You have referred to trimming the position based on price movement on either side. While that sounds a great strategy, quite difficult to implement in practice When the price going down, there is natural tendency to not book losses and vice-a-versa. How do you cater to this psychological challenge. Do you follow some rule per position e.g. if the price goes down by 5% for a particular position, you would trim it fully whereas some other more volatile stock, you might trim position only if goes down by say 10%ā¦
Hello Hitesh bhai, when a stock falls from all time high and you still believe in the long term story - what are indicators you look for to know that the selling has peaked out and itās time to accumulate ?
I think regarding the strategy I mentioned, once you get the hang of it its not too difficult to implement. The psychological inhibitions can be dealt with by beginning the experiment with small positions and then once you taste success, can be repeated in bigger positions.
For me selling losing positions is not at all a problem. I usually donāt like to see something in my portfolio to be too big a drag. Hence even after a reasonable amount of time, the stock does not move I tend to get out. The level at which trimming is done is something which is purely subjective and I do not have any fiexed formula for it. Usually in positions based on technicals predominantly, I keep a stop loss of 10-15% below my buy price. But there are no rules etched in stone. One thing is definite and that is to get rid of the losers.
Bigger problem is how to deal with the winners. When to sell. There will be oft repeated drawdowns, some quite mysterious without any fathomable reason and those are the times when the temperament is tested. There a combination of fundamentals (predominantly) and technicals (to some extent )
helpsā¦
In my experience, stocks hitting all time high have a lot going for them and most of the times, company tends to keep beating estimates and hence stock price tends to trend up .
But sometimes because of extremely overbought positions, or some other reason, stock prices tend to correct from ATHs. This often happens closer to a major event like results or some other announcement like qip announcement etc. Most of the times stocks in strong uptrend dont correct more than 20% from their ATH. So this is usually the level to watch out for as a first port of call.
In sharp market drawdowns, even these strong stocks with very good business tailwinds will correct. In those times, I watch out for stocks to take support near the 200 dema and preferably consolidate in the region.
Finding out when selling has peaked out is a combination of technicals and a read on market psychology. When the headlines are most negative and stock stops falling its usually a sign that selling has subsided. Other times you watch out for action near the crucial support levels in terms of trendline support, retracement support or some moving avg support. If the fall tends to get arrested nearer to these levels, and stock price tends to reverse, assumption is that selling has subsided and maybe uptrend can begin. Initially in first few days, the reversal is marked by small range movement with low volumes and then once uptrend tends to pick steam, bigger moves with higher volumes come about.
Mostly its about observing stock price actions closely and learning.
Hello Hitesh,
Question with market behavior .Do the markets always behave this way? Corono cases are rising, nations are going for second lockdowns, vaccine in terms of one which has efficacy is still not out. Scientists have a conservative estimate of overcoming in a year. IMF/World bank etc all have bleak outlooks. With all this why is the market moving up? Its looking ahead but ā¦where ā¦ ā¦I see no realistic quick fix . So ignore the market and look into companies which has earnings potential or the potential also evaporates if the market tanks? Are they related? Markets down , so earnings potential down or is that never the case? How do you block all of this information and stay on course?
In the markets, the expected seldom happens. Hence we have to keep an open mind while investing.
As I have re iterated in the past many times, Peter Lynch has summed it up beautifully ( as he has done most stuff related to investing) If you spend more than 13 minutes analyzing economic and market forecasts, youāve wasted 10 minutes.
This one sentence says it all. You can line up 10 economists in a panel and ask them about any impending recession or any other directional move in economy and most of them will not agree to similar views. Now when such eminent guys have diverse views, who are we with our limited knowledge to predict the direction of the economy.
Most of the times markets have already discounted future macros. This I learnt first hand back in 2014. The election outcome was somewhere in May 2014 if I remember correctly. And stock markets breached its 2010 highs of 6338 convincingly and closed well above that level in March 2014, a good 2 months in advance of the outcome of election results. Those who took the hint invested and made big bucks. Those who kept questioning the markets lost out big time.
Another observation I have seen, looking at the markets history over long periods of time and again reading Lynch a lot is that after a major truly global catastrophe happens and markets recover, then they dont stop soon or at expected levels. They tend to go a lot higher. So we must position ourselves accordingly. All that is within our control is to focus on which companies /sectors to invest in. If we put the macro worries away, we can easily focus on the individual companies and investing becomes a lot easier.
Having said that, I still sometimes get swayed by macros and the temporary market meltdowns and often commit mistakes, but I feel these are par for the course and as long as my winners make more money than the losses made by my losers, I should be okay.
@hitesh2710 We said.
On the discount future theory, do you see the possibility of the opposite in the short/mid term.?. I mean companies will perform well. (Combination of low base and revival in economy), but the price will not go anywhere. Because its already there in the current price. I havenāt seen this opposite thing play out in Indian market. ( Not generalizing. But in majority of the cases. Case in point, Asian paints etc. It goes up no matter what)
I think the conventional metrics like EV/EBITA,PE etc are no longer relevant. Due to the continuous QE , stocks might move in only one direction.
Hitesh Bhai. How do you view things when most cos in a sector go capex.
Is there any past indicator here with regard to any sector as a whole spending on capex? and how successful these have been. When companies show good growth over quarters, loans become easily available. Is this an indication with regard to some shift in demand for the products of the sector as a whole?
I am asking this in the light of pharma where most cos in sector have big capex plans
Thatās a great answer!
Like a student I regularly read this thread and understand a little more about stocks every time.
Thank you.
Going through the market capitalizations of top 20 companies from 2009, the PSUs and energy stocks lost out to Private Sector Finance stocks and IT Stocks. The reasoning for finance stocks is due to the fact that India needs a lot of credit to support its growth phase which is indirectly attributed to the young population. Similarly, IT sector stocks - TCS, HCL Technologies, Infosys & Wipro all are in Top 15 companies by market capitalization in India right now. Being in IT, I can understand the benefits of IT - Almost asset light, significant business opportunity and too much of supply in terms of software personnel.
My question to you - In your view, which could be the next IT or Finance sector? This is for mid to long term.
I think we are in a market where there is a lot of sector rotation. First it was pharma, coming out of the correction. Then it was speciality chem, and other sectors. All this while the financials were not participating. And now that the fears of Covid have started receding, banks, NBFC etc have started making big moves.
Similarly, steel, metals, cement etc also seem to be doing quite well. And all this while the high quality long runway kind of companies have been chugging up continuously.
How long this goes on needs to be seen. At some point of time in the rally , fair valuations are crossed and valuations start going into frothy and bubble zones. Thatās when something comes around to prick the bubble.
Whenever most companies in a sector go for major capexes, its usually a sign of an impending top. More so in a sector which is inherently cyclical. (or short cycles, because some people say that at some point of time, most stocks are cyclical, only difference being that the typical cement, sugar, steel etc kind of stocks are short cycles stocks while the fmcg, IT, pharma etc are long cycle stocks. )
When companies which have high ROE, good cash flows and very high revenue visiblility go for a reasonable amount of capex (not very high capex) then I would consider it okay. In fact I would be enthused by that.
Its only when a companies in same sector with typical cyclical characteristics like lumpy earnings over the years, swinging ROEs etc start doing heavy capex, we need to be on our toes to watch out for any signs of trouble.
I like the question. Which sector is going to be the next IT or finance sector. The simple answer is that the same sectors i.e IT and finance sectors are going to be the next IT and finance sectors. Finance more so because in a country like India, I do not see the need for credit going away soon.
If at all I would have to hazard a guess beyond these sectors, I would like to select some speciality chemical companies looking at the strong tailwinds blowing for them. The China plus one theory is I think playing out in full swing. And Indian chemical sector has over the years shown remarkable resilience during tough times and are now gradually getting recognition globally as reliable partners in business. The trend of manufacturing outsourcing chemicals, and speciality chemicals, pharma etc is getting stronger and stronger. In this backdrop we should be looking out for companies with good track records, good promoters, good technological and manufacturing skills and clean balance sheets.
Would you have any views on Transpek results? Is it because the company is choosing to not ramp up utilisation due to fears of covid? Or is it that their major customer contract has been put on hold? If it is the latter, any view when normalcy could return?
Hitesh Ji,
I am currently heavily invested in great Financials and FMCG companies. And want to diversify some funds in Pharma from the long term perspective .
I am in a dilemma , where should I invest now from the long term perspective with good margin of safety .
Laurus labs - Valuation (.PE is still lower than 5 years Average PE and PEG is < 1) is still attractive despite big jump for past few months and there is 10 % correction ā¦
Divis : It has also run considerably , but seems still has lot of steam left considering its further growth potential . Has margin of safety also.
Abbott : Good company. But there is margin of safety at current price
Or any other good company ??
Or any candidate from chemicals side ?
Please share your views that may help in taking decision.
with Vaccine news and US election uncertainty out of the way(hopefully), the recovery theme stocks (bank, auto etc) have done and have caught up. technically how do you see this poised and also fundamentally do you think that there are enough triggers in next 2-3 months for this rally to sustain?
Also what is your view on the pharma/chemical sector from medium term perspective which is taking a breather after the huge run up. do you think under-performance will continue given the outflow from defensives?
I think transpek continues to remain one of those unfortunate companies which keeps getting plagued with issues of one or the other form. Latest being poor results probably due to lower order flows from major customers.
In the current situation, its difficult to figure out when normalcy in its operations can return. Valuationwise, it might be one of the cheaper stocks on some parameters and the management and promoters are also quite good as far as I know.
But problem in investing in such companies is the opportunity cost. And how much you can allocate in such an uncertain en
Currently financials are having a good time and if you are invested, maybe its not a good idea to leave the ride. When something is in an uptrend, idea should be to ride the trend.
But from a business visibility point of view, even if Covid situation were to take a turn for the worse, till the time a vaccine comes around, pharma should do great. The current downmoves/consolidation seems to be suggesting a risk on attitude in the markets and one is not too sure how long this can last.
Coming specifically to the companies you mentioned, Laurus, Divis, and Abbott are all three different types of companies. Divis is a pure play bulk drug player. Laurus is play on a lot of segments of pharma business namely API, formulations, contract manufacturing etc. And Abbott is a great play on domestic pharma theme. So if you are looking to play the pharma, it might be a good idea to combine all three (or similar companies ) to get an exposure to all segments of pharma sector. I will not go into individual company details as valuations is something which one has to try and do on oneās own.
In a market flush with liquidity, even iffy news like the vaccine news has caused sudden run up in the 'recovery" theme stocks. Personally I think these type of companies will take longer than expected to make a comeback. So all these hotels, multiplexes etc type of companies which carry higher risks of acquiring infection might take a longer time to make a comeback. I have never been fond of aviation stocks mainly because of their poor wealth creation record.
I think at some point of time when all the frenzy for the financials and recovery stocks reduces, the more predictable pharma, and speciality chem companies will make a comeback. As of now they remain in sideways/downtrend. For someone who can do good work on the pharma stocks, and has conviction in the sector, this can be a good time to pick up favorite stocks.
Hats off to you Hiteshji for the knowledge you possess and your willingness to share it with all. You are really the pillar of strength for valuepickr.
Wanted your views on two companies Gland Pharma and Fermenta Bio.
When the price going down, there is natural tendency to not book losses and vice-a-versa. How do you cater to this psychological challenge. Do you follow some rule per position e.g. if the price goes down by 5% for a particular position, you would trim it fully whereas some other more volatile stock, you might trim position only if goes down by say 10%ā¦
Hence we have to keep an open mind while investing.