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

'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.

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%.

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
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.