Trading Rule – “Don’t deploy all your money in one go”…

Is this not what we do more often than not? When you have a corpus to invest, you tend to deploy the money in the market immediately. But, there is merit in a phased approach. The phased approach allows you to get a better bargain in stocks, especially when they are volatile. Secondly, by deploying all the money in one shot you are stuck in the zero liquidity syndromes. In the event of any fund requirement you may end up undertaking a distress sale of your shares. Always invest gradually and in a phased manner!

IT IS EFFECTVELY LIKE DOING A SIP ON EQUITIES?

If you have done a systematic investment plan (SIP) on mutual funds, then this is exactly similar. Instead of allocating your entire capital in one shot, you try to make the best of volatility. Take the case of 2009 when the markets were falling sharply. Quality companies like Axis Bank and ICICI Bank were available at almost 25% of their peak valuations. It was a great level to enter these stocks but then stocks went down another 50% from that level. You can argue that you cannot catch the bottom of the market which is absolutely correct. But what you can do is to adopt a phased approach so that you get the best price.

HOW TO PRACTICALLY GO ABOUT THE PHASED APPROACH..

Remember, a phased approach to buying is not a great idea when you are buying in the midst of a frenzied bull market. More so, if you are buying into the sectors and themes that created the bull market in the first place. But in a lacklustre market or in a falling market the phased approach works to perfection. That is because markets never bottom out and recover in a V-shaped formation. It normally tends to consolidate in a range for a fairly long period of time and that is when the phased approach really works in your favour. Before embarking on the phased approach, you need to first convince yourself about the structure of the market. Secondly, you need to identify the specific stocks that should be phased. Typically, stocks that have been volatile or vulnerable to macro cycles are the stocks that will give you the best opportunities for phased buying. Lastly, never try a phased approach in losing propositions. Gradually buying Unitech would have hardly helped.

“The 4 most dangerous words in investing are – This time it’s different.” – John Templeton

6 WAYS TO BENEFIT FROM A PHASED APPROACH…

  1. The most basic argument in favour of a phased approach is that you can get the best possible price in the market for the stock. Of course, it is not possible to practically catch the bottom but by buying through the consolidation phase of the stock, the actual buying cost will be as close to the bottom as possible. Also you have the flexibility to increase your allocation when the prices are lower which pulls your average cost of buying closer to the bottom of the stock price. The dynamic rupee-cost averaging works perfectly for your stock buying in this case.
  1. As seen earlier, the phased approach to investing works best in a lacklustre market or in a market that is trending downward. In both the markets, the common tendency among investors is to sell on rises. This is in contrast to a frenzied bull market where the normally tendency is to buy on every dip. Since the undertone of the market is to sell on rises, you will find sellers at higher levels putting consistent downward pressure on the stock. This will ensure that you will consistently get lower prices to enter the stock till the last weak hand has been squeezed out of the market.
  1. Don’t get overexposed to one particular stock. At the end of the day, your core purpose is to create a portfolio of stocks. Decide the outer limit of the number of stock that you want to buy and phase your buying accordingly. That is the only way you can get the best possible price. You need to zero in on 5-6 stocks that you are going to buy in a phased manner and decided the individual allocation for each of them as well as the price range in which you will execute your entire purchase.
  1. Keep an eye on the quality of the stock. There are stocks that are down due to structural reasons. We have seen that happen in the case of stocks like Kingfisher, Deccan Chronicle, Jaypee Associates, and RCOM etc. In all these cases the key reason for the underperformance was the unsustainable level of debt in the balance sheets of these companies. These are companies to be avoided. No amount of phased buying can ever make you profitable on these kinds of stocks.
  1. Know when to put your full stop to buying and change course. What happens if you are buying the stock but realize that the market is heading for a prolonged slowdown and the markets could remain tepid for over 3-4 years. We saw that kind of a market in the mid-nineties. Even if you adopt a phased approach, the opportunity cost of buying in that market will just be too high.
  1. Last, but not the least, never forget your context of investing. Remember, that equities are just one of the asset classes and your job is to allocate your money to the asset class that offers the best risk-adjusted returns. If debt funds or gold is offering better risk-adjusted returns then you can as well park your money in these assets and wait for an opportune time in the future to buy stocks in a phased manner.

APPLY THE SAME PHASED APPROACH WHEN YOU ARE SELLING TOO…

The phased approach not only applies to buying but to selling your equities too. It is quite normal to finish off with your selling quickly, especially when you are making good gains on a transaction. Remember, you make good money only on a handful of stocks. In other stocks you either make marginal profits or actually make losses. The onus is on you to make hay while the sun shines and adopt a phased approach to selling. Of course, you cannot catch the top but you can at least be as close to it as possible.

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