11.5 · Monitoring & selling¶

Why this matters: buying gets all the attention; selling makes most of the difference. The three ways to lose money after a good purchase are to hold through a broken thesis, to sell a winner because it went up, and to average into a loser because it went down. A monitoring routine tied to the memo's thesis-breakers, and pre-written sell rules, are the defence. This lesson also covers the Indian tax rules that shape when you sell — verified as of September 2026.

Learning objectives — after this lesson you can:

Run a quarterly thesis review against the memo's KPIs and thesis-breakers in an hour.
Apply the four sell reasons (thesis broken, valuation full, better opportunity, position too large) and distinguish them from noise.
Decide between averaging down and catching a knife using the thesis, not the price.
State the current Indian tax treatment of equity gains (STCG, LTCG, STT), the ₹1.25 lakh exemption, and use tax-loss harvesting correctly.

Prerequisites: 11.3 Writing an investment memo, 06.8 Margin of safety · Time: ~60 min

1. The quarterly review¶

After each result (Kaveri: May, Aug, Nov, Feb), fill the update template (casebook 03-quarterly-update.md):

Section	Content	Time
Results vs expectations	Revenue, margin, PAT, and the memo's 3–5 KPIs: expected vs actual, with the delta	15 min
Concall	Guidance changes; say-do row added; questions dodged; new disclosures or withdrawals	20 min
Thesis-breaker check	Each breaker: green / amber / red, with the evidence	10 min
Valuation now	Price vs bear/base/weighted/bull; what the price now implies; whether scenario probabilities should move	10 min
Action	Hold / add / trim / exit, with the reason in two lines; journal entry if not "hold"	5 min

Rules: review every holding every quarter, including the ones going well; update the say-do table before reading the stock price reaction; change probabilities only for evidence, not for price moves; and record the "no action" decisions — they are decisions.

Kaveri's monitoring list from the memo: segment revenue, EBITDA margin, receivable days (half-yearly balance sheet; ask on the call if the KPI stays withdrawn), provisioning, Hosur utilisation, pledge (SAST filings — continuous), RPT share (annual), auditor's report (annual).

2. When to sell¶

Reason	Test	Typical error
1. Thesis broken	A thesis-breaker fired, or the variant perception is refuted by evidence (not by price)	Waiting "for a bounce"; redefining the thesis to fit the new facts
2. Valuation full	Price at or above the bull case, or the price-implied expectations are ones you would not underwrite; the expected return from here is below your hurdle	Selling at the base-case value out of habit (leaving the bull case); or never selling because "it's a compounder"
3. Better opportunity	Another idea offers materially higher expected return per unit of risk, and capital is the constraint	Churning for small differences; ignoring taxes and impact costs
4. Position too large	The position has grown beyond the size the current risk justifies (a winner now 15% of the portfolio with a wider distribution than at entry)	Letting winners run without re-underwriting; trimming purely on a percentage rule

Not reasons to sell: the price fell; the price rose; someone on television said so; a quarter missed with the thesis intact; you are bored. Not reasons to hold: it is below your cost (cost is irrelevant to value); "it will come back"; taxes (a reason to time a sale, rarely to avoid one).

Selling is re-underwriting: the question is always "would I buy this today at this price with what I now know?" If no, and the answer is not "hold for a specific dated catalyst", sell.

3. Averaging down vs catching knives¶

The price fell 30%. Add, hold or sell? The price contains no information about which; the reason does.

If the fall is because…	And your check shows…	Action
Market/sector sell-off; thesis untouched	KPIs on track; no breaker fired	Add — the margin of safety just widened
A quarter missed on something the thesis anticipated (timing)	KPIs within the bear-case range but improving	Hold; add only if the price is below the bear-adjusted entry
A quarter missed on the thesis variable (Kaveri: receivable days up again)	Breaker amber; probabilities shift toward bear	Hold, do not add; re-run the weighted value; sell if the new weighted value is below price
A thesis-breaker fired (auditor qualification; pledge invocation; regulatory action)	Red	Sell — the distribution has changed, and averaging into a broken thesis is how small losses become total ones
You cannot tell why	—	Do the work before any action; if it cannot be done within the review, reduce

The asymmetry: a stock down 50% needs +100% to recover; the base rate for "broken thesis" stocks recovering is poor; the base rate for "sector sell-off with thesis intact" recovering is good. Averaging down is only ever justified by the second kind, and the way to know which kind you have is the memo.

4. Trimming and rebalancing¶

A winner that has doubled is a different position: larger weight, higher price, narrower margin, often a wider distribution (more of the value is now in the bull case). Re-underwrite: compute the expected return and asymmetry from the current price (06.8 §3) and size to that — which usually means trimming to the position size the new asymmetry justifies, not selling out. Set the rule in advance (e.g., re-size whenever a position exceeds 1.5× its target weight) so that the decision is not made under the glow of a gain. Taxes and impact costs are inputs to the timing, not to the decision.

5. Indian taxation of equity gains (as of September 2026)¶

Item	Rule	Notes
Short-term capital gains (listed equity/equity MFs held ≤ 12 months, STT paid)	20% (plus surcharge and cess)	Raised from 15% in the July 2024 Budget (Business Standard)
Long-term capital gains (held > 12 months, STT paid)	12.5% on gains above ₹1.25 lakh per financial year	Raised from 10% / ₹1 lakh in July 2024; no indexation for listed equity (Income Tax Dept; Bajaj Finserv summary)
Grandfathering	For shares bought before 1-Feb-2018, cost is the higher of actual cost or the 31-Jan-2018 price	A legacy of the 2018 reintroduction of LTCG
Securities transaction tax (STT)	On delivery equity: 0.1% on both buy and sell; on F&O: rates raised in 2024 (verify current)	Not creditable against capital-gains tax; deductible for business income
Dividends	Taxed at slab rates in the shareholder's hands (since FY21); TDS at 10% above ₹10,000 (verify threshold)	Buyback proceeds also taxed as dividend income in the shareholder's hands since Oct-2024 (verify)
Set-off and carry-forward	Short-term losses set off against STCG and LTCG; long-term losses only against LTCG; unabsorbed losses carried forward 8 years (return filed on time)	The basis for tax-loss harvesting
F&O income	Non-speculative business income, taxed at slab rates; expenses deductible; audit thresholds apply	Separate from capital gains (11.7)
Income-tax Act, 2025	In force from 1-Apr-2026; replaces the 1961 Act with renumbered sections and "tax year" terminology; rates unchanged for FY27 (Bajaj Finserv)	Verify section references when reading tax material

Verify all of the above against the Income Tax Department's site and the current Finance Act before acting; rates changed in 2018, 2024 and could change again.

Practical consequences:

The 12-month line matters: a sale at 11 months pays 20%; at 13 months, 12.5% — a 37.5% lower rate on the same gain. If a sell decision is made near the boundary and the thesis is not broken, waiting can be worth it; if the thesis is broken, the tax saving is rarely worth the risk.
Tax-loss harvesting: realise losses to offset gains in the same year (short-term losses are the most flexible); the ₹1.25 lakh LTCG exemption can be "used" each year by realising gains up to it. Do not let harvesting drive the investment decision — buying back a stock you would not otherwise own is a cost, not a saving.
Trading vs investing: frequent buying and selling can lead the tax authorities to treat gains as business income; a long-term investor with a documented process is on firm ground.

6. The exit journal and post-mortem¶

Every sell (and every decision not to sell after a breaker fires) gets a journal entry; every closed position gets a post-mortem (casebook 05-post-mortem.md): what was expected vs what happened; which scenario played out; process vs luck; what was knowable; one process change. Post-mortems on winners are as important as on losers — a winner for the wrong reason is a process failure that got paid.

Trader's lens

Thesis-breakers are stops on facts, not on price. A trader's stop is a price because the position's edge is priced; an investor's stop is an event because the edge is a belief about the business. The discipline is the same — set it before entry, honour it without renegotiation — and so is the failure mode: moving the stop to avoid taking the loss.

India notes

Half-yearly balance sheets (LODR Reg 33) mean receivable-days monitoring is semi-annual unless management discloses quarterly; ask on the call.
SAST pledge filings and PIT insider-trade disclosures are continuous — set exchange alerts for holdings.
Tax: capital gains are computed per transaction using FIFO within a demat account for identical shares; brokers' capital-gains statements are the practical record.

Common mistakes

Selling on price moves rather than on the memo.
Holding a broken thesis because of cost basis or taxes.
Averaging down without re-running the valuation and the breakers.
Never trimming winners and letting one name become the portfolio.
Letting tax-loss harvesting drive stock selection.
No post-mortems on winners.

Key terms¶

Term	Meaning
Quarterly review	The structured update of the thesis after each result
Say-do table	Guidance vs delivery record
Thesis-breaker	Pre-set observable outcome that triggers exit
Re-underwriting	Deciding whether you would buy the position today at this price with current knowledge
Averaging down	Buying more after a fall — justified only with the thesis intact
STCG / LTCG	Short-/long-term capital gains: ≤ 12 / > 12 months for listed equity
STT	Securities transaction tax
Grandfathering	Cost step-up to the 31-Jan-2018 price for pre-2018 holdings
Tax-loss harvesting	Realising losses to offset taxable gains
Post-mortem	Structured review of a closed position: expectations, outcome, process, lessons

Check your understanding¶

Kaveri's Q2 FY27 results show revenue +9%, margin 13.2%, and the H1 balance sheet shows receivable days of 101. You hold a 4% position bought at ₹260. What is the review outcome?

Answer

Breaker 1 (receivable days < 80) is red; growth below the base path; margin below. Probabilities shift toward bear (say 40/45/15 → weighted ≈ ₹274). At a price near ₹260 the position is around fair value with a worsening distribution: hold, do not add; if a further quarter confirms, exit. The decision is on the KPI, not the price.

A holding is up 120% in 14 months and is now 12% of the portfolio; your updated bull case is 10% above the price. Action?

Answer

Re-underwrite from the current price: expected return is low and asymmetry poor; the position has grown past its risk-justified size. Trim to the size the new distribution supports (likely 3–5%) — the gain is long-term (12.5%), so tax is not a reason to delay.

Compute the tax on a ₹4 lakh LTCG and a ₹2 lakh STCG in the same year (ignore surcharge/cess).

Answer

LTCG: (4.00 − 1.25) × 12.5% = ₹34,375. STCG: 2.00 × 20% = ₹40,000. Total ₹74,375. Short-term losses, if any, would offset the STCG first.

Why is "it's below my cost" not a reason to hold?

Answer

Cost is a sunk fact about the past; value and expected return depend only on the future cash flows and the current price. The only question is whether the position would be bought today; the cost basis matters solely for tax timing.

Go deeper¶

Income Tax Department, Capital Gains and Tax on short-term capital gains pages (incometaxindia.gov.in) — the primary source; re-read each budget.
Howard Marks, "Selling Out" (Oaktree memo, 2022) — the four reasons and the non-reasons.
Daniel Kahneman, Thinking, Fast and Slow — the disposition effect and sunk costs (11.6).
The casebook's 03-quarterly-update.md and 05-post-mortem.md templates.

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