When to cash in


Among several other incredible things, the Indus Valley Civilization is known for its urban planning, a key part of which is its elaborate drainage system. The systems for waste water drainage and trash collection used in the cities throughout the Indus region were far more advanced than any found in contemporary urban sites in the Middle East and arguably even more efficient than those in many areas of Pakistan and India today [i]. All the houses had access to water and drainage facilities. Drains had movable stone slabs and inspection points. Sewage was carried from homes through earthenware waste pipes to areas away from the city. And so on. Such elaborate designs as early as 3300 BCE for taking out the trash, suggest that it is the hall mark of developed societies to be meticulous about managing what is left behind after consumption.  Take that allegory to the field of investments. Do we ever have an exit plan for our investments? Our exits are mostly prompted by a sudden inexplicable urge to do so, or a sudden need for money, or a sudden fear of apocalypse. There is so much around us that tells us what and when to purchase, but so little about when and how to let go.

Exit plans? No, thank you sir.

The sales pitch of a successful investment advisor has two well defined parts. First is about lining up the right set of products suitable for the customer. Second is about how well he can appeal to the customer’s insecurity, his/her/their need or greed. But seldom, if ever, is enough stress given on when to cash in on the investments. More often than not, it is the introduction of a new product or a better stock that prompts a change in the investor’s portfolio. So, the whole ecosystem of investments works in such a way that you as a customer is at its weakest when it comes to exit. It is not dissimilar to any other investment or purchase, however. Be it your car, land or house, no one tells you the optimum time to encash. When it comes to stock investments, even a seasoned technical analyst may not be able to consistently call the top or the exhaustion of an uptrend.

Having said that it is inevitable that you feel some discontent after the sale. You could rue about the profits that you could have made, or the losses you could have avoided, had you held on it for a trifle longer, and so on. Behavioural theorists call this as “cognitive dissonance [ii]”, which is the mental discomfort experienced by a person who holds two or more contradictory beliefs especially when the belief clashes with new evidence perceived by the person. So, how can you make an exit from your investments, and also be at peace with yourselves?

Try asking yourself these questions.

  1. Have the circumstances of your investment changed? If yes, is it for the better? Is it too good to be true? Or too bad?
  2. Has the stock risen to your expectations? Now, expectations can always be misguided by fear and greed, but a few guidelines could be handy. What can be a realistic profit expectation? What cannot be, is the amount you are in “need” of. You can’t expect each of your stock to generate windfall gains. So, a starting figure can be arrived at by taking the annualized risk free rate that you could be earning, which is 6.6 %, if you consider India’s 10 year treasury yield and adding it with the present CPI, which is around 3.21%, giving you 9.8%.
  3. Is the upside expectation commensurate with that of its market cap? As a loose guidance, small cap stocks move more steeply than that of large cap.
  4. Is it May? The age old adage is “sell in May and go away”. History of stock market trends across the globe shows that stocks exhibit seasonality and they trend down or up during specific periods of the year. Recent history, however has evidence that one could miss out on major moves, if this is followed on blind faith, but the underlying suggestion on seasonality remains very relevant and employable, just like how my June’s article pipped the markets to turn higher in September based on seasonality.
  5. Have you lost more than “x” percentage? This “x” has to be the maximum threshold pain or loss in investment you can bear. “X” could be an arbitrary figure, could be a multiple of the risk free rate, or just say 10%.

Each of the first four points, are in conflict with the idea of letting profits run, and strikes at the very notion of stock picking. But when they are asked in unison, it gives a consensus opinion making the exit decision, a sober one. And the fifth point ensures that you lose only so much. This will ensure that you will not sit crestfallen with no capital to invest, just when opportunities come beckoning again.

Closing note: Archaeologist Jonathan Mark Kenoyer suggests that “the Indus River [iii] changed course, which would have hampered the local agricultural economy and the city’s importance as a center of trade. But no evidence exists that flooding destroyed the city, and the city wasn’t totally abandoned”. Indus expert Gregory Possehl says, “a changing river course doesn’t explain the collapse of the entire Indus civilization. Throughout the valley, the culture changed”. Suffice to say that, no amount of meticulous planning could avert the inevitable, but did ensure that it was in its mature form from 2600 BCE to 1900 BCE and lasted 2000 years. That is no mean feat.

Often, the idea of “investing for the long term” indirectly suggest that the exit decisions are to be considered only at the long end of that “term”; only, that term is always uncertain. The idea of accumulation cannot work if you don’t have a release plan, a consumption plan, or a diversion plan. Make systematic checks, a part of your investment strategy and hold if you could, and exit if you must. It will not insure you from failures though, but it will make your entries more meaningful and your long term journey more fruitful.

Food for thought: Now that markets are on an upswing again, how much cash will you strive to keep in your portfolio?

[i] https://en.wikipedia.org/wiki/Indus_Valley_Civilisation

[ii] https://en.wikipedia.org/wiki/Cognitive_dissonance

[iii] https://www.nationalgeographic.com/archaeology-and-history/archaeology/mohenjo-daro/


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