After witnessing freefalls in individual stocks like NHPC (a PSU!), Core Education, etc, we wondered what would we do if suddenly, markets decided to crash? No, we are not trying to predict a crash or correction. We are just trying to be prepared. It is same as buying life insurance. You don’t predict your date of death. But you want to be prepared for it and hence, you buy insurance.
We did a similar exercise 6 months back when we came up with a list of 10 great stocks to buy in market corrections. And now we feel that we should make this a regular 6 monthly exercise, i.e., every 6 months, we should be ready with a list of 10 stocks to buy in case there is substantial fall in their prices.
|Stock Market Crashes|
But before we go further, we would like to end any possible controversy, which may arise in future regarding our love (& prayers) for market correction. Please read this before going ahead.
So how do we come up with 10 stocks?
In four simple steps…
Step 1: Select 40-50 stocks initially
We have decided to start with an initial list of around 40-50 stocks. These include –
· Stocks respected by markets (part of indices like Nifty 50 & Sensex)
· Stocks which we love (dividend stocks)
· Stocks in our watchlist
· Stocks from our Dead Monk’s Portfolio
· Other great stocks to buy
|Step 1: Select 40-50 stocks|
Step 2: Decide parameters for evaluating the selected 40+ stocks
Now here is the tricky part. We are evaluating stocks. Hence, our first reaction was to choose parameters which are qualitative. For example, growth rates, profitability, ratios, etc. But then we thought that we should rather use simpler parameters to come up with 10 stocks. What we mean is that after ensuring that our initial list of selected stocks meets certain minimum criteria (on qualitative parameters), we should finally use more intuitive and simple filters. And therefore, we decided to use following 5 parameters:
- Company Management (It should be atleast decent*)
- Company shouldn’t be highly cyclical
- Company should have atleast above average growth potential
- Company should have a decent dividend record
- Would we be ready to hold the stock for next 10 years?
* Deciding what ‘Decent’ is, is subjective. 🙂
Now all these 5 factors were not used as eliminators. They were used to subjectively evaluate these companies, i.e. we used all these 5 parameters in totality to come up with a final list of 10 stocks.
Caution: The approach is very simple and may not appeal to those who love calculations to come up with stock ideas.
Step 3: Evaluate stocks on selected 5 parameters
The table below shows a simple Yes-No analysis of the selected 40+ stocks.
|Step 3: Evaluating stocks on chosen parameters|
Step 4: Final shortlisting of 10 stocks to buy for market corrections
As already mentioned in step 2, all parameters are looked at in totality to arrive at the set of 10 stocks. The table below shows the 10 stocks, which you can consider buying in next market crash.
|10 Stocks to Buy in a Market Crash|
Want to know which were our last 10
recommendedselected stocks for buying in market crashes? Click here.
But wait. We are not done yet. We had a tough time selecting these 10 stocks. We felt that once you are through with buying a few of these stocks in a market crash, it would be interesting to look at a few more good stocks, which did not make it into our list because of our own personal biases, our lack of knowledge, etc. So we decided to come up with an additional 7 stocks which we will keep an eye on…
|7 Additional stocks to keep an eye for in market crashes|
Now you might be thinking that these guys are trying to fool us. They started with just 40 odd stocks and have come up with around 17 stocks as their choice. Is this what we call shortlisting and selecting? How can this be called as stock selection? Choosing 1 out of every 2 stocks is not called selection.
But friends, this is only because we found it difficult to eliminate the good stocks. Why? Because we started with a very small number (40) of really good companies. But if you consider the number of available stocks in Indian markets, you would understand that we have actually selected 17 stocks out of about 5000+ ones listed on Indian exchanges, i.e. we chose just one company out of every 295 companies. Now that is called some selection 🙂