The #1 lesson every investor needs to learn

WHEN TO SELL A STOCK

Although Warren Buffett famously says that his favorite holding period is “forever,” there are occasions when you may need to sell off your investments. Buying a stock is only half the job done; knowing when to sell is equally crucial. Many investors excel at purchasing stocks but struggle with identifying the appropriate time to sell. This struggle often leads to missed opportunities for maximizing gains or minimizing losses.

1. You Made a Mistake in Your Investment:

Sometimes, despite thorough research, an investment may not turn out as expected. If you realize that your initial analysis was flawed or new information comes to light that contradicts your original thesis, it may be wise to sell the stock.

Example: Suppose you invested in Jet Airways (India) Ltd. based on its market position and growth potential. Later, you find that the company’s financial health is much worse than anticipated, leading to potential bankruptcy. In such a scenario, selling the stock would be prudent to avoid further losses.

2. A Better Opportunity Arises:

If a new investment opportunity presents itself that promises better returns or aligns more closely with your investment goals, it might be beneficial to reallocate your funds.

Example: Suppose you hold shares of WIPRO Ltd., but you notice that Tata Consultancy Services (TCS), a company with superior fundamentals, is getting listed. TCS shows strong growth prospects and potential for higher returns. Considering this, switching your investment to TCS could be a more strategic move. TCS was listed on 25/08/2004 and has since delivered significantly higher returns compared to WIPRO, as illustrated in the graph below.

3. The Company No Longer Has a Competitive Advantage (No More Moat):

A company’s competitive edge, or ‘moat,’ can erode over time due to various factors like increased competition, technological advancements, or regulatory changes.

Example- Nokia was the first to create a cellular network in the world. In the late 1990s and early 2000s, Nokia was the global leader in mobile phones. However, the company overestimated the strength of its brand and believed it could arrive late to the smartphone race and still win. In 2008, one year after the first iPhone release, Nokia finally decided to compete with Android, but it was too late. Their products weren’t competitive enough.

4. The Stock Becomes Overvalued:

When a stock’s price exceeds its intrinsic value significantly, it may be overvalued. Selling overvalued stocks can help lock in gains and reduce the risk of a price correction.

Example: Suppose you invested in Indian Railway Catering & Tourism Corporation Ltd. (IRCTC) during its IPO. The stock experienced a significant price increase of 700% from2019 to 2021, resulting in a price-to-earnings (P/E) ratio exceeding 300 in October 2021, which was much higher than the industry average. This overvaluation could have been a signal to sell and realize your profits. Indeed, the stock subsequently corrected by 48% and only returned to its 2021 levels in May 2024, after 31 months.

P/E ratio of IRCTC post listing (2019-2024):

Shares of IRCTC post listing (2019-2024):

5. Change of Management

Leadership plays a crucial role in a company’s success. A significant change in management can affect the company’s direction and performance. If you lack confidence in the new management’s ability to steer the company, it might be a signal to sell.

6. Slow Growth

If a company’s growth slows down significantly, it might no longer align with your investment strategy, especially if you are focusing on high-growth opportunities.

Example: Suppose you invested in Bombay Dyeing & Manufacturing Company Ltd. because of its diverse business portfolio and growth potential. However, if the company begins to show prolonged periods of slow growth, it might be wise to consider selling your shares in favor of a company with better growth prospects. For instance, Bombay Dyeing’s revenue increased from ₹2325 crore in FY 2012-13 to ₹2674 crore in FY 2022-23—a mere15% increase over ten years. Additionally, the company has incurred losses in six out of those ten years, indicating a weak growth trajectory.

Shares of Bombay Dyeing (2014-2024):

Additionally, portfolio rebalancing is another reason to sell a stock. Over time, certain stocks in your portfolio may grow disproportionately, leading to an unbalanced investment strategy. Selling stocks that have performed well and reallocating the proceeds into other investments can help maintain your desired asset allocation and risk level.

Personal financial needs can also prompt the sale of stocks. Life events such as buying a house, funding education, or covering unexpected expenses may require liquidating some of your investments. In such cases, selling stocks can provide the necessary funds while still aligning with your long-term financial goals.

In conclusion, while holding onto stocks for the long term can be beneficial, it is equally important to recognize when to sell. Regularly reviewing your investments and staying informed about market conditions and company performance can help you make well-informed decisions.

June 13, 2024June 13, 2024

MONTHLY MARKET UPDATE & OUTLOOK – MAY’24

NVIDIA's Meteoric Rise

NVIDIA, a leading name in the tech industry, has recently achieved a significant milestone by surpassing Apple to become the world’s second-largest company by market capitalization (for a brief period). This remarkable achievement reflects not only the company’s impressive stock performance but also its strategic positioning and innovative prowess in key technology sectors.

The stock is up 32 times in the last 5 years

The revenue & profits are up 5 and 10 times respectively in the last 4 years and are expected to increase by another 3X in next 3 years

Factors Behind NVIDIA’s Meteoric Rise

Dominance in AI and Data Centers: NVIDIA has established itself as a powerhouse in artificial intelligence (AI) and data center markets. Its Graphics Processing Units (GPUs) are critical for AI computations, machine learning, and high-performance computing, making them indispensable for tech giants and researchers.
Gaming Sector Leadership: The company’s roots in gaming remain strong, with its GPUs being the gold standard for gaming enthusiasts. The continued demand for high-performance gaming hardware has been a steady revenue stream.
Strategic Acquisitions and Partnerships: NVIDIA’s strategic acquisitions, like Mellanox Technologies and Arm Holdings, have bolstered its technological capabilities and market reach. These moves have diversified its product portfolio and opened new revenue streams.
Growth in Automotive Technology: NVIDIA is making significant strides in the autonomous vehicle market. Its DRIVE platform is a comprehensive solution for self-driving technology, attracting partnerships with major automotive manufacturers.
Expansion into Metaverse and Omniverse: The company is also venturing into the burgeoning fields of the Metaverse and Omniverse. These platforms are designed for creating virtual worlds and simulations, positioning NVIDIA at the forefront of next-generation digital experiences.

How Nvidia Makes Money

Picture of the month

Quote of the month

Winning at money is 80 percent behavior and 20 percent head knowledge. What to do isn’t the problem; doing it is. Most of us know what to do, but we just don’t do it. If I can control the guy in the mirror, I can be skinny and rich.

– Dave Ramsey

“India is a wow country” American investor, Jim Rogers

India to become second-largest contributor to global growth, says BofA Securities

Wall Street Lands on India, Looking for Profits It Can’t Find in China

Economic Indicators Overview:

GDP: The Indian economy grew at a robust 8.2% year-on-year (y/y) in FY24, surpassing the advance estimates of 7.6% y/y.

Manufacturing PMI: India’s Manufacturing Purchasing Managers’ Index (PMI) in May 2024 remained strong at 57.5 (compared to 58.8 in April 2024), marking the 34th consecutive month in the expansion zone, driven by accelerating new export orders and job growth.

Services PMI: India’s services sector displayed strong growth in May 2024, registering a PMI reading of 60.2.

GST Collection: Gross GST collections stood at INR 1.73 trillion (+10% y/y) in May 2024, marking the 27th consecutive month of collections exceeding the INR 1.4 trillion mark.

Core Sector Production: The index of eight core sector industries accelerated year-on-year to +6.2% in April 2024, compared to a +6% increase in March 2024.

Industrial Production: Factory output growth, as measured by the Index of Industrial Production (IIP), decelerated to -4.9% in March 2024, compared to a growth of +5.7% y/y in February 2024, driven by positive y/y growth in three major sectors: Mining, Manufacturing, and Electricity.

Credit Growth: Scheduled Commercial Bank credit growth reached 19.54% y/y as of May 17, 2024, compared to a y/y growth of 15.42% observed on May 19, 2023.

Equity Market Overview:

BSE SENSEX: The BSE SENSEX remained flat in May 2024, registering a slight decline of -0.7%, in line with the NSE NIFTY index.

BSE Mid-cap and Small-cap Indices: The BSE Mid-cap and Small-cap indices outperformed the BSE Sensex, with performances of +2.3% and -0.1% respectively.

Sector Performance: Capital Goods, Power, and Metals were the top-performing sectors in May 2024, with gains of +11.2%, +6.6%, and +4.7% respectively. Six of BSE’s 13 sectoral indices ended the month of May 2024 in the green.

Net Foreign Institutional Investors (FII) Flows: Net FII flows into equities were negative for May 2024, amounting to -$3.15 billion.

Domestic Institutional Investors (DIIs): On the other hand, DIIs were net buyers of Indian equities, with net inflows of +$6.43 billion.

Fixed Income:

After a sharp rise in April 2024 due to global financial market repricing, Indian fixed income market yields eased by almost 15-20 basis points during May 2024. This easing was attributed to easing global yields, muted inflation, a record RBI dividend raising hopes of faster fiscal consolidation, and rising expectations of lower gross issuances.

Liquidity:

Banking system liquidity was tight during May 2024, averaging a negative Rs 1.5 trillion, compared to flattish liquidity in April 2024, which is typically a seasonally easy month.

Looking Ahead:

The outcome of the general election suggests a likely continuation of key policies related to development and reforms. Coupled with India’s strong fundamentals, resilient domestic demand, and supportive policies, this continuity may provide buffers against external shocks.
Economic Growth: We maintain an optimistic outlook for economic growth, as past reforms are poised to support future expansion.
Investment Cycle: The investment cycle is expected to progress, with increased private sector participation, assuming no major shifts in global dynamics and risk appetite.
Consumption Recovery: Rural consumption appears well-positioned for a recovery, supported by a low base, falling inflation, and expectations of above-normal monsoons.
Sector Rotation: Post-election results may lead to sector rotation based on valuations and relative growth prospects.
Earnings Growth: We anticipate mid-teen earnings improvement at a broad level. Future market performance is expected to be largely dependent on earnings growth.
Investment Strategies: Large Cap-oriented strategies, such as Large, Flexi, and Multi Cap, appear well-placed. In the thematic space, Banking & Financial Services seem attractive due to relative valuations.
Mid and Small Cap Allocations: For the medium term, Mid and Small Cap allocations should be approached in a staggered manner through systematic investment routes.

June 13, 2024June 13, 2024

Achieve Your F.I.R.E: A Guide to Financial Independence and Retiring Early

What is F.I.R.E?

F.I.R.E stands for Financial Independence and Retire Early. This philosophy focuses on aggressively saving and investing to enable individuals to retire significantly earlier than the traditional retirement age (usually 60), achieving financial independence in the process.

How Can You Achieve F.I.R.E?

Here are some essential steps to help you on your path to F.I.R.E:

Aggressive Saving: Aim to save around 70% of your monthly income. This aggressive savings rate allows you to accumulate wealth rapidly, paving the way for an early retirement.
Frugal Spending: During your earning years, adopt a frugal lifestyle. Even if you can afford to spend more, the goal is to save and invest as much as possible, avoiding unnecessary expenses.
Disciplined Investing and Planning: Invest your savings as early and for as long as possible to maximize growth. Careful planning and evaluation are crucial to ensure your investments align with your financial goals.
Lower Risk Appetite: With a shorter time horizon for wealth creation, it’s important to manage risk wisely. Consider balanced investment strategies, such as hybrid funds, to protect your savings from high volatility.
The Rule of 25: This rule suggests that you need to save 25 times your annual expenses to maintain your lifestyle after retirement. For example, if your annual expenses are ₹10 lakh, you should aim to save ₹2.5 crore (₹10 lakh x 25) to retire early.
Post-Retirement Strategy: Achieving F.I.R.E is not just about accumulating savings; managing your finances post-retirement is equally crucial. Plan to withdraw no more than 3-4% of your savings annually to ensure your funds last throughout your extended retirement.

Although the FIRE method is a good way to achieve post-retirement financial freedom, it requires immense self-control and discipline. Despite the advantages offered by this unique financial strategy, it is essential to understand that the FIRE method may not be suitable for everyone.

For instance, if living frugally does not suit your lifestyle, adopting the FIRE approach may not be ideal. On the other hand, if you’re capable of saving and investing aggressively, you may consider adopting this strategy.

June 12, 2024June 12, 2024

Modi 3.0: Three Sectors Set for Growth

The political landscape in India now exhibits a sense of continuity, which augurs well for policy stability and the nation’s development trajectory. The reaffirmation of the ruling party’s mandate signals a resolute path forward, ensuring that key economic policies and initiatives stay on course.

The BJP’s manifesto, branded under the vision ‘Viksit Bharat,’ outlines an ambitious plan to transform India into a developed nation by 2047, coinciding with the country’s centenary of independence.

Third term:

In its third term, the BJP aims to continue its reform agenda and complete unfinished initiatives. Prime Minister Modi has hinted at making significant decisions to accelerate India’s growth. He highlighted the current period as unprecedented, marked by increasing growth rates, decreasing fiscal deficits, rising exports, a reducing current account deficit, controlled inflation, and growing opportunities and incomes. These factors collectively contribute to poverty reduction.

Future reforms:

Future reforms are expected to focus on further digitalization and strengthening India’s role in global value chains. The BJP’s policy push towards manufacturing and exports is anticipated to continue, with an emphasis on supply-side reforms. These reforms include a transition to clean energy, increased spending on both digital and physical infrastructure, and targeted policy initiatives aimed at youth, the poor, women, and farmers.

Infrastructure

A notable aspect of the NDA’s governance has been its focus on infrastructure development, resulting in the doubling of highway lengths and an increase in the number of airports from 74 to 146.

BJP Manifesto: ‘We will focus on the modern road network, enhance rail and metro connectivity with new age trains and expanded networks, develop comprehensive EV charging stations, construct new airports and advance our telecom infrastructure with affordable 5G and innovative 6G technology, promoting ease of living for middle class families’

We will expand the railway network to increase capacity for passenger as well as cargo transportation. We have constructed 31,000 km railway tracks in the last ten years. We are now adding 5000+ km of new tracks every year and will continue to add new tracks at this pace for the next five years’

Key players: Ambuja, Ultratech, L&T, Jupiter Wagons, RVNL, NCC, BHEL

– This theme will continue to gain prominence. Prime Minister Modi has recently announced that the speed of implementing infrastructure projects will be accelerated manifold in the next five years to make India the third-largest economy in the world.

– Railways and highways are expected to remain top priorities on the government agenda, with related sectors like minerals and metals also projected to grow.

– In the third term, the government may export locally designed and manufactured Vande Bharat trains.

– Over the next five years, the railway network is set to expand rapidly with the addition of 5,000 kilometers of new track each year.

– The government has set ambitious targets for the transport sector, including developing a 200,000-kilometer national highway network by 2025 and expanding the number of airports to 220.

– Further, Vision 2047 plans to complete the construction of national highways by 2037, as robust road infrastructure can have a multiplier effect in the following decade.

Defence Sector

BJP Manifesto: ‘We will vastly expand domestic defence manufacturing and exports of Made in Bharat defence equipment. This effort will be facilitated by accelerating indigenisation in major air and land equipment’

Key players: Hindustan Aeronautics, Bharat Electronics, BEML, Mazagon Dock Shipbuilders, Bharat Dynamics and Garden Reach Shipbuilders and Engineers

– India’s defense sector is witnessing a significant export boom. In FY 24, the country recorded a stellar performance, with defense exports reaching a record high of Rs. 211 billion, marking a substantial increase over the past few years.

– With rising demand for defense equipment, technologies, and services, there are promising prospects for companies involved in defense production and technology development.

Energy:

Key players: GAIL, IGL, Mahanagar Gas, Gujarat Gas, NTPC. APL Apollo Tubes, Finolex and pipe manufacturers may benefit from government’s vision to convert households to PNG.

By 2032, the government aims to add only 80 GW of coal-based power capacity compared to 500 GW of renewable energy capacity.

The focus is on reducing petroleum imports and achieving energy independence by 2047.

The government should prioritize the development of energy storage infrastructures, such as battery energy storage and pumped hydro projects, to facilitate a smoother integration of renewable energies with the national grid.

The views expressed herein constitute only the opinions/ facts and do not constitute any guidelines or recommendations on any course of action to be followed by the reader. This information is meant for general reading purposes only and is not meant to serve as a professional guide for the readers

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Month: June 2024