Saturday, September 13, 2014

'Chaiwalla (Tea Vendor)' Threshold in Equity Investing....

'Chaiwalla' is the hindi translation for the 'Roadside Tea Vendor'

I heard an expert say this on TV.

"When my 'Chaiwalla' starts recommending a stock, I know it is time to get out of Stock Market"

One of the greatest challenges when it comes to Equity Investing is the decision on when to sell you investments and book profits. Wrong timing and you could end up in losses, since a market can come down dramatically in a short time.

Given that I found the observation of the expert very interesting...

Normally this is what happens to the price of a typical stock. Let us call it Ratan Shaw Industries Limited (RSIL)

The price of RSIL is less than 10 rupees per share, the balance sheet is very week, the company is debt laden, sales seem to be declining quarter on quarter and there is doom all around. Then something happens and the stock price starts appreciating stealthily. Company is turning around, but only insiders know. Insiders start increasing their shareholding through creeping acquisition route. Externally the things are still worse. No one is ready to touch the stock even if you give them a bargepole free of cost. However the people in the know have started accumulating the stock. 

The new quarter results are announced. The debts have started coming down and sales is increasing and a few outsiders and bravehearts buy the shares. In the meantime the share price of RSIL has almost doubled in a month. 

Chaiwalla Threshold Diagram
Still you and I are unaware of the existence of this stock. We are still following the Infys and the TCSs of the world. Meanwhile the stock of RSIL has moved to 30, a 200 percent gain in about 4 months. 

The next quarter numbers are announced. The EPS has grown about 30 percent QOQ (Quarter on Quarter) and the share price of RSIL has touched 50 slowly moving to 100 and then 150 in about a year. EPS is growing at 50% per annum compounded. 

This is when CNBC experts notices. When the stock price has touched 200, the expert talks about the strong Balance Sheet and impressive Earnings Growth. Mutual funds start accumulating. The share is now noticed by the Stock exchanges. The experts start accumulating the stock of RSIL in good scale. 

The Stock start appearing in CNBC ticker. The retail investor starts noticing the stock and tentatively starts purchasing. Our retail investor Rajesh purchases 100 shares of RSIL at a price of 200. 

Meanwhile the stock price goes on its relentless upmove. It touches 300, 400, 500.....

It has touched 800. One day Rajesh is sipping tea at the local Chaiwalla with his friend Sujesh.

"I purchased RSIL at 200 and my investment has touched 800 in 6 months. Awesome returns, almost 800% annualized", Rajesh informs Sujesh. Chaiwalla is listening. 

Another week passes. The stock price has touched 1000, PE is 90, overpriced and for the first time in two years, the Sales growth has plateaued. Mutual funds are worried. The price has come down to 950. 

One day two friends, Ajay and Ashish, are sipping Chai in the same Chaiwalla. Ajay has got a recent bonus and is discussing with Ashish on opportunities to invest.

Chaiwalla is helpful. "The other day I heard that RSIL is a good investment opportunity. I have heard many of my customers (!) say that they have made good profit out of RSIL stock."

Friends, this is what I call 'Chaiwalla Threshold'. When your Chaiwalla starts recommending a stock, it is time to sell it and exit. Market may be about enter the bear phase.

Your 'Exit' problem is solved.

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