'Let all the failures of the past year, be your best guide in the new year' goes a famous saying. The phrase perfectly depicts how the year coming to an end is neither an end nor a beginning, but a continuation with all the wisdom that experience can instil in us. The appeal of making money often lure people into the trading, but the reality of losing money can be quite a dampener.
Here are a few investment learnings of 2020 that can be of help to novice as well as experienced investors:
Buy early and sell early or buy late and sell later:
'Buy on a huge dip' has been an age-old advice followed by many. However, most of those investors fell in the trap of selling too early. The mantra is to remain patient. The Year 2020 gave many opportunities in the form of huge dips and the trend is expected to continue in the upcoming year.
Risk management system on a 45% drawdown:
In 2020, a calculated risk management system was tested. While traders grappled with volatility, investors evaluated the risk management system. The risk management system carefully identifies and assesses the risk as well as developed strategies to manage and minimize the same while maximizing profits. The mantra will be to reduce the risk by not investing in derivative and leverage position, but rather invest in cash markets.
Sector Rotation is Key:
It is a known fact that all the sector do not perform well at the same time. In 2020, sectors such as pharmaceutical, FMCG, IT, BFSI outperformed, followed by an upward trend witnessed by laggards. The mantra is to understand sector rotation.
Increase allocation of stock bottoming out and decrease allocation on stock topping out:
The mantra will be to increase exposure on the downside and reduce exposure on the upside.
Focus on Position Sizing:
Traders often invest in a random position size. Importance should not only be given to what you want to invest in, but also the size of the investment. Taking a minor position with a huge upside is an opportunity lost to make a significant return.
What not to buy is equally important as what to buy:
In all market conditions, especially in 2020, focus should not just be on what to buy but on what to not buy. Good companies perform well whether the market is bullish, bearish or neutral while bad stocks underperform in all market conditions.
Here are a few key investment advices that can be followed in 2021:
Laggards as value investing opportunities:
The mantra in 2021 will be to keep a look out for beaten down sectors such as PSU, Power, Real Estate, FMCG or stocks that have the potential for an upward spiral.
Protect profits and hedge with defensive sectors:
After a substantial gain, it is advisable to control position and let the profits ride in. It is also advisable to protect your profits by disinvesting in the underperformers and cleaning your portfolio.
How to increase allocations with corrections not being very deep:
Post the worst market scenario in 2020, it is essential to build confidence to experience drawdowns which will be comparatively milder, in the anticipated 10 percent to 15 percent contraction levels which is on par for the course. The mantra will be to buy the dips and stay in the market for a good multiyear run.
Look at the strong companies getting stronger:
Focus should be on identifying companies who are increasing their cash flow, margins, market share, shareholder’s value. Though they will be valued at a premium, the importance should be given to the strength and potential of the stock.
Annual & Q4 earnings will provide more opportunities in 2021:
Post Q4 and annual earnings investors get a more calculated clear picture for sector selection, allocation, and identification of outperformers.
Alpha opportunities still available in mid cap/small cap sectors:
In 2021, the market will statistically look high. There are opportunities which will be available for value investing and the recovery will be more visible in the small/mid cap companies.
(Nitin Shakdher is the Founder & CEO at the Green Capital Single Family Office.)Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.