When to Sell – Part One

I’ve been spending some time digging around in my trade journal and trying to understand this. Getting a handle of this very important aspect of investing is one of my birthday resolutions. This study and therefore these series of posts are a set of steps in that direction. I’ve entered into 337 sell transactions till date. The first time I ever booked a profit on a secondary market trade was way back in 05Oct’01 and the latest one was as near as 06Sep’10. To understand more about the when of my selling behaviour I looked at these 337 in conjunction with the market and it’s valuation. I also tried to plot my sales in along time to see if there were clusters of sales happening during particular time periods. I will bother (and write) about the other questions of why, how and what regarding my selling behaviour at a later stage.

For now, I constructed this chart which shows my selling activity during the period spanning Oct’01 to Sep’10. The small green histograms at the bottom show the distribution of my sell trades. Three clusters seem to emerge: Aug’04 to May’05; Jan’07 to Apr’07 and Aug’09 till date. I have started my investing career with a handicap – which might seem like a paradox given the upward ascent of the NIFTY since 2001. What I mean is that my investing thought process has been spawned during a whopper of a bull run. Nearly anything anyone touched during 2001-03 turned to gold. Midases were everywhere, hemlines were getting higher by the minute. Then after that 2008 and the early part of 2009 was such a humbling moment. And a great learning experience. I lost money on a few trades and the flurry of sales that you see during more recent times are my unwinding of those doomed trades as they recouped some of their lost ground. The wicked blue line represents the market – NIFTY in this case. The oscillating orange band represents the value of the market – trailing 12 month NIFTY P/E ratios. If one uses this lens to view the art of getting off the train, then it’s good to be a net seller when the NIFTY’s P/E is above 25. It pays to be a net buyer if the NIFTY P/E is below the first quartile (under or at 15). Currently the NIFTY P/E is around 24 so we are entering hilly terrain – best to tighten up our seat belts. I use the terms “net seller” and “net buyer” since even at exalted heights of market valuation one can find a few lonely bulls rampaging around and likewise the depths of market penury still throw up some bears lying in wait to maul you.

The idea is that statistics and data tell a story about your trading pattern. It is useful to step out of the frame once in a while and see things from a wider time perspective. I guess successful traders need to necessarily have oodles of experience behind them. The best minds in the business have lived through at least a couple of downturns and figured out their behavioural patterns and emotional compass. Also, when you see the picture in cinemascope, a few down months don’t seem all that frightening.

The wise ‘old’ men of investing mysteriously say – buy when you see value and sell when your asset gets expensive. but how the heck does one go about ‘seeing value’? We seem to know/have heard about things like fundamental analysis, discounted cash flows, industry compares, etc. Most of us however, do not have the time to do detailed down-to-the bone analysis of company financials. Some of us don’t even know how to go about doing it. I don’t think that such people should not participate in the markets or run scared of balance sheets and mathematics. I guess what is required for this set (I may fall in this realm) is to develop and consistently use common sensical heuristics with modest return expectations. One such rule is getting in and out depending on the movement of NIFTY P/E as compared to the two control limits as depicted in the chart. You may have a better method – gazing at tea leaves perhaps – whatever it is, I think the key is to stick to it. Economies and therfore the stock markets have a slight inbuilt bias towards expansion and growth. Therefore, the dice is loaded – but only if you stick to the same dice.

I don’t drink tea, BTW.

Advertisements

World Badminton Championship

Saina Nehwal has won her first two matches and plays 6th seed Shixian Wang tomorrow. Shixian Wang comes into the quarter finals beating Jie Yao, the 11th seed in a slightly more emphatic style. So lets see if Saina can enter the semis. The other quarter final to watch tomorrow is between Hongyan Pi (5) and Xin Wang (3). The winner of this match will clash with the winner of Saina vs. Shixian in the semi final.

Meanwhile current world number one, Yihan Wang is out of the tournament. [update 8PM IST, 27Aug: She’s out of the tournament. Toobad – but I think she was outclassed well and truly in 34 minues flat]

BTW, I made one observation about tags and google searches and hits on websites. It’s quite surprising that not a single soul has stumbled upon my website through google using the search phrase “Saina Nehwal”. So I ran a quick analysis on what search topics have been most successful in diverting traffic to my website and the result was quite an eye opener. Other than searching for me, people who spend their time looking for fairness creams and pani puris are more likely to come up to my site as compared to people looking up John Abraham’s butt or Katrina Kaif. Or Saina Nehwal for that matter. I felt quite let down since the whole purpose of writing about that man’s butt was to get more iballs. I thought about it for a couple of minutes and then guessed what must be amiss with my logic.

It’s the thing about statistical long tails and probabilities. Since Saina, Katrina and butts are much written about the chances of my humble ramblings on them getting shown up early enough in Google search rankings is miniscule. But since the likes of pani puris, fairness creams and IFCI sit on the long tail, the chances that my website will get picked up, if someone is looking up on these topics is high. It runs counter to common logic – that write about hot topics and you’ll get noticed more. Niche positioning. I am amazed at the kind of people that my writing resonates with – imagine being patronised by someone who is interested in “fairness creams for Muslim boys”! Or surfers  concerned if eating “pani puris will cause blindness”.

Some time back I had read a very insightful book called “The Long Tail: How Endless Choice is Creating Unlimited Demand” by Chris Anderson. The book talks about the growth of niche markets and specialist sales on the internet. So taking a leaf from this book and applying the conjecture developed above, I guess the key to getting more and different people to look at my website is to use many many tags (Napster, Amazon, eBay use the limitless potential of online store to stock up an enormous array of merchandise) and tags that are off center. If this post sounds like a pathetic lament to increase the traffic on my site as opposed to writing what really interests me and my core group of readers, then you hear right. Screw it. I dont care how many new sets of feet trample my online space. I will write what I want to write.

%d bloggers like this: