A Sale Decision

Many gurus have mentioned that selling is much harder than buying. Here is what Warren Buffett says in his 1974 shareholder letter:
"Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results."

The various Good Reasons to sell cited by successful value investors are:
- Sell when new facts reveal that you made a mistake and your original valuation was wrong
- Sell when the original reason for purchase is no longer valid
- Sell when there is a better opportunity for your money


Notice that there is no 'Sell because market looks overvalued' in the above list. This is because of the difficulty involved in precisely defining what is meant by overvalued. Also, you will need a corresponding definition for 'undervalued' which tells you to get in the market when the time is right.

Think about it for a moment. If you could define such a rule with sufficient precision, you won't need to worry about stock picking. You can just play the indexes based on your overvalued/undervalued criterion and make oodles of money.

There is not a single documented case of an investor who has made fortunes this way - though I suspect there will be many examples of people who have lost fortune this way; sometimes many times over. For the curious, read Victor Niederhoffer's recent blow up in this New Yorker Article.

So, why am I selling right now? Though I must admit that there is a 'market is overvalued' voice getting louder and louder at the back of my mind, I am trying hard not to listen to him and liquidate all my positions. Instead, I am trying to systematically evaluate my stocks and see if there are any candidates which match my 'Good Reasons to Sell' list.

Fortunately there are a few cases when the sale decision is just easier. Here is what Joel Greenblatt has to say on the selling dilemma.

This is probably as good a time as any to discuss the other half of the investment equation - when to sell. The bad news is that selling actually makes buying look easy - buying when it is relatively cheap, buying when there's limited downside, buying when it's undiscovered, buying when insiders are incentivized, buying when you have an edge, buying when no one else wants it - buying kind of makes sense. But selling - that's a tough one. When do you sell? The short answer is - I don't know. I do, however, have a few tips.

One tip is that figuring out when to sell a stock that has been involved in some sort of extraordinary transaction is a lot easier than knowing when to sell the average stock. That's because the buying opportunity has a well-defined time frame. Whether you own a spinoff, a merger security, or a stock fresh out of bankruptcy there was a special event that created the buying opportunity. Hopefully, at some point after the event has transpired, the market will recognize the value that was unmasked by the extraordinary change. ...

This process can take a few weeks to a few years. The trigger to sell may be a substantial increase in the stock price ...

When I mentioned on July 31 blog that HTMT global was attractive, the stock price was 390 and the company was selling for less than reproduction cost of assets. There was 400 Cr+ of cash on balance sheet out of 800 Cr Mcap.

There was an even better opportunity for a brief period of couple of days in August when the price went to 290. I was happy to add to my position at the much reduced price.

Now that the price has crossed 520 and the market cap is reaching 1100 Cr, the original reason for purchase has been fulfilled. I am not claiming this is due to market recognizing the value. It might just be the rising tide lifting all the boats. Whatever the reason, the stock has moved out of my bottom tier of value. To continue holding the stock would require valuing the stock on 'earning purchase power' or 'growth of value within franchise' i.e. valuing it in Greenwald's tier 2 and 3. In my opinion, there is simply not enough history behind HTMT global, and for that matter, BPO business to value them as franchises.

So it is prudent for me to exit out of HTMT global and be happy with the satisfactory results obtained.

Exit price: 520

Note to self: The returns were substantially juiced up by averaging down when the price went below 300. A strong confidence in valuation is required to average down. I am not averaging down on Manugraph.