43% Gains in 6 Months in Covid First Wave. What Will the Second Wave Bring?

Nov 9, 2020

Rahul Shah, Editor, Profit Hunter

What if we ask the famous Peter Thiel interview question to investors?

Peter Thiel, the billionaire co-founder of path-breaking companies like Paypal, uses an interview question that's pure gold.

Whenever he sits down to hire someone for an important role, he never fails to ask the following:

What important truth do very few people agree with you on?

Let that sink in for a minute. It is a simple question but not that straight forward. It requires digging deep into our mental reserves and coming up with an insight that's not just true but also unique.

Well, in the field of investing, the question will translate something like this:

Is there an investment insight that works wonders in the market and that very few people are aware of?

Well, I don't know about awareness but there's an investment insight that's very powerful and yet, majority of the investors don't use it while picking stocks.

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I first grasped the true importance of this secret few years back when I listened to a fantastic 1962 lecture by Benjamin Graham.

Graham observes that majority of the investors make a big mistake while trying to invest. They confuse the stock market with a market of stocks.

Put differently, most people think that their main job is to pick individual stocks and they don't have to worry about the broader markets.

As per them, it is useless to talk about what happens to the market as a whole as having a major influence on how the investor fares.

Well, even I have operated this way for a major part of my career. I used to pay scant attention to the broader market and was completely focused on picking good quality individual stocks at attractive valuations.

Well, for the past few years, I have been using the opposite approach and the results have been very encouraging to say the least.

Instead of focusing all my energies on picking up individual stocks, I am also taking into account the broader market levels.

So, in 2019, when the market reached an all-time high level and was looking expensive on the valuation meter, I decided to be only 25% in stocks. I recommended my subscribers to put the remaining 75% into fixed deposits.

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As the markets kept going up, we kept looking like a fool.

But then came 2020 and the brutal crash of March 2020. The news of the Coronavirus pandemic taking the entire world in its vice like grip sent shivers down the spine. It lead to the Indian markets tanking by more than 35%.

And while people were focused on losses in individual stocks and damage control, I again took into account the broader markets.

To me, the markets looked much more attractive than the previous year. I therefore recommended my subscribers to buy stocks. The allocation was thus reversed from 25% stocks to almost 75%.

The reversal couldn't have been timed better in my view. The service is up more than 40% since the lows of March and I have closed 10 consecutive positions with an average gain of more than 50% and an average holding period of just 6-7 months.

I strongly believe that if looking at the broader market wouldn't have been a part of my strategy, I would have been almost 100% invested back in 2019 and wouldn't have had any money to invest when the markets tanked in March.

Taking into account the broader market helped me and my subscribers not just escape the crash with minimum damage but also allowed us to ride the upside that followed.

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And now, as we are again close to all-time highs, I am again looking at the broader market and have therefore brought down the stock allocation from 70% to 50%.

Thus, if a second Covid wave were to hit and if the markets were to crash again, we have enough cash to scoop up stocks at attractive valuations.

On the other hand, if the there is no such wave and the markets were to keep going higher, our 50% stock allocation will ensure that we get to ride the upside.

The Ben Graham idea of not ignoring the broader market valuation has been a great revelation to me and has worked wonders for me and my subscribers.

I strongly believe you should try it out on a small percentage of your portfolio if not a substantial one.

Trust me, you won't be disappointed with the result if you give the approach enough time.

By the way, do check out this video to know why I was bearish going into 2020 and why I turned bullish in April 2020,

Warm regards,

Rahul Shah
Rahul Shah
Editor and Research Analyst, Profit Hunter

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