Time To Reap Fruits

 

Though the economy is doing well, one needs to look out for selling opportunities:

Two years after the storm broke across the financial world, the India growth story continues to roll. Despite some disturbances, our GDP has reverted to an average growth rate of over 8 per cent per annum, and our corporates turned in stellar numbers last quarter.

In response, the stockmarket has held up well.Since Diwali, the Nifty has held the 5000 mark, with only a few short dips.

The private sector is being forced to reduce its debt levels, so one needs to be wary of firms with a lot of debt

Yet, there is a certain nervousness in the stockmarkets, of which India VIX, a volatility index, is the best indicator. On 26 May, the India VIX hit its high for the year at 35.86 and closed at 34.52. The India VIX levels do tend to peak on the last Thursday of the month when futures & options (F&O) accounts are settled. However, earlier this year, in April, volatility peaked at 23.15; in March, at 20.27; even in February, despite the uncertainty regarding the recommendations of the Union Budget, volatility was relatively low, peaking at 32.14.

At the same time, it must be said that the India VIX has been much higher: in mid-October 2009, it crossed 60, and the uncertainty triggered a sharp drop in the Nifty, from 5175 on 17 October to 4687 on the last trading day of the month.

In other words, although the European debt crisis has troubled our markets a fair deal, the reaction has been muted, both in terms of the index level and volatility.

What’s on the cards? On the positive side, commodity prices are falling—of both ‘soft’ goods (such as wheat, sugar and milk powder), as well as of industrial goods such as metals and crude oil. This will have a favourable impact on a wide range of companies, whether fast-moving consumer goods (FMCG), consumer durables, or the auto sector. The latter, though, will also have to deal with a gradual increase in fuel prices as the government tries to lower subsidies. Gas prices have already risen, and both diesel and petrol will move towards decontrol, though we can hope that the price of crude oil will drop to a level where the government can free product prices without having to raise them.

The auto sector may also be impacted by interest rate hikes, which seem inevitable, although sales are on such a roll that they seem unstoppable. Concerns about interest rate hikes seem to be affecting the real estate sector more, though I suspect that the worries are more about the huge debt burdens that firms are carrying.

It is at this level that our linkages with the rest of the world are deep—between the years 2003 and 2007, many Indian firms grew rapidly thanks to the easy availability of capital overseas. As debt becomes due, it is becoming more difficult for most firms to roll it over at attractive terms. As a result of this, the world over, the private sector is being forced to reduce its debt levels, so one needs to be wary of companies that are carrying a lot of debt on their books.

At the aggregate level, the Nifty is priced at 21 times its historical earnings. This is far from cheap. It is below 22—above which lies the Bubble Land. In other words, we are now at a level where the lights are amber. Cash in on stocks that are over-priced; if you have made money on them, so much the better.

And do not be afraid to hold cash—at the current levels, international disturbances are likely to provide the retail investor with several buying opportunities.

Selling shares? How to reduce your tax outgo

Investors looking for high returns and willing to take high risks use stock markets as an investment avenue. As an investor do you know what the tax implications of gains/losses from this investment are?

Are you aware of the impact corporate actions (rights issue, bonus, split, dividend) have on you from a tax perspective? If not, it is essential you understand the same so that you are able to minimise tax incidence and increase return on investment.

Securities traded on the stock exchanges are treated as a capital asset. Hence transacting in securities will lead to a capital gain or a capital loss.

Anil purchased 200 shares of Axis Bank at Rs 740 on May 10, 2009, and sold them off at Rs 820 on March 15, 2010. There was a gain of Rs 80 per share, which is termed as 'capital gain'. Capital gain/loss can be either be short-term or long-term depending on the tenure for which the security is held.

Short-term capital gain/loss

If securities (or stocks) are sold on the exchange within a period of one year of purchase, it is short-term in nature. Short-term capital gains are taxed at 15%. Short-term capital loss can be set off against short-term capital gain & long-term capital gains.

Long-term capital gain/loss

Securities held for tenure greater than a year, are termed as long-term. Long-term capital gains are tax free. Long-term capital loss can be set off only against long-term capital gain.

In Anil's case, since Axis bank is held for a period less than one year, his gain will taxed @ 15%. So his capital gain tax would be 15% of 200*(820-740) which is Rs.2400. So his income would be reduced to Rs 13,600.

However, if Anil had sold off his shares anytime after May 10, 2010, his gain would be Rs 16,000.

If long-term and short-term capital losses cannot be set off against the capital gain of that particular year then they can be carried forward for the next 8 consecutive years.

Losses under the head 'Capital Gains' cannot be set off against income under other heads of income whether salary, business & profession, house property, income from other source.

Impact of corporate actions on taxable income

Dividend on shares: It is not taxable in the hands of the recipient, as the company declaring the dividend has already paid dividend distribution tax.

Bonus shares: These are free shares given to the shareholders depending on current holding of the share holder. If a bonus of 1:3 is announced, it means a shareholder will be given 1 share for every three shares held.

For tax purposes, the ex bonus (at which the price is adjusted for corporate action on the stock exchange) date fixed by the company is considered to be the date of acquisition of the shares and the cost of acquisition is zero. So depending on when it is sold, it will be treated as short term or long term.

Rights issue: When additional shares are offered to existing shareholders at a price, it is termed a rights issue. The price at which the rights issue is done is treated as the cost of acquisition which is normally at a discount to the market price.

The date of allotment of right shares is treated as the date of purchase at the rights issue price. Accordingly, it will attract tax depending on the tenure for which it is held.

Stock splits: This refers to reduction in the denomination of the shares by reducing the face value of the share. That will result in a corresponding change in the market value. The date of buying the original shares is treated as the date of acquisition and the gains are taxed in the same proportion as the split.

Suppose Anil has 100 share of XYZ Company at a face value of Rs 10 purchased on January 10, 2009 at a price of Rs 500. On March 10, 2010, the company reduced the face value of the share to Rs 5. On March 30, Anil sold off the shares at Rs 305.

The impact is as follows:

Change in number of shares held: On account of the split, Anil will have 200 shares of XYZ Company and his purchase prices will now be Rs 250 per share

Tax liability on gains: Although the split has been done on March 10, 2010, the date of acquisition for Anil will continue to be January 10, 2009. Since the period of holding is greater than one year, it is categorised as long term capital gain. So his gain of Rs 11, 000 (Rs 305-250), is tax free.

Tax Tips

• Make sure you look at the holding period before sale of the security. You may want to wait for a few more days, to move from short term to long term tax treatment, if you're making profit on a transaction, so that you enjoy tax free earnings.
• As long term capital loss cannot be set off against short term capital gain, you will be able to minimize your tax liability if you sell a security making huge losses for you within a period of one year.
• In order to reduce your tax liability you may have sold stock before the month of March. You need to take note of the same, so that you could take position of the same stock after April 1. This way you could save taxes, and also hold shares of the entity you sold, to book losses and hence offset gains. While calculating net gains, make sure you take the transaction cost of buying and selling into consideration.

Those who didn't panic made money

'Don't Panic' is the maxim from Douglas Adams's Hitchhiker's Guide to the Galaxy. It could as well be the survival mantra on Dalal
Street. Chances are that those who had the nerve to stay put in the market, when it plunged in the aftermath of the financial crisis, are richer now.

Consider this: On September 26, 2007, the sensex had for the first time gone over the 17,000 mark. Over the next seven months, it crossed several milestones to top 21,000 in early-January 2008. But within the next 10 months, it had lost nearly twothird of its value to a multiyear low of 7,700 in late October of the year. In less than a year from then, the yo-yo is back at 17,000. However, investors' wealth, measured by BSE's market capitalisation, is now Rs 6 lakh crore more than what it was when the sensex had crossed the 17,000 mark earlier.

Additionally, 20 of the 30 stocks that are represented in the sensex are at a higher level than they were in September 2007. And if one had put Rs 1 lakh in each of the those 30 elite stocks, despite the volatilities and crashes of the last two years, they would still be richer by about Rs 4 lakh, or 13%. Remember, since we are considering a period of over a year, this gain is tax free. So keeping faith in the long term power of Dalal Street does have its rewards.

While the past few months have been unusually good — sensex has more than doubled in a little over six months — the road ahead too looks relatively free of unknown financial landmines. ‘‘There are at least four reasons why we believe the Indian market will give strong returns over the longer run,'' said Ved Prakash Chaturvedi, MD, Tata Mutual Fund. ‘‘ Firstly, its strong resilience (during the financial crisis) has boosted the faith of overseas investors in our economy. Secondly , it is now clear that some of the emerging markets will outperform most others and India is among those outperformers,'' Chaturvedi said.

Two other reasons are, stronger belief in India's domestic market and a higher level of confidence in the continuity of the economic policy because of a stable government at the centre, the Tata MF chief said. In September 2007, when sensex had crossed the 17,000-level for the first time, the uncertainties of a general election were just round the corner, as were the fears of discontinuation of economic policies if the then incumbent government was sent packing in the polls.

Technically too, the markets are on a strong footing. At 17,000, the sensex has crossed an important psychological and technical level . Similarly, the nifty crossed the 5,030 level decisively.

‘‘ In all likelihood sensex will move to 17,300 and most likely to 17,500, based on futures and options data. The corresponding nifty levels are 5,200 and 5,250,'' said Amitabh Chakraborty, president-equities , Religare Capital Markets. A correction in market place thereafter could be expected, he said.

10 lessons learned in the recent sell off

• ‘Cheap Stocks’ Can Always Get Cheaper
• Macro Issues Matter
• Oversold Markets Can Become More Oversold
• Support & Resistance Don’t Always Hold
• Investors Have Short Memories
• A Major Shift Is a Subtle Process
• Stop Losses Are Lifesavers
• Money Management Is Crucial
• When Your Timing Is Off, Step Away
• Smart People Do Dumb Things

When to sell stocks

When to sell a stock

Having bought stocks, the problem is to decide on when to sell them.

Before you proceed further, ponder on this - What is YOUR selling strategy? Do you have one? Have you thought through and come to your own conclusions about which of the very many varied approaches to selling make sense?

I am a big believer that making spur of the moment choices about selling, or for that matter buying, is suboptimal. In the long run it might prove injurious to your financial health. To me, it makes sense to have a structured approach to buying and selling. There are a lot of strategies out there - try to pick one that makes most sense to you.

My take on on what others are saying about it (When to sell stock) …
Sell when:
1. You need money (ie. personal reasons - which hardly merit any further discussion)
2. When the stock rises above your desired price (ie. book profits )
3. When the stock falls below your threshold price (ie. stop loss triggered)
4. When new information causes change in your investment hypothesis (ie. you made a mistake)

The logic, approach and the reasoning might be different, but in essence, almost everyone seems to agree with the above. The above seems to hold good irrespective of the type of investor or trader (short/medium/long/whatever term, day/swing/positional/whatever ) one decides to call oneself.

Duh! Wasn’t selling a stock supposed to be more complicated? Then why is there so much source of confusion? What is missing in the above summary?

Well two things …

First, the implied desire behind the quest of “when to sell” question is not understood.
Second, the methods and manner of arriving at the “desired price” and “threshold price” are not explored properly.

The quest behind when to sell …

Let us say I have the perfect answer to “when to sell ABC stock” … what would your expectation be ? Wouldn’t it be that I should be able to guide you in selling the stock at the absolute high (or something close to it)? The stock should fall soon after you sell it and should not increase substantially beyond your selling price .

There in a nutshell is the problem. When we are looking for a strategy to sell what we are actually looking for goes something like this:

Tell me how can I sell at or close to the very top? Hey, while you are at it, keep in mind two things …

1. I should be spared the pain of being wrong about the stock after I am right (after having made paper profits, I don’t sell and the stock drops like a ton of bricks to way below my price. ouch! ).
2. I should equally be spared the pain of being very right about the stock (the stock skyrockets after I sell, ouch! ouch!).

In short, tell me how can I squeeze the last little profit from the market, outsmart it and be spared of every kind of pain.

Do you see the problem here? Now can you see where part of the confusion is coming from?

You can solve the first part of the problem by simply acknowledging the fact that the market will make a duffer out of you sooner or later (and often). Irrespective of how you choose to buy and sell stocks:

1. There will be some stocks that will become multibagger after you sell your lot.
2. There will be some stocks that fall below your purchase price after showing handsome paper profits.

Like death and taxes, this is INEVITABLE.

Once you understand that there is NO WAY to always outsmart the market, you can look to develop a rational selling strategy that YOU feel comfortable with.

Determining the price at which to sell the stock

I think its a mistake to consider the selling strategy in vacuum. It should go hand in hand with your buying strategy (nay. you should take into account your whole portfolio policy). Your buying should support your sell rule and your selling should be in sync with how you buy stocks.

If you are investing (as opposed to trading), you should clearly have a minimum profit potential built into your buying rule. The buying rule should include sufficient margin of safety. You should be convinced at the point of buying the stock that it offers adequate safety and desired profit potential.

Here again there are two approaches - margin of safety and intrinsic value.

With margin of safety, you are not doing valuation of individual businesses. You are just trying to ensure that the business representing the stock is worth a lot more than what the market is offering it for. You don’t necessarily have to know about the management, its products, its revenue model, capex plans or anything complicated. The classic Graham way is to look at the company as a black box and measure the box by just looking at its output.

With intrinsic value approach, you buy stocks (businesses) that you understand well and can realiably arrive at its intrinsic value. Here you are doing business valuation. You do a deep dive and look at and into the company in great detail. You care not just about the output, but also what is inside the box. Actually, you rip up the box. This might mean, among others, looking at the management, their performance, the competitors, the buyers, the suppliers, the upstream/downstream value integration, competitive advantage, period of competitive advantage and what not. After analysing all the different factors, you come up with your own conservative “intrinsic value” of the company - one with adequate margin of safety. When the market offers you the stock (company) at a huge discount to your evaluated “intrinsic value”, you lap it up with glee. You periodically monitor the company to check if its intrinsic value has increased or decreased.

Either way you begin with target profit potential in mind. You are not interested in buying a stock unless at the current price is value enough to generate the required upside.

In the first case you sell when it reaches your target price and in the second case you sell when the price is close to the intrinsic value.

To Stop Loss or Not

Having loss in some stocks of your portfolio is almost a mathematical certainity. It is not something to worry about - but certainly something to anticipate and plan ahead. You should know before hand what YOUR default action will be if the price of the stock keeps dropping.

Stop loss is an issue on which different people have very strong and diametrically opposite views.

Essentially there are three approaches:

1. Sell when the stock falls below threshold price (saying yes stop loss)
2. Buy more when the stock falls (averaging down)
3. Do nothing (no stop loss, but no averaging down either)

I have thought long and hard about this and am convinced all three approaches make sense. I can make a case for each of the above approaches.

If you are a trader you DEFINITELY need stop loss. If you are an investor, pick any one of the approaches that makes most sense to you. If you decide to go with the stop loss, it essentially involves picking an arbitrary number (say X) and consistently selling any stock that falls by X percent. Some practising investors have suggested that one should stop loss at 25% (Anthony Gallea in the book Contrarian Investing). I have nothing intelligent to add to this.

If you make a mistake …

If new information, data or analysis reveals that your investment was a mistake, just sell and come out. You don’t argue with your mistakes - just acknowledge them and rectify it. In the intrinsic value approach, you still don’t sell the stock in a loss unless you are quite sure that the price offered by the market is more than your evaluated intrinsic value.

Promoters sell stake in Dish TV

The promoters of Dish TV today sold over 5.5 crore shares at Rs 49 per share.

Jawahar Goel, managing director, Dish TV, said: "Promoters have ofloaded 55mn shares at Rs 49..this money has to come back to the company because we had the rights issue last year..." The promoter shareholding has now declined to 52.1%..

Rights Issue
51.81cr shares at Rs 22 per share
Issue to bring in Rs 1,139cr
promoters had underwritten the rights issue
Payment schedule of Rs 22
On application: Rs 6
Between 3-9 months of issue: Rs 8
Between 9-18 months: Rs 8

Brokerages upgrade cos on positive economic outlook

June 2 With the equity market gaining momentum and the country’s economic outlook looking stable, brokerages have started upgrading companies here.

Most of the upgrades have been of companies in the capital goods, oil and gas, infrastructure and real estate sectors.

Securities and investment bank Nomura revised its 12-month target price on SAIL from Rs 65 to Rs 90 a share; Goldman Sachs upped its target price for Cairn India to Rs 290 from Rs 240 a share, for Sesa Goa to Rs 180 from Rs 153, and on DLF to Rs 300 from Rs 124.

Nalco, Hindalco, L&T, ONGC, BPCL and HPCL are some of the other company shares whose 12-month target prices have been upgraded. (Some of them, such as DLF, HPCL and ONGC, have already surpassed these targets.)

BHEL, Reliance Industries and Jindal Steel were all rated as sector outperformers by Macquarie Research.

Enam Securities has upgraded Mundra Port, and Cropmton Greaves to ‘outperformers’. Motilal Oswal has maintained its ‘buy’ on Cairn India, JSW Steel, Puravankara Projects, DLF and Jindal Steel.

“The outlook for India looks quite positive now. Our GDP numbers were better than expected; we are definitely on a path to recovery. The infrastructure and power projects will get a boost with the Congress win. PSU disinvestments will also be very good for the economy,” said Mr Alex Mathew, Head of Research at Geojit BNP Paribas Financial Services.

Brokers are advising investors to be cautious about sectors such as IT and healthcare. “Looking at the global situation and our appreciating currency, one should steer clear of companies in the export sector,” said Mr Devesh Kumar, Managing Director at Centrum Broking.

The outlook for India itself has become positive. Bank of American Securities-Merrill Lynch has revised its India GDP growth estimates for FY-10 to 6.3 per cent from 5.3 per cent.

“Recent indicators of investment activity — the Purchasing Managers’ Index, cement sales, and the capital goods component of the Index of Industrial Production — are showing sequential improvement. The economy continues to have significant pent-up demand for investment, especially in infrastructure and in affordable housing. We, therefore, see upside risks to our GDP growth forecast of 5.8 per cent for FY10,” Goldman Sachs stated in a recent report.

The second half of 2009 should see an improvement in the ex-agriculture economy, reflecting the combined effects of a regional trade recovery, India’s fiscal impetus, sharply weaker commodity prices and higher oil and gas output, said HSBC Global Research.

FIIs seem to be back in buying mode now, being net buyers of equity worth Rs 13,886 crore this May itself. In 2009 they have net bought equities worth Rs 10,756 crore so far.

Factors to consider when to 'sell' stocks

Many investors lost money in the equity markets over last one year when they witnessed a steep fall. This triggered a question in the minds of the investors and traders – when should I sell? Though there is no one answer to this question, here are some factors you should consider while taking the ‘sell’ decision.

Objective based profit booking:

Meet Rajan Mahanor, an ardent trader and investor. “I sell when my target returns are achieved. I decide how much I want to make before I commit my money,” says he. This type of investor does not look at potential upside of an investment in the long term, they have strict ‘book profit’ levels attitude. The only downside here is the investor may lose some multi-baggers, if he/ she can't visualize them. The other side of timely profit booking is, limiting the loss.

Stop loss:

Most professional traders enter trades with a clear stop loss in mind. As the position advances in the desired directions and starts achieving targets, the trailing stop losses are introduced. Respecting a stop loss is a good way to avoid greater losses in the market. However these are quantitative methods of deciding the selling point. There are some qualitative aspects that you can also consider to decide if you should sell.


Deterioration in fundamentals:

Smart investors enter an investment due to some solid reasons. Take a simple case…you have entered a stock because the company is run by a set of professionals with established track record. If the set of people on whom you have faith happened to quit, there is a good reason to sell the stock if you think that the management is the biggest factor that influenced your buy decision.

Investors sell their stocks when the macro fundamentals such as interest rates, GDP growth or the micro fundamentals such as product portfolios, management, demand supply situations change in adverse manner.

Valuation:

Some investors are aware of the valuations bands a stock or an index command. At the upper end of the band, they prefer to sell and at the lower end of the band they buy. For Nifty index, there are investors who sold off when it quoted 18 times its trailing 12 months earnings. The same category of investors gathered to buy when the index was quoting around 9 times earnings. This strategy however, must be employed when you have a good track record to rely on. For companies in relatively new sectors where the growth rates are very high, it is difficult to go with this strategy.

Policy changes:

If there is a change in the policy one may come across increased competition as several players enter with better products. Such incidences may warrant a quick sell decision. Also adverse changes in the taxation policy or tariffs on the competition products may lead to a sell decision.

The pool game:

This happens with especially the small investors, as their portfolios comprise few stocks. If one stock delivers super normal returns and outgrows the rest of the portfolio occupying most of the space in your portfolio, it makes more sense to sell the stock and diversify into some other opportunities.