The golden rule of investment is to remain invested only so long as you feel that the economic conditions six months ahead are going to be better than they are today, says Aditya Shroff in ‘Armchair Investing: Making money in stocks – simplified’ (www.visionbooksindia.com). Assuring that you will develop this ‘feel’ as you grow better informed and more aware of the economy, he adds that the stock prices of companies within certain industries can also serve as a warning.
The investment strategy discussed in the book has two parts, viz. fundamental and technical, the former for choosing the stocks in which to invest, and the latter for confirmation and timing to enter and exit.
Advising that the exposure in any one sector be limited to 10 to 15 per cent of the portfolio (so that investments will be in at least 6 to 8 different sectors), the author suggests that, in any single sector, 70 per cent or more of the funds be allocated to stocks of large companies and 30 per cent or less to stocks of medium and small companies.
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The book offers a simple guidance on assessing the performance of the company’s stock price relative to a benchmark index such as of the BSE or NSE, by comparing the percentage change in monthly closing prices of the stock with that of the index. If we find that for 2 or 3 successive months, the stock is performing better than the index, we can label the stock as an outperformer, notes Shroff.
“If we find that the performance is comparable, we can label the stock as a performer; and, if we find that the performance is worse, we can label the stock as an underperformer… If a stock in which we have invested has become an underperformer, we should consider booking profits in that stock.”
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