Correction in the market has brought opportunities to invest in long term businesses for legacy. What are those businesses? Why these businesses have consistent long term growth? How have these FMCG businesses fared in the last 20 years? One such opportunity for investment is now available in ITC.
When stocks reach for a new low, investors dump it, fearing that the price will reach even lower. And that is what happens in reality. When a stock reaches for a new high, it continues to reach for newer highs till there are no more buyers to push the stock upwards. This condition is a bull market. Same when the stocks reach for new lows and more stocks follow, it is called bear market. When more stocks follow in the same direction, fear escalates into a bigger sell off.
As the market reaches its extremes, there comes a very good buying opportunity. That is, when a large percentage of stocks reach for a new low, the whole market slides downwards. Taking along with it even some of the good stocks. These good stocks become attractive and give opportunity to buy for big gains that will come up almost immediately.
How to identify such opportunities?
Plotting the New High – New Low index for the market will help us get the picture of when there is opportunity to buy or sell. This index is the total number of stocks that hit a new high for the day and number of stocks that hit a new low for the day. The total of highs is subtracted with the total of lows, we get the New High – New Low index. Which is also called the NH-NL index. More detailed study on the NH-NL index can be had from Dr. Alex Elder’s book on New High – New Low.
Having the data plotted takes a little effort, we have been plotting the same for about 850 stocks that we track. From the daily values, we sum the values for the last 5 sessions to make it a weekly value and have it plotted.
These values are taken for 3 time periods to get a better understanding. Along with 52 week High low, we also collect data for 90 days and 30 days. This chart here shows all three values as a plot. We can observe that when 30 day NH-NL reaches past 1000 (Orange line in the chart), market gives a reversal. The sections highlights with yellow are the reversals.
An even more powerful buy signal comes when there is a divergence on the NH-NL index. Points marked with Green arrows indicate where there were strong reversals.
When we have the 30 Day NH-NL move past 1000, you can begin checking charts for stocks that show strength on their prices, like having a bullish divergence on the histogram or the MACD lines. Get ready to buy when the down side move is completed. When they reverse their direction in few days they give very good profits.
As we are writing here, there is one such reversal that is in progress. And in the last 1 years we have had 9 such opportunities. Can we expect the same to repeat every year, ideally not. NH-NL nails bear market bottoms, where after a weakness, market recovers for a short period before going down again. Using NH-NL, we can identify such short term reversals and profit from it.
IN a bull market, we can use the divergences to exit our long positions before the markets slide and take away most of our gains. Regions marked in Blue on the chart were conditions where NF-NL had a divergence to the price movement. As price reached for a higher high, NH-NL reached for a lower high, giving us first signs of weakness and alert to tighten stops on long positions.
Therefore, when market reaches for the low and many stocks are giving new lows. It gives a good buying opportunity. We are not doing bottom fishing here, we are identifying strong stocks in a weak market which will help us make some quick gains.
Where can you get NH-NL charts?
We will have it published on our website by mid-march, which will be live on daily data.
As big names in the corporate world keep tumbling down due to the pressure of not being able to service their debts. Let’s look into a few cases with reasons behind their fall.Continue reading
The advantages long-term SIP’s explained with the comparison to RD or one time investing. SIP helps have 1.50% more gains that one-time investment into equities for a period of 25 years. Against RD where an Rs. 1000 investment per month grows to 11.03 lakhs, SIP grows to 15.53 lakhs in 25 years. Where RD multiples the investment by 3.70 times, SIP’s multiply more than 5 times. SIP’s help creates long-term wealth with the minimum contribution.
Here are some myths & facts about Mutual Funds which are useful, when investing in this asset class.
Myth – Mutual Funds are meant for long term investors.
Fact – Mutual Funds can be a short term investment but, It is meant to be a long term asset, to receive high returns. Mutual Fund when invested for period of 5 years may give a return of an average of 12 – 15%. ₹1 lakh invested for 5 years will be 1.75 lakhs in 5 years. At 15%, money will double in every 5 years.
Myth – Funds will get locked and cannot be used.
Fact – There is no lock-in period for Mutual Fund Investments, apart from ELSS schemes which are done to save taxes. Even these schemes are one of the lowest lock-in available in the tax saving products universe. Other products like, PPF, Tax saving FD’s, ULIP’s etc are locked for more than 5 to 15 years.
All other mutual fund investments are available for redemption at time after the investment. Only that withdrawals made before 1 year from the date of investment will have 1% exit load and above 1 year, it is free to withdraw.
Myth – Mutual Funds always give positive returns
Fact – Investments into mutual funds are market related and will go through the up’s and downs of the market. If invested for short durations, there is possibility of having negative returns on the other hand, if the investment horizon is more than 5 years chances of negative returns becomes zero.
Myth – Mutual Funds is very risky
Fact – It becomes risk only when we do something without the knowledge of what we are doing and don’t know the outcome. In mutual funds, experienced fund managers manage the investments and they are well equipped with research teams to identify good investment opportunities.
Myth – Big Funds will give big returns and small risk
Fact – Wealth creation is about time and not size. Just investing into a big fund will not give big returns, while staying with the fund for a longer period will for sure give big returns.
In early October this year the emerging economies predominantly India was worried about crude
increasing rapidly on its price. Many of analyst expectations that it will not go beyond $63 went wrong, it moved past $80 and there were pessimists in the forefront talking that it will soon cross $100 and will bring big challenges for India on its CAD, the government on its elections, inflation etc. Oil going up continuously even defying its own weakness on technical made many who thought that pain of oil price to the world is behind us were also made to believe that it will have some more damage done to the growth of developing economies.
For the Oil producing countries, there seemed that they were the lords of the world, dictating terms
on price front threatening of production cuts to jack up price. At times it felt like they were enjoying
the pain that the emerging world was undergoing.
Within 40 days the story turned upside down. On 5th October, oil was at $84, it is overvalued on the
charts. On 21st November, it was $63, going straight to undervalued zone. Now the talks of the global media also have changed. So far, it was a concern that the emerging world is at pain. Now, thoughts of global slowdown has come.
Mercy thoughts are flowing in support of the oil producers. Saudi wants price to be above $73, to meet its budget plans. Russia says $70 is ok for us and we cannot stop our companies from producing as it will bring pressure to their capital. US says even $68 is ok for them.
Emerging countries are in party mood. In India, pressure on the Government to bring down taxes on
oil when price kept moving higher has now brought double benefits to the users. Oil price is down
and along with that lower taxes, it is big savings for the consumers and in a election year, there will
be no increase of taxes so, it is time now to enjoy lower pump prices.
So much in just 2 months. What took more than a year for the bulls to move up oil prices only took
40 days for the bears to damage. This is why it is said that, Bulls climb by the stairs and Bears jump
out of window.
In a couple of years from now the importance to Crude Oil as a product will be history. For immediate periods, Crude will try to move up in price, while it will find resistance on every upside rally and bears will bring prices down. At least 2 such events of lower price penetration will be there before we have any significant upward movement in prices of Oil.
Investing into stocks for dividend income was one of the passive income sources. In similar manner own the businesses that produces the products that you consume in your daily routine. This actually brings confidence to be invested. For example – Say your grocery bill always has a couple of maggi packets in it. You regularly buy Good Day biscuits for your kids at home. You use Dove soap.
You know the reason why you are consuming these products and can relate to similar usage pattern among other users. So, it will bring confidence in you that this product is going to stay for long. In such a condition if you have a few shares of the companies that produce these products like Britannia for Good Day, Nestle for Maggi, Hindustan Lever for Dove soap.
For every purchase you make, you get a small portion of the money spent as your profits because you are a part owner of this company. And as you see more and more people in the stores consuming these products while you are doing your purchases, you really feel very proud that your business is growing.
Many such regular products of consumption which are available in the markets for users to own them. A few among the list would be TITAN, BATA, MARUTI, BAJAJ AUTO, ITC, DABUR, NESTLE, GLAXO etc.,
So the next time you buy a product that you have been consuming for a long time, turn the packet to find the company which is manufacturing it, find if the company has listed its stock. Along with spending on your consumption purchases, also spend some amount to buy a few shares of the company.
Believe me, after you have a good number of companies in your investment kitty, while you walk on a busy street, you will be trilled that you own many of those businesses. As you see people buying products of your company, your pocket is getting filled with money.
Dividend from investments into listed companies forms one of the passive income streams. Whenever this concept of dividend as income is talked, that too from shares, the immediate thought is that, it will be very less returns and the next one is, how to rely on a company for a longer period. Because every person who has a fairly good period of exposure to stock investing will know in their memory itself, many companies have vanished from their business.
Whereas, on the other side, there are people who are having dividend as a regular income stream. A couple of years back when the Tata Sons board had a thought of reducing dividends, there was big concern raised by elderly people who said that, they had commitments in their life based on the dividends and reducing it will impact their lifestyle.
What this shows is that, there is a possibility to have dividend as regular income which can take care of our livelihood expenses. In that case, how is it sustainable if a company gives ₹5 as dividend for a stock that is quoting ₹250. The dividend yield comes to only 2% of the investment.
Yes, most of the good, familiar and companies that have long track record of existence generally pay out about 2% of their prevailing value of the stock as dividend. While these are companies that are growing in their business consistently and that growth takes the stock price higher as time passes.
So, today if we buy a stock for dividend the return will be lesser, whereas holding on to that stock for a longer period increases the value of the stock as also its dividends. A ₹250 stock will become ₹2000 over a period and at the time the 2% dividend will work out to ₹40. So you will be getting ₹40 as income from your original investment of ₹250, which becomes attractive.
Only criteria here is to chose a stock that has been there in the market for a fairly long period and also continue to be in existence for an even longer period. Do we have businesses like that in our country?
Yes, there are many. Like ITC, BATA, TITAN, Hindustan Lever, Godrej, Bajaj Auto, Maruti to name a few. Look at these names, most of them or producing daily use products that you and I consume. When will we stop consuming and these companies can run out of business? For example, ITC has been there for more than a century now. In almost every corner of your city you will find Bata store, probably you will be using a Bata product too.
Investing in these kind of businesses will help get a good dividend income over a longer period and these investments will become legacies which you can leave for your children. If not to have all your income coming from dividends, one can look at having a portion of his or her income from dividends.
This is passive, because you are not required to put any kind of effort in making these investments work, people consume & growth these companies. So long the consumption continues, your investment grows and keeps giving you returns.
I did a working on ITC to find if it is viable. The stock price of ITC was about ₹850 in 2000. Over the last 18 years ITC has given many bonuses and splits in its stock price. If someone had bought 100 shares of ITC in 2000 by investing ₹85000. His dividend in 2001 was only ₹1000. It is just a little above 1%.
After all the splits and bonuses, today the 100 shares have grown to 4500 shares and the stock is priced at ₹300 today. The value of ₹85000 invested in 2000 is now ₹13.50 lakhs. The dividend that came for these shares in 2018 is ₹23500.
₹85000 investment in 2000 is now fetching 23500 per annum which is close to 30% of the investment & it will keep increasing.
If you have thoughts of having dividend as one of your sources of income in your retirement years, you can think of accumulating stocks like ITC to create a legacy. One more advantage is that, the feeling that you own a part of the countries economy. As you go across town in your older days, as you keep seeing brands across and people consuming, your mind will say, “I own a part of these businesses and every minute it is earning me income.”
What a feeling right?
There is a saying, “Sell in May & go away”. Markets proved it right this year. It gave back gains made in April. Mid & Small caps lead the fall. They lost 6.5 to 7%, rising concern among conservative investors to move away from the markets.
While not all portfolios melt the way the indices did. The leaders of the current market are in Chemicals, Electrodes and Construction sectors. Stock holdings in these sectors, preferably the leaders in them stood out strong.
Right stocks at the right time are the need of the day. As Crude oil is reaching for highs, currency depleting & bond yields on the rise, the major concerns that shook the markets. Stocks that had gone up beyond fundamentals took the larger beating.
Adding fuel to the fire was the Karnataka election results which brought more confusion and lots of challenges for the next year’s general elections. Media started giving their share of bad news that, opinion polls show only 47% of our population now willing to give BJP the next term.
Yet there were gems still available in the hay stack. Newspapers reported that, stocks like HEG, Graphite grew strong on their fundamentals. These stocks stood the test of selling pressure.
Stocks that the experts were bullish on like Ashok Leyland, M&M Finance & Escorts – all of them showed more strength on the upside. We have all these in our portfolio which has helped us lose only half of what the markets lost. In April we had 11% gains, double the gains made by the broader indices like the SENSEX.
When markets corrected, we are holding strong with lesser loses. Our portfolio has given back about 3%. Such small and consistent strength over the years have helped us make 200% gains in the last 5 years.
Consistence in holding the top positions for every time periods is an even bigger challenge that fund managers face. This is because of some committed stock not behaving the way it has to or the fund manager holding a view that largely differs from the market.
In this space, we held strong. We were not emotional on our positions. We are not judgemental when entering or exiting a position. Just followed the system and we have consistently outperformed all the other funds in the diversified category.
Last year financial sector had bigger exposure in our portfolio, now we are shedding weight in there. We have been adding a slew of stocks in the consumption and construction sector. With such kind of elite stock picking and commitment to follow the system rules with the highest discipline, we are confident that the outperformance will continue.
I met a couple of top fund managers, whose are now foreseeing a flat year for India. The expectation is that, it will take about 12 to 18 months before bullishness returns to our market. Checking with the patterns in the market now to find if we have to retreat from equities and move to debt or reduce equity exposure. I found that, though there is not much upside from here for the markets. It is not showing weakness as what is perceived by the managers.
It can have another small rally, which can break the 36K on the SENSEX where it will go weak. For this to happen Crude has to retreat, Currency has to get strong. As of this writing both have done that, while it is not over yet. They will rise again, breach the high and then turn down. That is where the markets will manage to reach for a new high.
There is going to be a lull, while before getting there, lets accumulate the gains provided so that, we have a better edge when the tide turns against us.
We are planning to move out of equity exposures in Mutual funds and move capital to Equity savings till the 2019 election fever is over and hop in, into the next leaders at that time. So, markets are going to be tricky and strong players will take the advantage to maximise their gains.
After the correction in the markets that set in post the budget session following Global trade war, Crude Oil price increase and stress on financial assets due to expected interest rate hikes, markets had a sharp bounce back in April. SENSEX recovered more than 5% in April almost getting back most of the losses in Feb & March. Our portfolio has managed a growth of 10.20%, which was possible due to our strong portfolio of stocks. Investments into Specialty Chemicals, Metals, Electrodes, Graphite & Carbon Black helped us have the enormous edge of giving almost double the returns given by SENSEX to its investors. Private banks facing challenges with their CEO’s, Election year volatility is likely to bring more volatility into the markets. Markets are likely to touch lows once again before turning bullish. The next visit of SENSEX to 32500 levels will be a good opportunity to invest into the markets as it will be a base and give immediate gains.