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Wednesday, February 15, 2012

A strategy to beat that ‘missed out’ feeling

A sudden gush of FII money has propelled the Nifty to a 1000 points gain from its Dec ‘11 low, and caught experts and small investors unawares. What had looked like a typical bear market rally is beginning to look more like the first stage of the next bull market.

Many who failed to buy at the low prices of 2011, and those who booked profits and moved to cash in the hope of buying at much lower prices, are feeling that they ‘missed out’ on the rally. How do investors ensure that they don’t miss out on opportunities to buy (or sell)?

In this month’s guest post, Nishit discusses the FoC (Free of Cost) strategy to beat that ‘missed out’ feeling.

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The stock market has rallied more than 20% from the Dec ’11 bottom. Many of us are feeling left out from this rally. What must one do to avoid such a situation? The stock market is one place where one can create a lot of wealth over the long-term. So, how does one go about doing this?

Step 1: Identify about 10 businesses which you feel will do well over the long term (as in next 5-10 years). Remember you are investing in businesses - not only stock prices.

Step 2: Once these businesses are identified, keep a watch on their stock prices. The strategy one will adopt is to keep investing into these stocks at regular intervals.

Step 3: With knowledge about the stock market and Nifty, buy these stocks at attractive valuations. There are 3 things which can happen to the stock prices. They can go up, go down or remain flat.

  1. If the prices go down, be ready to average the stocks and buy them at a cheaper rate. For doing this, awareness of the broader trend of the market helps a lot.
  2. If prices go up, be ready to book profits. One very effective way of doing this is by making the shares ‘Free of Cost’. Let me give you the example of SAIL. Say 100 shares were bought at Rs 90. Now the price has rallied to Rs 110. I feel I had enough of the ride and expect a correction in the markets. I book out 84 shares and remove my cost price. Now, the remaining 16 shares are free for me (i.e. my holding cost becomes zero). I know that SAIL will continue making steel for the next 10 years (and may be much longer than that). These 16 shares I will not touch unless there is a blow out rally where the Nifty trades in 22 + P/E which would be around 6300+.
  3. If prices remain flat, I just wait and watch.

With this strategy, I will not be sad if prices go up and I have not bought anything fresh. If prices go down, I will be having cash to add to my holdings.

The risks to this strategy are the identification of the companies. If one goes for fly-by-night operators and the company goes bust, then one is in trouble. The ‘Free of Cost’ shares become worthless. Hence one has to keep a watch on the fundamentals of the companies and take a call to move on to other stocks.

This approach combines both fundamental and technical aspects. In the last year itself there were 4 bear market rallies. Even if one had booked with about 15-20 % profits one would have had a sizeable quantity of ‘Free of Cost’ shares right now.

This is one way to create long term wealth in the stock market.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

4 comments:

Ganpat said...

Why to sell 84 out of 100 at the first rise itself?
Since the investment is 9K,just hold when the value is ranging between 8K and 10 K.When it rises above 10 K ,sell the req.no to make it close to 9K again.(example: when the price goes to 110,the value of 100 shares become 11K ,so sell 18 shares so that the balance 82 shares would be 82*110=9020.Now if the price becomes 90 again,the value of 82 shares become 7400 ie 1600 less than 9K so buy 18 shares @90 and make the holding value(100 shares) back to 9K.Now you are left with 2000-1600=400 bucks cash!
or if the price rise to 140,the value is 82*140=11480 and so to sell another 18 shares to make the value 64*140=8960
Note:Numbers given are only illustrative and can be varied to suit individual's attitude

Chaitanya said...

what would you do if you haven't purchased. So would you buy in the rally a small percentage or again just sit on fence. I guess this is where small investors get confused buy at higher prices and then stuck forever or take loss and get completely out of market. so what's your take on this? what would you suggest here.

Nishit Vadhavkar said...

Thanks for your suggestion Ganpat. It is an interesting suggestion and worth pondering over.

Nishit Vadhavkar said...

I would add a small quantity now. Here is where Technical Analysis helps.
This rally has legs to go. So a dip would be a buying chance.
The key is in picking the right stocks. Then you can average at lower levels if need be.
Hence buy 10 pc of yr quantity now and 10 pc at say 5300 levels. If goes higher book part out or at lower levels be ready to average