PPB Vs Greediness

Over the last few weeks the global equity markets have rallied by over a whooping 30%. This was mainly on account of some decent data releases from US, Obama’s plan to purchase the toxic asset, a weakening dollar (leading to a rise in the commodity prices) and the expectation of the G-20 meet.

The Indian stock markets too have broken the past resistance levels and the Nifty is trading well above 3150. I had already stated in my blog earlier that this pre election rally is going to continue for sometime since those politicians need money for campaign.

However we can not be euphemistic once again and start saying that the index will rise to 4100 or 4500 or … (even higher levels). The stocks we have invested in at around 25-2700 index have rallied more than 35-40% and hence I believe that it’s a good time to go for partial profit booking (PPB). Likes of Tata Steel, Hindalco, DLF, etc have risen by over 40% and I see no harm in partially booking the profits at the current levels.

The biggest problem in retail investors is their market psychology. They are the ones who are least reluctant to sell once the markets are going up, with expectations of further return and tend to hold on to their investments and always sell when the value erosion has already taken place. In India the risk free rate of investment is around 7% p.a. and if my investment has given a return of over 30% in few weeks time, it makes much sense to book the profits.

There is one very simple way to book partial profits. Lets assume you bought 100 shares of company X at Rs 50/share, total investment amounting to Rs 5000. After two weeks time the market price of the share is Rs 75/ share and you are making a profit of Rs 2500 (50% profit). So in order to book the partial profit you can sell only 33 shares of company X, retaining the other 67. (Here 37 = 2500 profit / current price per share). Thus your profit is in your pocket and the initial investment of Rs 5000 is still intact. This will ensure that if the price goes up to Rs 100, you don’t miss that opportunity and if the market goes down from here your investment would not fall too much in value as the case could have being.

Thus start doing PPB instead of being over greedy. As the pic says that the choice is between booking super normal profits or more super normal profits