You Can Beat The Market, Even In Times Like This
May 19, 2022
After witnessing a profitable 2021, the Indian equity investors entered into a not so profitable 2022. First, the rising inflation spooked the market followed by the Russo-Ukraine conflict. This further exacerbated the already high energy prices and led to a global rise in crude prices as the world started moving away from the Russian supply, weighing on stocks even more.
High inflation prompted central banks all over the world to increase their interest rates. RBI too followed suit and in a surprise move, on May 04, 2022, the RBI increased interest rates by 40 bps & increased CRR by 50 bps as part of its measures to control inflation. This was an action taken outside the scheduled RBI Monetary Policy meeting showing the urgency on part of RBI. Additionally, RBI has clarified that it is likely to increase the interest rates to near pre-covid levels implying at least 2 rate hikes of 50 bps each in the next 2 meetings.
While the increase in rates will help tamp down inflation which we believe will benefit the economy in the long run, there is a fear among the investors that increasing rates too high and too fast may actually cause a recession. In light of such fears, the equity markets have been witnessing a sell-off across the globe.
Despite everything, we believe that it is indeed possible to beat the market, even in times like this. One of the major reasons why so many investors are not seeing the kind of returns that they want is because they don't know of any ‘new’ stocks to get into. They find themselves in mediocre stocks because they don't know of anything better instead.
The underperforming stocks
A lot of companies in the NSE & BSE are beating the index and showing positive returns this year. But then many others are underperforming the Index with roughly two-thirds showing a negative return. Even 'good' companies like Infosys Ltd are down by -20% or Wipro which is down -30 or Avenue Supermarts which is down -30%. So what gives?
We don't intend to single these out so you can feel bad in case you are holding them in your Portfolio, But instead, we want you to stop and think about 'why' you have them. Nobody invests so that they can underperform the market. If you're underperforming the market, then it means that you have more of these types of laggards in your portfolio than leaders.
How the Other Half Lives
There are a lot of stocks that are beating the Nifty too. Take Tata Power, SRF or Tata motors for instance. They all are outperforming the indices. But let's move outside of the indices for a moment.
Have you ever heard of a company called Astec Life? If not then let us share with you that it has outperformed the market by gaining +73.2% since the start of the year. What about Gokex? It is up by +115.3%. Do you know of Intellect Design Arena? It is up by +167%. This proves that there are hundreds of stocks producing fantastic gains that many people may never have even heard of.
The Stock market is filled with people who hear or read about such stocks at a much later date & think to themselves that if only they knew about that one stock ahead of time, then they would have surely held that in their portfolios.
Expand Your Stock Universe and Enhance your Stock Picking Game
You don't have to reinvent the wheel in order to create your stock universe. Increasing your knowledge and awareness of newer & lesser-known quality stocks is actually easier than you think.
As you may know, there are close to 4000 listed stocks on BSE and about 1800 on NSE. This includes highly valuable companies like TCS and absolute thuds such as pretty much all the Z category stocks on BSE. Companies such as these form the two extreme ends of the spectrum. The question is, should you track all these stocks to build a profitable portfolio? Of course not! Doing so would be a waste of time.
You need to filter out stocks & create your own stock universe so that you can maintain a track of a fixed number of quality gems. It can be quite straightforward and be limited to the Nifty 50 stocks or the BSE 500 stocks or you can choose to custom create your universe on any parameters. For example, out of the entire 1800 stocks on NSE, you could use a filter to weed out stocks that have a minimum market cap of at least 1000Crs. This filter alone will shrink the list to a much smaller & manageable set. You can further add other criteria such as the market price of the stock should be less than 2000. So on and so forth. Using such custom creation techniques can help you filter out and build a universe that exactly matches your requirement.
We suggest that you have at least 150-200 stocks in your stock universe if you wish to build a portfolio of 12-15 stocks.
Stock Picking Secrets of the Pros
One of the best ways to begin picking better stocks is to see what the pros ie the ‘stock market experts’ are doing. Whether you're a growth investor, a value investor or you prefer fast-paced momentum stocks, there are certain rules and principles that these experts follow to maximize their gains. You too can follow their rules & enhance your portfolio’s gains.
For Instance, the experts keep a definitive eye out on acceleration in earnings. Studies have shown that most successful stocks have seen an acceleration in earnings before an uptick in their prices. An acceleration in earnings growth refers to an incremental rate of growth on a yearly basis. For instance, company A's growth rate in the previous year stood at 10 per cent while this year it is pegged at 13 per cent. Hence, there is an acceleration of three percentage points year-on-year. On the other hand, company B's growth rate in the previous year was 20 per cent and this year, it is again 20 per cent, then there is zero acceleration in the company's earnings growth.
An increasing percentage of earnings growth means that the company is fundamentally sound and has been on the right track for a considerable period. Meanwhile, a sideways percentage of earnings growth indicates a period of consolidation or slowdown while a decelerating percentage of earnings growth may at times drag prices down.
Another principle that profitable investors tend to follow is that of always choosing the market leaders. The companies in leadership positions can effectively control the pricing in their segments due to their strong hold over the market. At the same time, they can bargain for better prices from their suppliers. They also boast an enormous brand power after having earned the trust of customers over several years. Industry leaders enjoy a healthy cash flow due to sustained high demand for their products and get funds at a much lower cost than their competitors. For investors, these companies have typical traits that make them worthy investment candidates. They are among the first ones to benefit in a recovering market and also enjoy high liquidity on the bourses as investors always have a high appetite for these stocks.
An Easy Way to Start
An easy, smart & efficient way to start curating an evergreen portfolio that can outperform the markets is to adopt a strategy that is built on similar smart rules or principles. We at StockAxis have filtered out the six stock market principles that hold true throughout ups and downs. We have gone a step further and curated a smart investment strategy MILARS that is based on these six guiding principles. MILARS is an active investment strategy that is complete with selling rules and aims at creating substantial wealth over time by investing in quality stocks at the right valuations.
We invite you to learn more about MILARS so that you can start building a healthy portfolio that can make all your financial dreams come true. Even now, the equity market is full of golden investment opportunities. The sooner you invest in these quality gems, the more potential gains you stand to gain. So don't delay and start investing!