Everyone makes money in Bull markets. It is said that the bulls are the friends of the fools. This is why when the bulls get slaughtered in the market crash; the fools are the first victims. They are the most hopefuls of the lots. They tend to believe that there will be always sunshine. They ignore the earnings and warning signs, garland the high flyers in the name of growth, and greet the Mergers and Acquisitions as the sign of positive interest in their economies.
However, regardless of the pains, they enjoyed the journey and whatever minor gains they earned for their smartness. The market correction comes from nowhere, without notice, without anything appearing on CNBC or other business channels, and that is what called the “Market surprise”. Often the media blurts on both horns that “market says this, market says that, market will go here, market will go there etc”. This is very amusing. The market never talks; it just behaves the way it wants to. The innocent investors, who are normally late entrants; read, hear and watch 100 times same item and get carried away.
I always used to teach my customers that you never make investments by reading newspapers or watching CNBC, NDTV or other stocks channels. When the news is known to everyone, there is no more secrecy left, and the stock pattern reverses itself.
Now that one has burnt his finger as a speculator, he qualifies to become an Investor. The losses are the tuition fees that one pays to learn from the bears. The bulls just kick, bears never do. This is why there is always a “Bear Hug’. Only those hug who are our friends or well wishers. Those who invest in bear market make the most money by design and planning with lots of thoughts. Those who invest in bull market make small money many times by accident. However, when they lose, all of their past gains disappear in a flash. It is the bull’s nature to kick. Have you ever heard the term “Bull Hug”?
Not many cope with the stress and the problem. They begin to distrust everyone, same way the banks do not trust each other today. All are in same boat.
Learn this Primer before you proceed further
When you were in normal or bull market…
You were perhaps entering after watching others making money (that they falsely claim – never believe them). Your entry level is perhaps high. Do the following:
- Treat each transaction (A1, A2, and A3) of each stock (A, B C) as separate transaction. Never count the Average Cost
- Sell the transaction whenever you are in profit by at least 11%.
- Thus if you are losing in A1 but making money in A2 and the stock is not going further, sell A2 and retain cash – do not employ elsewhere.
- If the stock A goes higher, do not regret your decision for selling A2. You still have A1, so sell it if the stock has made big move recently.
- If the stock goes down, buy back the same stock, if you believe that its full potential is not reached as yet.
- NEVER hate yourself for any mistake. It is natural. You are your best friend and worst enemy. You decide what you want.
- Never ignore your mainstay business while investing in stock market. Remember, you got money to invest only from your mainstay business.
- Keep two boxes – RED and GREEN.
When you make money, deposit 10 Cents/Paisa per 100 (0.10%) in either box if you booked losses or gains. For example, if you make 1,000, deposit Rs/$1 in your green box. If you have booked loss, put it in red box. At the end of any period, see how many units are in Red and Green. If Red contains 20 and Green 30, you made a gain of 10 x 1000 – 10,000
- Avoid buying IPO in bull market because they are always hyped up and valuation is rich. When the stock does not have history, do not touch it as far as possible unless you have special reasons to do so. The idea of becoming instant money on opening day of the trading is dangerous. I never bought IPO in my life.
EXAMPLE: Look what happened to Reliance Power IPO (in India). While it is at depressed level, in this market crash, Goldman Sachs has come up with the negative recommendation lowering the target even further. Where was the Goldman at IPO stage? All brokers are suckers in the game – When it is good, they call it best; and when it is bad, they call it worst. When they want to see the price higher, they talk about the company vs GDP, Infrastructure, and growth etc – all big things. When their call goes wrong or the market crashes, they start talking about the fundamentals.
- Read, listen and watch everything and everybody but make your own decision. God has given you a tiny little brain which is thousand times more powerful that Intel dual core chips. Use it while you are human, otherwise in next birth (if you believe in reincarnation), the God will make you an insect or animal that does not need a versatile brain of human. The same way a banker cancels customers’ credit line if he no longer uses it.
- Reverse the transaction as soon as possible if you ever thought that you made a mistake due to impulse. For instance, you bought a stock by error, just sell it right in the market, regardless of loss you have. Similarly, if you have sold something by mistake, buy back immediately. (The reason is that if you continue, it stings you even at night and you will continue to blame yourself. This is the biggest mistake an investor makes.) In stock market, the only thing that counts is the Decision, Decision and only Decision, just in case of property where the rule for selection is Location, Location and only Location. How much you lose in reversing your faulty decision immediately – only 1% to 3%? Just take it, instead of losing 20% to 70% later.
In stock market or for that matter, in any market, only decision makers make money in the long run. The indecisive person always tend to lose and they blame their own fate or lady luck for their loss. Both fate and lady luck amuse themselves. They know their job is thankless.
Restructuring the troubled Portfolio for quick Turnaround
Remember, the market is an ocean. Anything you throw into the ocean always comes back. The ocean is large hearted – it never retains anything for its own use. Similarly, what you throw into the market will ultimately come back, provided you follow the market discipline. All the points mentioned under 1 to 7 apply to the depressed market as well.
Now that you have lost heavily, do not brood over it. It is a fact. The loss is a history. You can not roll it back. Your aim should be how to recover and turn this cheaper opportunity into good profit. This is the art you will have to learn and practice.
At any time, you feel that you are indecisive, follow the mentioned rules in two parts – Actual and Demo. When you are unable to decide with physical involvement, play it out on paper in demo exercise. Write down the date, time and index when you took the actions. It is provided in this Article’s PDF copy with excel in the download center on right bar.
- If your portfolio is very large, more than 12 stocks, you will have to prune down the list to 12 or less. Check your list and determine what you hate and would not have. (Example – Watch the growing plant; if some shoots are blackened, the gardener prune them out to save the whole plant. He also prunes the healthy shoots to promote the growth. An investor should also take the profit in same stock occasionally)
- When the market recovers, the large cap stocks recover first. So determine, whether you have any large cap stocks. If you do not have any, buy some first. When the market is sufficiently advanced, sell the large caps and focus on the mid or small caps held by you.
- NEVER think that if the stock at 100 is expensive and at 30 it is cheap. All prices are relative to earnings. See the price relative to earnings (P/E)
- If the market sentiment is negative to extreme, DO NOT invest fresh money; instead do the following:
- Re-Check which stocks you want to retain for long haul.
- If you own high priced stock, and loss is not much, sell it to raise the cash for redeployment later.
- Identify the sector that might benefit more on recovery. You will be buying stocks in those sectors first. Within that sector, you have to identify top 2 or 3 stocks. The selection of stock is more like a beauty contest. They eliminate 45 contestants to come to final 5, then 3 and then the final one.
- Identify which stock has the least loss and one has maximum loss. Sell the stock with least loss (say 20%) and buy the one with greater loss (say 50% or more). By doing so, you are averaging down the cost of the bigger loser with same amount of money, without pumping new money.
- If the stock has come down by 70%, (say 30 from 100), the stock has to more than triple from low level. So, buy 3 times more than original quantity (if you own 300 @100, buy 1200@30). My rule is simple; if the stock has become 1/3rd, buy 3 times; if 1/4th, buy 4 times and 1/5th buy 5 times. Of course, you do not buy all at same time, but in 3 stages; 2 on way down and one on way up so that you know that the bottom has finally reached.
- When you swap from one stock to another, always ensure that you are getting into smaller value stock from higher value (not other way round). The low value stocks (not penny stocks, but the stocks above 8 and below 20) tend to rise fast due to low base. They make more % gains. It works other way too. They tend to go down faster as well in down market. For instance, if stock A (at 300 ) has come down to 160, and other stock B in same industry has dropped from 100 to 20, then in that case, provided there are no stock specific news, sell the stock A and use the proceeds (160) to buy 8 shares of stock B @20. Since the industry is same, the stock B may show better gains than stock A due to rise in that sector. Please note that this arithmetic is an approximate science, but works all the time. There is nothing to replace earnings as key driver to stock prices. Do demo exercise to start with to understand this game.
- When you have a choice, avoid buying holding company’s stock. Instead buy the major subsidiaries stock. The reason is that if the parents (holding company) run into troubles, they sell Children (subsidiaries) that become takeover play giving you more than average return. For instance, when Ford (US Automaker) ran into trouble, it sold Jaguar in UK and is trying to sell 30% stake in Mazda. Big companies are also bigger fools – they do not cut the losses but allowed it to run, like most investors in stock market. The correct strategy is to let the profit run and cut the losses immediately. Normally, people take the profit first and let the losses run. When some one says that he is having portfolio of 1 Million, presume that in 80% he is losing. When he makes money quickly, he admires himself as smart investor; and when he loses, he calls him Warren Buffet – a long term investor.
- Bring down the list to 12 or below. Do not focus on other stocks unless they offer better value. How many children you have? 2 to 5 or more than 20? Keep the inventory list to the extent you can effectively manage.
- After doing above adjustments, relax, have a coffee, go for a movie in Cinema (not at home) and have a fresh look at the reformed portfolio. Just as the pruned plant needs time, but it does prosper very fast, your portfolio will bloom soon.
- Study those stocks in details, paying special attention to their behavior, how they move up or down, in size and speed, and its volume. If the price rise or fall is not accompanied by volume, the movement is erratic.
- Remember you will not use the law of averages while making decision. Each purchase is a separate deal. If that deal makes money, you should be prepared to sell.
- Do not try to make money in every deal. It is impossible. See the overall position, whether you made money in the portfolio (not individual stocks) or not.
- Watch the market movement, government policy, concerned industry, and the industry that may benefit
- Invest new funds only when you feel that the market has stabilized and may not go down more. Allow the market to come up by 15% from all time low before deciding to invest more new money.
- It is always more profitable to average up than average down. In such case, your average cost is always below the market. For instance, if A 200 cost in bull market was 100 for 200 shares, and then crashed to 20, you buy 3 times at 20, 18 and 25. Then when it reaches to 40 and retraces to 35, buy some more. The idea is to catch the upward trend. Please note that this imperfect science. It all depends on the mental make up of an investor, and circumstances prevailing at that time.
- Always be alert and agile even if you are not participating in the market due to bad conditions. Always keep the market conditions right under your eyes. You never know when the screaming opportunity would arise.
- Be stock specific rather than market specific. If certain stocks go down more due to reasons peculiar to the industry, buy that stock regardless of the market conditions.
- EXAMPLE: When the oil prices were very high, near 145, the Airline stocks were very low, so also the refineries. They would have come down more due to industry specific reasons. Buy them.
- DO NOT sit over the stock like a Chicken hatching an Egg. If the stock has gone up higher and slows down, simply sell that stock at the market even if recent high could not be reached. When it comes down, buy it back. Do not use that money for other stocks. In other words, in bear market you float with the stocks.
- EVEN IF you make wrong decisions, do not worry. It is better to make 3 wrong decisions than not making any at all. Once you start making decisions, you will improve progressively with the result that you may one day make a big killing that will compensate you for all past losses. It will also improve your character. In every form of business or personal life, you will begin to make decisions rather than keeping the issues on back burner. Delay is gone from your life forever.
- Sit before Candle at night for 10 minutes.. . When you lose money, you do not get sleep easily. What you must do is to sit before a lighted candle for 10 to 15 minutes just before you go to bed. Focus only on light. Deep breathing also help you focus better. Inhale from left nostril and exhale from right. Presume that gains are coming in when you breathe and losses are moving out when you exhale. This has nothing to do with finance or stock market. It just makes you focus on trade as well when you transact. Secondly, it costs you nothing and gets everything.
- And finally, Dress Up at your Best during Bear phase… When you dress up well, you feel good and charming. You will begin to respect yourself. This is what you need. Money comes to those who are neat and clean. Good things always bring in good result – that is the rule of the nature. So do it.
I enclose the Hypothetical Portfolio and how is it restructured (go to the side bar – Download Center, scroll down to excel file – Rebalancing portfolio – 08-008 and download this file). This applies to all markets. Replace the names and indices as appropriate to your country. It is an excel spreadsheet where you can replace my entries with your stock name and quantity and price. You can modify to your needs as the time passes by.
Please remember, the Gains and Losses are the form of day and night. They come and go all the time. Face them like a Lion, not a Lamb. You are your best friend and your worst enemy. Pick up what you want.
This reminds me of a friend who died some time back. He used to display a banner in his home as under ( English translation from Gujarati – an Indian language)
These Days shall Never Be Forever
I asked him what it meant. He said:
In good days, it forewarns me not to overspend.
Good days never last forever. Save something when there is sunshine.
In bad days, it encourages me not to despair.
Do not spare your efforts. Double up. After all, these bad days too do not last forever.
Kalidas, Hong Kong
14-Oct-2008 Article ref: 08-008-Rebalancing Portfolio