Markets are up and your portfolio is doing well (presumably) and you are euphoric. You just started a new SIP and also put a lump sum into one of the funds in which you are doing a SIP.

Or you just ended up buying some more shares of a company whose shares you already have. You are feeling great, right?

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! Or even better sell your non performing stocks and put money in a mid cap fund – it is likely to fall lesser than the stocks that you pick personally.

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. Some high growth companies could also be here, so a detailed analysis is a must. Look at FCF for say 5 years before you jump to conclusions.

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. Sir,

    Would it make sense to also book some profits in say a Franklin India Bluechip fund (investing since last 3 yrs) and re route the same using the Liquid Fund + STP route?

  2. depending on your time frame Sujit. If you have a 20 year view (or 10 year view) you need not do this. However if you have a 2 year view on this amount, makes sense to do so…a slow sip at that

  3. Thank You Sir,

    Between, I got foxed by the rise in markets, and sold all direct equity too early, was out of all stock by 16th may.
    Selling some was necessary (Coal India, PNB).
    But sold out on (Eid parry and Coromandel).
    Also Piramal Enterprises.

    However holding on to all the MF Positions. The view is more than 10 years.
    The problem for me is, how do I deploy all the cash saved at the end of the month. Cann’t aggressively invest all every month. I live a frugal life, no plans for fancy car, no movies, eating out is once in a month, no fancy gadgets. End of the day the thoughts about real estate start coursing in my mind, so far successful in keeping them away.

    Any thoughts on how the surplus can be gainfully invested?

    Regards
    Sujit

  4. Very useful. Thanks!
    Is there way to detect large scale fraud? Why is that fraud always exposed when market are down?
    Thanks again,
    Madhu

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