Scene 1: Achieving 500% yield in 5 years in a single stock
Scene 2: Achieving 20% yield in 1–2 year(s) in a single stock
Probability of Scene 1 is 78.96% less than Scene 2. Right? Most of the big bulls like Rakesh Jhunjhunwala and other majors also hold a stock for average of 1–2 years. So let’s see how to pick stocks that give 20% yield in 1-2 years.
There are multiple strategies to achieve this. I will talk about the dumbest one and simplest one which has high reward low risk. I call it “Shopkeeper Strategy”. I read about it in a book written by Mahesh Chander Kaushik namely “The Winning Theory in Stock Market“.
But what mentioned in book, I have optimized it further as the strategy mentioned there has a high drawdown of 67% (Yes, I back tested every single move Mr. Mahesh publicly stated.) but it always touched profits !!
The book is pretty weird to read.
This is the Spiritual formula: – on Tuesday take a small piece (near about 3-7 inch) of Shisham (Dalbergia Saisso) tree bark. Wash it with fresh water and dry it. Always keep this bark in your pocket when you work in the market.
Then he attached the picture of a tree. Well, there was an entire chapter on it. Let me summarize the strategical gist out of the book point wise on how to pick stocks according to me. Then you can see if it is feasible for you to earn 500% yield. It will depends on your risk appetite .
#1 Diversify the Portfolio
Why don’t retail investor treat their stock market investment like retail shop.
If you have 100K, invest 5K in 20 different stocks. Or, in other simple hand, do not expose more than 5% to a single stock.
Always start buying from a low price stock that’s fundamentally good.
#2 Don’t incline to same sector
Well, if you buy all the pharma stocks with 5% allocation that will be high risk as sectorial fund is the riskiest investment ever. Diversify into further sectors.
#3 Profit Booking
Book profit at 15% if you have hold it more than 1 year. Book 20% if you have hold it less than 1 year.
Why there is difference of 5%? Well, if you have hold a stock more than 1 year; then you can enjoy 15% tax benefit. Otherwise 15% has to be deducted as a short term capital gain tax. So the question is – How to pick stocks which we can hold for more than a year.
#4 Stock Nature
Dividend: Buy dividend paying fundamental stocks so if the stock doesn’t achieve target in the period ; you can enjoy dividends which are also tax-free. (*Actually companies pay tax on dividends directly to the Government before issuing the dividend). Here you can read another story where some investors are not planning to sell their stocks any soon and enjoying hefty dividends.
It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price. – Warren Buffet
Fundamental: The dividend rule is not a must cause there are some stocks which done pretty well without dividends. Warren Buffet’s Berkshire Hathaway doesn’t pay a dividend.
But our chosen stock must have strong fundamentals.
#5 Average Out a Stock
Don’t average out stocks when they fall but you can do this when you are assure of having high probability of win.
I did it for Asian Paints recently. It plunged huge from my buy price. So I bought it again at low price yesterday cause I was sort of certain of today’s uptick from it’s technicals.
Averaging out is a good technique when you have good hold of market.
Let’s learn how to pick stocks like a opportunist. Always keep 50% of the money as liquid. Who knows when opportunity comes. News like recent Surgical Strike on Pakistan, US Presidential Election, Indian PM Selection, Demonetization enables to buy amazing stocks in dips.
And it gives steep relief rally. You can see my massive volumes here in such days. Investors like Rajiv and Dolly Khanna avoid Pharma and Bank Stocks for this reason as it shows more volatility due to fundamental rules. Personally, I get more happy when markets are down cause it implies a strong volatility.
#7 Base Price Concept
The most apt answer on how to pick stocks is – DCF Analysis. Normally we do DCF (Discounted Cash Flow) analysis to find a stock’s ‘should-be’ stock price. If the current value is lower than it, we call it undervalued.
We use Base Price here. Base Price is 3 years average price of a stock. It is easy to calculate using Google Sheets here. Save it to your Google Drive. All you have to do is put the ticker name of the stock.
Always buy a stock below 20% of its base price. Try to book profit 20% above the base price. If the stock is in uptrend and the CMP (Current Market Price of the stock) is 10% above the base price; then it is a value buy.
#8 Net Sale Per Share Concept
When we say EPS and PE ratio we are talking about only profit making companies because EPS are calculated on the net profit basis and profit making companies are always traded at high valuations. So it is more wise to invest in a loss making company which has possibility to be a profitable one.
When companies expand, the expenses incurred is shown as loss but company expansion is very profitable in the long term. EPS and PE will not reflect this.
Let’s call it RPS (Revenue per share). Take last year net sale amount and divide it with the total number of shares.
#9 Book Value
Book Value has to be higher than Current Market Price of the stock. If it is 20% lower than the CMP then it is a value buy.
#10 The Optimized Target Price
Though our target is to buy the stock 20% below the base price and sell it with 20% profit (~ I know I mentioned to try to sell above 20% of the base price which means 40% profit. I’ll come back to that) but here is a more optimized target price to buy which we can get by making an average of base price, book value and the NPS and then reducing it by 10%.
Buy below 20% of the optimized target price.
Note: If the CMP of the stock is above 20% of the optimized target price. Avoid it.
#11 Block Deal in Stocks
A block trade is a permissible, noncompetitive privately negotiated transaction either at or exceeding an exchange determined minimum threshold of quantity of shares, which is calculated apart and away from the open outcry of the electronic markets.
You need to stay away from the stocks where bulk deals happen regularly. It completely disrupts our concepts. Always avoid a stock with recent bulk deals (at least 2 years). If the bulk deal is happening when the stock is traded near 52 year high or low; then it is maybe a sign of reversal.
Recent Block and Bulk deals of an stock is always available on Stock Market.
#12 Year High/ Year Low Ratio
It recommended a stock which year high/low ratio is below 2 but this ratio is accepted till 2.5 when company posts good results after year low. This is because a good company doesn’t jump 100% in 52 weeks.
In the whole method, we close our position if the stock crashes 50% from the year high or the Year High/Year Low ratio becomes more than 2. Then buy back the same stock when it is back in uptrend and Year High/Year Low ratio is less than 1.5
Also do not buy a stock which falls 50% from a year high and do not buy a stock which rises 50% from a year low.
#13 Face value Comparison
In this method we compare by face value instead of book value.
IDBI is trading at 65 and it has a FV of 10. Then CMP/FV = 6.5. Similarly MRF is trading at 50,000 INR and having a FV of 10. Then CMP/FV = 5000.
So, we consider min(CMP/FV) as the best. Anyways, if the stock is trading below it’s face value (happens with Penny stocks) then it is too risky to touch.
#14 Trailing Stoploss
In the optimized target price section it’s mentioned to book profit of 20% which counters a previous argument of buying 20% below the base price and selling 20% above ~ 40% profit. In our learning curve of how to pick stocks, our trailing StopLoss is an important factor to make good profits.
It’s depends on your greed and risk appetite. What we meant is 20% above the base price is a strong support. However, here comes the concept of trailing stoploss for people having higher risk appetite. Whenever you’re in the profit zone of 20% profit (25% in case of short term) do not sell it immediately.Put a trailing stoploss like 5%. The less the merrier, the more the riskier. But without large risk, there is no larger gain. But I recommend you to keep 5%.
#15 Promoter Holding
Bill Gates is a Promoter of Microsoft. That’s a simple way of telling who’s a promoter. Do not invest in stocks in which promoter stake is less than 15%
You can consider penny stocks as a scarp business and you can invest maximum 3% of your wealth into it depending on your risk appetite. Stock selection follows the same procedure but chances of loss is there but there are also chances to hit with multi-baggers.