Saturday, January 21, 2012

Cash for Clunkers

Cash for Clunkers is a program that allows one to trade in an old gas guzzler cars in exchange for a new fuel efficient car. Around the time we stepped into the New Year, I decided to introspect into my portfolio and get rid of the gas guzzlers and dud stocks. Those were the stocks that existed because I bought them for no reason. Often times we pick up names of companies that we want to invest in, based on corridor discussions. It sounds very exciting for the first time, the story of how well the company is diversifying or the scorching pace of growth etc. Anticipation of future gains makes us feel very good and proud. This lovely feeling subconsciously motivates us to reach the phone and place a buy order for this great new stock. We give in to this feeling every time we hear about a new stock or a company and we end up with a portfolio of stocks we should not have bought in the first place. This portfolio, I would tend to call a Clunker. The biggest challenge is in getting rid of a clunker portfolio. Selling looser is no easy as it makes you feel wrong. Hence you hold on to it for eternity as you see the value depreciate by, with hopes that one day market will prove you right. This is one big challenge in making money in stock markets. You want to look good in-front of yourself and would never admit to a mistake by selling the looser. Research has proven that we are twice more likely to avoid losses than favour potential gains. To sell a looser is registering a loss and hence we hide behind the hopes of a turnaround. A stock does not become a looser just because it has fallen in value. If the intrinsic value of the business is intact and the stock prices could have fallen for other reasons, it could be time to buy more. Hence I don't believe much in stop loss.

So I went ahead and identified 5 stocks in my clunker portfolio and after days of research I decided that there was not enough reason to hold them. By selling them I not only got out of a losing proposition, I generated cash that I could now put to better use. Given that the markets have corrected quite a bit, I had identified a few stocks with juicy valuations to savour. Selling winners too soon is as responsible as holding on to looser too long, to diminish investing returns. It helps to stick to a simple rule of why you should not buy ? This primarily takes the spotlight away and you tend to ease a bit from illogical decisions. You get to avoid the looser stocks in the first place.

The markets have corrected about 25% in the last one year and while we fish in troubled water for good stocks, my friend reminded me of a great sitting option for people with home loans. Look no further in the stock markets for exciting stocks. The interest rates have peaked and if you are one of those with a home loan, paying 12 or 13% interest, there are no better times to part-pay the outstanding. Most banks have today waived off part-payment charges as was mandated by RBI. You are making your money work for you the best possible way and earning a guaranteed 13% neat return. As they say the best things about life are very simple.