Bad loans, frauds in listed companies, weak markets, interest rate volatility, bankruptcy proceedings, corporate deals and a full plateful on the political debate arena. All seem to strike at the same time. So many distractions. As the financial year closes and new tax rules are about to set in, it is time to tick the boxes again. I do not know how your year has been (not that a financial year matters in the investment journey), but what chatter I can hear on the social media, it looks like a lot of inventory that is under water, is waiting in many investor accounts.
This is as good a time as any to reflect on the actions we did. We had at some point agreed that we will be ‘disciplined’ investors. Discipline was with reference to our yardsticks for buying, our objectives for buying and our processes for stock selection. If we re-examine our ‘mistakes’ we will probably see that we let our optimism get the better of us and bypassed our set processes or violated our discipline.
What this will do is to scare us off the market. We will be frozen. While the index may have fallen 10 per cent, there will be many stocks which have fallen 20 to 50 per cent. Not all of them may be good buys, but there could be some opportunities. So, the thing to do is not to keep away from the markets, but to take a piece of paper and write down our rules for investing/trading. I make a distinction between the two.
Investments consist of high quality stocks that will not be sold, unless the entire story changes and not just one quarter mishap. Trading will be stocks we pick up, where the quality of earnings is not the best and would probably offer some cyclical/seasonal plays. Here, the price of the trades is important. Taking money off the table is important. Stop-losses are extremely important. You will see that many mistakes are still in the portfolio because we did not have the heart to be strict about our stop-loss rules.
I also see that there is a lot of corporate action, insolvency proceedings etc which can throw some trade opportunities. 2019 being an election year, and one with no proper budget, there is greater stability in government policies. Tax rules have changed, which makes the investor almost indifferent to long or short term from this perspective.
Thus, the task ahead of us is very simple. Let us divide it in to two parts:
Investment opportunities in high quality stocks can be done, if the price is right. In a market correction, there will be some extremes, which offer a great opportunity for buying. Sticking to high quality will protect you from getting washed out. It is important that the core portfolio be built with high quality stocks.
Trading is for those with a penchant for trading. Those with a compulsion to do something. At an aggregate level, this portfolio is almost certain to give a lower return than the investment portfolio over an extended period. Here, the way to preserve capital / reduce losses is to stick to ‘stop-loss’ discipline. Treat each trade as a unique event. Focus has to be on prices. Do not fall in to a trap of keeping the stock for long and increasing your exposure to it by ‘averaging’ on dips etc. Do not forget why you do this.
As a ‘trader’ you often do not do any study of the company. Many could be on impulse or on the basis of ‘following’ someone. You do not have any reason as to why it should succeed. That is the reason a stop-loss rule helps. Just as you have a stop-loss rule, it is important to have a ‘book-profits’ rule. Do not violate that. The third element you may like to include is to have a ‘time-limit’ for a single trade.
Stock prices are dependent on a lot of things. Value is an important thing and when there is an over-valuation, we are in reality just ‘trading’ the trend. Ensure that you are not ‘anchored’ to past ‘high-lows’ of the trade you make. That is a sure way to end on the losing side. It is best to remain focused on the ‘now’ in your trading portfolio.
(The writer is an investment advisor. He can be reached at firstname.lastname@example.org)...