Friday, June 19, 2009

Hurdles In Following Strategic Plans


In the 'Comments' section, an interesting query has been posted by Abhay pertaining to the likely hurdles in following the Strategy for Investment at different levels.

In the query, Abhay has registered some sort of apprehension on the use of strategy and consequently missing any upside momentum as stock prices keep moving upward. Though, he has not expressed this in writing, he is somewhat confused as to what should be done in scenarios when stock prices keep on moving higher on every bout of selling that an investor/trader uses by way of strategy.


The feeling could be roughly described as below:
(A) I sold some quantity of stock at Rs.X, but later the stock price went up to Rs.X+1.
(B) I again sold some quantity at Rs.X+1, yet again after I sold the stock price went up to X+2.
(C) Now, if I continue to sell some more at Rs.X+2, what if the stock rises to X+3?
(D) Hey, You never know... the stock may ultimately top out at an exuberant X+5 levels. If so, why should I sell now?
(E) In the meanwhile, what is Market Crashes down in near future?


Abhay's Query:
I had L&T at Rs.950/- I sold my 30% of L&T at Rs.1400/- after 2 days.
It rose to Rs.1650/- What should have I done, sell again or what? Strategy for investment plan is great... but it does have some limits. Can u please suggest the readers and me a better strategy, if any? I have short-term perspective on L&T.

In this posting, I shall try to address the above query in detail regarding how to use the strategy for Buying or Selling more fruitfully to avoid any 'Missed-out' Feeling. Whether we can use some other strategy? The posting seems to be a bit long, but i shall try to keep it as simple as possible:


The Pyramid Concept:

Lets take an example of a ‘Pyramid’. It is typically tapered at the top and it gradually broadens with more space as we go down towards its base. It consumes the broadest space at the base and most narrow at the top.

In strategy for buying and selling stock, we have to somewhat collate the same strategy as mentioned above for a Pyramid. The profits are small and limited as the stock starts its upward journey from your cost price. But, as the stock finds itself in the midst of momentum rally, the profit scope broadens. This is what will should try to inculcate in our strategy for trades to squeeze the maximum benefit from its follow-up.

Let me come directly to the query of Abhay in specific relation to his trade in L&T which he had bought at Rs.950/- for Trading purpose.

Trading Strategy:

1) Abhay has bought L&T @Rs.950/- (Let us assume he has bought 20 shares with an investment of Rs.19000/-)

2) Since he has bought this Infrastructure and Capital Goods stock just in time before an all-important event of Budget announcement, we will likewise strategize the trade keeping that in mind. So, we can factor in that the stock shall make bigger moves before the budget as the stock is placed at the sweetest spot to benefit from government’s emphasis on Infrastructure spending and development.

3) We will first create a strategy to sell the stock at specific intervals or at specific price points. Like, for example, the selling should be in small quantity at profits in initial stage. However, the selling should gain more aggressiveness as the stock rallies higher and we move closer to the base of ‘Pyramid’. And, at last stage of excessive euphoria, our selling should reach peak levels (at the bottom of the pyramid) when others are buying aggressively.

4) So, going by above planning schedule, we will strategize to book profits in L&T in 3-4 phases at different price points. The selling would be done in such a manner that Abhay should benefit more with every rally even after selling at lower levels but still at profits.

Phase 1:

First we would sell 20% (20% of 20 shares = 4 shares) of the stock at Rs.1200/-. Amount redeemed Rs.4800/- with a profit of Rs.1000 accrued on 4 shares bought at Rs.950/- and sold at Rs.1200/-.

Phase 2:

Second we would sell a large chunk of 30% (30% of 20 shares = 6 shares) of L&T at Rs.1450/- assuming that the stock has already appreciated a whooping 50% from Abhay’s cost of Rs.950/-. Amount redeemed Rs.8700/- with a profit of Rs.3000/- on 6 shares bought at Rs.950/- and sold at Rs.1450/-. We have got rid of 50% of the stock held until this phase- 20% in Phase 1 and 30% in Phase 2.

Phase 3:

Now, to the surprise of everybody the stock appreciated to Rs.1650/- in a matter of few weeks. No problems, we will sell another major 30% (30% of 20 shares = 6 shares) of our L&T scrip at Rs.1650/-. Amount redeemed Rs.9900/- with a profit of Rs.4200/- on 6 shares bought at Rs.950/- and sold at Rs.1650/-. At the end of this phase, we have almost sold-off all our stocks with barely 20% of the stock still left to be sold. But, herein lies the caveat. One should not under-estimate the ability of return generation from these left-out 20% stock, if they're sold at higher prices. The reason being, these remaining 20% would be sold at the 'BASE' of the Pyramid, which would yield attractive returns even from a small quantity.

Phase 4:

Now, we are skeptical whether the stock will move to Rs.1850/- or not since the stock has almost doubled from Abhay’s cost price in a compressed time horizon. Still we are left with a crucial 20% (20% of 20 shares = 4 shares) of the lot which Abhay had originally bought at Rs.950/-. Lets suppose that L&T moves to Rs.1850/- we will sell all the remaining 4 shares at this price. If this price does not come true, Abhay will have to maintain a Trailing Stop Loss of Rs.1650/- on the breach of which he has to sell all the remaining 4 shares. In fact, he can as well observe a Deep Trailing Stop Loss of Rs.1450/- if he is a high risk trader (in case he can bear some risk of holding the stock to once again test his luck for Rs.1850 sort of levels). We will presume that Rs.1850/- levels did not turned up and Abhay sold the remaining stock at Rs.1650/- as per our Trailing Stop Loss Strategy.

5) The Rising Pie: If you notice in above 4 phases, the profits have gone up in increasing order of value. Abhay managed to sell 50% of the stock in Phase 1 and 2 with substantial profits of Rs.4200/-. However, the same amount of profit of Rs.4200/- also got accrued from Phase 3 itself, indicating that a larger share of profits is garnered as we move up the value chain of the Phase wise strategy following.

6) If you go back and visit the phase wise selling as described above, one would notice that we sold the first chunk of 50% shares at a healthy average of Rs.1350/- and the remaining 50% sold at Rs.1650/-. The average of all shares sold comes to Rs.1500/- which is still 50% higher from Abhay’s buying cost. Once can argue, that the returns would have been 100% if Abhay would have sold all his stocks at Rs.1850/-, but is it possible to time your exit at the highs as per one's wish. It is almost impossible to time exit at the peaks even for the best of the best Analysts or Fund Managers.

7) Stock Reversal: One another scenario would be, suppose what if the stock stops its upward journey at Rs.1450/- and does not test higher levels from there? During such time, Abhay would have already sold 50% of the stock based on guidelines in Phase 1 and 2 as mentioned above. But, for the remaining 50% of the stock held, Abhay will have to maintain a Trailing Stop Loss based on Technical levels which could be around Rs.1200/- or Rs.1300/- as the case may be depending upon stock to stock.

8) Now, suppose the stock reverses after testing the Trailing stop loss levels of Abhay, than again, based on Technical levels Abhay (as a trader) shall re-enter the same counter by buying the stock on an upward break-out above the previous highs of L&T at Rs.1450/- with a strict stop loss and a probable target of Rs.1650/-. Traders should always trade with the trend.

9) Where is the Opportunity? Suppose the stock tests Rs.1450/- and starts its decline for a long time to come. In such case scenario, if Abhay would not have booked even the 50% gains as mentioned in Phase 1 and 2, we would have felt terribly uncomfortable in selling at lower levels. At some point, even his cost of Rs.950/- would be tested in some vicious down cycle dragging all his profits to nil. At such times, use of Strategy (including stop loss strategy) would come in handy in aiding a trader from taking any emotional decision for his trades.

10) In the long run, use of strategy will help you in entering and exiting your desirable stocks in a swift and a gradual manner without hurting your preset targets and disallow your decisions to be dictated by emotion-led calls. Use of strategy would also mean that a trader does not get stuck into his trade at any specific levels and gets to benefit from all the up cycles and down cycles of the industry.

Using Strategy in Investment:

Taking the same case scenario of Abhay from a long-term Investor’s perspective. Abhay bought 20 shares of L&T at Rs.950/-. Now, in a short span of time Abhay stands to earn a smart profit of Rs.500 per share at Rs.1450/- on L&T. What should he do?

11) Although Abhay has invested with a time span of 5-10 years, if he wishes to makes use of his portfolio investment held in L&T as a ‘Passive Trade’- he can sell 30% of the his stocks invested in L&T at around Rs.1450 to Rs.1650/-. By this, he will ensure that he is able to book profits in 30% of the stock held. But even still, he has a major 70% of the stock still invested to gain from any future upside momentum in the counter.

12) Buying Back Lower: In longer-term, Abhay will definitely get an opportunity to buy this 30% chunk back at lower levels of say around Rs.1200 or say Rs.1100/- or say even Rs.900/-. At that time, he can buy back those 30% chunk on dips, which sums up to nothing but lower averaging of his over-all cost for owning the stock. More aggressive but Passive investors could as well sell 40-50% of the stock around Rs.1650/- where valuations are more expensive for the counter. They can as well buy back some qty around Rs.1400 followed by Rs.1200 and even Rs.1100, as the case may be.

Footnote:

The follow-up of this strategy does have some specific hurdles. But, these hurdles are not strong enough that investors/traders can willfully shun the use of this strategy. The benefits from the use of the strategy clearly out-weighs the hurdles from the follow-up of the same.

Its somewhat similar to SIP (Systematic Investment Plan) facility that one avails of while investing in Mutual funds- investing in small lots at regular time intervals irrespective of market levels in order to benefit and brace from market volatility. Strong and Constant Perseverance in using the strategy for longer times to come will prove that the strategy has more pronounced benefits than hurdles.

The strategy concentrates on the aspect that when you book profits you dont book only part-profits and ride the up side momentum with the remaining shares held. On the other side, in the down trend, it ensures that you buy only in small but handful quantity on every larger dips. It sees to it that you an benefit in averaging on any further down side as the down leg deepens. Most of all, it ensure that your RISK is cut on both sides in any market condition.


Disclaimer: All data, content and/or reports posted by Viral Rajnikant Dholakia on this site are only for information and educational purpose of visitor/readers of this blog. It does not constitute to be a recommendation/offer/advice to buy or sell assets/securities in any form. Individuals/organizations are requested to take an informed call by consulting their Financial Advisor before acting on any matter/data published on this blog. This blog does not warrant of any kind of accuracy, adequacy and completeness of data, ideas or thoughts published in it. This site and Viral Rajnikant Dholakia assumes no responsibility or liability or loss or damage of any kind/nature for your trading and investment decisions and its consequent results.

19 comments:

mohd said...

Hi Viral
It is am excellent n simple to understand post. We could bye at lower levels but more importantly selling is a great art where i failed repeatedly, your post has given me a practical plan. I bought GUJNRECOKE and Tanla but failed to book to profits due to no plan. Thanks and wish u all success.Umar

Vikas said...

Hi viral

Nice post - easy & to the point. I want to ask you a very different question... Govt has announced three major decisions last week...

1. 10% disinvestment in BHEL
2. 3G License to be auctioned
3. State bank of Indore to be merged with SBI

In your earlier post you have recommended to buy BHEL ..does it make more sense now to accumulate this at regular dip

with 3G license being auctioned in a short span - which telecom scrip will reap max. benefit for a Long term view... which stock should be accumulated keeping this in mind

With Subsidiaries of state bank getting merged with the parent company, can we show interest in buying SBBJ, SBT & SBM ..as these will also be merged at some point of time...

My last question to you is ...how do you see Financial Technologies faring in future...this company has big plans for India & abroad with ADAG group

Awaiting reply

Thanks
Vikas

Antriksh Patel said...

Hi Viral,

Very true, exit has to be planned. The greed is the fundamental barrier which has to go.

Regards,

Antriksh Patel

Viral Rajnikant Dholakia said...

Dear Vikas,

I had recommended buying power equpiment major BHEL as a Trading Call. The call was given to accumulate the stock in the range of Rs.1900-2050 on May 20, 2009. The Targets for the call were given as Rs.2300-2500.

Since then, our first target has been achieved at Rs.2300/- over where a direction to book part-profits was given earlier.

Dear Vikas, if you have missed trading on that call and you wish to trade in the stock again do observe a strict Stop Loss of Rs.1965 on closing basis. Near term Target and Resistences are placed at Rs.2175-2285-2350 levels.

Please Note: The call on BHEL is only a Trading idea and not an Investment bet at current valuations.

Coming to your query on auction of 3G License, as per latest news it seems that government is set to double the base price for auction from Rs.2000 crore to Rs.4000 crore approximately.

This would mean that Telecom companies interested in offering 3G and WiMax services to its customers will have to fork out more money to obtain licenses. This, in turn, will make these elite services more costlier for the end customer.

Going by that, this does not seem very positive news for Telecom companies, atleast from the current standing of the news flow. Any follow-up news need to be tracked to get more clear signs on the issue.

From valuations perspective, Bharti is well placed at current juncture from Investment perspective, though not aggressively. But, the downside shall be limited in this stock even if markets are to correct substantially. (Not a Trading idea)

SBI is expected to trade strong at least until Budget. If you wish to trade in SBI w.r.t. mergers with its subsidiaries, you can observe following levels:

Stop Loss: Rs.1630 (Closing Basis)
Targets: Rs.1760-1880

Pls Note: At the end of the day, the prospects of heavy weight SBI will hinge on the trend in the market and will be an out-performer in a stable market. (Views are for Trading until Budget)

Financial Technolgy has rallied sharply from Rs.400 to Rs.1300 in last 4 months. Almost 200% appreciation from its lows. FT is a niche company which has clearly emerged as an out-performer till now.

My view is that the company shall continue to perform well even in future but based on market trend. The company still holds stake in number of Commodity Exchanges around the world. Quite possibly, the stock will go on to test its all-time highs of Rs.3000 as and when the Sensex nears its highs of 21000 levels.

Yes, I expect the stock to Double from current levels when Sensex reaches its peak of 21000. Though, I would not like to buy the stock at current levels. A long-term buy call was given in my list of Favourite MID-CAPS at lower levels, if u can surf and visit to my specific post.

DARK KNIGHT ABHAY said...

Dear Viral (a.k.a Bulls)

Thank You Very Much For Ur reply ,it was a gr8 post and we find ourselves lucky to have a guidance from such a genius.

regards
ABHAY

DARK KNIGHT ABHAY said...

DEAR VIRAL

Almost all u r stocks have reached their targets and HAD come BACK to the buy zone..

like..
BHEL
REL CAP
EDUCOMP ( PARTIALY REACHED TARGET)
NMDC ( U SAID IT HAS STRONG SUPPORT AT 360,ITS NEAR IT)

WHAT SAY, CAN ONE BUY THEM AGAIN AND WAIT FOR THE SAME TARGETS

MMTC IS ALSO A PSU AND HAD APPERCIATED AROUND 300% FROM ITS 52WK LOW.IS THEIR ANY TRADING PROSPECTIVE LEFT IN IT WITH THE BUDGET AROUND ?

THANKS A LOT FOR UR PATIENCE TO READ MY QUERY.
ABHAY

Viral Rajnikant Dholakia said...

Dear Abhay,

Usually, more often than not, it is preferable to take Buy position in Trading calls/stocks when the calls are given.

The reason being the chances of stock rising based on Technical levels is more pronounced during the time when call was given. At a later date, if you get a chance to buy the stock again at the same recommended levels, the charts might have changed.

The major difference being, the stock has moved up and retracted back to the same levels. In some cases, this move down may depict weakness in the counter.

Though, it is not always the case with every Trading call. So, thats the basic overview as to what could be the difference in taking an 'OLD' call vis-a-vis a 'FRESH' call.

Coming to stock specific:

For call on BHEL please refer to one of my Reply to Vikas's query where i have updated the call on BHEL.

Educomp continues to remain in strong momentum even as Sensex is down 1500 points from its peaks established a week ago. For Educomp, you can still buy around current levels with SL of Rs.2830/-(On closing basis). However, the original SL mentioned in the call on the blog was around Rs.2730/-.

NMDC does have a good support at Rs.360/-, the levels where the stock had topped-out in the mid-August rally. So, that resistence levels of mid-August period should act as a support for the stock on the downside.

However, in the near-term (atleast as of now), the counter seems to have lost momentum. But, you never know the stock may start moving again just before budget. Even MMTC is witnessing same sort of weakened trend as NMDC at this juncture.

At current juncture, if you want to start trading in some of these stocks, you can keep an eye on Kalindee and Educomp (from budget perspective). Both the stocks are showing strength in the near-term.

Vikas said...

Thanks Viral for clarifying my doubts on those 3 questions.

Shabu's said...

Superb!!! Thank you very much for such an excelent post. The strategy you have explained in a simple and comprehensive manner and this post is an evertime gem for readers as the strategy is applicable irrespective of market mood. Great!! Keep it up

Viral Rajnikant Dholakia said...

Dear Mohd and Shabu,

Thanks for your kind and appreciating words.

Mohit said...

Excellent post Bulls,

I have cleared all my positions in educomp great call.

what about alok, I am holding it.

Any new calls

DARK KNIGHT ABHAY said...

thanks for solving my query ..

regards

abhay

Viral Rajnikant Dholakia said...

Dear Mohit,

If you remember, I had given 3 Targets for Educomp in my Trading call on the blog as: Rs.3300-3500-3700. Ideally, you should have exited the stock in atleast 2-3 tranches above Rs.3300 levels on every substantial rise and not all at a go. This stock has shown amazing strength and is expected to remain robust until Union Budget announcement.

However, booking profits is a must but with a strategic approach.

Coming to your query on Alok Industries, the call from me that you're referring to was Value Investment Call. Please do not confuse it with Trading calls given by me.

In near-term, Alok Industries is depicting some bit of weakness to take a fresh trading call.

Regarding Fresh trading call shall not be given frequently. It may be given when there is some degree of certanity for stock to move higher either based on fundamentals or technicals.

Viral Rajnikant Dholakia said...

Dear Mohit,

Specifically, I am not tracking Cals Refineries. But, i just had a look at its performance of last 5 years which shows Sales of hardly 0.08 crore.

I wonder what to do with investment in such stock unless you have a speculative intent in this counter.

Viral Rajnikant Dholakia said...

Dear SANTY,

One of your query has been answered in the previous posting where you had posted your query.

Mohit said...

Thanks Bulls,

I am holding 25% of my holdings in educomp for target 3 booked 50% pfoit on target 1 and 25% on target 2.

Thanks for your guidance.
About Cals it is a spice energy group company, The company has aquired on refinary in germany and is trying to bring that to India and reassemble it and start new refinary the refinary would have capacity next to RIL and would be second biggest refinary in india. But this is was they say in news and every were just wanted to know if you have any ideas.

Thanks

mohit

DARK KNIGHT ABHAY said...

Hi Viral....

a technical question...

which website do u use for tracking stocks,studying charts,their previous prices 52 wk low /high .etc..?

i searched and used a few(like moneycontrol .etc) but didnt find them tht useful


plz do help...
thanks
abhay

Viral Rajnikant Dholakia said...

Dear Abhay,

I usually track historical data directly from historical charts of last 5-10 years.

I usually surf the data from my Broker's Terminal. But, when i didn't have terminal access, i used to refer Moneycontrol.com.

Even you can find charts with such data on Moneycontrol.com for charts since last 8-10 years. Pls check their section properly for detailed charts view since the year 2000.

DARK KNIGHT ABHAY said...

Thanks Viral for clarifying my doubts.