Sell unwanted shares and plough back profits in the market

A week ago the Sensex rose, along with the hopes of many to a 17-month-high of 29054.28, resulting in expectations of it crossing the 30000 mark and going beyond. That unfortunately was not the case and the Sensex fell at the end of that week to 28797.25. This week too the market has been volatile, with the rise being impressive on one day and the fall the next day being equally significant. On September 16, the market rose by 186.14 points to end at 28599.03.

As I read the Sensex, my belief is that the perception is (and it's perception that rules the market) that we are in for a bull phase for awhile. I had a conversation with a knowing group consisting of a respected investor, the chief investment officer of a mutual fund and a senior officer of a foreign institutional adviser. They agreed that while there will be some volatility, the focus must be on identifying good companies and then purchasing shares of those companies. These savvy investors were no longer looking at sectors – they were digging deeper into individual companies. Another interesting revelation was that they were not necessarily looking at the really large corporates nor the very well established ones – they were focusing on those that are likely to do well in the next five years. Another aspect that emerged was that they were cutting their holdings on those companies that were dependent on revenues from abroad or had large investments in other countries – preferring to focus on those that were India focused. They agreed there will be swings. That would be because there will be investors wanting to cash in on profits. However, as far as they were concerned, at this time, the strategy had to be to sell those shares one was not comfortable with and to reinvest the proceeds into shares that one felt there is potential.

Is that good strategy? It's a yes and a no. If you have borrowed in order to purchase shares and are making a profit, it is sensible to encash and repay your loan. The profits you make can be ploughed back into the market without the spectre of loans and interest looming over your head. Profit encashed is real and not paper profit and no one can take that away from you. On the other hand, if you have good investments and you are happy with the shares in your portfolio, it does not make sense to sell them. Why would you? You would have to reinvest the profits again in similar shares and you may not be so lucky the next time. In this situation, my recommendation would always be to hold on to your portfolio, keeping, of course, a close watch.

You must keep a close look on your portfolio and not believe that a particular company is in an unassailable position. I remember only too well when I returned to India about 40 years ago there were the true blue chips of blue chips – Metal Box, ICI, Shaw Wallace, United Breweries et al. I remember at that time buying shares in HDFC, a company that had just been floated and kicking myself for several years as the share was stagnant. The true blues of yesteryears do not exist and the roost is today rules by entities not even conceived at the time – Infosys, HDFC Bank, ICICI et al. There are, in these dynamic times, no widow's shares. You have to keep a close eye on the shares you hold, not get attached to them and be prepared to sell them should the need arise without sadness or attachment.

The Bank of England held onto interest rates though there is some concern whether the Federal Reserve would do the same. With regard to wholesale inflation, it is at a two-year high of 3.79%. Passenger vehicle sales grew for the 14th straight month in August by 16.68%. The growth this year is now estimated at 10-12%. Another industry that must be closely watched is IT. TCS's N Chandrasekhar has mentioned that discretionary spends on IT were getting delayed and that this is resulting in sequential loss of growth momentum. This is affecting both the European and the US Markets. Though the new RBI chief has begun his term with the good news that in the April to June quarter, there was a current surplus of $ 2.6 billion – the first surplus since 2007, we need to see how he plans to steer the economy. There is a concern. I was also a little perplexed by Cyrus Mistry of Tatas mentioning that he'd exit companies if required. Considering the difficulties Tata Steel is having with its companies abroad, is he hinting? And this was a widow's share three decades ago.

As an investor you need to keep your ears to the ground and extrapolate the effect of happenings. However, as Baron Biggs says, "The biggest intellectual problem an investor must wrestle with is the constant barrage of noise and babble. Noise is extraneous, short-term information that is random is basically irrelevant to investment decision making. The serious investor's monumental task is to distil this overwhelming mass of information into knowledge and then to extract investment meaning from it. Meaning presumably leads to wisdom, which should translate into performance – the only thing that matters."

The writer is MD, Cortlandt Rand, and an author