I am asked this question very often. Typically it is “I bought GMR infra for Rs. 70, now it is 8 what should I do?” or “I bought Jain Irrigation DVR for Rs. 54 about 3 years ago it is now at Rs. 57 what should I do”.

This request comes in the form of a position that is not shaping up like the rest of the market. Maybe you own 15 or 20 holdings that are all positive on the year.  But that one or two shares just don’t want to behave like everything else.

It is worth holding onto for a comeback or should you just cut losses and look for fresh opportunities?

The easy answer is that every SHARE is different and no one knows what is going to happen in the future.  There is no perfect answer or resolution because future events are uncertain, fast changing and therefore returns are unknown.

You have to ask yourself the following questions:

  • Is it a market leader in its category?
  • Is the fall temporary or is it losing market share consistently?
  • Is it a contrarian play expected to do well ONLY when others are not doing so well?
  • Does it apply to a broader macro theme like commodity prices or interest rates?
  • Is it an undiscovered gem with attractive fundamentals and not meriting institutional investment YET ?
  • Was it based on a technical attribute like trend, price, pattern recognition, or….. momentum? or whatever?
  • Or did you just overhear your 2 people talking about it near the chai ka dukan?
  • Or was it some expert mentioning it on the Idiot box?
  • Or was it just something that you inherited and you have no clue why it is in your portfolio?

Market leaders may not make money for you EVEN in the long run if you got some commodity cycle wrong. Look at Tata Steel, and Reliance Industries – if you just bought and held them for the past 7 odd years, you have been a big time loser. So do not get carried away by tags like ‘forward looking management’ or ‘reputed management’ or ‘very big’ or ‘well diversified’. Markets are ruthless, but they are also a slave of EPS and PE i.e. earnings and perceived future prospects. Importantly one feeds the other.

If your logic and theory is still sound and you believe in the long-term fundamentals of the company, you think the quality of management is still very good, then it is likely a position that you can hold onto with greater conviction.  Sometimes the market can overlook a single company or sector for quite a while until the key factors that YOU identified becomes a dominant theme for the whole market.

Conversely, if the macros, business execution, or technical landscape are not conducive to the original investment reasons – then it may be time to move on. It looks so difficult for Tata Steel investors who entered the share at Rs. 900 to believe that they will ever be able to justify the initial price. Traders will tell you that YOU SHOULD cut and run on a position that is going against them.  They normally show a certain level of professional detachment and quick action.  They are more wedded to charts and not the share. However,  investors who have worked hard to identify an opportunity, may find it more difficult to let go of the theme.

No one wants to be wrong, but shit happens to all of us.  Do not allow emotion to overcome discipline or allow a new story to fit the current environment – it surely will only lead to further loss of control. I remember having shares of Crest Animation – a disaster in management. When Vallabh Bhansali joined the board, I was convinced that it is a good company – BUT AMAZINGLY STUPIDLY I did not sell it when he quit the board. I built a new narrative and was scalded for that big error.

If it’s just something you bought on a whim in the hope you would strike it rich, then maybe you should clearly have a time, and a price target. Say you bought a share without much conviction for Rs. 100. Keep a time limit (say 6 months), a trailing stop loss at 20% (so Rs. 80) and see what is happening. In six months if the price has not moved, and you have no inclination to do some research, SELL.

Make sure you do your own homework, and constantly comparing yourself to a good well run mutual fund. Consider ETF if you are more comfortable.

One very strong and important reason to sell is if the share is becoming a bigger and bigger portion of your portfolio – like a ESOP doing well. In such cases sell small portions and invest in a diversified ETF. Another reason to sell is if you find a much better share to buy – after all we all have limited resources. These are difficult calls to take…but you MUST!!

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