How to use Recurring Deposits to make money in Stock Markets!!

Strange…. isn’t it?

You must be thinking that how a boring recurring deposit (RD) can help make money in stock markets?
Though it may seem a bit strange, the fact is that it can be done easily. All it requires is some common sense and a little patience.

recurring deposit rd
Accumulating funds using RD

Now lets reason out as to why this can be done and why it makes sense.
So, according to you, when is the best time to buy stocks?

You will say that when they are cheap. You can have your own meanings of cheap. We think that markets are cheap when they are trading in lower parts of PE range of 12 to 24, i.e., closer the index’s PE is to 12, cheaper it is. And we have a valid reason to believe that markets are cheap at such valuations. You can read more at Do Indian markets bounce off PE levels of 12 and 24? & A PE analysis of Indian markets. You can also check the current state of markets to know about market’a current valuations.
Once we are able to sensibly judge when the markets are cheap, it makes sense to buy stocks of great companies at cheap levels. It is the concept of buying low and selling high (though we personally prefer not to sell if we have bought a stock really cheap).
So, now you want to buy stocks. But how do you fund it? Either you have a stash of extra cash which is waiting to be deployed. Or you can just crib over the missed opportunity. You know markets are cheap and you have the courage to go out and buy stocks. But you don’t have the cash. How much unluckier can a long term investor get. 🙁
But this fate is avoidable.
Its a given fact that markets will move up and down. So suppose markets today are trading at expensive valuations. Knowing that markets are supreme and you are just an average investor, you have opted for systematic investments in mutual funds. But you also know that a time will come, when stocks would be available at really cheap valuations. This thought should act as a trigger for you to start a simple recurring deposit. This RD would keep accumulating money, month after month. And don’t forget, this RD earns interest too.
Now suppose after 2-3 years, there is a market crash and stocks are available at really low prices. This is the time when you can use the money accumulated in RD to buy large quantities of great stocks, at really cheap prices.
It is as simple as that.

How to use RDs to make money in Stock Markets

Personal Example – The author still regrets that in mid 2009, with stocks available at throwaway prices, he could not purchase them in big numbers and wasted a good crisis.
Out of the trio of three Cs : CASH & COURAGE in CRISIS, the author desperately missed the first one.
Moral of the story
You cannot control the CRISIS.
COURAGE is also optional and situational. You will only know you are courageous when crisis is round the corner. So, in a way, even courage cannot be controlled.
But as far as CASH is concerned, if you plan well, you can accumulate cash to create a war chest to be deployed when markets crash. You then have the ability to buy stocks which you were waiting to buy in the next market crash.
What do you think?

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A look at major Indian stocks during the bottom of 2009 stock market crash

Everyone remembers the bloodbath on Dalal Street in January 2008. But what panned out over the next one year was something which changed lives of many people who had the courage to take bets on great businesses. 

    
With markets trading at a PE of 28, a correction was always on the cards. And correction, or rather a crash is what happened in January 2008. Markets (Sensex) tumbled down from 21000 to 8000 in a period of just 14 months.

It has now been almost 4 years since markets touched their bottoms in absolute terms (Sensex@8000) & rock bottoms in valuation terms (PE>12)

A few days back, a perennial Indian Bear (read Shankar Sharma) predicted that we might be heading towards 2008 lows. So just out of curiosity, we decided to analyse price performances of large cap companies (& a few smaller ones) since 2009. This exercise has no significance apart from the fact that it dispels the myth that only small and mid caps can give big returns in short term.

We have nothing more to add except that please do focus on numbers in Light-Red-Colored Absolute Returns column of the table.

The figures (in %) are free of typos, i.e. there are no errors in calculations.

We hope you got the hint 🙂

Since 2009 Lows…
Click to enlarge


To quote Joshua Kennon, “It was such a bizarre time. (In 2009) People lost their minds on the upside, and gave up all hope on the downside. Anyone with money (& courage) during these dark days got very rich.”

Note – CMP figures as of April 5, 2013

Disclaimer – Long term positions in few stocks mentioned in this post.
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10 Stocks to Buy in a Market Crash

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
·       Stocks from the sector we like (oil stocks: 1, 2, 3 &4)
·       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 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…
 
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 🙂