The key to investment success is by knowing when and how to sell
25-Sep-2023 •Dhirendra Kumar
Sometimes, the most basic, supposedly obvious things about saving and investing have to be spelt out, so here's one: The entire point of investing is to sell. You invest to earn money. When you buy, someone else gets the money. Only when you sell do you get money. And yet, almost the entire conversation about investing is about buying!
More than two decades ago, when 'Mutual Fund Insight' was just a few issues old, I interviewed a fund manager who had done very well during the IT/dotcom boom around the turn of the century, but had done very badly in the crash that followed. In those days, there were no real norms for limiting industry or sector exposure. Some funds had such rules, but most probably did not. Even those that did got tempted and violated them when the going in IT got too lucrative to ignore. Unlike most later bull runs, that particular time was particularly fraught with such a sectoral concentration risk simply because IT stocks did hugely better than the general market. The performance difference between funds that put large chunks of their assets in IT and those that tried to stay diversified was just too big to ignore. In retrospect, this was the reason that investors learned much more from that boom-and-bust cycle than later ones.
In that particular conversation that I'm referring to, this fund manager told me ruefully, "We bought well, but we did not sell well." At that moment, when I was some two decades younger (and thus two decades less experienced) than I am now, it sounded like an interesting idea. Certainly, it has the ring of wise self-realisation, expressed quite eloquently. Later, when I thought more about it, my attitude towards this idea became far less positive. In fact, it became obvious to me that this was a particularly sub-optimal (I'm putting it politely) attitude from an investor, let alone a professional fund manager.
As I pointed out, the point of investing is to sell. We achieve nothing when we make an investment. In fact, our risk and uncertainty go up when the money in our bank account gets converted into an investment. Only when we sell, when the investment gets converted back into cash and reaches our bank account do we reach our goal.
The funny thing is that this moment, this denouement of the whole activity, never occurs to the fund manager of an open-end mutual fund. In fact, equity investors should also realise that this moment never comes for the management of the company whose stocks they have invested in. This is a subtle point, so do give it some careful thought. Fund management and running a business are perpetual activities whose success is measured by daily NAV, annual returns, each year's profits, etc. Therefore, it is up to us to ensure that we do not end up buying well and not selling well. There is no such thing as buying well; there is only selling well because if you don't sell well, then the buying does not matter.
So, how do you sell well? The answer is obvious: not just by choosing well and buying well, but by continuously monitoring your investments and being ready to take action. This is easier said than done, especially as we saw in last month's 'Mutual Fund Insight', which highlighted the 'fund-collecting' mindset of most Indian investors.
That's why our current issue of Mutual Fund Insight's cover story is dedicated to figuring out when to sell your mutual fund investments. We've done a comprehensive survey of the reasons for which investors should sell their mutual fund investments and created a guide with some precise recommendations. Just as importantly, we have also discussed 'fake' reasons for selling, which appear to be good reasons to sell but should actually be ignored.
Hopefully, armed with our cover story, you will be better equipped to tackle the most important stage of your mutual fund investing.
This editorial appeared in Mutual Fund Insight October 2023 issue. To read the cover story and other insightful analyses, columns and articles