Why is My Strategy Asking Me to Turn Cautious?

Jun 7, 2021

Rahul Shah, Editor, Profit Hunter

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.

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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.

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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.

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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
Rahul Shah
Editor and Research Analyst, Profit Hunter

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5 Responses to "Why is My Strategy Asking Me to Turn Cautious?"

G P PALEKAR

Jun 8, 2021

I totally agree with you. Because know one knows the real top. And when market starts falling it does it very fast. Even today one bad news can make fall of market by 500_600 points in 8 to 10 days.

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Koushik

Jun 7, 2021

I am subscriber of your double income plan.I second your strategy and is turning cautious after the ongoing rally specially in mid & small caps.

I am keen to book some profit at this stage and increase my non-equity reserve. Now to take sell call which one i should give priority : 50-100% profit or 2 years? Or the decision should be based on whichever of the above scenario happen first for a script?

Pls advice.

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Harris Abdulla

Jun 7, 2021

It takes a lot of guts for a smaller investor to take risks. It takes absolute guts for a thorough professional like you to give such a clear explicit opinion. This is saying it like it is without beating around the bush. Couldn't have been more specific. Thank you for your invaluable advice.

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Kavitha Veeramani

Jun 7, 2021

I do the same as I don't believe in fixed deposit in any Bank. I am in shares or equity from 27 years now. I will buy good companies and if they go down, I will buy more of that company. I also go to selling some companies as they go above my percentages. I also go for good dividend yield companies and put the dividend to buy companies whose Finance is Good to super, even if the P/E is above Industry P/E. These are for 5 years keeping. This is my view above equity.

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Manish Saxena

Jun 7, 2021

Principally I am in agreement that at 50k Sensex was costly....Now the catch is individual stocks .Basis your research and my one longterm investing experience I had expected in 2020 market would go back to never heard levels (as 2008 was a localised problem to few countries and did not impact India as such economically) But pandemic was global phenomenon and hence should have destroyed value but markets have been moving in uncharted territories so are u specifically saying that we should sit on 75 percent FD now ..Third wave is being forecasted which will have deeper impact on the earnings in FY 22 and GDP might just grow in low single digits or once again could be negative

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