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 🙂

2013 Indian Stock Market Predictions

2012 is drawing to a close and Indian markets have given close to 25% returns this year. And just like past years, experts are coming out with targets like 21,000, 23,000 & 26,000 for Sensex. It seems that everyone is anticipating a bull market. And this anticipation is fueled by buzz words like Reforms, FDI, coming rate cuts, rising investor sentiments, etc.

So what are our predictions?

Before you close this website after reading our answers, we would like to tell you 2 things:

If a bull market is really coming, you will not listen to what we have to say. If markets correct next year, you will repent not listening to what we had to say.
So here is our answer:

We have decided not to make any predictions. It is irrelevant for long term investors like us. We will continue to invest in great companies and try buying them at really cheap prices.

So, have you decided to leave? Because you didn’t get that hot stock tip??

No?? …Then we will go ahead and tell you two really important facts…

Fact 1:

Indian markets are currently (December 2012) trading at P/E multiples of 19. And this is not cheap by any standards. You can check State of the Markets to get a snapshot of Indian market’s valuations. We have an analysis which tells that investing at current levels may not turn out to be a good bet for next 3-5 years. Anything less than 3 years does not interest us. Just check the table below:
PE Ratio & Returns Sensex
P/E Ratio of Sensex & 3-5 Year Returns
We are trading close to P/E multiple of 20. And average returns over 3 year periods are abysmally low at 4%. We won’t vouch for 5 year data as this number is skewed because of bull-run of 2002-07 (which may not be repeated during our lifetimes).

Fact 2:

We checked last 20 years’ data and found that 13 of those years gave positive returns. Out of these, 6 can be attributed to Great Indian Bull Run (2002-07). So, there were 7 ‘normal’ years of positive returns. These 7 years were followed by 4 years of negative returns & 3 years of positive returns. Surprised? Yes… its true. The probability of getting positive returns, just after an year of positive return is lower than that of getting negative returns.
We are sorry to disappoint those who were looking for hot stock tips for 2013. We continue looking for safe, stable, rock solid, cash generating machines. We don’t know what would happen in 2013. But we do know what we would do in either cases. If markets correct, we would buy more of these great stocks. If it moves up into the overvaluation zone, we would not buy. It is as simple as that. 🙂 But as it has been rightly said, successful investing is simple, but not easy.