll next need to decide when to sell it. Since bonds/ debentures sell themselves when they mature, this question primarily applies to shares or mutual funds (even the debt mutual funds have to be sold). Essentially the debt mutual funds are temporary parking spaces meant to hold money till you need it to invest or spend, timing is not so much of an issue in accrual funds with a long hold.

Many retail investors believe they can “time” the market, predicting when the rise and fall. So they are all over the internet, giving counsel and asking you to sell all your shares when the market is about to fall (market is at its peak), and buying them all back when the market prepares to rise. If investing were that easy, there would be no market. If these people had that amazing skill of timing, then, they would be investing and not trying to sell investment newsletters.

The tough part of selling (to re-balance) is you have to sell EXACTLY when your gut tells you that “this time it is different” and ‘the markets are in a state of a perma bull’. Selling to meet your goals is easy – the expenditure has to be met, and so you sell. Sure, when over all the economy is slowing, and it is hurting corporate earnings and growth, it is a good signal to sell. However, a good management may find great opportunities in some other part of the world – negating the floundering home economy. Look at JLR it is owned by an Indian company, operates in UK, China and US. What signal will you get from the economy? Or how one bank – Hdfc bank became a wealth creator in the past decade and ICICI bank destroyed your capital? The economy remained the same did it not?

Beyond that very general economic scenario, an accurate system for timing the market remains an investor’s pipe dream. In fact contrarian investors might look for these signals to be buying so the real signals may not come from the market players.

Sadly mutual fund investors are quick to withdraw their cash when returns turn start going down. Several studies (in US and UK) have proven that investors who jump from one fund to another, tend to do much worse than those who do nothing. An amazing case is my dad’s investment in Franklin India Prima Fund for the past decade.  Be prepared to stick with a fund through good times and bad — with one exception – when the fund manager abandons the focus. We entrust our money to a professional manager (and not to a proprietor) who says “Prima will invest in midcaps” – however if the fund starts investing in large caps just to get better performance, it is time to say good bye. Also when a fund manager leaves the fund, his / her replacement may not manage your money with equal skill, and you may consider selling. However, if you think your fund manager has a good robust mechanism in place, even the fund manager change need not bother you much. A few weeks / months of under performance by your fund is no reason to jump ship.

Selling shares can present asking yourselves a far more complex set of questions. There are of course some basic reasons to sell a share-

• The business’s basics change  Is there a fundamental change in how people do business? If there was a listed company which ran a chain of bookshops, I would short that because people are using Kindle to read and using amazon to buy books. This is a fundamental change. Like how Kodak was in denial for a long time about digital photography. Or is a new competitor rendering the way the product is being used/ delivered? Look at the impact that the Uber and Ola are having on the car market – people are owning lesser number of cars, and are postponing the replacement of cars. Or is the company doing something wild and ‘hoping’ to make money? ITC for example. It makes money ONLY in tobacco – all other products are just a diversion!
• The share becomes very expensive. Has the market taken the company’s shares up to unsupportable heights? Berger Paints has given me better returns over the past 3 years than Asian Paints. Or why Kotak bank and Cholamandalam Investment have given me better returns than Hdfc bank. So ask yourself – is the share about to crash on the slightest bad news? Is it possible that Hdfc bank is likely to be sold by many FIIs all at the same time? Will the tumble be permanent?
• When you are happy to book part of the profits This of course has nothing to do with the performance of the share, it is your personal need. This is not a blog post where I am going to dwelve on your personal asset allocation.
• When you get an even better opportunity The time to sell a good story is when you spot a great story. So if you have a great story, and you need cash, the chances are you will sell your older stories and book some profits so that you can use that money for buying the new story. I did sell Hdfc bank to buy a story called Polaris – and just cashed out. We are not endowment fund managers who keep getting money, we need to allocate to the best portfolio regularly.

While some of these signals can provide reasons to sell, it is possible that you may not hear these signals in the market cacophony!

So very importantly – Don’t listen to the noise
Easier said than done! The media pays too much attention to the market — but it sadly does not understand on what to focus. AT best if focuses on the index assuming that all of us are index investors. It gets excited and speaks with a shrill when the market goes up or down by a big number. Sadly, the older the players the more excitable they are and become. Frankly there is no way how the media can know what is really happening. They are in the market for eye balls, and they do not really have a crystal ball, and you know that too.

Successful investing relies on analysing the strengths and weaknesses of YOUR individual companies. Remember Peter Lynch telling us if we spent 10 minutes on Macros we have wasted 7 minutes? Exactly my thoughts too.