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.

Strategy for Investment

So very often have I come across a query from various Long term investors asking whether this is the ultimate market bottom & from when should they start investing in such volatile markets?

This is the question to which no particular person can find an accurately reply on a consistent basis. It is better not to attempt to TIME the market for its entry or even exit. Buying & Selling should be done in a systematic manner & one must ensure that they do not resort to bulk dealings in any particular transaction during a concentrated period of time. Diversification of portfolio is yet another issue to be taken into account while investing, which we shall discuss in some other post.

Strategy for Investment:
(A) Buying in small quantity on larger Dips
(B) Selling in small quantity on larger Rise


(A) Buying in Small Quantity on larger Dips:

At the Onset of the Bear Phase:

This strategy is very useful, more so, during such markets emanating bearish patterns, wherein investor should protect themselves from the vagary of timing the markets. Often during such turbulent market conditions, investors start entering markets on a little or a small correction, witnessed from their peaks & start pouring with their funds in the markets which are still to come down substantially. They feel that, like most of the times, markets will correct marginally & again bounce back; and consequently they may lose the opportunity to invest their good money.

Staggering the flow of Funds:

In such circumstances, strategy like BUYING IN SMALL QTY ON DIPS helps investors in not attempting to time the market entry. Investors should stagger their decisions over a period of time instead of buying on a fall of every 3-5%. Continuous watching of screen is, often, the main culprit in such rather early averaging process. Instead, investors should divide their cash intended to be invested into 3-4 parts & invest them at larger dips (say, around every 15-18% for large-caps & 20-30% fall for mid-caps) at various price points, thus averaging sensibly. This strategic division of cash will ensure that the averaging is done not at small & frequent dips, but at larger fall- as the whole part of the divided cash will be used for one by one buying at different price points & time intervals.

Preserving Cash initially but Slowly Deploying it in falling Markets:

What Buying in small qty will ensure is that the investor does not run out of his cash money at a particular point of time at higher levels & that he would also be able to Average out if the money is sensibly apportioned over a period of time with different price points in strategic approach. On the contrary side, the same strategy will also ensure that the gullible investor does not have to hunt for that ultimate bottom & in the process lose out buying good stocks & right valuations. The best part of this strategy is that it does not demand huge cash reserves at any single point of time... as the buying decision is deferred over a period of time. This process is called more of an "Accumulation" rather than flat "Buying". Someone has rightly said, "Investing is an art".

Example of Implementing Strategy:

Suppose an investor Mr.X has Cash worth Rs.50,000/-. He owns 10 shares of RIL @Rs.2700/- which were bought once markets started melting down from its peaks. Later the stock stabilized at Rs.2300/- for a few months. Mr.X bought another 10 shares for averaging purpose & bring down his cost. His average of both, old & new holdings of RIL, would now work out to 20 shares @Rs.2500/-. But, later the markets came down further on global recession news & RIL came down to Rs.1800/-. However, Mr.X could do nothing but watch the falling prices of the counter & diminishing mark-to-market value of his investment in RIL, as he had already blocked all his cash by investing most of them at higher levels.

By using the strategy of 'Buying in small quantity on larger dips' as explained in this article, Mr.X would have benefited by averaging in a better manner & further bringing down his cost of acquisition in RIL on every larger dip in price, albeit with the same amount of Rs.50,000/- held by him for investment in RIL as follows:

As mentioned earlier, Mr.X originally held 10 shares of RIL @Rs.2700/- when markets started melting down from its peaks. On using the strategy of 'Buying in small quantity on larger dips', he would have further bought 3 shares @Rs.2300, 3 more shares @Rs.1800/- & last lot of 4 shares @Rs.1300/-. To sum it up, his new average would have turned out to be 20 shares @Rs.2225/-, which would be lower than his earlier average of Rs.2500/- had he not used the strategy.

Net Saving Effect:
Initial Cash Balance: Rs.50,000/-
Investment in RIL by using Strategy: 20 shares x Rs.2225= Rs.44500/-

Calculating Rs.50,000 initial cash balance - Rs.44500/- cash invested in RIL = Rs.5500/- as Cash balance which was a 'SAVING' effect of lowered average of acquisition cost in RIL, obtained by basing Buying decisions on strategy of 'Buy in Small Quantity on Larger Dips'.


(B) Selling in Small Quantity on larger Rise:

Getting light very Every Bout of Selling:

This strategy can be used at any period of market cycle, whensoever an investor is sitting on substantial profits & more so in raging bull run scenarios. SELLING ON RISE IN SMALL QTY is exactly the opposite of Buying on dips strategy but the basics remain the same - using 'strategy' while investing. This strategy involves getting light with every bout of market up move & thus minimizing risk & generating more cash in the process to get equipped with any downturn in the near future, if any.

Tackling Pre-mature Hitting of Targets:

Often in bullish market conditions, the targets set by long-term investors either get easily achieved before expected time frame or such stocks can move lot more than the targets actually set by investors, due to market mania. This strategy of Selling in small qty on rise serves this purpose very well in which the investor sells in small quantity, like selling the stock in 3-4 phases, instead of selling all the stocks at once since the set target of the investor is achieved..

Minimizing Risk with every Stock Hair-cut:

How this will benefit the investor is that- once the actual target is achieved, the investor would usually get rid of 70% of the stocks held & ride the momentum with the remaining 30%; in the process-- the investor cuts the majority of his risk by selling the larger 70% of stocks & that much cash redeemed as well. This way the investor can, if strategy is used sensibly, get on to sell the stock at much higher prices than expected and targeted & benefit by part selling. The best part of this strategy is that it not only induces u to book part gains on rise, but also raises cash for the times to come.



Summary:

BUYING IN SMALL QTY ON LARGER DIPS:
1) Never run out of cash as they are divided into various phases & invested on major declines.
2) Strategically averaging at lower levels on dips.
3) No need to time (hunt for the illusive bottom) for buying stocks.
4) Reduces the amount of speculation needed.
5) Buying decision deferred over a period of time and hence no need of funds.

SELLING IN SMALL QTY ON LARGER RISE:
1) Getting risk free with every bout of sale of stocks & still ride the momentum with remaining shares held.
2) Generating more cash with every phase of sale & get equipped for the next phase of downturn.
3) Possibility of getting more returns (yet risk free) than actual targets set on staggering selling decisions.
4) Cooler mental state, with the speculation factor reduced with systematic use of strategy.


Investors should note that these two strategies are not the only points to be considered while finalising one's decision on investments. These are just 2 of the core aspects highlighting the importance of use of strategy while making investment bets. But, what the above 2 strategies facilitates investors is that it lessens the speculative factor involved in the process of dealings as the decisions are provoked by strategic calls rather than emotive calls. It also helps investor to remain away of mental agony caused by high beta market fluctuations in turbulent market conditions. To conclude, Investing is an Art which gets refined if coupled with Scientific decisions.


A Request to Readers:
Readers are requested to post their views/queries/suggestion in the below given 'Comments' section. They can share their thoughts, positive or negative, through this interactive 'Comments' section which will make the blog much more interesting for the readers themselves, in gauging the response to the article & knowing different view points of various investors/traders.

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 nature for your trading and investment decisions and its consequent results.