Yesterday, I crossed an important milestone.
This year, I set self a target - to make 8% on my equity investments.
Yesterday, I achieved that goal.
With the Feb dividends, one might even close at 9 - 10%.
What makes this super special is that this includes only the cash profit that I have made and is in the pocket - dividends and trade profit. Not the notional increase in the value of the stocks, which varies from day to day and is currently at 1.1%).
(Today, the market fell and I bought a lot, bringing the portfolio return value to just under 8%, but that's ok)
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It's not phenomenal. It's something fund managers do all the time. But for an individual investor who has never seen equity as a wealth generator, this was HUGE.
So, I took time to reflect on the things that went well. This post is a retrospective for me to refer later.
What I look for in a stock
1. Trend in NET PROFIT, not revenue. If overall trend is positive, then one invests. Growth is not necessary. The company should have been able to defend its margins and work well. Even when everyone was laughing at REC, i looked at their numbers and they made a lot of sense. So, I bought. REC gave 45% annualised return. Same thing for BHEL and SAIL.
2. Asset heavy - I have always preferred companies that are asset rich. Capital assets preferred over stock in trade or current assets. Land preferred over machinery. This is the main reason that GAIL and OIL are heavy in the portfolio. Average annualised return for GAIL: 47%. OIL: 44%.
3. Good management - This is a deal breaker. The management team is very important because my investment period in each company is over 5 years and consistent growth matters. This is the reason that Dabur is a permanent fixture. Same for Ashok Leyland. Tata Steel was Jubilant were added this year to the portfolio. Of these, Jubilant I went through a fair bit of due diligence on management.
4. Debt - Equity Ratio trend and current debt profile - Debt -Equity ratio of <.5 is ideal, <1 is necessary. Likewise, Capital Adequacy and the trend of debt. If the operating income is negative, it's a sell. If debt is being used for day-to-day operations, that is a sell immediately. Debt is the cancer of a company. In all my 20 years of investing, only 3 companies have gone belly up. Two of them were Jet and Kingfisher - both in aviation and both to debt. Every single company in the portfolio today as a debt - equity ratio <0.5
5. Ethical Business - I am old fashioned and believe that if you give money to a murderer, the blood is on your hands too. This is why I have made no money from Big Pharma, Diamonds, and other businesses where we knew the dealings are not ethical.
When to buy, and when to sell
1. I consider the annual inflation rate to be 6%. So, to be profitable in real terms, the sale must be at >6% annualised profit. At less than that, hold. Some stocks have taken years to bloom, some remain depressed. That's fine. Kotak was bought at 1316 in 2018 and sold at 1830 this year. HUL, bought in October 2021 during a slump gave 8% annualised when sold this year.
2. When buying, if a stock is failing, I use one of the two strategies - either buy small units every day of the fall, OR, wait for the day the stock rises a little bit. On that day, even if it is a little more expensive than the previous day, buy. Usually, value stocks rise after that. Have used this to accumulate Kotak Mahindra Bank in the past and Asian Paints, Reliance, and Bata this year.
3. For high dividend stocks, look at the dividend pattern and decide whether the trading profit will be more than the dividend value. For instance, most PSUs give dividends in Feb, so from December onwards, I accumulated them, but also sold if the trade profit was more than 4% of the market value, because dividend rarely goes beyond 2.5-3% of the market value.
4. Don't be emotionally attached to the stock. If it is high today, just sell. Don't look at the opportunity loss from selling at a lower price when the stock continues to rise. I didn't sell Dabur at 610, thinking it will go up again. But next day, it was at 604, at which point i sold immediately. So, no one can time the market. Take your modest profit in pocket and relax.
5. Do consider replacement buy for value stocks. Put a GtDt order immediately if you don't trust your memory. For my portfolio, these staple stocks are OIL, IOCL, SAIL, BHEL, and some other PSUs that I truly value.
6. I maintain a separate excel sheet where I record all my trades. When selling, i do a mental calculation of which lot I am selling, and do the accounting in my excel sheet. Brokers tend to record the most expensive lot of shares first, so that your tax liability is lowest. But you are doing your lot trading. It evens out, because eventually, the securities account and I both agree on the total figure - capital appreciation + trading profit.
What I did differently this year
Honestly, only these things -
One, I fixed a tangible target to meet.
Two, even if the markets were moving only in a band and for months the stocks gave nothing but dividend, I did not stop going to the market every day and monitoring buy and sell opportunities. Some day, it would come. And they did.
Three, I raised the band of individual trades. A wealth planner volunteered to manage my equities this year and made 4 large trades. Two of them tanked (and are still in the portfolio, costing a neat amount), but he said - Mam, bada socho - think big and trade big. So, my risk appetite increased a little bit.
Four, I read a LOT MORE about how big investors choose their stocks, what they look for, what are the common things in their portfolio and mine. Bought Moneycontrol Pro (waste of money). As usual, I completely disregarded the research houses and their recommendations. Traders are not investors. Their money comes from keeping capital flowing in the market. Investor's money comes from stability. So, I read only those reports where the investor speaks about how they choose, when they decide to buy and sell, and learnt from that.
Five, understood that PSUs may not be a popular sector, but they are the sector that I know best, and therefore, this year, I did a lot of investing and trading in the sector I knew instead of looking for good high earning stocks. My son invests only in blue chips so I followed his lead and made some decent moneys on that too. Evey month, he invests 10,000. I would wait for him to choose his stocks and immediately put money in the same ones. Basically, he has been ok with choosing good bluechips and I have been ok with PSUs and I shamelessly used both. BUT, i stopped the Hunt for More stocks and stopped doubting myself. Just plodded on.
And what I always did:
One, NO SIPs. SIPs are lazy investing. If a fund manager or stock wants my money every month, let them be worthy of that money every month. The only person who is helped by a SIP is the fund manager - because irrespective of how the SIP performs, he will get his cash inflow to invest. He does not have to worry about making money grow to invest next month. Also, MF as an asset class does not work for me because even in low value stocks like PSUs i find that there is more money in stocks directly than in the MFs.
Two, NO Tips. No talking to traders to understand which stock is going to rise in the short term. Even the high value stocks that are stuck in the portfolio are robust companies, so am not too worried.
Other than that, it was my 20 years of knowing the stock market, the stocks I am comfortable with, and knowing that even if it looks rock bottom, if the company is good, buy. It will go up. I have now lived through at least two stock market crashes, bought GAIL at 497 and at 97, and all that collective experience really helps stabilise the mind.
