When the index is doing well….we all buy into the optimism. It may actually be a great time to review your portfolio and SELL the duds and perhaps be in an index ETF. This is a tactical strategy of getting away from the high Beta stocks to safer territory – if the market goes up, the Sensex will. If the mid and small cap fall hard , you are still protected. If the large cap also falls you will still fall less compared to your mid cap and small cap. Also be aware of your ill-informed shifting you from large cap funds to mid and small caps…or enjoy the roller coaster ride!

It sound so easy to say ‘sell poor stocks’ . Here is a small note on what is a poor stock – and what are the characteristics:

1. Has a negative cash flow – and not because of growth investing. If the company is still ‘buying’ markets, establishing itself etc. in a difficult market conditions,  the capital market will punish such companies real hard during hard times, so be careful.

2. Too much of debt: In an easy debt market in the world many companies take on too much debt to grow. When interest rates go up such companies will be hurt real bad. So high debt equity ratio, and low interest coverage ratio, expensive roll overs and inability to convert debt into equity will all bring the earnings and the price expectations to new lows. Infrastructure companies with many SPVs fall in this category, be selective avoid over-leveraged companies.

3. If the price has gone up more on p/e increase rather than earnings increase: a sure-fire sign of a share being over-priced. In real estate terms if the rents are stagnating and the ‘price’ of the house is going up, it is time to think of it as a bubble. May burst later, or much later but be prepared for the burst that is all.

4. Warnings before quarterly results: When a company revises its quarterly, and half yearly EARNINGS, the capital market ALSO reduces the expectation (price-earning ratio) thus dramatically hurting the price. See the high standard deviation in the price of Icici Bank.

5. After issuing the warning if the company actually follows it up with poor results and does not know how to cope with it, the market will kill it further. Of course the market may do it on the sell side too (Bharti fell to 245, remember?).

6. Company talking big – expansion, merger, foreign acquisition, etc. but has accumulated losses! If you had bought this share at Rs. 30 and is now quoting at Rs. 150, RUN with your clothes intact. If the share price falls, there will be NOBODY to buy it! So I am repeating point no. 1 – see whether the CASH is coming in or going OUT.

7. See the origins of bulk sales of the companies shares. This is a little tricky, but not impossible. Keep your eyes and ears open.

8. Keep reading message boards – Moneycontrol.com, Myiris.com, etc. they all have shareholders, employers, suppliers, etc. willing to tell you things which the media does not know. Keep track.

9. See whether there is a spate of resignations, large scale flight from one company or from the industry? Look at the mutual fund and life insurance industries! There is a massive reduction of people – and it is not the low end employee’s fault. It also reveals the culture of the company – and that is useful.

10. See the SEBI website / IRDA website to see whether the company has been warned, punished or warned your mutual fund, life insurance company or your broker – tell tale signs to change your broker.

these steps will keep your life, wealth and happiness – ALL intact immaterial of whether the market is at 18700, 13800, or 9800…or 76,000!

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  1. Hi Subra,

    A very timely and relevant topic. As mentioned in an earlier comment, people tend to BUY in a rising market and SELL/STOP in falling market while it should be the other way round. Some other parameters can be forays into unrelated areas, too much equity dilution (with resultant loss in EPS), too high historical valuations etc.

    You have not mentioned MFs here. I think the time should be utilized to redeem/partially book poorly performing MFs too. There have been many funds which were good performers in the last 2-3 years but have become laggards now. Time to cleanse the portfolio of such duds too.

    I did a study of Nifty PE values from 1 April 2001 to 16 Septmeber 2010 and it has given nice inferences. During this span, out of 2358 days of trading, Nifty has closed above 25.4 P/E levels for ONLY 45 DAYS….:-O

    We have closed at 25.41 on Friday…:-S

    45/2358 days…. Not trying to scare anybody but surely a fit case for removing duds/trimming portfolio/partial booking etc. It is not the markets can’t go further. We were trading at 28.2 just prior to Jan 2008 crash. Indices are purely a play of liquidity now and have moved ahead of fundamentals with FIIs pumping money like mad. All this while, DIIs have been under tremendous redemption pressure. August alone saw redemptions of 2900 cr from equity MFs. Clearly, retail is missing from this rally and this is one of the reason correction is not happening yet. They need somebody to hold the paper wealth, no?

  2. Agreed Sanjeev. However I like only 2 fund houses + one fund manager. So my personal choice has only been amongst these 4-6 schemes. When the performance is poor I normally wait. I still hold Prima, Prudence (07 and 08 were bad if you remember). My choice is

    90% of a scheme performance is professional integrity of the fund manager + systems + luck.

    To me under performance of a scheme is some searching and then deciding what to do. Yes I have got out of poorly performing debt funds but equity have been selective..so NEVER reshuffled on the basis of immediate performance. Simply because I do not have enough access to the decision making process of scrip selection.

  3. What are those fund houses and Fund managers, Mr. Subra…?? It will be helpful for us not finance-savy investors….! Flipkart has just delievered your book to me – and I hope it will be great read.., like your blog…!

    Thanks a lot..

  4. In any case, you don’t need more than 2-3 diversified equity funds and 2-3 ELSS funds. And contrary to equities, MF selection is bit easier if you know how to interpret Ratios.

    Performance, for Equity Mutual Funds, implies long term only since Equity by itself should be held only for long term goals. However, definition of Long term varies from person to person…LOL. I know of people for whom long term meant, in 2007, 3-4 months. Fortunately, now they have come to their senses post Jan 2008, and some have become long term investors by default as their trades have gone bad…. 🙂 :). For MFs, ideally a bull/bear cycle seprates the boys from men or 3 yr plus performance.

  5. i think, even for good equity mutual fund managed by a competent fund manager ,has his work to deliver best returns even to his best market movement understanding is impossible on account of limitations by the regulations of keeping minimum equity investments and fund’s own mandate,during turmoil like situation as in 2008. this is inbuilt limitation for any good equity mutual fund.i think, in such reality, the better alternative for a lay investor is direct equity investment through PMS with good manager, or to have asset allocation between equity and debt.of course believing and following are different tasks!

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