How Crash Proof is Your Portfolio?

Aug 25, 2015

In this issue:
» Stocks most vulnerable to FII selling
» Biggest jump in the fear index!
» India's macros 2015 v/s 2013
» ...and more!


When it comes down to it...what is the ultimate goal of an investor?

We think a fair response would be to maintain purchasing power. To do so, investors put money in various asset classes, with equities being one of them.

Within equities, investors aim to beat the long-term returns of benchmark indices such as the BSE-Sensex. Why so? Simply because it contains some of India's largest companies. Considering the index has returned an average of 15% to 17% per annum over a long period, it provides a good target to beat. beat these returns, an investor can do two things (or at least, aim to)...

First, have a portfolio of stocks that rises faster than the index. Second, have a portfolio that falls less than the index.

Stock screeners are usually helpful in identifying companies with long-term track records. They can help narrow down a list of companies to further research - companies that have the best chance of beating the index.

That takes care of one side of it. But what about the other -- how can you find companies that will fall less than the broader market? After all, wouldn't it be great to be able to identify the stocks you should avoid...or at least dump at the first signs of trouble?

Well, we've have identified a system that helps you do just that!

The score that matters...

Financial strategist and writer James Montier discovered that what he calls the C-score has the power to predict underperformers. His process involves scoring companies on five separate parameters. The higher the collective score, the more likely the stock will underperform.

It's a simple system... But it does work!

How can we make such a claim? Well, we conducted an internal study, based on Montier's process, of BSE-500 stocks dating back five years.

The aim of our study was to find out how well a portfolio of stocks with low C-scores did vis-a-vis a portfolio with high C-scores. We wanted to test if investing consistently in low C-score stocks would provide better returns than investing in stocks with high C-scores - and, if so, by how much.

The results were encouraging...

The worst 10% of stocks (in terms of C-score) underperformed the top 10% by a massive 13.2% on an annual basis over the five year period.

The results confirmed for us that this tool can provide a nice boost one's portfolio. And, perhaps most valuable, it can help identify stocks to avoid.

You're probably wondering about the parameters involved in Montier's process and how they help weed out such poisonous stocks...

Well, yesterday, we released the "Crash Score" report, which explains Montier's process and parameters in detail. The good news is we've made the report available FREE to all. Do make sure you grab a copy today.

What kind of companies do you tend to avoid in your portfolio? Let us know your comments or share your views in the Equitymaster Club.

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How To Beat A Stock Market Crash... Effortlessly!

The stock markets have been battered.

And ordinary investors have lost lacs of Rupees.

Yet, thanks to this same market crash, a few years down the line, a small group of investors could likely emerge even more wealthier than they were before this crash.

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This will only take a few minutes... But has the potential to impact your wealth for a lifetime.

So click here for full details...

At a time when there is a lot of speculation around the Fed upping interest rates, coupled with news of the crackdown on P-notes by the SEBI as well as India's 'overweight' status in emerging markets - a lot of volatility (as we saw yesterday) is expected.

After all, FIIs have a large role to play in Indian stock markets. They hold a whopping 40% of the non-promoter portion (called free float) of Indian listed companies (on the basis of total market cap). Not surprisingly, their decisions to buy and sell do tend to influence the movement in stocks. If anything, yesterday's crash was a testimony of the same.

We had covered this story earlier this month, in one of the Premium editions of the 5-Minute Wrap up. But considering how yesterday's developments unraveled, we thought it would be a good idea to share the list of stocks that FIIs have been in love with in the year gone by on this platform as well.

What we did was simply take out a list of stocks with the largest difference in FII holding in the quarter ended June 2015 from that of a year ago. Then, we compared the latest FII stake to the overall free float portion. The purpose for this is to only indicate how vulnerable the stocks could be to any rapid change in FII holding.

Here's the list we came up with...Please note that these have been ranked by the absolute change in FII holding since last year. And mind you, this could include FCCB conversions as well. Also do note that the 'FII/free float' column consists of 'Foreign financial institutions', 'Foreign institutional investors' and 'Foreign corporate bodies'.

Are these stocks most vulnerable to FII sentiments?
No.Company NameChange in FII holding* (YoY; in %)FII/ Free float (in %)
1Marksans Pharma Ltd.14.328
2Just Dial Ltd.13.258
3Eveready Industries (India) Ltd.13.129
4Bharti Infratel Ltd.12.788
5Kiri Industries Ltd.11.733
6J Kumar Infraproject Ltd.11.544
7Credit Analysis And Research Ltd.11.263
8Speciality Restaurants Ltd.9.736
9Noida Toll Bridge Company Ltd.9.121
10Mangalam Cement Ltd.8.614
11Ashoka Buildcon Ltd.7.925
12Siti Cable Network Ltd.7.337
13Poly Medicure Ltd.7.115
14Motilal Oswal Financial Services Ltd.7.145
15Kolte Patil Developers Ltd.7.046
Data source: ACE Equity, Equitymaster research; *from a year ago

We would like to add here that FII movement may not necessarily have to do with changes in stock fundamentals. Volatile movement in stocks, if any, due to FII sell off would be short term in nature. Investors would do well not to panic in such situations

 Chart of the day
When identifying the most vulnerable stocks to throw out of your portfolio, never forget that such market corrections are often the best time to buy good quality stocks. Warren Buffett is famous for buying when others are fearful. So should you. The chart below clearly brings out this logic. Yesterday's crash was the biggest in terms of a one-day movement in the so called 'fear index' i.e. the India VIX. This measure of volatility tells you why Buffett is right.

Time to be greedy when others are fearful?

You might notice that the biggest one day jump in the India VIX before yesterday happened in August 2013. A casual glance at this 5-year Sensex chart shows us that August 2013 was a great time to buy stocks! Also, the year 2011 features four such 'fearful days'. As we all know, the market bottomed out at the end of that year. The conclusion is simple. Protect your portfolio from bad stocks (as we have stated above) but don't be afraid of a market crash like the one we saw yesterday. This is usually a great time to start buying good quality businesses.

Why do we say this? You see in the long term, there's only one thing that moves stock prices. That is earnings growth. However, in the short term, all sorts of things can move markets. Today it is the Chinese economy. Tomorrow, it could be a rate hike by the US Fed. The simple reality of the markets is that such events never end. There will always be something to worry about. One such fear is about the Indian currency. The meltdown witnessed in 2013 is still fresh in the minds of investors. However, the economy is not in the same situation as it was back then.

As the RBI governor Raghuram Rajan stated yesterday, India has sufficient forex reserves to guard itself against a currency crash. The economy too is in recovery mode. Inflation (excluding food) is more or less under control. Due to the crash in global commodity prices, the current account deficit (CAD) is also not a big concern. Thus, from a macroeconomic point of view, India is not in any serious trouble. It's important right now that the government does not miss out on the chance to implement tough reforms to get growth back on track.

At the time of writing, Indian markets had given up their early gains and were trading in the red. The Sensex was trading lower by about 350 points. Amongst sectoral indices, stocks from the capital goods, IT and pharma spaces were least favored, while those from the banking and energy spaces were in demand. Mid and smallcap stocks were trading quite weak with their respective indices trading lower by about 1.6% and 2.7% respectively.

 Today's investing mantra
"I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years." - Warren Buffett.

Publisher's Note: Vivek Kaul, the India Editor of the Daily Reckoning, just made a bold call - Real Estate priced are headed for a fall. Well, if you are someone who is looking to buy real estate, or is just interested in the space, I recommend you read Vivek's detailed views in his just published report "The (In)Complete Guide To Real Estate". To claim your copy of this Free Report, please click here...

This edition of The 5 Minute WrapUp is authored by Devanshu Sampat (Research Analyst).

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Equitymaster requests your view! Post a comment on "How Crash Proof is Your Portfolio?". Click here!

2 Responses to "How Crash Proof is Your Portfolio?"

krishnan vc

Aug 29, 2015

I have always respected your thoghts and I really appreciate your sequence of articles on the study of shares. I really liked it. If you are linked with Bill Boner, let me tell you, his thoghts are very unlike an economist on a payroll. I really enjoy his articles.



Aug 25, 2015


Crash Score is a Good Method.
If EQM also gives Crash-Score, in its Research Reports, for each stock, ( You can automate it, centrally), it will benefit your Customers.

Like (2)
Equitymaster requests your view! Post a comment on "How Crash Proof is Your Portfolio?". Click here!
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