How to Make a Killing by Paying Zero Attention to Demonetisation

Dec 2, 2016

In this issue:
» Demonetisation Hits Manufacturing - Biggest Fall Since March 2013
» After War on Cash, is Gold the next target?
» Round up on Markets
» More...
Rahul Shah, Co-Head of Research

Demonetisation is giving people sleepless nights. Especially for us analysts who have to assess its impact on economic growth and corporate earnings.

The future is anyways not a fixed outcome under normal circumstances. It is a range of possibilities with various likelihoods. It is our job to analyse and predict. And when a potential disrupter like demonetisation gets thrown into the mix, all calculations go for a toss.

Thankfully there's a way out. A technique that pays absolutely no attention to events like demonetisation and still makes a killing in the markets.

We have been using this technique to generate 110% returns in just three years. Meanwhile, the Sensex and the BSE Small-Cap Index have fetched 29% and 86% respectively.

Agreed, three years is still early days for the technique. But it's been used in the US markets too. And the results over a period as long as fifty years have been phenomenal, beating the US benchmark by a factor of 2:1.

As per the technique, all sorts of things would seem important when evaluating stocks. Market share, projected earnings, inflation levels, interest rates, etc. However, these factors are significant only in theory. They turn out to be of little practical use in deciding what price to pay for particular stocks or when to sell them.

Do you agree? Well, you may not, but the evidence is hard to ignore. Pick up a stock price chart of any company over the last ten years and you are bound to see peaks and troughs. Sometimes a stock is priced too high and sometimes it is priced too low.

Therefore, instead of getting lost in all sorts of calculations and trying to predict the future, how about waiting on the sidelines and buying only when the stock falls below a pre-determined buy limit and selling when the stock goes above a pre-determined sell limit?

The magic, it seems, is in being reactive and not proactive. You react to the prices Mr Market offers you. But you do not try to predict those prices. Market prices were unusually low before Modi rode to power in 2014, lower than our pre-determined buy limits for a lot of good companies with strong balance sheets.

We knew we had to react. We duly recommended a handful of companies, making as much as 545%, 176%, and 170% in stocks in one year flat. We knew prices were much lower than historical levels and that, sooner or later, they had to go up.

If not Modi, something else would have made them go up in the medium to long term. If you buy at some point during an environment of low prices, you are always doing the right thing from a long-term perspective.

How is the technique dealing with demonetisation? Well, we're once again reacting and not predicting. If there were to be a fall in the markets, and if we found stocks trading lower than our pre-determined buy limit, we wouldn't hesitate to recommend buys to subscribers. And if prices were to go above our sell limits, we would recommend a sell and keep some cash handy to buy for the next round of low prices. The beauty of this technique is you can use it across macro environments. You only need to keep three things in mind:

  • An individual investor's buy limit has to be based on certain objective parameters such as book value. We think a predetermined price-to-book value incorporating an appropriate margin of safety serves as a good starting point.
  • There should be a definite selling guideline.
  • Last, if not many quality stocks are available at a discount to book value, you should have most of your money in cash. And if quality stocks are available, then you can be more heavily in stocks. But never 100% in either at any point in time.

Our Microcap Millionaires service is using exactly these principles and has been killing it without worrying over issues like demonetisation. There's no reason why you can't either.

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03:15 Chart of the Day

The manufacturing Purchasing Manager's Index data is out for the month of November. The index measures expansion or contraction in the business activity. A reading above 50 indicates expansion. A reading below 50 indicates contraction

The index is down by 3.9% on month on month basis. Biggest fall since March 2013. On an absolute basis, India's Manufacturing PMI now stands at 52.3, down from 54.4 last month when it touched 22 month high levels.

Demonetisation Hits Manufacturing - Biggest Fall Since March 2013

As reported in Business Line, the decline in the PMI index for November is attributable to sudden withdrawal of high-value bank notes. The money crisis hampered production growth. It's still been less than a month, yet various businesses have been feeling the heat of the cash shortage.

While the government has assured that this a temporary phenomenon, the shortage of the currency notes will not be over any time soon. And in that case one may expect further contraction in the PMI index. The impact could be seen in the companies' performance too.

In such uncertain times, one could do well by considering buying the safe stocks. Some of the bluest of blue chips that have been trading at premium valuations could offer buying opportunity during this temporary down cycle of the businesses.

We have a special report on Safe stocks, which could possibly be amongst the best ones to bank on for the long run.


Yesterday, the government issued a clarification with regards to holding of gold. There have been rumours after demonitisation, the centre is preparing ground to seize the personal possessions in the form of the gold including ancestral jewellery possessed by a person. But the center has issued some clarifications over this, giving legitimate owners sigh of relief.

But at the same time, the government also highlighted instruction no. 1916 issued in the year 1994. This stated that gold jewellery and ornaments amounting to 500 gm per married lady, 250 gm per unmarried lady and 100 gm per male member of a family need not be seized. This is even if prima facie, it does not seem to be matching with the income record of the assesse. However, if the assesse holds more quantity of the yellow metal than the suggested limits, but could prove the sources of the same, it would not attract any charges or penalty.

The limits given by the Ministry seems to place a lot of importance on the amount of one's holding. Thus it remains to be seen whether the government acts in a hurry on the gold holdings too. If yes, it could pose a new problem for the black money hoarders who have been spent out of panic to acquire yellow metal after demonetisation. But more than that it could trigger unnecessary panic and lack of trust in the government.


In the meanwhile, after opening on a weak note the benchmark indices have continued to plunge. At the time of writing the BSE Sensex was trading lower by 250 points (down 1%), while NSE Nifty was down 85 points (down 1.06%). Both BSE Small cap and BSE Midcap indices were trading down by 0.9% each.

04:55 Today's Investing Mantra

"Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst).

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Equitymaster requests your view! Post a comment on "How to Make a Killing by Paying Zero Attention to Demonetisation". Click here!

4 Responses to "How to Make a Killing by Paying Zero Attention to Demonetisation"

Ravi Raj Oberoi

Dec 8, 2016

Indian economy has unknown resilience to absorb shocks.The Indian businessman is shrewd and innovative.
I feel the market will bounce back within a period of six months and FIIs will make substantial investments.
In such a scenario,investors will gain buying quality stocks now with due regards to the safety margins.

The market will present trading Oppurtunities in the short term.


Dhir Bhateja

Dec 8, 2016

Modified tread softly for u tread on our dreams



Dec 5, 2016

Very good article. Most of the very successful people I have seen pays almost no attention to what the government is doing. We should pay attention to the things that we can control and keep on improving yourself.



Dec 3, 2016

It is not demonetization,it is just replacing the old notes with new notes.all panic of the people is due to cash shortage in terms of new notes.after three or six months ,every thing will run as and white they travel in hand in hand,as they coming .out from reserve bank,one and the minister must be crazy in stalling black not blocked moneys,which is in the guise of land,real estate,gold and diamonds,dollars,stocks,and in so many models,

Equitymaster requests your view! Post a comment on "How to Make a Killing by Paying Zero Attention to Demonetisation". Click here!
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