Deep dive into the river
The primary objective of investing in stocks is to make decent returns—returns that are fairly attractive when compared to bank deposits. We do not want to keep our money idle even for a day. Because every other guy in the street is making money in the stock market—easy money that too, without any monumental effort. We want to be there at any cost, to feel the excitement at least. We decide to jump into the river—shall I call it the ocean? —without knowing the basics of swimming.
Euphoria, excitement, luck
There is what is known as beginner’s luck. So, when you put your hard-earned money to test—based on the noise created on television channels, seeking expert advice from friends/relatives, and doing your own research—you tend to buy stocks with low Price-Earnings Ratio, fat book value, and available at a fair price (according to you) and usually from the small-cap space which are quoting below INR 100. To spread the risk, you buy a basket of say half a dozen stocks pouring the entire savings into the well within no time. In a rising market, as the saying goes ‘‘every idiot can make money’. Aided by luck, one or two of the invested stocks will touch the sky and your investment tends to double within no time—despite the laggards that do not seem to wake up from deep slumber. Every morning you tend to look at the screen with a winning smile and begin to build castles in the air. Before you could think of buying a new vehicle with the paper profits, the merciless Market gets brutally crushed by forces over which you do not seem to have any control. The prices crash slowly or suddenly—it does not make any difference since you are in no mood to leave the arena with a loss—and the rosy paper money melts down under your own nose. You remain paralyzed for a painfully long time and the shock begins to work on your nerves. When the pain becomes unbearable, you exit after losing your pant and shirt.
Doom and gloom
When you look around, almost everyone seems to have a similar sordid story to tell. If everyone is losing who is making money is the moot question. Obviously, those who have the knowledge, skills, and experience to understand the nuances of the Market. The experts always say: spread your risk, do not keep all eggs in one basket—the age-old wisdom that does not seem to work in your case. In hindsight, when you look back you are certain to find that one stock has definitely made rapid strides ahead of the pack—offering mouth-watering returns. You never booked the profits, expecting a further rise. Other stocks proved to be duds. All in all, to cut short a long argument, only one horse and several donkeys in the portfolio. The story is the same in almost all cases. Some stocks move very fast, some other stocks linger at a slow pace; many others go down the drain without a trace. Is there any alternative to arrest this trend?
Single stock betting
Yes, concentrated investing is a perilous game, the oft-cited appropriate menu for the experienced souls. But it can be a good bet, especially in situations where the resources are limited. To achieve success, you need to gain a grip on the basics:
v Volume: Look for stocks with rising volumes. Look for stocks that exhibit a lot of momentum—stocks that become topics for the dinner table.
v Price: Look for stocks that have a lot of price momentum as well. Stocks that seem to register a steady rise in price over a 5-day/10-day cycle
v Delivery: look for stocks that are seeking a lot of action in terms of delivery. If the delivery percentage is rising along with momentum in terms of volumes and price action—keep a vigil over those stocks
v Beaten down badly: Every expert on the street is giving a negative picture? Every television channel is advising you not to touch those stocks. Identify those stocks and keep them on the radar screen—to pick those fallen angels. Some examples should clear the fog
v Example: Stocks like RBL Bank Tanla Platforms, Persistent Systems, PFC, and NMDC have been at the receiving end of the stick for a long time. There was no soul on earth recommending those stocks. RBL has fallen to INR 80 levels, Persistent has fallen to 3200 levels, PFC was lying at 100, Tanla fell to 550 levels NMDC was a forgotten story.
How to achieve success?
Did you ever clean up the books completely? I mean, selling every stock in the portfolio and marrying the beaten down, fallen angels, putting all eggs in one basket? When a stock reaches the maximum point of pessimism, as Sir John Templeton did, if you have the courage to liquidate your entire portfolio and bought the fallen angle in truckloads, and wait for a rebound patiently—not only your losses will be recouped, you will be rushing back to the bank with a winning smile. All the above-cited stocks have recovered sharply within a 30—60-day span. RBL rose from 80 to 150; Tanla rose to 900; Persistent crossed 4000 effortlessly; PFC rose to 140. (caveat: the chosen stock should have good fundamentals, fallen out of favour due to the negative sentiment over some bad news like in the case of Divi’s Labs—interestingly LIC has been buying this in truckloads in recent times)
Any current example that meets the criteria?
Yes, excellent stocks like LTMindtree, Mphasis, Mastek, and Sonata have fallen out of favor. Every analyst is talking about doom and gloom in the software sector. Have they reached the point of maximum pessimism? Difficult to say, but you can safely liquidate your entire portfolio—sit on cash, pick these fallen angels slowly in lots of say 10,20, or 50 depending on your appetite, and wait for the rebound within a 6-monthly span. I am sure, the tide will turn and bring in rosy returns
Alternatively, if you have limited resources say INR 2 to 5 lakhs, momentum investing should be your cup of tea. Let me take two recent examples. IRFC and Yes Bank. IRFC was showing all signs of momentum from the INR 17 level. Volumes were rising, price action was positive daily it was topping the volume charts; fundamentals were good—zero NPAs, tax-free status loans to the Railway stocks enjoying monopoly status, etc. If you had bought say 20 or 30K in one go, liquidating the entire portfolio consisting of a dozen stocks with varying degrees of success, you could have reaped a rich harvest. Why go that far? The stock in the news, YES BANK could be a potential winner in the near future. The volumes are humongous. The price action is excellent. Volume topper currently. A lot of hedge funds playing the game excitedly. Can you play the one-up game against the street and win? Yes, possible. Certainly achievable. For that, you need to pool all your resources and play the game patiently buying in lots of 50, 100, or 200 in a 5-hour span daily. After buying say 2000/3000 you take a pause, and look back if the price is rising or falling; if it rises by 50 paise, you begin to sell and get back your entire money. At every fall you should have the money ready to buy small lots; and whenever the price action picks up, you need to exit and sit on cash. The primary goal should be to make money by playing on price and volume action and get back your money without getting dented. If you remain happy with small gains on a daily basis, like a typical hedge fund, you can stay in the game for a long, long time—making decent money all the while.