In the last two months or say nine weeks markets have risen by almost 10% and many might be thinking of selling stocks and booking profits, especially when the last year market returns were negative. But many of us might be looking at the same scenario in other way and ask, “Why would I sell my shares when the value of my portfolio goes up every day?”

The short term price movement in either direction can be triggered by multitude factors that have absolutely nothing to do with underlying value of the stock in your portfolio.

There are plenty of examples in the Indian stock market about these multitude factors affecting the prices. A jump of 100% in the share prices of L&T after the new government sworn in two years back, on the hope of its infrastructure business will double in three years was big speculation. After touching those highs, its share prices tumbled almost 40% in the second year when market realised that the growth they were expecting will not be achieved in three years.

Recently, just before the announcements of SBI results, the bank was trading around Rs 170 per share. The market was expecting bigger NPA numbers and lower profits, but after releasing its results its stock price jumped up to Rs 205 per share in three trading days as both the NPA’s and profits were far better than street expectations. The results were not that great to change 20% valuation of SBI in weeks’ time. While writing this article it was trading at Rs 197 per share.

As we always mention, in the short term, news and speculation drive the stock prices. But in the long run it is the value of the stock that share price mirror.

In today’s dynamic world, buying stocks and forgetting about it for 10 years (even if they are of good quality and bought at cheaper price) will not work even if your investment horizon is for the long term (10 years) investment. If you are an active investor and follow the strict set of investment rules that guide your trading strategy, then getting in and out of shares will be a more regular occurrence.

If you are following our blog from long time, you would have an idea about how much we love JK bank and its business model. In the last 3 years we bought this business twice and sold it off twice from our portfolio. We will buy it again if nothing fundamentally changes and our opinion about its price is cheaper to our expected intrinsic value.

For most investors buying shares is easier and selling is trickier. Why? Maybe you are emotionally attached to it or you are holding in a hope that it will come good soon.

Having a strict rules of when to sell shares will help you mitigate this circumstance which you are facing now and give you a framework to make decisions rationally rather than emotionally whim.

Here are the five reasons why we sell stocks from our portfolio might help you out.

  1. Business performance is declining

If you are looking to buy property and the broker of that property tell you that the furniture in the property is damaged by insects, have leaking roof, no water supply in the building and might have to rebuild the whole property completely. You would not even go to see that property! Well, it is the same when you are looking at the stocks for your portfolio. Declining profits and falling of return on equity are the red flags and there is seriously something wrong with the company.

Bharti shipyard which now is known as Bharti Defence and Infrastructure, four years back its stock price was trading at Rs 150 per share and today at Rs 26. What went wrong with this business? Look for the Bharti shipyard tag and you will find nine posts about them in the last four years or click here and read about it and you will get all the answers.

  1. Intrinsic value is declining

Who wants to hold the stock that is expected to be worth less than what it is today? Not me! As soon as you notice that future value of stock is likely to fall, it’s time to sell.

This is exactly what is happening with JK bank if you look at the bigger picture. The trend of its yearly intrinsic values is in south. Until this trend breaks, it is better to stay far away from it.

  1. Share price has become super expensive

This gets worse when we see that share price of business rises three or four folds to its intrinsic value. What I mean here is that share prices run up by 50% in a year, where its intrinsic values are expected to climb only 15% per year.

The best example to give today is Axis Bank. Its share price had a good run of 39% in the last four months and its expected intrinsic values are expected to rise by only 12% for the next two years. The banks PE ratio stands at almost 12 times and price to book value of almost 1.90 times.

It might look cheaper to many but our experience say that the steam to run further ahead is exhaustive and unless we see any growth in its earnings the stock price will be at sideline for medium term.

  1. Future Growth is less promising

Businesses are dynamic. If you had bought recently any financial product (investments) then in a very small font there is a disclaimer which reads as, “past performance is not a reliable indicator of future performance”. This is also true for all the companies listed on the stock market.

The best examples to find these kind of businesses is in the large caps. Look at the Reliance Industries and Bharti Airtel. Falling profits and declining return on equity will not move up aggressively its intrinsic value.

  1. You have found better opportunity

The last thing you want to do is hold to a stock whose profits are falling, especially if you found a stock that looks set to take off on an impressive growth path.

This is what we did by replacing JK Bank by Indiabulls Housing Finance from our model portfolio. As an investor you want to fill your portfolio with the companies whose business model are easy to understand, whose earnings are rising, debts are minimal and cash flows are positive.

If you are not able to find superior business, don’t be afraid to keep your portfolio in a safety of cash. At the end of the day, it’s better to achieve no return than one off -15%.

Aziz Dodhiya is the chief investment officer for the Valueoperations funds which operates in the Indian market as an FPI (Foreign Portfolio Investor). We do not offer any personal advice to buy or sell any stocks and the views that are shared by Aziz might not incline to your personal investment strategy and this is the reason we advise you to take professional advice before going ahead with our views.