Art of buying low and selling high

WHICH investor doesn't dream of "buying low and selling high"? But how many end up doing the opposite?

This week we met a Bangalore-based chartered accountant who has managed to beat the equity market.

Meet G.V. Sunder, who expects on an average 50-60 per cent return from the stock market and gets it too! But then he is a long-term investor, though not averse to booking profits quickly when a share appreciates substantially.

An investor in equity from 1993, Mr Sunder concentrates on " good mid-cap stocks", which have shown good performance and pay a decent dividend, "rather than going for frontline stocks like Infosys, Reliance, L & T, Telco, Wipro, HLL or Dr. Reddy's Laboratory. Whenever I choose a stock, I look at its EPS, dividend track record and lower P/E ratio."

In October 1998, when the BSE Sensex was scrapping the bottom, he bought several such mid-cap stocks like Aban Lloyd, Balmer Lawrie, Escorts, Paper Products, Thirmulai Chemicals, Ashok Leyland, Raymonds , Tata Power, Tata Tea and Kotak Mahindra Finance. "When all of them went up substantially during the boom of 1999-2000, I booked good profits in almost all the counters," he says.

For example, he bought Ceat in June 1998 at Rs 21.75, which he sold in August, 1999 at Rs 68.05; Ballarpur Industries at Rs 32.57 in October 1997, and sold at Rs 87.4 two years later; Tata Tea at Rs 268.2 in June 1998 and sold at Rs 520.7 in January 2000, Kesoram Industries in March 1999 at Rs 14.24 and sold seven months later at Rs 55.45; Raymond in August 1998 at Rs 52.15 and sold next June at Rs 105.45 and Tube Investments bought in June 1998 at Rs 30.1 and sold in August 1999 at Rs 78.95.

But his best profits came from the Kotak Mahindra counter which bought at Rs 20.95 in November1998 and sold at a whopping Rs 228.4 in January 2000; and Escorts bought at Rs 78.45 in September 1998 and sold at over 300 per cent profit at Rs 247.5 in February 2000. In the former, of course, he booked over 1000 per cent profit.

"Around the same time, noticing the boom in IT stocks, I applied for almost all IT IPOs. When allotted, I sold them at a good profit after a few days of listing. I never held on to them as I felt they were over-valued. During the boom time, most IT stocks appreciated and gave me very good returns. Some are not even quoted now. But I have made losses in such stocks as Hotel Leela Ventures, Eveready and R.S.Software," says Mr Sunder.

He used the stock market crash following the WTC attack to buy into several good mid-cap stocks.

"Convinced that there is an opportunity in any crisis, I organised a small get together of friends and clients and told them to take a bold step and invest in equity at that point. I requested a former President of the Bangalore Stock Exchange to address the meeting that was held on September 23, 2001, which was a Sunday. Two days earlier, the Sensex touched a low of 2589. On Monday, September 24, the Sensex gained 60 points and started rising. Those who invested then, reaped rich rewards with the Sensex going up to 3700 during March/April of 2002."

He himself bought Himachal Futuristic on September 19, 2001 at Rs 33.6 which he sold in November at Rs 100.1; Engineers India on September 21 at Rs 68.3 and sold at Rs 172.25 in February 2002; Rolta at Rs 54.25 in August 2001 which he sold at Rs 109.95 in February 2002.
Around this time he also bought Aurobindo Pharma at Rs 146, Gammon India at Rs 68.5 and Amararaja Batteries at Rs 64.1, all of which he continues to hold. Mr Sunder is a firm believer that every two-three years there is a boom when the Sensex would go above 4500 points.

"During such times investors should stand away from the crowd and just watch the market. Most of the good stocks bounce back after a crisis or a sudden fall. We should have the courage to pick up good stocks when the market is down. This contrarian approach has always given me good profits."

But he has watched many an investor doing the opposite and lose. He has also seen greed stopping people from booking profits. "After you have picked up stocks at low values, it is important to book profits when they appreciate. Despite suggestions to sell, most of my friends did not sell Infosys during boom time when it was quoting at more than Rs15,000. I don't think Infosys will get similar valuations ever again."

Mr Sunder himself bought Zee Telefilms (face value Rs 10) at Rs 93. "After a year, I sold it at Rs 600, booking a good profit. Later, during the 1999-2000 boom it went up to Rs 20,000 (when a Re 1 share touched Rs 2000) but I have no regrets.

So is it a good time to buy?

"Oh yes. I am sure in 12 to 18 months, the Sensex will go up again; maybe even beyond 4500 points and that is a time I will be selling the stocks I'm holding. I am now acquiring such stocks as Monsanto, Syngenta, Nirma, Indian Hotels, Birla 3M, Moser Baer and Tata Power. I'll wait for one to two years and hope to get 50-60 per cent profit on my purchase price apart from the dividend."

Mr Sunder admits that his being a chartered accountant does make it easier for him to analyse the balance-sheets of companies as also better understand such things as P/E ratio, EPS, dividend yield, and the like. "Normally I look for companies with high EPS and low P/E ratio," he adds.

Another trick, he says, is to look for "decent profits rather than windfalls. I have done just that and benefited. When people are now recommending buying Electrosteel at Rs 300 plus, I have exited and booked excellent profits in this stock. If you see the stock movement over a period of three-five years, good companies have always stood the test of time. That is why investors should not fear or panic when the stock market is going down. Even a bear phase is an opportunity; only at such times can you pick up good shares at low values. But, then, selling is an art, with the timing of the exit being all important."

Touche.

Courtesy: Business Line! Oct. 25, 2003

Some links of Interest:

Profitability @ High Probability
My recent stock pick
How to pick Multibaggers?
Have you seen my other blog?