As the carnage deepens in the wider market, Dalal Street is now full of pessimism. Amid heavy FII outflows, retail and other domestic investors have been unable to bail out Sensex. Market veteran Shankar Sharma says in situations like this, keep it simple – buy strength, not weakness.
He explained his 80-20 formula for rearranging your portfolio in difficult times, he said that 80 percent of your portfolio should be rearranged into stocks and groups that are strong and only 20 percent should be in stocks that really have a lot have crashed, but you believe they represent good value for fundamental reasons.
“The typical mistake all of us – seasoned or inexperienced investors – make is that we do the opposite. We keep our losers and sell our winners and that’s usually a recipe for disaster because when markets recover, and they inevitably the strength group that would have given you positive returns even in a bear market, while the weakness group will remain low and could probably go even lower,” Sharma told ET Now.
Giving a recent example from his own US portfolio, he said he had written a put on Peloton at $62, when the price was $150. “It was exercised because the price fell to $40-45 at expiration which was a 6-8 month option and it was unimaginable that a stock with a reputation like Peloton could drop that much! What should you do then? This the stock shouldn’t have fallen that much, unfortunately I’ve had this stock at $60 for a long time and I need to sell it. There’s no point waiting for it to recover to go beyond $60, which is my buy price. what we all make is that we hold on to such losers.”
He said you should buy stocks that will hold up well in this carnage. “Buy those and only 20 percent should go into the real 90 percent down stock or 95 percent down stock if you believe they fundamentally don’t deserve to be there.”
Sharma asked investors to build a portfolio for the next five years. “Instead of worrying about the losses, think constructively about where I can recover these losses and you may not be able to recover it from your existing portfolios.”
Giving the example of
, which is up 15 percent so far, he said the cigarette supply could be a good place to hide. “I don’t think you’re going to make 30-40-50 percent on that, but it shouldn’t go down… It’s the high flyers that really hold it back in the kind of market we’re in.”
(Disclaimer: The experts’ recommendations, suggestions, views and opinions are their own. They do not represent the views of Economic Times)