Govind Parikh, the newly discovered stock wizard, advised us in his chat with Ramesh Damani that it is not enough to home in on a winning stock but we should also know when to gracefully exit the stock.
Govind Parikh’s words of wisdom are worth recalling:
“In my opinion selling is even more important than correct buying. Correct selling and after selling keeping the cash is more important than even correct buying.
Buying is easy, people buy the stocks and once it comes to selling people get a little possessive because price goes up more than the expected levels and then they keep over expecting. They give wrong valuations to themselves. Everybody likes the stock which they have bought, when the price goes up they get even more happy but they don’t think that you have to be fearful as the price overshoots your level. What people don’t realise is, they create a very powerful asset by selling a stock called bear market buying power.”
This practice of gracefully exiting a stock when it is on the ascent is known as “skimming cream from hot milk”.
Earlier, we saw Ramesh Damani skillfully execute this technique in the case of Ricoh India. By gently exiting from the stock during the period of its rapid ascent, Ramesh Damani reduced his exposure to the stock, booked mega gains and had a big smile on his face when the stock crashed like a ton of bricks.
Relaxo Footwears became popular amongst us when Prof Sanjay Bakshi, the authority on value investing, wrote a treatise explaining its various attributes and why it was a terrific buy.
However, Dolly Khanna was, as usual, ahead of everyone else in realizing the potential of Relaxo Footwears. As far back as in December 2012, Dolly lorded over a truckload of 601,710 shares (120,342 shares adjusted for split) of Relaxo and has been sitting pretty ever since.
As the months turned into years, and the stock rose to become a magnificent 6-bagger, Dolly indulged in gentle selling of the stock. Every few days she would visit the counter, selling little bits of her vast holding.
Tangible evidence of Dolly’s action in the financial year 2014-15 has now emerged. Dolly started the year with 522,815 shares of Relaxo. During the year, she visited the counter on 49 occasions, spread over all the 12 months, and sold off bits and pieces of her holding. As at 31st March 2015, Dolly’s holding was reduced to 383,641 shares. Her holding as of 30.06.2015 is not known.
|Dolly Khanna’s holding in Relaxo Footwears|
It is very clear from Dolly’s action that she has indulged in some healthy “profit booking“. There is nothing wrong with the fundamentals of Relaxo Footwears. However, when you have a magnificent 6-bagger on your hands, it is always sensible to cash in on some of the profits appears to be Dolly’s thinking.
It is worth emphasizing that it is this technique of graceful exit that saved Dolly Khanna from the carnage that Hawkins Cookers witnessed.
At this stage, we must note that while ace investors like Dolly Khanna, Ramesh Damani and Govind Parikh are quite adept at the fine art of selling a stock, novice investors like you and me have a long way to go. If we are lucky enough to land a winning stock, it may be better for us to stay put in it rather than try to surf the waves unless we are absolutely sure of what we are doing.
In fact, Basant Maheswari is one of those who are opposed to the concept of booking profits. In his book “The Thoughtful Investor”, Basant has warned:
“Selling a stock to buy it back later on a slight dip isn’t the optimum way to get rich but is surely a nice way to get rid of stocks that will make an investor rich”
So, we have to heed this warning whenever we feel tempted to book profits from our winning stocks!