How to Time markets ?
Before you pull out the gun and knock my head off even for suggesting to time market, let me tell one such experience where discipline and patience has helped me to time market
Lets begin – Cicra Feb 2011
I had accumulated decent savings in short term debt funds and hence I started to look for opportunities in stock market, My strategy was to look where the smart money is investing in small and mid cap space, so I started digging holdings of successful mutual funds , funds which had given more than 18% CAGR return for last 5 years
Quite a few funds were shortlisted, next I sorted these funds with least expense ratio and then chose five funds in order of highest 5 year CAGR returns.
The subsequent exercise was to determine stocks owned by these funds, a minimum of two funds should own a company to make it to final evaluation list, you can read this method in a detailed post I did some time ago
Final list looked liked this
Do I under all of the above business?
Obviously no so chemical companies – Bayer, Tata Chemichals, Zuari,UPL were first shown the door followed by Mining companies – Sterlite
Large cap – Bharti and ONGC were next to go as I was keen to invest in Mid cap and Small cap companies, How these stocks were owned in funds dedicated for Small and Mid cap funds is another story altogether 😉
Banks I had a strong exposure in my then current portfolio so they went to watch list – Federal , ING & Union
I was left with five companies Amara Raja , Bata , IPCA , TTK, Torrent
All of the five were fundamentally sound business doing well, Amara Raja , IPCA and TTK made the earnings quality cut , I slept over the ideas and tried valuing all three business to the best of my knowledge
Made up my mind, IPCA was the final stock that I had set my eyes on, it delivered an EPS of INR 21 and was growing at 20+% year on year for last 5 years, my rough intrinsic value range was between INR 360 – INR 400 then I was comfortable to buy at anything below INR 250
Opened moneycontrol and found that the market price was INR 299 which was below my intrinsic value calculations but a steep 25% more than what I was willing to pay. I almost bought given that I had worked on this idea for almost three months, but somehow I resisted remembering the three most important words in investment – “Margin of Safety”
Markets were going nowhere but IPCA was moving north at INR 335 it made me feel despondent, I was finding difficult to reconcile with my decision not to buy, one has to be very disciplined and needs to stick to their decision ,while some may call this imprudent but not buying temptation have served me well till date
Months went by like years, the stock was looking at me and telling me I am not going to come down, IPCA was indeed trading around INR 300, I started to refine my work on other companies to determine a buy price of them as somehow I felt that I am not going to get IPCA at INR 250 or less this year. IPCA swiftly moved from my fortnightly watch list to monthly watch list
17th Oct 2011 , an email alert from broker finally told me that IPCA was trading at INR 235, I bought 5% of my portfolio, I didn’t care if the stock went further down as I was convinced that it was trading at least 40% below its instrinic value
With patience & discipline I was able to time market, the wait was almost 6 months for me with IPCA, in other cases it could be years or worst – it may never come, Market gyrations offers a small investor a big edge – he can wait and bid his time by not doing anything as he has no return statement to produce,no owners to oblige
All one has to do is behave like a trained hunter Aim, Wait and Shoot
Side Note – While waiting for your buy price to be served on platter by Mr. Market always continue the search for companies which are undervalued
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Charts : Moneycontrol.com