SAFE (Stock Analysis for Everyone) is an initiative to help common people to get benefits of the stock market. SAFE is not promoting a dream return to everyone which is anyways not feasible theoretically. Through SAFE we have intention to ensure the growth of retail investors as the regular market is growing. At present (based on our informal survey) more than 8 people out of 10 have experienced loss in the stock market while we have found that NIFTY has grown by 12% (yearly compounding) in last 20 years and 20% (again yearly compounding) in last 10 years.
20 Years NIFTY growth pattern compared with 12 percent growth line
10 Years NIFTY growth pattern compared with 20 percent growth line
NIFTY represents India's largest companies in the sector and typically they grow slower than rest of the companies. Theoretically, a random style of investment should return equal or better than NIFTY's return to investors. We investigated the issue by studying several cases and found that a typical investor with spread of 10 stocks in portfolio has made reasonable profit in around 8 stock while has lost significantly (40-60% loss) in 2-3 stocks, which eroded all profit. Such losses have similar impact in negative way as compounding interest has in positive way. We call it "Curse of Reduction" (opposite of "Impact of Compounding"). Simple example, if we have lost 10% in a stock then we require to gain in the same stock by 10% (nearly). As number goes high then it is not the same story. For 20% loss we have to target 25% profit. For 75% loss we have to target 400% profit.
In our finding we noticed that if investors take out their money after a loss of certain percentage (lets X) and do not enter the market unless it has gained same percentage from the recent bottom then their portfolio gets more balanced and gives significantly better return than index. Following chart has depicted the same with X=12, 15 and a hybrid where we have changed the figure on the way.
Impact of withdrawal at right moment (12 Percent graph has got overshadowed by Hybrid1215)
Need for change has been signalled in advanced (see the red circled portion). This simple rule and one time change in value of X has returned 16 times while regular NIFTY has just grown by 8 times.
Value of X=12 and 15 are just indicative one and no way we are claiming most optimal one for harvesting the maximum benefit.
Our product for investor APS (Active Portfolio Service) has been designed on the same findings, where we find the optimum value of X for various stocks regularly and send the alert on basis of events based on optimum X.
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