Answering the million-dollar question: When to sell?
Authored by Rohan Mehta, CEO and Fund Manager at Turtle Wealth Management Pvt Ltd.
In a market reaching all-time highs, with the NIFTY 500 showing a 10 per cent increase in the current quarter and a remarkable 22 per cent in the current calendar year, investors find themselves torn between excitement and apprehension. Despite robust GDP growth, stable inflation, and a bullish outlook for India, concerns linger about the unexpected market rally. As the CEO and Fund Manager of a USD 100 million PMS Fund, I observe a cautious sentiment prevailing in the market.
Contrary to expectations, there is no euphoria; instead, investors seem more fearful than excited about the market's surprising ascent. A closer look at NIFTY 500 from 2017 to 2022 reveals a prolonged consolidation, with a significant doubling down only occurring post-2020.
Examining NIFTY 50, where the top 10 stocks contribute over 50 per cent of the weightage, reveals that eight out of these ten have been underperformers. Interestingly, it's the broader markets that have exhibited more robust performance than the major indices.
However, the market does not seem to be in an oversold zone, considering three crucial parameters: * Price
*Emotion and,
* Valuation
In all three aspects, the market does not show signs of being overbought. As the saying goes, "There are decades when nothing happens, and there are months when decades happen," and this holds true for the stock market. Understanding that the market operates on an 80-20 principle—80 per cent of the time providing 20 per cent returns and vice versa—investors must navigate the unpredictable nature of market movements.
A case in point is PFC, a top performer in NIFTY 500 this calendar year, showcasing a 400-per cent increase. However, over the last 15 years, it remained at the same price despite consistent YoY profits. Timing the market is challenging, and deciding when to exit poses a million-dollar question. To address this, we propose two quantifiable approaches.
1. 200 EMA Indicator: Utilizing the simple yet effective 200 EMA indicator, which is available for free on various platforms, can guide decision-making. Any stock trading above the 200 EMA is considered a hold, irrespective of the reasons for selling. The 200 EMA acts as a powerful tool in gauging a stock's potential and works consistently across various assets worldwide.
2. Outperformance Assessment: The primary reason for investing in stocks is to outperform the market index. Regularly evaluating a stock's performance relative to NIFTY 500 over a one-year horizon provides insights. If a stock consistently outperforms, it indicates its potential to continue delivering positive results.
A strategic approach involves identifying stocks that both underperform NIFTY 500 and fall below the 200 EMA for potential exits. Swapping such stocks with outperformers can optimize portfolio performance, akin to building a winning cricket team with top-performing players.
Understanding the simplicity and precision of these approaches, investors can make informed decisions about trimming, exiting, or holding their investments. It's a strategic move toward sustainable wealth creation in the ever-evolving landscape of the stock market.
I hope this will create excellent value for your further wealth-creation journey.
Disclaimer: The opinions expressed above are personal and may not reflect the views of DSIJ.