Three weeks ago, one of my largest investments was under threat. I have a minority stake in a privately held education business, whose flagship centre we had to close because of a Supreme Court ruling regarding land-use in Delhi.
The day before we closed, I handed over a cheque to the commercial manager of the business, saying, "You may be needing some funds." Luckily, we had to remain closed for only four days, as the Supreme Court ruled that we could function at least till January 2007, by when the Delhi Development Authority, plans to unveil its new Master Plan for the capital city.
But the Supreme Court could have ordered us to remain shut, in which case we would have lost a large chunk of our business while we looked for another place. This would have hit our bottomline, and funds would have been required to set up a new centre. Which is why my cheque may have been useful.
At the same time, my cheque was a testimony of faith in the management of this company, and of its business strategy. In effect, I was saying - I believe this company has a future; short-term setbacks will be overcome.
There is a parallel to this in managing a portfolio of publicly traded shares. If there is an unfortunate development in the business of a company, it is important to evaluate whether this is going to affect the company's long-term future, or merely put pressure on the bottomline for a few quarters.
Bad news will typically bring down the share price, so if you think that the company's long-term prospects are not affected, it has suddenly become a more attractive investment. Remember that a share is basically a claim on the future profits of a company. This strategy is called "buying to the sound of cannons".
If you were already holding shares of the company, a fall in the share price would also mean that your holding is now a smaller percentage of your total portfolio. Adding to your holding would bring this percentage back in line.
Correspondingly, when a sudden spurt of interest in a company causes its price to surge, you need to relook at it. For over two years now, I have been invested in a medium-sized software company called KPIT Cummins Infosystems.
As its performance has improved, I have continuously raised my price target on the stock; this quarter, it was Rs 630. On 2 and 3 November, there was unprecedented buying in KPIT, taking it to Rs 650. This was a trigger to take some profits, and I sold about 25 per cent of my KPIT holding.
This decision was made easier by one of my rules for myself - to restrict the value of any one stock, I hold it to less than 10 per cent of my total portfolio. The new highs meant that my holding in KPIT had now crossed this level. I could, of course, have cleared my entire KPIT holding, but I believe the company has a great deal of upside.
Also, if the share continued to surge, I would kick myself; thirdly, at these index levels, there is a shortage of other attractive stocks.
At the time of writing, KPIT has slipped to about Rs 600. If the stock goes down further, I will certainly be looking at buying some more - it would be under-priced again, and I would like to take my holding back to 10 per cent. If, on the other hand, it crosses Rs 650, it will make sense for me to trim some more of my holding, to hold to my 10 per cent cap, and, of course, to cash in on an over-valuation.
In a privately held company, one cannot buy and sell stock with the same ease, which is one of the reasons why promoters of successful companies go public - this allows them to cash in on their profits from nurturing a good investment, while diversifying their portfolio for ongoing financial stability.
Private or public - balance is key in investing.
The author is an investment advisor to a select group of clients.
