Note – This is a very old post that has not been updated for the last several years. Do not use any content of this post as investment recommendations.
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.
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| 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
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| 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.
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| 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.
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| 10 Stocks to Buy in a Market Crash |
Want to know which were our last 10 recommended selected 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…
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| 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.
Isn’t it?
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 🙂
Why do you guys choose such simple filters for shortlisting stocks? There are more comprehensive and well proven comprehensive methods of doing the same.
@1cbfeb5f440165afee26e0089924f3dc:disqus
Hey Rakesh…
You are right that we prefer using very simple and primitive parameters for shortlisting stocks. We thought that a lot of our readers might also have similar questions about our methodology. So we decided to reply to your question with our next post.
Hope you will wait for our response. 🙂
Rakesh Mehta
We have addressed your concerns at http://stableinvestor.com/2013/03/mailbag-why-use-simple-stock-selection-criterias.html
I too follow the criteria that you have suggested. However, my experience / observation is –
Management & 10 yr time frame – Very difficult to evaluate. Easier to rely on PSU & Tatas. Others can give you shock any time.
Dividend vs Growth – These are contradictory strategies in most cases. If the company is a high growth company, then why would it payout dividends? If it distributes dividends, then how would it be a high growth company?
Non-cyclical businesses – Actually this is ONE sure way of making money. Cyclical businesses actually offer you “stock level bear markets” within a broader flat/ bull market. So instead of waiting for a broad bull / bear markets, you make the most in the interim opportunities available in specific stocks.
@dceca74b888189d7531f3fa3b9bd61a0:disqus
Thanks for sharing your experiences. 🙂
Appreciate it.
I truly agree with all above mentioned information regarding best stock to buy. Factor mentioned above is actually much profitable who wants to invest his /her hard earned money with open eyes. Dear I am a small businessman and I don't have much knowledge regarding this topic. Please guide me how I can invest my savings and which stock is much beneficial for me?
HI Daniel
We would need a little more information about you, your financial background and status before we could come up with something close to customized advise for you.
Hello Good Friend,
Accept my warm regards for the time you must be devoting for detailed study before putting it on the blog.
Just two points I would like to add, I.e. if the scrip free from govt. policy change/interference ,for example banks , oil company just to name few.
2. Share pleaded by Promotors .Because the downfall in case of sell of pleaded share CAN NOT BE STOPPED .
With due Respect ,
Vakharia M J
Thanks for your views Mahesh.
You are right that one should try to pick businesses which are free from govt policy and don't have their shares pledged. This eventually reduces the dependencies on uncontrollable factors.
NOW THAT BALMER IS TRADING AROUND 304 OR NEAR THE 52 WEEK LOW IS IT A GOOD TIME TO ACCUMULATE THE SAME
Shankar
The price does seem tempting for long term investors and those looking for yields. But recent announcement by govt asking its own departments to avoid booking tickets through govt agents like Balmer Lawrie etc has raised some concerns. This agent fee is one of the important if not the largest revenue drivers. But it remains to be seen as to how this would eventually effect company's profitability. Company has also decided to shutdown it loss making tea business and is also looking to buy a ticketing company. This may effectively negate the ill effects of govt's advise. But it remains to be seen and its better to wait for while before taking a position in this stock.
I have not understood the reason for answering most questions in the negetive about Noida Toll. I am a newbee and haven't the skills to evaluate managements. BUt other factor, i dont agree with. REducing debt, incr Profits, incr sales, simple business model and lack of alternative(read MOAT) all should indicate greater faith in the company. But its imp to be contranian. So, can u tell ur reasons in detail pls.
I must acknowledge dedicaion and discipline to keep up this very simple and logical site for us unnitiated lot is really commenable. Many thx
Hi Anz
Thanks for the compliments. Are you referring to evaluation of Noida Toll Bridge Company on basis of above 5 mentioned filters? Or is it addressed to something mentioned in comments section?
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