Whether the trigger was long-term capital gains (LTCG) tax or rising global bond yields, or both, the correction is upon us and it does not look good. Everyone had been talking of a correction in the market and now that we have one, there is already talk of a bear market and the possibility that we might be staring at a financial-meltdown type situation.
While the broad market indices have shed less than 8 percent from their peaks before the budget, it does not reflect the true picture of the smaller stocks. Many small and mid-cap stocks have lost more than 50 percent in value.
On a day when the BSE Sensex falls by nearly 1,000 points it is difficult for an investor to stay calm. But a cool head is exactly what a shrewd investor is made possesses. Remember Warren Buffett’s quote ‘Be fearful when others are greedy and greedy when others are fearful.’
But, is an 8 percent correction from the top a signal to be ‘greedy’? Jumping to pick up stocks every time the market falls is the fastest way to disaster.
Smart investors have a shopping list of their stocks to purchase when the market falls and the stocks come close to their comfort zone.
Most retail investors generally are clueless on which stocks to purchase. With a sharp fall in the market all those ‘experts’ passing on ‘tips’ and ‘stock calls’ suddenly disappear. The poor investor is left high and dry.
Thankfully, there are now resources available to help, provided one knows where to look. There are free source sites like www.screener.in and www.trendlyne.com which have readymade queries to help search through stocks. Many investors have been using simple queries on databases to arrive at low valuation stocks or picking up dividend yield stocks during a fall.
But these sites help pick up stocks the way professional fund managers do. Every fund manager has a particular style of investing which plays around with the publicly available financial data to match their investment parameter. Their investing style can be mathematically represented into a formula. Only when various parameters are fulfilled does the fund manager considers adding the stock.
A word of caution here, the queries that are available on most such sites use historical data. While some fund managers are perfectly fine with using historical data some prefer to add their own projections of forward earnings.
Let’s look at three of the commonly used queries of renowned fund managers who use only historical data.
Benjamin Graham Value Screener
Warren Buffett’s guru Benjamin Graham, also known as the father of value investing, had a set of rules for selecting stocks. A stock with a Graham Ratio of greater than 1 was considered to have healthy financials.
The Graham Ratio is arrived at by dividing the ‘Graham Number’ by the current share price. And the Graham Number is deduced by measuring a company’s value by taking into account earnings per share and book value per share.
Readymade queries will throw up companies that have a ratio greater than one and make stock selection easier for the investor.
The Magic Formula
The Magic Gormula was first outlined by Joel Greenblatt in his book ‘The little book that beats the market’. The formula identifies cheap stock with a high earnings yield and a high return on capital. Greenblatt in his book says the formula has generated an average return of over 30 percent over a period of 17 years and has beaten the index 96 percent of the time.
CANSLIM uses a mix of fundamental and technical analysis to generate investment worthy stocks. This approach was created by the founder of Investor’s Business Daily William J. O’Neil.
CANSLIM is an acronym which stands for current quarterly earnings, annual earnings, new products, the supply of share in the market, leading or laggard, institutional ownership and market direction. O’Neil used a combination of these parameters using various filters to pick his stocks.
This formula catches stocks which are fundamentally sound and have strong momentum.
There are a number of filters and queries that are available on the internet. Even if one is not qualified enough to understand the workings behind these formulae, the output is much better than the ‘tips’ that are freely available in the market.moneycontrol