Working of Bear Markets:
As we get deeper into bear markets, the equity investors are increasingly losing faith & sheen in the stock markets. The braoder market is either poised for a long-drawn range bound movement or resume its journey towards attaining its illusive bottom levels. During such bear markets, investors tend to lose interest in equity markets & stay away as a natural instinct on constantly witnessing markets making newer lows. Even investors holding substantial cash & sitting on the side lines, tend to delay their decision of investing in markets until there is some semblance of stability or a new wave of up move.
This article is primarily aimed at new investors who wish to start accumulating good stocks, but have little knowledge as to how to get started with it & which stocks to buy due to their scope of limited knowledge & research in equity markets. Though, even other investors can take a clue from the list of stocks mentioned in this posting as to how to divide the portfolio into parts and give varied importance to different parts of the portfolio depending upon their fundamentals.
However, long-term investors can find good value among strong fundamental stocks during such depressing times. Most of the big wealth is created by making shopping decisions during times of extreme pessimism and cautious outlook.
The valuations are much more subdued and reasonable during such times when supply outstrips demand. During such phase of slowdown, the investment strategy needs to be staggered as the worst is not yet over for the markets. The price may further dip from the cost of acquisition of investors, but in longer-duration the chances of substantial appreciation stands good and strong.
Building-up of Equity Portfolio:
In this posting, I have discussed about Portfolio Building for Long-term Investment in Equity markets. I will speak out my view on my favourite list of stocks that should constitute as a part of one’s long term aspirations from equity portfolio. The list is reflection of my views on stocks to be held for long term. But, the views of investors can differ from this list of stocks depending upon individual risk profile, long term goals, outlook on equity markets, expected return ratio, age-profile of the investor and many other aspects that goes into determining the portfolio features of an investor.
It is also important to understand that a long-term portfolio should be well Diversified in terms of exposure to specific ‘Sector/Industry’ and even in a ‘Stock specific’ way.
Prior Objective Analysis:
Before building or starting up with a new portfolio, the investor should carry out certain analysis of his future needs & expectations in terms of returns from his money intended to be invested for long-term goals. Without the direction to your portfolio goal, it will run into troubles caused by lack of clarity about future goals and expectations. Like, for example, an investor who has no goal for his money invested, may not be able to determine his target to book profits on his portfolio, as may be suited to his future requirement.
Another case in point, supposes an investor is investing for long-term through Mutual funds. If he has no clear priority in his goals, how would he determine whether to invest in the ‘Dividend’ option of the scheme (which pays dividends based on the fund returns) or to subscribe ‘Growth’ option scheme (where the fund culminates all the returns that accrue to the fund & reinvest the money for further growth). Dividend option gives the investor an option to get regular income in the form of dividends announced by the fund on regular basis. On the other hand, if the investor feels he would be in no dire need of funds in between the time intervals, he may as well opt for the ‘Growth’ scheme of the Mutual fund.
Balancing of Equity Portfolio:
(A) Magnetic touch of Speculation: Equity investments is, traditionally, regarded as ‘long only’ portfolio with a primary objective to earn steady income in the form of ‘dividends’ & secondary aim to earn returns on capital from investments. But, with on set of every new bull phase, this feeling of stable & safe returns is vindicated once investors taste the blood of ‘short-term gains’. Investors get attracted by the prospects of quick gains in few months over long-term wealth creation process.
(B) Categorizing Portfolio: Smart investors are aware that such short-term speculative trading is fraught with dangers of market uncertainty & unpredictability. Sharp market fluctuations can as well inflict painful losses to such investors who may have diverted their attention from ‘long-term portfolio building to short-term speculation’ unless market sustains in positive. To counteract this dichotomy risk of sharp portfolio fluctuation, investors shall go for division of portfolio into 3 different categories.
1) Core Long-term Portfolio
2) Tradable Long-term Portfolio
3) Short-term Speculative Portfolio
Core Portfolio: The Core long-term portfolio refers to a specific set of few very good fundamental stocks that needs to be held for long-term without indulging into trading in these stocks irrespective of trading opportunities based on news/technical indicators/actions related to these stocks. Though, that does not mean that investors should stop tracking the prospects of these stocks once they are bought as a part of their ‘Core’ long-term portfolio. Investors should keep tracking even the best of the best company in their portfolio in the light of current market events, prospects & potential.
Short-term Portfolio: Short-term portfolio is, on the other hand, dictated by a number of market forces like news, rumors, technical indicators, triggering of set target and most importantly exiting when Stop loss levels are hit. Stop loss plays a very important part in determining exit on failure of the call to thrive as per expectations on the stock. Risk management strategies need to be adopted in short-term calls in order to ride out the market uncertainty & fluctuations.
In this posting, we will concentrate on discussions about stocks to be constituted as a part of building ‘Core Portfolio’ and ‘Long-term Portfolio’.
(A) Core Portfolio:
Note: Core portfolio is a list of ‘must have’ stocks in any good long-term portfolio. All the above mentioned 7 stocks should form a part of a core portfolio. As to how much should each of the above stocks constitute as a part of the over-all portfolio in Percentage terms would be dealt in next article on Diversification of Portfolio.
1) Reliance Industries: This stock has a long tradition of rewarding its share holders driven by its diversified business operations led by crude Refining & more recently gas discoveries. The stock has an immense unlocking prospects & large potential reserves in initial stage of discoveries.
Accumulation Zone: Rs.900-1220.
2) Larsen & Toubro: It is yet another diversified stock from engineering & capital goods space with its wings spreading in various sectors like shipping, defense, nuclear power, IT, etc. L&T holds a pending order book of over Rs.75,000 crore. It is a leading Engineering & construction (E&C) company in India.
Accumulation Zone: Rs.450-650.
3) Bhel: It is the largest power equipment manufacturer in India with a pending order book position of over Rs.1 lakh crore. This PSU company forms a core part in India’s emergence as a nuclear power & energy. The company has proven capability of executing power projects from concept to commissioning.
Accumulation Zone: Rs.950-1250.
4) NTPC: This company is by far the largest thermal-power generating company with highest share of power being produced in India. This PSU is placed at the core of India’s nuclear ambitions. The stock has been an out-performer versus the benchmark indices on the back of strong prospects of the power sector and fundamentals of this power company.
Accumulation Zone: Rs.115-145.
5) State Bank of India: This Public sector bank is the one of the largest financial institution in India which holds a record number of branch network spread across India – including urban & rural areas. This large-cap bank is leading the race in providing cheaper & subsidized loans to spur the economy.
Accumulation Zone: Rs.750-950.
6) Power Grid: This PSU Company is a clear case of monopoly in the transmission sector with one of the largest grid network in India. The company has a market share of around 40-50% in the Transmission sector. The company also provides transmission-related consultancy services.
Accumulation Zone: 55-70.
(7) Reliance Comm: This telecom company has presence in both GPRS and CDMA networks. The company has more recently spread its wings within the GPRS network on acquiring licenses for pan India network. The stock has recently witnessed a sharp correction.
Accumulation Zone: Rs.135-185.
(B) Non-Core Large Cap Portfolio:
(Figures within brackets represent the levels of ‘Accumulation Zone’)
1) ONGC (Rs.550-650)
2) TCS (Rs.400-550)
3) HDFC Ltd. (Rs.900-1200)
4) ICICI Bank (Rs.250-350)
5) ACC (Rs.450-550)
6) Grasim (Rs.800-1200)
7) ITC: (Rs.135-155)
8) Cipla (Rs.145-175)
9) M&M (Rs.250-350)
10) Sterlite Ind. (Rs.180-240)
11) DLF (Rs.125-175)
Note: From the above 11 Large Cap stocks, investors should not for all the stocks in the list. They can choose 6-7 stocks depending upon size of an investor’s portfolio, Sector prospects from time to time & the portfolio features & expectations of investor.
(C) Core Mid-Cap Portfolio:
1) R.Capital (Rs.270-370)
2) Suzlon (Rs.30-55)
3) R.Power (Rs.80-115)
4) Sesa Goa (Rs.60-85)
5) Thermax (Rs.155-220)
6) Bharat Electronics (Rs.500-650)
7) Pantaloon Retail (Rs.100-135)
8) IVRCL (Rs.80-125)
9) A.B.Nuvo (Rs.300-450)
10) IDFC (Rs.45-60)
11) GSPL (Rs.25-35)
Note: From the above list of 11 stocks of Core Mid-cap portfolio, Investors should select and buy at least 6-7 stocks from long-term horizon. All the above stocks are fundamental picks from the mid-cap space.
(D) Non Core Mid-Cap Portfolio:
1) LIC Hsg Fin (Rs.170-215)
2) Gitanjali Gems (Rs.35-55)
3) Oracle Financials (Rs.450-600)
4) Bank of Baroda (Rs.170-200)
5) Praj Industries (Rs.45-65)
6) PVR (Rs.70-110)
7) Videocon Ind. (Rs.80-130)
8) Welspun Gujrat (Rs.60-90)
9) Educomp (Rs.800-1200)
10) Jain Irrigation (Rs.280-350)
11) Punj Llyod (Rs.70-120)
12) Everest Kanto (Rs.90-120)
13) Adlabs (Rs.150-200)
14) Indian Hotels (Rs.30-50)
15) Crompton (Rs.110-140)
16) Cummins (Rs.140-165)
17) Asian Paints (Rs.600-700)
18) Financial Tech. (Rs.300-450)
19) Titan (Rs.450-600)
20) Mundra Port (Rs.250-350)
Note: From the above list of 20 Non-core Mid-cap portfolio, investors can select remaining part of the mid-caps stocks to complete their portfolio balance. How much of mid-caps to select will be discussed in my next article.
1) Punj Llyod: Looking at the fundamentals & price erosion in stock value of Punj Llyod, the stock would have been included in the ‘Core Mid-cap Portfolio’ category. But since we already have L&T as a part of Large-cap Core portfolio, investors can determine the decision of buying this stock as ‘Optional’ in nature.
2) LIC Hsg. Finance: Even this stock would have easily formed a part of core mid-cap portfolio based on its superior fundamentals, low beta fluctuation & cheap valuations, but for the presence of another stock from the same sector- HDFC Ltd in large-cap Non-core portfolio. Though, investors who have not opted to Buy HDFC Ltd. could certainly include LIC Hsg. Fin in the core mid-cap portfolio.
Some stocks can prove as 'Dark Horses' for long-term investors if they are bought at lower levels and valuations. Currently, these stocks may not be in lime light due to some fundamental problems or High Debt problem or Pledge issues or Credit crunch (or if nothing, just that the stock may have melted down on the back of severe bear phase) that some of these stocks may be suffering from. But as and when there is recovery & stabilization in the global market conditions over longer duration, these stocks may fare well if all things fall right for such stocks. These stocks can as well be termed as 'Contra' bets.
1) Tata Motors
2) Ranbaxy Laboratories
MID-CAPS / SMALL-CAPS:
2) Kalindee Rail
4) NIIT Ltd.
5) Time Technoplast
6) Ess-Dee Alluminium
7) Bajaj Financials
9) Hind. Construction
In My Next Post:
I will discuss as to how to arrive at a well-diversified list of portfolio from the above mix of large-cap & mid-cap stocks both. The strategies that could be adopted to get a right mix in terms of sector allocation & (market) capitalization levels of the above stocks. So, in my next posting, don’t miss out on various strategies that could be adopted while diversifying & risk minimization of portfolio.
Share your Favourite Portfolio in the 'Comments' section:
Readers are requested to post their view/query/suggestion on the above PORTFOLIO in the 'Comments' section. Readers can also post & share their favourite portfolio constituents for 'Long-term Investments' in the same Comments section. This will make this posting on Long-term portfolio more interesting, interactive & explore new stock ideas among themselves.
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