A Safe Stock Portfolio for These Uncertain Times - The 5 Minute WrapUp by Equitymaster
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A Safe Stock Portfolio for These Uncertain Times

Dec 12, 2018

Sarvajeet Bodas, Research analyst, The 5 Minute Wrapup

October was one of the scariest months for the stock market in 2018.

Why am I writing about October in December?

October has some scary history behind it. In the US, there was the great crash of October 1929 (Black Tuesday) and the 23% one-day crash of October 1987 (Black Monday).

In simple words, stocks tend to fall during October... more than any other month.

This October, the BSE-Sensex fell about 7%. There was a much deeper correction in the mid and small cap space.

Well, after the market correction in October, Kunal Thanvi, Girish Shetty, and I thought about building a mock safe stock portfolio.


But this wouldn't be just any ordinary portfolio. We wanted to build a portfolio that could withstand any correction.

A portfolio which could give investors a peaceful night's sleep.

But how did we do this exactly?

First, we gave higher weightage to large-cap stocks compared to mid and small caps.

Second, we kept our overall allocation to blue-chip companies quite high.

Make no mistake, we love small and mid cap universe. These are the stocks which have the potential to give outsized returns.

But blue-chip stocks dominated our portfolios.

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Why?

It was more about stability, safety, and a long track record of proven execution.

Blue-chip companies are leaders in their respective industries.

Stocks of such companies also pay dividends consistently.

During difficult economic conditions, investors turn to these companies because of their secure business models.

So what did we discover?

Among the large-cap companies we selected, there was a common theme...

  • The businesses were easy to understand.
  • The business models were reasonably predictable.
  • The businesses generated a lot of cash flow consistently.
  • They were run by good management teams.

What about growth?

Well, we had a simple filter.

We selected companies that could grow more than India's GDP growth.

We were also looking for companies that are increasing market share within their respective industries.

In short, we were looking for the safe and steady performers.

But here's something interesting...

This is how Tanushree selects safe stocks for her StockSelect subscribers.

For Tanushree it's the quality of the business (reflected in financials) and management (reflected in shareholder friendly behaviour) that tells her if a stock is safe or not.

And one more thing...

Tanushree likes to recommend businesses with these qualities only when they are available at attractive valuations.

That's because, she is a firm believer in safe stock investing.

You see, she has mastered the art of recommending safe blue-chip companies over the years.

She strongly believes the key to making money is to not lose it in the first place.

If the margin of safety in a stock is not high enough, she doesn't recommend it. As simple as that.

This principle is the cornerstone of the 74% success rate of StockSelect.

With an uncertain macro and domestic environment, I believe safe stocks can protect the downside while providing steady growth as well.

I will constantly evaluate this portfolio in the coming months and keep you informed.

In the meantime, I recommend Tanushree's special report on safe stocks - 7 Stocks To Profit From This Market Crash.

Safe Investing!

Chart of the Day

Talking about safety and stability, I wanted to check how the BSE-Sensex performed compared to BSE-Midcap and BSE Smallcap during downturns.

Here's the result.

Large-Cap Index Outperformed in the Downturn

The starting point of this exercise was the economic downturn of 2008.

During this time, the BSE-Sensex was down 38% compared to -54% and -59% of BSE-Mid and BSE-Small index respectively.

Similarly, during the period of 'policy paralysis' of 2011-12, the large-cap index outperformed both the indices.

FY16 was an exception where the large-cap index underperformed.

Nevertheless, during the current calendar year, the BSE-Sensex outperformed by a wide margin and is currently giving a positive return of 6% compared to -17% and -27% of BSE-Mid and BSE-Small indices respectively.

Clearly, in the face of such volatility, you need a balance of growth and safety. Safe stocks will offer you that safety.

To get started, I recommend Tanushree's special report - 7 Stocks To Profit From This Market Crash.

If you are a StockSelect subscriber, you can read the report here.

If you want to access to this special report, all you need to do is sign up here.

Regards,
Sarvajeet Bodas
Sarvajeet Bodas
Research Analyst, Smart Money Secrets

PS: Tanushree Banerjee is Equitymaster's co-head of research and editor of StockSelect. She has a long and illustrious track record of picking safe stocks. For over 16 years, StockSelect subscribers have received safe stock recommendations that delivered double and triple digit gains. You can receive Tanushree's safe stock recommendations by signing up here.

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