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What Should You Do with Your Stocks in This Falling Market? - Private Briefing

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What Should You Do with Your Stocks in This Falling Market?
Jun 29, 2018

It was a tough week for the market. I believe it must have been hard on you too dear reader.

So today, I believe it would be best if I share with you all the updates our editors sent out to you. In can you missed any of these...here they are again.

First things first...

Fedders Electric and Engineering

I completely understand how you must be feeling dear reader. It was a shocker.

We were flooded with your angry mails. You have every right to be angry. I won't try and give a long explanation here.

However, I will re-post Rahul Shah's replies to his Microcap Millionaires subscribers...

    How Can I Exit Fedders Now?

    Question: I bought the Equitymaster reserve services in March 2018. Since then all the shares recommended by you are in the red. The shares we bought are all in losses. Take the case of Fedders, it's down 50% in a span of 2 months. You recommended exit in Fedders on 26th, but it's locked on selling today as it's down 20%, how can we exit?

    Answer: We are sorry that you had to incur a loss on the stock. The company's past performance and its presence in a relatively stable industry led us to believe that this is yet another candidate where things would revert to the mean and investors investing at the cheap valuations will be handsomely rewarded.

    However, we really did not expect the company to not announce its results and then also face a ratings downgrade.

    Please note that it is in the very nature of the service that we take bold, unpopular calls and go against the grain. All we try to do is ensure that the company's balance sheet is strong enough to withstand any near-term pain and the upside to downside ratio is firmly in favor of the investor.

    Yes, Fedders Electric was a bad call and we think no matter how much due diligence we do, we may not be able to avoid a few Fedders Electrics in the future.

    However, we will leave no stone unturned in trying to ensure that for every such stock there are two or three that reward shareholders handsomely and on an overall level the service ends up significantly outperforming the markets over the long term.

    The fact that the service has outperformed both the Sensex and BSE Small Cap index since inception goes to show that the strategy is working.

    Having said that, as you rightly pointed, there's no scope to get complacent and we will certainly see what steps we can take to minimize such errors in the future.

    You Could Have Told Us Sooner

    Question: Extremely disappointed with your recent recommendation on Fedders (Microcap) - not because of a change in fundamentals which has resulted in the loss, but the fact that all your calls come after market closes. You may have closed the position at a 38% loss. It opened gap down today 20%, so the rest of us are sitting on a bigger loss! and am unable to exit the position.

    Answer: With reference to your mail we are really sorry, but as a policy, we are not allowed to send a report out during market hours.

    Hopefully, future good recommendations could alleviate some of the pain you would incur by selling Fedders at a significant loss.

    The recommendation is to exit at whatever price one can exit at.

    Is Fedders Still Fundementally Good ie Worth Holding?

    Question: This is about Fedders Electric of MCM service. As soon as the news of exit came, the stock has hit the 20% lower circuit, making exit impossible. It may do the same tomorrow, and the stock may reach price of Rs 25 to 27. Is it worth selling at this kind of price?? You have always mentioned that the company you (Rahul) choose have good fundamentals. Have the fundamentals deteriorated that much to sell it at Rs 25? Or is it that we should we hold and gradually keep on selling and exiting??

    Answer: Honestly, such calls are difficult to take. To be on the safer side, an option worth considering could be to offload half the shares right now and hold on to the other half just in case the stock bounces back. Of course, as always, we still recommend you to consult your certified financial advisor.

    Do you recommend stock without any due diligence?!

    Question: I am a Reserve member and writing about your wrong selection of stocks in MM

    You recommended Fedders Electric, even though you were doubtful about it being a borderline case, this should not have been done at all.

    You have now recommended Aro Granite without doing DD and I know about the company well as I am from the same industry and it may be a wrong recommendation again in my opinion.

    I think Equitymaster is also recommending stocks last few years without ground level due diligence and it is a very poor show in my opinion.

    I know that Equitymaster is a most ethical outfit and my complaint is only about the analysis and DD part of stocks selection and subsequent lax monitoring and very late exit calls which serve no purpose at all. We subscribers expect you guys to keep your ears close to the ground on your recos and we are being let down badly.

    Answer: It isn't that we hadn't done any due diligence at all. The company's past performance and its presence in a relatively stable industry led us to believe that this is a candidate where things would revert to the mean, and investors investing at the cheap valuations will be handsomely rewarded. We could not have expected the company to not announce its results and then also face a ratings downgrade.

    Similar is the case with Aro Granite. We know things are bad. However, the recommendation is a bet that within a period of 2-3 years, normalcy will be restored and the company's earnings and share price both will start looking up.

    Sometimes, no matter how much due diligence we do, we may not be able to avoid a few Fedders Electrics in the future.

    However, let me assure you once again: We will leave no stone unturned in trying to ensure that for every such stock there are two or three that reward shareholders handsomely, and on an overall level the service ends up significantly outperforming the markets over the long term - as it has outperformed both the Sensex and BSE Small Cap index since inception.

    We are cognizant that any loss can hurt. But we want you to rest assured, that there's no way we will get complacent, and we will always take all necessary steps to ensure we minimize such errors in the future. Any suggestion on this front will be most welcome.

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