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The Best Strategy for This Crazy Market
Sep 28, 2018

Last week, I wrote to you about the 5 stocks from Equitymaster's best analysts.

I'm happy to report that our editors have finalised their top picks and they're ready to reveal them.

All you need to do is click here.

Now coming to the strategy...

First, I must say, I can't take any credit for it. This strategy was developed by none other than our top analyst and co-head of research Rahul Shah.

He calls it Accelerated Profits.

Yes, that's right!

At a time when the markets are falling who can you expect - other that Rahul Shah himself - to stick their neck out and talk about making quick profits?

I know of no one else. Understandably, when Rahul first revealed this strategy, he was flooded with your queries!

So I asked him to set aside some time and explain to you, dear reader, what Accelerated Profits is all about.

Over to you Rahul...

  • As many of you know, I recently held an online summit where I revealed my market-beating system... the Accelerated Profits Strategy. I also requested readers to send me their most pressing questions about the strategy, and my work.

    I received almost a hundred questions - and today, I'm addressing the ones that were most frequently asked... I'm doing it here so that all my readers have access to all the information - I'd hate for anyone to miss out in any way...

    Question: Hi Rahul, as we all know - change, as well unexpected events - have impacted all of us in different ways at different times. However, the pace of change and myriad ways of it hitting us anytime anywhere due to various aspects like global integration, complexities, nature's fury, etc. How do you propose to be flexible, safety measures, as well things which you recommend to minimise the wealth erosion for especially middle-class savers?

    I sincerely believe that over the long term, the stock market news will be good.

    In the last 40 years or so, India has endured quite a bit. Balance of payments crisis, coalition governments, communal tensions, nuclear tests, Kargil war, global economic meltdown, droughts and crude prices going through the roof. Yet, the Sensex rose from 100 to 38,000 now. And if experts are to be believed, India's best years lie ahead of it and not behind.

    Thus, it is possible to make very good returns over the long term provided investors don't give in to their emotions. The way Microcap Millionaires works it ensures that investors are invested in stocks when the possibility of making money over the next 2-3 years is maximum and have only a limited exposure to them when this possibility is at its minimum.

    Put differently, Microcap Millionaires is designed to be greedy when others are fearful and fearful when others are greedy.

    Question: Which is the cheapest growth stock I can hold for next 10 years?

    Everyone wants to invest in the next Page Industries when it is available cheap. It is easier said than done though.

    Amongst all the listed companies out there, how many of us would give ourselves a strong chance of identifying a future 100-bagger? Or for that matter, how many of us correctly foresaw a few years back that Page Industries would be on the cusp of becoming one.

    And even if we do end up investing in one such stock, they fluctuate so much in price year after year that an investor really gets a nervous breakdown holding on to it in the middle of all its price volatility.

    Which is why in my Microcap Millionaires service, I don't waste time trying to find the next 100-bagger.

    For me, a 2 to 3 bagger over one to two years will do just fine. And these stocks are not that difficult to find provided you know where to look.

    Using simple Benjamin Graham rules, I've recommended BUY and SELL on a full 37 of them, with 32 ending up giving positive returns.

    These stocks have on an average returned 79% with an average holding period of around 16 months.

    This is a much simpler way of earning 20%-25% returns from stocks over the long term than identifying the next big growth stock.

    Question: As a 23-year-old with 2 lakhs capital, what is the best investment decision I can make?

    Start with Ben Graham's principles like the one we used in Microcap Millionaires and then move on to Warren Buffett once you have acquired enough competence in identifying long lasting moats.

    In fact, even if you don't switch to Buffett's style of investing, it is fine in my view as Ben Graham's principles should be enough for anyone with a small corpus to earn market beating returns over the long term.

    You can check out a recent article that I wrote on a similar issue here.

    Question: Which will be the best sector to invest for 1 year?

    We take a strictly bottom up approach to recommending stocks in Microcap Millionaires.

    In other words, undervaluation of a stock and a strong balance sheet is more important to us than the sector that the stock belongs to. We do ensure that we don't overexpose our subscribers to a sector and therefore, may not recommend more than 2-3 stocks out of a total of 18-20 stocks from a single sector.

    Question: Will this strategy work in a falling, and also a crashing, market?

    February 2018 marked the completion of the four years of the service.

    In each of the years, the strategy could outperform the Sensex despite being 50% in cash most of the time. The crowning moment came in February 2016 when the service ended up flat while the Sensex ended up losing 20% in the previous 12 months.

    So, the way the service works, our goal is to make it lose less than the market in a falling or a crashing market and make it outperform or at least perform as well as the broader market in a rising market. This factor alone should ensure that the service ends up beating the benchmark index over a long-term period like it is doing right now. so whether or not it works in a falling market is of little consequence in my view. The aim should be able to beat the benchmark over a complete market cycle which the service seems well positioned to do.

    Question: If a stock price of any company goes down below its book value, (the company has good fundamentals) then what we should check before buying shares of that company?

    In Microcap Millionaires, we have typically looked at factors like promoter pledging, last 10-year history of the company, debt on the company's balance sheet, insider ownership, its dividend policy and a few others.

    The idea is to ensure as far as possible that we are not getting stuck into a value trap and the company should be able to effect a turnaround should the business conditions improve.

    Question: Referring the graphs how should one know a share is going to break out & earn profits and when should one sell the stock and book profits?

    We don't attempt to time our purchases. All we do is identify a fundamentally good company that's going through rough times and because of which its share price has been knocked down way below what it should command in a normal business environment.

    We don't think anyone can time their entry into a stock, with our without the use of charts. The moment the stock price falls below a pre-determined buy level, one should go ahead and buy the stock and not worry whether it will fall further.

    A lot of our recommendations that ended up giving huge double and even triple digit returns fell right after we recommended a BUY on them. But they recovered and went on to give fabulous returns over the next 12-18 months.

    As far as selling is concerned, an underperforming stock should be given sufficient time to recover but not so much that it starts proving to be a drag on the overall performance. Which is why we give a maximum of two years to all the stocks recommended under Microcap Millionaires. Once the two-year period is over, we recommend a SELL, no question asked. And this is irrespective of whether the stock has performed or not. We believe that the investors are better off investing the amount in some other stock rather than be stuck with a loser for too long.

    Question: Will all your recommended stock(s) yield minimum 12% return per month?

    Please note that this is a group based approach to investing and therefore, investors would be better off investing in all the stocks that are in open positions rather than picking and choosing. As far as returns from these stocks are concerned, these have returned an average of 79% with the average holding period being 16 months.

    While these are extremely good numbers, it won't be realistic to assume the trend to continue going forward as well. Our goal is to make the entire group stocks (including the cash component) earn returns that are well in excess of the benchmark index over the long term. So, if the index earns 15% going forward, we won't be targeting anything less than 20% from the service.

    Question: Please tell us the 3 simple rules that you follow.

    Well, the three simple rules are
    • A definite buying rule
    • A definite selling rule
    • And a rule defining allocation between stocks and fixed deposits based on the overall stock market valuations.
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