SMART investment framework has identified five crucial parameters which need to be monitored for a successful investment experience.
1. Stick to Liquid Stocks: Investor must be able to sell current holding at any point of time. At Bombay Stock Exchange we have noticed more than 60% stocks never trade on daily basis. In absence of regular trading, such stocks are dangerous in two ways. (i) Such stock easily can be manipulated by an operator to give wrong impression of fall or rise (ii) If stock is not trading then at any moment market sell price can slide drastically from last traded price.
2. Multiple Stocks & Sectors: Always distribute your investment money in multiple stocks and multiple sectors. Our recommendation is to distribute your money at least in 10 (but not more than 20) stocks and at least 6-7 sectors (see Portfolio Advisor feature for assistance). Our historical data analysis has given evidence that any such combination has magical performance. For example NIFTY 50 (which has all leading sectors stocks and 50 stocks) has given around 18% compounding interest per annum on last 10 years scale and more than 12% for last 5 years.
3. Avoid surprising Stocks: Chamatkar Ko Namaskar (Say good bye to alchemy). Any stock which is rising by more than 20% in a single day may slip down by same amount some other day. We have two reasons to avoid them (i) Such stocks just disturb the rhythm of growth. Our wisdom and common sense stop working when rhythm is disturbed. Most likely result is that we can lose in such state of mind rather than gain (ii) Gain of 20% is not equal to loss of 20%. For losing 20% we have to gain 25%. More contrast example, for losing 80% (not uncommon for many investors) means one has to gain 500% (rarely heard that story) to equate.
4. Ride the Rising One: Do not buy anything which is 52 week low or at similar value proposition. Falling stock is like falling knife. Impact of holding such knife is often severe than imagined. We can also analyze the impact of this event on basis of loss 20% is not equal to 20% gain as explained earlier. Often investors are advised to buy a stock because it is about to bottom out or take U turn. Agree, why to buy at first arm why not at second arm? Let us assume that the stock is falling and current price is ₹ 140. Assume that our advisor is right and it bottomed out at ₹ 130 and took U turn. Our advice is to buy the stock while it is going up to ₹ 140 rather than investing when it is going down to ₹ 140. If you need more reason for the same? Read MUF concept.
5. Timely Withdraw: All stocks go through ups and downs. Unless one withdraws the money at appropriate time chances are high that one will lose most of the gain. Often we give analogy of harvesting a paddy field. If you do not harvest at right moment, all seeds will fall and you will have to wait till next harvesting season.
See Rule-X for actual evidence for 4 & 5 on NIFTY data. For individual stocks see Stock Review.
APS & SMART Investment Framework
APS investors (who have taken APS subscription) automatically follow the SMART rules without any extra effort. We have 400+ selected stocks which qualify criteria 1 & 3. We have Portfolio advisor this helps to compose a balanced portfolio to qualify the criteria 2. For criteria 4 & 5 we send periodic emails as well as SMS alert to APS subscribers
Did you like this article? Please share it with your social network