Everyone has goals in life. Some of these may be essential ones like saving for retirement, house, children’s education, marriage, etc., or aspirational such as a foreign trip. Unless you are born with a silver spoon in your mouth or draw a hefty pay cheque, what determines whether you achieve your goals or not is the way you handle your savings at the end of each month.
Equity, as an asset class, is one of the best avenues to grow your surplus money. Between 2001 and 2015, while real estate and gold gave annual returns of 12% and 12.4%, respectively, Sensex gave an even better annual return of 15%.
Now, how will you as a retail investor with limited amount of time to research on stocks, identify the best horses to ride on, and avoid the ones which can drill a hole into your portfolio? The answer is not very complex. First of all, your portfolio should be simple with the number of stocks being typically less than the number of fingers on your hands. The second aspect of a simple portfolio is that the stocks you select should be typically those where you largely know the business. The idea is that by constructing a portfolio with a limited number of stocks whose businesses you can relate to, it becomes easy for you to track your portfolio on a regular basis and swiftly decide whether any new developments warrant exiting from any particular stock.
Let us get into some more intricacies of selecting these “simple” stocks. Your objective, while selecting stocks, should be not to fall in love with any stock, but rather pick those horses (stocks) which can get you faster to your destination (goals). Your best bets are the stocks which are delivering accelerating sales and earnings growth, with expanding return on equity. Keep an eye out for new products and services, which can lift a company’s sales and earnings. Do not hesitate to buy such stocks, since they are trading at high valuations based on price-to-book or price-to-earnings ratios. Remember, stock market is an avenue where investors are on the hunt for better returns. As such, quality franchises with strong growth prospects demand a premium valuation.
The stock should not go anywhere in a big, sustainable way if its current earnings are poor, say experts.
Now, let us get into when you should buy and sell such stocks. If you cannot do enough research on your own, you should piggyback on those who are doing it. For this reason, institutional investors such as mutual funds, insurance companies etc. are your invaluable friends. They do their research before buying a stock, and the sheer force brought on by the transactions of many funds, which manage millions, eventually guide a stock’s price to where it ought to be.
This brings us to the question of how you can identify the stake held in a company by the institutions. You can get this data from the website of the stock exchanges or the investors’ section of the respective companies’ websites after the end of each quarter. But this disclosure would usually be stale from the perspective of piggybacking on the institutions’ investment calls. So you need another tool which can alert you to the institutions buying or offloading any stock. Stock charts offer you precisely that.
Charts can help you select the best stocks in a better way as also the timing of both buy and sell decisions in stocks and the general market, experts believe.
You should be on the lookout for base patterns such as cup-with-handle, flat base, double bottom, among others. During a base formation, the stock makes a temporary decline and eventually, a successful base completion results in the stock recouping its losses and breaking out of the price range of the base pattern on the upside. What you want to see in the base pattern is that when the stock initially declines, it happens on low volume, which conveys that it is due to some weak hands exiting the stock, and there is no selling pressure building up in the stock. Towards the culmination of the base pattern, when the stock recoups its losses and eventually breaks out of the base on the upside, trading volumes should surge indicating the funds buying into the stock. Similarly, institutions offloading a stock show up on charts in the form of high volumes accompanying stock declines, telling you it’s time to get off that horse.