Three golden rules for making money in the stock market: Angel Broking

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Updated: September 29, 2017 4:46:30 PM

While most investors may be aware of the phrase “Sell on greed and buy on fear,” it becomes difficult to put the same to practice.

investors, managing cash, equity market, HDFC Securities,  investment, how much cash one should have in hand, real market?Sell on Greed and Buy on Fear? is easier said than done, says Angel Broking. (Graphic image)

While most investors may be aware of the phrase “Sell on greed and buy on fear,” it becomes difficult to put the same to practice. Research and brokerage firm Angel Broking points out that the year 2000 and 2008 “were screaming sells even for someone with a very rudimentary understanding of the markets,” however, many investors still held onto their positions.  In its latest Blog report, Angel Broking explores the impediments which investors face while trying to “sell on greed and buy on fear.” We highlight three key takeaways from the report-

Role of Peer Pressure

The research firm says that a plethora of IPOs hit the market at peak levels; and many analysts recommend these stocks at steep valuations, and investors end up subscribing for the same as they see what their colleague or neighbour is doing.In fact, of late there have been a lot of overvalued IPOs which have been grossly oversubscribed- Prataap Snacks Ltd’s IPO which was priced at more than than 200 times relative to earnings got oversubscribed by 30 times! Harshil Sethia of BP Wealth told FE Online earlier this week, “Some of the IPO companies are really overvalued. The bubble has to burst sometime.” Taking an example of Wipro, Angel Broking says, “ Your intuition tells you that buying Wipro at 150 times P/E ratio in 2000 was a bad choice, but you still went ahead and did that because that is what every Tom, Dick and Harry on the street was doing.”

Avoid over-exuberance at the peak of bull markets

Angel Broking points out that at the peak of the technology boom, investors were told that technology would transform the world to the extent that electronic money will replace physical money entirely. Further, taking the example of real estate, the research firm observes, “ In 2007, we all believed that Unitech at Rs 25,000 per share was justified because real estate companies must be valued based on land banks rather than on sales and earnings.”  Most realty companies lost nearly 95% of their market value and are nowhere close to their peaks even after 10 years, says the report. As John Templeton, one of the best stock pickers of the 20th century, once said, ““The four most expensive words in the English language are, ‘This time it’s different.”

Stick to Rule-based trading to ensure liquidity at lower levels

In the report, Angel Broking points out that the biggest reason for not being greedy at lower levels is that investors just do not have liquidity on hand. “You bought L&T at Rs 6000 and do not have the heart to now sell it off at Rs 3000. So you hold on in the hope that you will eventually make a profit on L&T, which unfortunately never materializes. In the process you miss out on the salivating opportunities at the market bottoms,” says the report. To tackle this, Angel Broking suggests a disciplined rule-based trading approach. Explaining the strategy, the firm says, “Say you have bought an IT stock at 18 times valuations. If the historic average valuation is 23 times earnings and the stock goes 10% above that, then you exit. That means at 25 times earnings you exit.” By liquidating the positions at close to peak, the investors will have liquidity when the price of the scrip falls, after peaking.

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