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"Start Trading to Protect Your Portfolio from the Next Crash"

Jun 7, 2016

In this issue:
» PSUs to revive the Indian capex cycle?
» Was today Rajan's last monetary policy?
» Today's market update
» ...and more!
00:00
Devanshu Sampat, Research analyst

Dear Readers...

Today we have guest editor Asad Dossani from our trading franchise Daily Profit Hunter to share his views on the importance of diversification, especially at a time when the global pressures are high. Asad discusses some of the ways investors can get an edge over others by diversifying not only within equities but also across asset classes.

Over to Asad...

**********************************************

Asad Dosani, Editor, Profit Hunter


Don't put all your eggs in one basket. That is investing rule number one. For most investors, diversification means allocating your capital across different stocks.

While this is beneficial, its effectiveness is limited. You may be protected from the risk of one stock going bust. But you're not protected from the entire market going bust.

Consider the following statistic: On average, four out of five stocks fall on days when the overall market falls. If the market crashes, you'll almost surely lose money. And no matter how diversified your stock portfolio is, one crisis can wipe you out.

But there is a way out. You can take diversification to the next level. For example, you can allocate capital to different asset classes such as commodities. Or you can allocate to different investment or trading strategies.

Suppose you allocate a portion of your portfolio to trading. And you can keep this amount small to start. How could this help you?

First, you can improve your returns. You can expect to make a higher return on your trading capital compared with your long term portfolio. Our trading strategies expect to make returns of 20-25% on capital per year. Of course, trading does require more effort. But we can help you with that.

Second, you can reduce your risk. Allocating capital to a trading strategy is a great diversification tool. This is because most trading strategies are designed to make money regardless of the overall market direction. In a bear market, traders can make money by taking short positions.

Now this is real diversification! Suppose the market crashes and your stock portfolio tanks. Your trading strategy's profits can soften the blow.

The most effective trading strategies for diversification are long-short strategies. Because such strategies make money regardless of market direction, take both and long short positions, the returns have a low correlation with the overall market. And this is how you can protect your portfolio from the next crash.

Now I don't want to give you the impression that trading is low risk. It isn't. On its own, it's riskier than long-term investing. Of course, you are compensated with higher expected returns.

But hopefully I've convinced you that this isn't how you should think about risk. What matters is the risk across your portfolio, not the risk of the individual components. This is why we diversify in the first place.

Here's the truth: A market crash is coming. I don't know when or why. But I do know that it will happen. All markets go through cycles and crashes.

Before that crash occurs, make sure your portfolio is protected. Start trading to protect your portfolio from the next crash.

Do you want to add trading to your portfolio? Let us know your comments or share your views in the Equitymaster Club.

02:20

As expected, RBI governor Raghuram Rajan kept all key interest unchanged today. All eyes are clearly on the progress of the monsoon. Inflation has edged up recently due to the rise in food prices. Good rains will lead to a good cropping season. A good harvest will stop the rise in food prices, hopefully before the end of the year. That's the theory at least.

If food inflation is checked, then in all probability the CPI will also come under control. The RBI hinted that in such a situation there is a chance for further rate cuts. However, the RBI does not believe that inflation has been killed. The governor warned that there were upside risks to the RBI's 5% inflation target for January 2017.

While this policy did not have much to in terms of eyeball grabbing headlines, it was still significant. This will be the last monetary policy in which the governor called the shots. From August onwards, monetary policy in India will be decided by a six-member monetary policy committee (MPC). Also, it will be a matter of great interest if the August policy meeting would be the last one for governor Rajan. His tenure expires in September and there is still no official announcement from the government if he will get an extension or not.


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03:50 Chart of the Day

PSUs have been in the limelight off late. With their massive cash piles, it seems the government is keen on them becoming good capital allocators. Either they put it to use or they pay it out. For the latter, there have been a slew of developments in recent times, which include the possibility of buybacks, or large dividend payouts.

This development is also likely to lead PSUs to increase their investment plans. As per Mint, the top ten state run PSUs are likely to invest Rs 1.35 trillion as capital expenditure in FY17; this amount is higher by 11% YoY. The average annual investment for this lot stood at Rs 1.19 trillion in the preceding three years.

Today's chart of day shows the trend in capex of the major PSUs in recent times.

PSUs to Lead the Capex Revival Effort?


However, what needs to be kept in mind is that a large part of this capex is expected to be done by companies from the oil & gas and energy spaces. And thus it goes without saying that their plans will depend on the energy prices. As per Mint, ONGC is expected to spend about Rs 293 billion (22% of the investment amount by the top ten PSUs) this year while the oil marketing companies will be spending about Rs 346 billion (26% of the amount).

Having said that, the capacity utilization levels of India Inc. are still at their multi-year lows. And thus, while the PSUs may seem to be doing their bit to revive the capex cycle, it does seem that we maybe a while away before their private peers follow suit.

04:40

At the time of writing, the Indian markets were trading firm. The BSE-Sensex was trading up by about 126 points or 0.5%. Gains were seen in stocks across the board, with those from the FMCG, steel and realty sectors leading the gains. Stocks from the telecom sector were trading weak. Mid and small cap stocks were trading firm as well, with their representative indices trading higher by about 0.5% each.

04:50 Today's Investing Mantra

"Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now." - Warren Buffett

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

Today's Premium Edition.

Several Factors Will Influence RBI Policies in the Coming Months...

Several factors, including Dr Rajan's decision to exit or not, will determine the direction of RBI monetary policy.
Read On...Get Access

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Equitymaster requests your view! Post a comment on ""Start Trading to Protect Your Portfolio from the Next Crash"". Click here!

3 Responses to ""Start Trading to Protect Your Portfolio from the Next Crash""

Dharmesh

Jun 11, 2016

Return of 20 to 25% on capital but asadbhai track record of daily profit hunter,income alert & swing trader does not endorse that.please do not induce naive investor to become trader and loose hard earned capital. First improve return on trading services.

Like 

J M Khanna

Jun 8, 2016

Would like to know more of how it will be done.

Like (1)

Sundaravaradan S

Jun 7, 2016

Hi,
Sub: Market:
I am 100% sure the market in India will go up....!
Only thing I dont know...is When? Why? by How much?
So build your strategy of BUY/Sell/HOLD, accordingly.....
(Sounds similar..? sorry...)

Like (1)
  
Equitymaster requests your view! Post a comment on ""Start Trading to Protect Your Portfolio from the Next Crash"". Click here!
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