Have you been selling your stocks?

Fri, 18 Jul Pre-Open

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Recent reports indicate that Indian retail investors have been pouncing on the opportunity to sell their shares in recent months. An Economic Times report observes that SBI saw a decrease of 110,000 in the number of retail shareholders owning the bank during the quarter ended June 2014. Tata Steel's retail shareholders fell at a relatively lesser figure of 70,000, while that of Reliance Capital fell by 55,000.

In fact, for the 1,000 odd companies that have put out their shareholding data for the June quarter, more than two-thirds of the companies have seen a substantial decrease in the number of retail shareholders owning a stake in them.

So what's going on? What is the reason for this exodus?

One big reason could be the fact that the recent experience of retail shareholder during the time before the June quarter was quite bitter indeed. There was a long lull in stock prices over a multi-year period. During this time, there were also shorter periods like August-September 2013 during which time a large number of companies were seeing their stock prices fall to decade lows.

What led to a further feeling of disdain was the fact that many such retail investors had ended up buying shares in companies with fair-weather business models at fair-weather prices. Years like 2007 and 2010 were very conducive to small investors making this mistake. Thus the high cost price of many small investors made the subsequent falls in stock prices look even more distressing. Such experiences in recent years have created an aversion in the minds of many small investors as far as equities are concerned. And for the ones that held on to their stocks through this bad phase for not wanting to sell at a loss, the upswing in prices during the June quarter must have seemed like a great opportunity to exit. And exit they did!

So, how should you be looking at things right now? Well, first off, one needs to look at the right reference point while deciding to buy and sell stocks. Many end up looking at whether stock prices have been rising or falling in recent times while making their buy/sell decisions. And that usually ends up being a costly mistake to make.

The soundest reference point to use while making your buy/sell decision for the stock of any company is that with its fair value in mind. It doesn't matter if its stock price has risen or fallen. It doesn't matter if people predict its price is going to rise or fall. All that matters is where its price is currently with reference to its fair value. And if things look attractive from this point of view, it's likely a good idea to buy. And if it looks unfavorable, you're probably better off selling, or avoiding.

Club Question: So how have you been making your decisions to buy and sell stocks recently? Do share your views on the Equitymaster club.