When should a long-term investor with the view of 5 or 10 years book profit? Should overvaluations be criteria for booking profits? If not what else?
In the current market fall, I had plans to write about the profit booking. At the right time, one of my blog readers shared with me a fascinating question on booking profits in Bajaj Finance.
Hope all well
There is a confusion in my mind for a long time so I thought to bring this to your attention.
The subject is about profit-booking, while on the journey to hold a performing stock for 5 years or 10 years.
The recent example of Bajaj finance which went up to 3700 but later down to 2900. Everyone was aware that Bajaj finance was overvalued at 3700, and still it’s a quality stock.
If a person has decided it to continue to hold it for 6 to 10 years, then he should go for profit booking at 3700 by selling some 25% shares or he shouldn’t touch it at all.
Please let me know if there is any better way to handle the profit booking of overvalued stocks at the same time if we want to hold it for a long time.
It is fascinating, very relevant, and to the point question. Moreover, the question of when to book profit will always exist in the market.
When the market is at its peak, there are more questions about profit booking because it is tough to keep holding the profits.
So I will share some practical viewpoints that will help. I am not Guru, but I am sure the view I share should help you decide on booking profits.
Profit Booking is Different for Everybody
Every individual has a different view on booking profit. That’s why we call it a Market. Someone buys, and others sell.
The view on booking profit also changes from stock to stock as well.
Let me explain what I mean.
So let’s say my view is to book profits. So will I book profits in all my stocks?
Again, there are different ways to book profits.
- Some investors will book profits on profitable investments. Mainly the retail investor.
- Others will balance out profits and loss-making investment to save on the tax: mainly high net worth individuals or HNIs.
- The third type of people will cut the losses. This category is rare in the market, at least in the retail category.
So depending on the market view, sector view, and stock view, you may be booking profit on profitable or loss-making investments.
Now Let’s take the example of Bajaj Finance
We know about Bajaj finance has gone from ₹3700 to ₹3000.
Most of us will agree on the fact it was overvalued at ₹3700.
Is it undervalued at ₹3000?
I know the question is tough to answer because everything is relative but let me rephrase the matter differently.
Bajaj Finance has gone from ₹1500 to ₹3700 in the last couple of years. Did the business double in two years?
So why the stock was overvalued at ₹3700 and not at ₹2700 in the mid of 2018?
So if we consider it to be overvalued at ₹2700 in mid-2018 and we book out to find it moves to ₹3700. Will you be not tempted to buy again at higher levels?
So, I am never of the view that one should book profits because the stock is overvalued. Of course, you should be buying when it is undervalued.
Example: Warren Buffett & Rakesh Jhunjhunwala
Both are marquee investors and hold stocks for a very long time.
Warren Buffett is holding Coca Cola for decades now. Don’t you think it may have been overvalued once in such a long time?
Rakesh Jhunjhunwala is holding Titan for a long time as well. Don’t you think it may have been overvalued once in such a long time?
Don’t you think Titan as over-valued now?
Yes, I know Rakesh Jhunjhunwala sold some part of his investment in Titan but not because he wanted to book out of Titan but because he had a new investment opportunity.
Book Profits with a Future Plan of Action
Is there a better investment opportunity than the current investment?
Booking profit for the sake of it isn’t something I recommend. I am no Guru, but this is how I prefer it to be.
I booked out of Jubilant groups, especially Jubilant Lifescience from my portfolio because I didn’t like the management decision.
But I have not touched my investments in Pidilite since 2016. If you ask me
- Is Pidilite overvalued? There is no doubt about it.
- Will it continue to remain overvalued? I have no clue.
- Can the stock have one bad quarter and half like Page Industries? Very likely.
Still, will you book out of Pidilite Industries? The answer is NO.
I put Pidilite and Page Industries in the same quality, but I booked out of Page Industries around ₹27000 and re-entered around ₹21000.
The view was to re-enter and make sure you dare to re-enter at lower levels.
The critical aspect is planning for the future and booking profits.
There is nothing wrong with booking profits but don’t do it because it is over-valued.
Book profits if you need money or have better investment opportunity.
I will leave you with a couple of examples of true rags to riches story – The investor in Wipro or grandfather’s investment in MRF. They made money not because they were smarter to move in an out of their investment.
Dead people make more money in the market than those who try to outsmart the market. I know it is a generic statement. So don’t apply it on all stocks but one should definitely apply it to selected few stocks.
I believe let the companies make compounding profits and justify overvaluation instead of investor justifying it as overvalued and booking profits.
Do you agree? What are your views about the profit booking? Share them in comments below.
Md Zishan Paya says
Very interesting read, I was completely unaware of such strategy of booking out. Thank you
Shabbir Bhimani says
The pleasure is all mine Zishan.