The 3 Times When You Should Sell a Stock | Warren Buffett:- Ultimate Guide to Exit the Stock |

Exit is very important in a company. When it was time to sell, we said we'll take 3 more people. It was 0. We lost 40 crores. What is your thinking model? How do you exit? This is a 3 step process that I follow. The immediate thing is to sell. You have to think later what to do. Sell first, think later. There is an event. I think 10 people are invited as guests. Everyone presents an idea. I said I'll present it. When do I have to do it? He said present it tomorrow morning. I said a lot of people share it on Twitter. That his idea is on number 1. His idea is on number 2. I was trending last in that chart. I was the absolute last. Whenever I opened Twitter, I used to feel so ashamed. I said, God! Then I presented another idea. This year I was trending in number 1. All India rank 23. I had fun at the gate. Mistakes happen right now. And they happen because it is part of the game. It's like you are playing cricket but you want to get a six on every ball. Which can never happen. No matter how much you do, mistakes do happen. Hinduja is the same group. Almost 4-5000 crore cash was going to come in this company. All the investors were thinking that the money will be distributed to all the investors. Dividend will be given in huge amounts. Management said no, we are not distributing any dividend. Out of 4000, we will distribute 400-500 crore dividend. The remaining 3000 crore cash that has come in, we are giving it to another Hinduja subsidiary company on a loan. I can show you this in the balance sheet as well. What happened here. If you see the balance sheet. So Shubham, as you are also making mistakes, what is the bulletproof process? So, I think the most important thing is that... Okay, so just before starting the podcast, all of you who are interested in investing, there is a small update for them that Shubham is doing a webinar on Sunday. So, for those who don't know about Shubham, Shubham was financially free at the age of 29. That's why he left the Amazon US job and shifted to Bangalore, India. And became a full-time investor. So, if you are interested in this webinar, and want to learn about Shubham's experiences, then we have given the link in the description and first comment. Anyway, let's start with this amazing podcast. Okay Shubham, a lot of people were asking that exit is very important in the company. What is your thinking model? How do you exit? So, I think exit, there is very little talk about it. Most people keep discussing the name of the stock. I bought this, I bought that. And no one talks about exit. I think that makes it a very, very important topic. So, before I actually talk about the process, let me tell you a story. It is a very interesting story. Recently, I think it's almost 1-1.5 years old. So, last year, there is an event, an investing event. So, it's a very big event. A lot of investors from all over India, who are hardcore investors, join it. In that, I think 10 people are called as guests. And they are told that everybody gets to present one idea. So, everyone presents one idea. And at the end of the day, because Twitter is very famous, so a lot of people are coming and sharing it on Twitter that someone presented this idea, someone presented that idea. And after every month, that his idea is running on number one, his idea is running on number two. It was the first time for me. It was 2-1.5 years ago. So, I said, I was a little hesitant. So, I was not invited in that too. In that, I was told that one of our people has backed out. Do you want to present? I said, okay, I will present. When do you want to do it? So, I got a call at night that I have to present it tomorrow morning. So, I said, I am not able to understand what idea to present. At that time, there was a company which was studying. Its name was Samman Capital. You can see it on the screen. So, in the beginning, there is a very bullish feeling that something is happening here. There was a turnaround in this. In which this group, which was a very infamous group, had kind of exited. The founder of India Bulls by the name of Sameer Gahlot, his name had become very bad and he exited from the group. Because of that, the story was becoming good. It seemed that a new management will come and everything will be new. It seemed like a good story. At that time, the rate was around 190-200. You can still see 132 here. So, before telling you about the exit process, I would like to tell you that everyone makes mistakes. Here, I made a mistake that I presented this idea. As soon as I presented it, after a few days, the stock was fine. After a few days, suddenly an announcement came. Because it is an NBFC, it distributes loans. So, there were some old loans that they had distributed at the time of Sameer Gahlot. So, they used to show it separately that this is our past book. So, in that book, here I have presented that after 15-20 days, they declared a loss of 2700 crores. Clean up. That we are cleaning up the money that we are not able to recover in our past book. And before this, they were saying that now everything is fine, now we don't have to book more losses. Now our book is fine. Now there will be an increasing trajectory. That's why I was bullish. As soon as this happened, the stock started falling. And as soon as it fell, the stock of 270 came here almost 150-160. I think within 1-1.5 months of me presenting. In that chart, I was trending last. I was the absolute last. Whenever I used to open Twitter, I used to feel so ashamed. What happens in this is you can't present many ideas. You have to present only one idea. Otherwise, you also try to hedge yourself. Because it is a game of probability. Mistakes can happen. You cannot predict what management will do tomorrow. You take an educated guess based on the knowledge you have at that point of time. When it happened, I bought it around 190-200. As soon as the moving average of 200 broke, I sold it at 160. Because I sold it at 160, the idea continued for a long time. I used to see it every day. I used to insult it every day. Oh God! I am trending last again. I am trending last again. After a few days, this event happened again. They asked me if I wanted to present. I said I don't want to present this time. I don't want to present. They told me it's a game of probability. Anything can happen. It was a game of probability. Why did you make it public? I said, I will do it this time. It doesn't matter. We will see. Then I presented another idea named Shankara Building Product. Luckily, this idea was demerging. I presented it around 550-600. After a couple of months, due to demerging, the triggers played out. It became 11-12 hundred in the next few months. Because of this, the chart I was telling you about was trending at number 1 this year. All India ranked 23. I had fun at the gate. I said, at least this time, some respect was saved. Otherwise, it was a waste of respect. Anyway, I am telling you all this because this game is of probability. No matter how much you do, mistakes do happen. For example, the company I was telling you about, Samman Capital, the most important learning is that if the thesis you have made changes, then it's an immediate sell. Here, the thesis was that the management from the last 3-4 quarters was saying that our book is clean. Now, the ROI profile will improve. Now, we will increase the loan book. And, the opposite happened. The management lied. In a jiffy, they booked a loss of 2-2.5 crores. They knew they were going to do this. They chose not to tell the investors. So, basically, that breaks the trust in the management. Now, I had to take a loss. And, I will also say that if you feel that the thesis is broken, then quietly take the loss of 15, 20, 50. Take a leave there. A few days ago, it had reached Rs.100. I was happy that I exited at Rs.160. So, the triggering point is below 200 DMA. So, this is the first learning. Yes, there are two things. One is that the black line of 200 DMA. So, I use a Technofunda approach. Technofunda says that the story should be technically good and fundamentally good. In this, both things were triggered together. Fundamentally, the story was ruined. And, technically, it came below 200 DMA. So, both things are negated. Basically, clear exit. I think another important thing is how much did you invest in this? Because very few people understand the game of asset allocation. You do very little. When the thesis starts, then you double down on your winners. I always start with 1%. And then, as the story is actually playing out, I double it down to 3%, then 5%. How much do you take maximum? I take up to 5-7%. Unless it seems very exceptional, then I take up to 15%. But, that is very rare. I mean, it seems very clear that there will be a sure shot here. That confidence is different. It comes sometimes, not every day. If there is Rs. 100, then start with Rs. 1. If you say mostly stocks, then in the portfolio, it will be between 3-5%. And, they have also gradually reached 1-3, 3-5 when they actually delivered. So, in this case, it had hardly reached the allocation of 1-1.5%. Which is a good thing. So, that is how we have to play the game. So, this means that we put Rs. 1 and what was the loss in this? Almost from Rs. 200, it went to Rs. 160. So, 20%. 20% on 1% portfolio. So, a loss of Rs. 20. Which is okay. It's a manageable loss. If it was Rs. 100, then Rs. 99 and Rs. 80 are left. So, in the same way, this is how you actually play the game. So, if those theses actually play out correctly, then you have to basically like Peter Lynch says, don't water the weeds, water the flowers and cut the weeds. So, you have to keep cutting the weeds and the theses that are going in your favor, you have to keep increasing them. You have to keep watering them. So, that is how the game is played. And, actually, I will say that 90% of the game is that only. It is easy to find stocks. I mean, if you go on Twitter, you will find 20 names every day and you will find 50 names everywhere. It's the opposite. There are so many names, but where to cut down and where to average up is a hard process. And it comes only when you track the stories. I am intentionally saying that because we recently made a video on multibagger. So, learning was about multibagger, but I think everyone thought that everything becomes multibagger. But that is not the game. The game is to understand the process and asset allocation. Correct. So, this is the first thing. Here, the story went against you and then technically it became weak. The second is the exit process when the valuation is too high. For example, let me tell you about a company. This is India Mart. I used to own this company and now I don't own this company. I am talking about 2020-2021. If you look at the chart at the back, let me actually open it in trading view. So, between 2020 and 2021, this stock did very well. And at this point, around Feb 2021, it had a PE of almost 100. As far as I remember, it had a PE of more than 100. This is where I am talking about. It had a PE of almost 105. No doubt, the quality of the company was very good. It is the competitor of Alibaba in India. It is like the Alibaba of India. So, this is a B2B marketplace for buy and sell. So, it is a platform business. Quality of business is excellent. There was no such issue. They got a very good bump up in COVID because physical marketplaces were closed and online marketplaces were open. So, because of this, everybody wanted to be here. I was owning it for quite some time. Valuation became unoptional. I did not sell. Because in the past, I had also made this mistake that I used to sell and the stock used to go up. So, now that 200 DMA thing combined with valuation. So, when you do that, that makes a very very killing process. So, here you will see that I did not sell here. I did not sell at almost 5000-4800. But then finally, I sold out around here. Around 3900. When this 200 DMA broke here with huge volumes. It is not visible here. It is a very bad red candle. Here, I sold at 3600-3700. I had to give out on the gains. So, from 4900 to almost 3600 I missed out on a good gain. But it was a multi bagger for me. And what happened behind was that I used to sell and it used to double from there also. So, this time, I did not want to do that. So, because of this, I said that you can take 10-15% from me but I will stay in the journey. So, now my process is the same. For example, I sold out and then it went to almost 1800 after that. I lost 50% more after I sold. And then the story reversed and these cycles keep on playing. Valuation also got cheaper after a point and everything. Now, if you see, it is on the opposite end of the spectrum. A few days ago, it was at 25 PE. And we also covered this in the community. Not very long time ago, like 2-3 months ago. So, this is valuation. There are many such examples. Same thing happened in Dixon Technology. I did the same thing here. I applied for Technofunda from 5400 and when it broke I sold it here in 2022. And I was so happy that it went from 4300 to almost 2800. But after that when it started running again it went from 2900 to 16000. So, I got a learning major that many times if there are high growth companies if you sell there and the growth is continuous it was losing 100% growth and kept on coming. So, that 200 PE also got cheaper after a point. And in between there was a correction of 1-1.5 years but after that when it went back it still runs at 120 PE. I think you can't say a clear strategy that this is a perfect strategy. I am saying this because every strategy has nuances. And after a point the same stock comes back above 200 DMA. So, for example, if you see here it came back above 200 DMA and someone will say that you sold out and you missed the big journey. But if someone is actually following that process it came back above 200 DMA and if you were following the story you could have entered back when it came back. But the reality is it is very hard to enter back. And even I couldn't enter back. So, this is absolutely true. But I think we all are trying to improve and I am also trying to improve every day. But I mean at a high level this is the process that I follow right now. Understood. Next is corporate governance. Corporate governance means if there is a fraud in a company or if a company does something wrong I have seen a lot of companies where such things come. The immediate thing is to sell. You have to think later what to do. Sell first and think later. It is a simple funda. Then you start seeing charts or you start seeing anything then it works. Then you don't get an exit. For example, I can give you two examples. One is Best Agro Life and the other is Hinduja Global Services. I used to track both these companies. This is the same group. Hinduja Global Services is the same group that makes your trucks. You must have seen that Hinduja trucks come. So, basically the story is that there was a company of the same group which is an IT company. Global Services. They were selling a business and they were getting a lot of cash. Almost 4-5000 crores of cash was going to come in this company. They were selling a division of their company and the value of the company was very low. The market cap was very low. So, the cash was going to come a lot. All the investors were thinking that the money will be distributed among all the investors and all of us will become rich because we have bought the money in 1000-2000 crores and everyone will get a lot of dividends. The company was sold. Everyone was waiting. The management said that we are not distributing any dividends. Out of 4000 crores, we will distribute 400-500 crores of dividends. The remaining 3000 crores or some big amount of cash we are giving to another Hinduja company on a loan. And I can show you in the balance sheet what happened here. If you see the balance sheet, you will understand the story here. This was the time when it happened. The cash amount was 536-3500 crores. After that, the loan and advances were other assets because they gave loans to their group of companies. The loan amount was almost 2800 crores. This is not the loan that they took from the bank. This is the loan that the company gave to its associate or promoter companies. If you see the timing, the cash came approximately around here. It came around 2022. Around this time, everyone was waiting. When the loan aspect came, till then, the company said that they will not distribute it. But when the management told them that they are giving a loan, the whole story ended. After that, the cash came from 1300 crores. If you see, it came to around 450 rupees. It was one third. So, I think, corporate governance is one of the most important aspects. There was another similar thing. Best Agro Life. There was a different story. The company's numbers were very good. There was a huge growth. Everyone was crazy about it on Twitter. I am talking about here. From 105 to 192 crores. After that, the company's cash flows were not coming. The profits were coming but the cash flows were negative. The cash flows were not coming. Sales were happening and there was nothing in the pocket. Soon after that, at some point, there was an issue of corporate governance. The main question was related to cash flow. As soon as it surfaced, the growth slowed down. There are multiple combinations. There was an option of growth from 127 to 1700. The growth slowed down and there were issues of corporate governance. The same thing happened in the chart. As soon as the growth slowed down and there was an issue of corporate governance, the stock came down from 1200 to 250. But the most important thing is that all these things have one thing in common. All these things are under the 200-day moving average. This is a master indicator. If there is nothing else, under 200 DMA, if you sell it and keep the stock above 200 DMA, that strategy is foolproof. That is one thing. These are basic maths. Shubham, as you are making mistakes, what is the bulletproof process so that you don't make a mistake? Not just me, you can take any big investor like Damani, Ashish Kacholia, or anyone else. Mistakes happen because it is part of the game. It is like you are playing cricket but you want to get a six on every ball. Which is impossible. I think the most important thing is that the winners keep moving and the losers get cut. Imagine for example if you have 10 stocks and there is a 50% hit rate. Half of the time you are wrong and half of the time you are right. But when half of the time you are wrong, there is a 10% loss. And there is only 1% allocation. But when half of the time you are right, then you are timely because you are tracking the pieces, you are taking it to 1-5%. And the gains that are coming are 100% or not 100%, let's say 20%, 30%, 50%, whatever. So this is also a very very favorable game because when you are losing only 10% is going and when you are winning it is coming in multiples, 20, 30, 40%. So worst case a stock can go down to 0. Only 100% loss can happen. But if I become a multi-bagger, then the one stock that becomes a multi-bagger 4x, 5x, it can cover 5 0 stocks. So it is a simple game. And my personal style is the same. Like I said, I divide it into three. So first of all, the story is looking good, chart is getting set up, I put my foot in the water, testing the waters. After that, earnings started, price breakout came, so I increased the allocation. And then once the trend got validated, story is a bit long, and growth is continuing, so then I increased it more and tried to ride the entire journey. Generally journey is of 2-3 years. And tried to ride the entire journey. So this is a three-step process that I follow. And same goes with the exit. Understood. So I think I will summarize it once. The first point that we discussed was that if the thesis is wrong, you made a story, read it, whatever material is available, after reading it, you thought of something, but something else went wrong. So in that case also, get out of 200 DMA. That is the worst case. Second is valuation. Valuation is too much. 150-200 PE. That is also one of the trigger points that we can exit there. The third is corporate governance. Corporate, you heard all the con calls, nowadays there is a notebook LMB, put it in it, you took a curve quickly, and later found out that what you thought did not happen. So that will also exit. And finally, we saw asset allocation. That exit, along with entry, exit and asset allocation, how much money is invested where. Like we read in the company, return on capital employed. So that capital should be employed in different places. Actually, we have a feeling, like with family, if someone is not doing well, we try to double down. They can't do it in this. They are losers. Everyone consciously starts, that this is fine, but why am I not earning from this? Many people do the same. This has become expensive. What fell, became cheap. Now double down this, because when it will grow, it will do very well. What is doing well, it keeps doing better, and what is bad, it makes it worse. I remember a quote from Peter Lynch, that the next best stock could be in your portfolio. That is true. You keep adding water there, it will grow. And in business, you make a mistake, that you put your best man where the business is not going well. Not just that, many people do this. If there is a new business, they add verticals. Your own business is going well, first achieve one scale, double down in that, grow that. And it comes after making a lot of mistakes. If you get a mentor, everything is fine. Thank you so much for sharing everything. I hope it will be valuable for everyone. Jai Hind. Jai Hind. Bye Bye.