|»5 Minute Wrap Up by Equitymaster|
On This Day - 25 AUGUST 2015
How Crash Proof is Your Portfolio?
In this issue:
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.
Now...to 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.
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'.
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
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.
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.
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...
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