Why is My Strategy Asking Me to Turn Cautious?

I am a proud editor these days.

It is not often that you get to see your recommendations bathed in a sea of green and that too across all your services.

Sample this.

Since April last year, I have made a grand total of 55 recommendations across all the three services combined (open as well as closed positions).

And how many of them are trading in the positive?

Well, all of them except three.

Yes, you read that right.

Having 52 of your 55 recommendations trade in the positive is indeed something to be very happy about. You don't get to see such numbers often.

I am not writing this piece to pat my own back though.

The stocks market has been a one way ride since it bottomed out in March last year.

The benchmark index has doubled from its lows and is certainly looking good for more.

Thus, anyone who'd bought a basket of decent quality companies at reasonable valuations, would be sitting on some strong gains right now with the same success rate as me or better.

You see, when the markets get hammered like they did back in Feb-March 2020, all you need is a lot of cash and a little bit of courage to start taking exposure to stocks and then sit back and watch the gains roll in.

Unfortunately, a lot of investors either have the first or the second, but not both.

When stocks fell like nine pins early last year and became attractive from a value standpoint, many investors were dying to get into stocks and take advantage of the meltdown.

However, either they were fully invested or had very little cash to deploy into stocks.

Likewise, those who were sitting on a lot of cash, were not courageous enough to deploy it, thinking that the markets may crack further.

To be honest, even I was in this second camp for a while.

However, what helped me pull the trigger was a well-defined strategy I have across all my services.

The strategy is designed such that it allows you to reduce exposure to stocks when markets turn expensive and increase exposure when they turn attractive.

Thus, once I had the strategy in place, all I had to do was follow it and let the results take care of themselves.

Well, right now is another of those times where a well-defined strategy is the need of the hour.

Without the strategy to guide you, there's every chance you may end up taking decisions that are not in your best long term interests.

Therefore, if you don't have a well-defined strategy just yet, here's how you can start creating one.

Figure out how many stocks are you going to have in your portfolio? My view is that it should not be less than 20 and more than 30.

Figure out a buy rule and stay as true to it as possible. Are you going to be a buyer of a stock at a PE of 10x, 15x or 20x? Make sure the ideal PE that you are willing to pay for a stock is not very high.

I believe that 20x is a good cut off to have for large, stable companies and 12x-13x for mid & small caps.

Also, make an exit plan well in advance. Are you going to sell the stock after a gain of 50%, 100% or may be more. I find 50%-100% over 2-3 years a good target to have. Once the stock crosses this threshold or a holding period of 2 years, I consider exiting. Maybe you can do the same.

Last but not the least, I believe in alternating between stocks and fixed deposits, depending on the broader market valuation and some other indicators.

So, if markets are very expensive, I don't mind being even 75% in fixed deposits and only 25% in stocks. And if they are cheap, I believe in doing the reverse.

Now, just as the strategy guided me back in April 2020 to turn aggressive and make a flurry of recommendations, it is now asking me to exercise caution.

Accordingly, I have trimmed exposure to stocks and booked profits across some positions. Most importantly I am not gripped by anxiety that a lot of other investors without any definite game plan are.

If the markets were to go up substantially from here on, I know exactly what I am going to do i.e. trim stock exposure further.

And if the markets were to go down, I can deploy more into stocks by liquidating fixed deposits.

What do you think of this approach? Is your approach also similar to this or is there a marked difference between the two?

Do let me know.

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter