Use this Trick with a 90% Success Rate to Pick Winning Stocks in this Market

Apr 15, 2020

Rahul Shah, Editor, Profit Hunter

'Rahul, it is not a question of whether we should be investing but a question of what we should invest in. I am hoping you will find us a way out of this dilemma.'

I am loving this new found maturity among many of my investor friends.

I am happy they are not afraid of Investing in the current environment. In fact, quite a lot of them have increased their stock exposure post the current meltdown.

Therefore, while they are clearing the first hurdle with a newfound flair, it is the second hurdle they are finding difficult to cross.

They know this is one of the best times in years to invest in stocks. However, what is giving them the heebie-jeebies is choosing the right kind of stocks from among the thousands available.

Well, it does not have to be like this.

Let me try and explain why.

Warren Buffett's business partner Charlie Munger once observed it is in the nature of things that many hard problems are best solved when they are addressed backwards.

So, if you want to stay fit, look for ways of staying fit by thinking backwards.

Don't ask what will help you stay fit. Think backwards. Ask, how can you avoid turning obese?

Exercising regularly, staying away from junk good and drinking enough water are the three most important things that come to mind.

And voila, you have the answer.

If you want to stay fit, try incorporating these three things into your daily life. You will soon notice a huge difference in your overall well-being. That's the power of thinking backwards right there.

What has this got to do with our problem of investing in the right stocks you may ask? A lot I would say.

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You see, back in 2014, the market environment was eerily similar to the one right now. Sensex was attractively valued, a large number of stocks were trading really cheap and people in general, were afraid of putting money into stocks.

However, there were a select few, like me, who believed that markets were presenting a fantastic buying opportunity. Therefore, there was little doubt in my mind that increasing exposure to stocks would pay off in the long run.

So, how did I cross the second hurdle? How did I choose from among the thousands of stocks available? Well, I solved this problem by thinking backwards. I did not ask myself which the best stocks to invest in are.

Instead, I asked myself, how do I stay out of the worst stocks?

And solving for this problem proved to be a much simpler job than trying to find the best stocks.

The worst stocks are usually the ones which have weak balance sheets and/or are trading at expensive valuations. I also threw a third factor into the mix. Minimum revenues of at least Rs 2 bn in the latest fiscal.

You'd be amazed to know the kind of magic these three simple parameters can create. Here's the complete list of stocks I ended up recommending in 2014 based on these parameters alone.

Company Name Reco Date Reco Price (Rs) Selling Price (Rs) Gain/Loss (%) Sell Date
TITAGARH WAGONS 20 March 2014 102 658 545.4% 23 February 2015
LEEL ELECTRICALS LTD 21 April 2014 64 177 175.9% 20 March 2015
HIL 01 February 2014 242 654 170.1% 23 February 2015
NAVIN FLUORINE 20 February 2014 258 696 170.0% 23 February 2015
TECHNOCRAFT 21 April 2014 93 233 150.0% 23 February 2015
BIRLA CORPORATION 20 March 2014 241 566 134.9% 20 August 2014
MANGALAM CEMENT 21 April 2014 135 269 99.6% 20 March 2015
SWELECT ENERGY SYSTEMS 21 April 2014 253 434 71.7% 20 April 2016
NALCO 20 March 2014 35 56 59.4% 20 June 2014
BHARAT BIJLEE 20 March 2014 446 675 51.4% 20 June 2014
GUJARAT INDUSTRIES POWER 20 March 2014 59 79 34.3% 18 March 2016
HCL INFOSYS 20 March 2014 37 42 12.2% 18 March 2016
GUJARAT ALKALIES 20 June 2014 197 217 10.3% 20 June 2016
GSFC 20 May 2014 74 78 6.0% 20 May 2016
GLOBUS SPIRITS 20 June 2014 81 65 -20.3% 20 June 2016
SAIL 20 September 2014 75 48 -36.4% 20 September 2016
PENINSULA LAND 20 March 2014 31 19 -38.7% 18 March 2016
VENUS REMEDIES 20 February 2014 219 92 -58.2% 20 February 2016
Average 86.0%
Data Source: ACE Equity, Equitymaster

Well, the stats don't lie, do they? By thinking backwards and by trying to eliminate the worst stocks, I was able to recommend 18 stocks in 2014 out of which 14 ended up giving positive returns. That's a success rate of an impressive 80%. The average gain per stock is even more impressive at 86%.

In case you are wondering why I chose these 18 stocks and not the others, well that's easy. I could have chosen an entirely different set of 18 stocks and yet would have ended up with the same impressive returns. The thing is, based on three parameters above, I ended up with a list of 190 names in 2014.

And guess what?

90% of the stocks ended up giving positive returns during the year with an average return per stock close to 100%.

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If this isn't enough to convince you the power of backward thinking and also of keeping things simple, I don't know what will be.

I am firmly of the belief that in investing, perfect is often the enemy of the good.

Investors can end up wasting a lot of time trying to find the perfect stock or a small group of perfect stocks after a big market meltdown.

However, when the valuations are attractive, like they were in 2014, putting together a group of good stocks is often the more sensible option.

And I do believe that the environment right now isn't very different from 2014.

So, don't beat yourself up trying to find the perfect stocks and don't get paralysed looking at so many stocks to choose from. Just think backwards about which stocks to avoid and put together a list of good stocks.

I have recommended 5 such stocks across a couple of my services in the last one month. All of them are trading in the positive with gains as high as 32%, 25% and 22%.

You need to do the same. Trust me, it is a decision you won't regret over the long term.

Good Investing,

Rahul Shah
Rahul Shah
Editor, Profit Hunter
Equitymaster Agora Research Private Limited (Research Analyst)

PS: Read about our small cap expert, Richa Agarwal's, #1 stock pick for 2020 here.

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1 Responses to "Use this Trick with a 90% Success Rate to Pick Winning Stocks in this Market"

DR. RAJAN GARG

Apr 16, 2020

SIR,

WHATEVER I HAVE LOST IN MICROCAP MILLIONAIRE OR OTHER SERVICES OF YOURS IS COMPENSATED BY THIS KNOWLEDGE.

"In case you are wondering why I chose these 18 stocks and not the others, well that's easy. I could have chosen an entirely different set of 18 stocks and yet would have ended up with the same impressive returns. The thing is, based on three parameters above, I ended up with a list of 190 names in 2014.

And guess what?

90% of the stocks ended up giving positive returns during the year with an average return per stock close to 100%."

MARKET CYCLES ARE NEVER ENDING. THEY WILL COME AND GO. I UNDERSTAND NOW that in next downturn I WILL BE RICHEST IN MY LIFE.

BY the way I have checked all my stocks on YOUR PARAMETERS and found 90% of my portfolio is as per your criterias. My personal holding PE of is 10.07 [ VALUATION REPORT] . SO I HOPE I MAY EARN 20% RETURN IN NEXT FEW YEARS.

SOME STOCKS ARE NEW BUT THIS COURAGE IS REQUIRED IN MARKET . THE CALCULATED RISK.

I was really worried if my stocks are good or not as I was finding some other stocks are rising more than mine. But I kept patience and added at lower and lower prices. Still question remained WHY NOT I SWITCH TO THIS STOCK OR THAT.

NOW I UNDERSTAND THERE CAN BE MANY EXCELLENT STOCKS BUT I HAVE TO HAVE limited in my capacity.

Of course I UNDERSTAND BUSINESS OF ALL MY STOCKS. IF I DON'T UNDERSTAND THAN I DON'T BUY.

NICE MEETING WITH YOU SIR TODAY.

DR. RAJAN GARG

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