Tackling volatility

What should be your strategy in these volatile markets…?

The market index, like it happens so often, does not tell the whole story. From its peak, immediately after the Union Budget, the Nifty has corrected close to 13%. But, scratch the surface and the real story starts unfolding. You have companies like Sun Pharma, Lupin, and Asian Paints that have corrected over 20% during the same period. Private Banks have been through a similar ordeal. I am not even talking about PSU banks, which have lost half of their value. What does this mean for investors and how to approach markets?

Use the ratio troika…

In financial markets, “the more things change, the more they remain the same”. This market is back to the golden ratio troika of a healthy company. Focus on companies with High ROE, low leverage and consistent growth. This ratio troika has always stood you in good stead and in this market more so. Not to forget; even stocks with the benefit of this ratio troika have lost close to 20-25% of their value. The idea is to go in and lap it up. Remember that debt could be the biggest drag in this kind of an uncertain market. Companies with high debt should be avoided like the plague.

It is time to churn your portfolio…

No point in fretting about the selling opportunities you missed out. The good thing is that you are getting good quality stocks at very reasonable prices. Rather than clinging to stocks of dubious quality in the fond hope of a bounce-back, focus on the value that is available in the market.

Mid caps can be a dangerous game in this market. Unless a mid-cap company is able to scale its business without resorting to excess debt, these stocks should be avoided. You also need to prepare for a possible rate hike in the US. When outflows become a reality, the first hit will be on mid-cap stocks. Focus on quality and use this opportunity to clean up your portfolio.

Stagger your purchases

The good news is that there are pockets of value that are still available. The bad news is that this volatility and direction-less market can continue for quite some time. The idea is to stagger your purchases. It is hard to predict the bottom of the market and much harder to buy at the bottom. If you stagger your purchases, you stand a better chance of bringing your average cost closer to the lower end.

The moral of the story is very clear. As an investor you need to focus more on the opportunity rather than the volatility. Focus on the ratio troika, clean up your holdings and stagger your buying. You are likely to end up with a salivating portfolio of quality stocks at virtually unbelievable prices. ©

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