Raj Vyas, Author at StockBasket Blog

Educating Investors

Understand your Risk Appetite

By Raj Vyas August 1, 2020

Hello everyone, I’m here to brief you about the risk appetite for investments.

As an investor, if you are not saving any of your money NOW, then you are at the highest risk of your life. By saving a handful portion of your salary can be fruitful in your future. The juice and the fruit will be as mouth-watering as you have saved your fruit from ripening. So, please concentrate on the investment process rather than the fruit.

Before starting an investment or planning to invest, be sure that whatever happens like if your investment doesn’t give you return or the returns are quite low, be patient and act smartly in these situations because investments take time to give good returns.

Investment is not an easy job. You have to plan your expenses, plan your EMIs, control your extra expenditure, extra shopping and save your money. You can always refer to Mr. Warren Buffett who is one of the most successful investors of all time. We can’t be like him but we can always follow his footsteps so that one day you can achieve your goal of investments. As he says, put all your eggs in one basket and watch the basket very carefully to grow because then you can concentrate on one thing rather than having diversified investments in which you don’t have time to track every investment. Multiply your money as much as you can.

Be it Mutual funds or the shares, you must have perfect knowledge about the company and the sector you’re investing in and of course how its peer companies are performing. You can differentiate your investments in high, medium and lower risk patterns according to your capacity of taking risks. In total there are 8 types of risks such as Maximization in which you always choose the high-risk option in any decision. Maximus in which you strategize that will give you a chance of making maximum return irrespective of risk. Risk Seeking is the risk in which you are comfortable with high risk but only willing to take a calculated risk. Risk Neutral is often taken for a good reason based on an analysis of risk-reward. Pareto Risk is the type of risk in which you believe 80% of the gains come from 20% of the risk. In Risk Adverse you prefer to select the safest option. Minimax is you prefer to minimize security risk associated with something and Minimization is nothing but you prefer to minimize every risk whatever the cost.

What we call a risk appetite is nothing but the way you handle your risks and how can you manage the investments by keeping an eye on your investments. You must have often come across people who say they have a high-risk appetite. 99% of the time people who say that they have high-risk appetite are the ones who have never seen a market crash. They think that there will be a nice fall in the market, then they will put more money and suddenly it will move up and then eventually they will get high returns. It is like you will earn high returns and the question is how can you say that. A market crash is a quick reaction to something that happens unexpectedly. You can only say that the person has made huge profits after the event has passed. So, only when the market crashes you will come to know whether a person has made money or not. You should not invest with the feeling in the market that by the end of this financial year you will earn 20% profit as no one can predict what is going to be the next big thing in the market. If your returns are not up to your expectations, you will feel disappointed. So it’s better to keep a track on the performance of your portfolio.

The above picture is of a mouse who is preparing to get his cheese which states that risk is not only seen bad. If the mouse is said to be an investor, what are the uncertainties that matter to you as a mouse and of course we see the trap? The mouse sees the trap and he is preparing as you can see he is with his helmet on and he goes very carefully so that he doesn’t fall into the trap or get injured. Your investment is cheese. Cheese has value, cheese has benefits and cheese will good returns what you as an investor need. This tells that as an investor you know that there could be some amount of risk associated with the investments you have made but you should always be ready, carry out due diligence and be active to decide in bad times so that you may not incur a huge loss.

To be frank, my risk capacity is quite moderate. I can’t bear heavy losses and continuously keep track of each investment of mine and believe that my hard-earned money should be safe. I’m selfish regarding my investments because these investments are the only thing that will keep me going in all the endeavours of my future. And one more thing you should not be much greedy if you gain some profits in your investments. Be patient, relax and enjoy the fruit unless and until you feel that it is the best time to throw off the fruit.

Thank You!

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Educating Investors

Secular Vs Cyclical Stocks

By Raj Vyas April 4, 2020

If you want to beat the stock market without losing money in the next crash, I have got a strategy you will love which will boost your returns. I am telling you about Secular Vs Cyclical Sectors.

A lot of you have often heard about people talking and discussing Secular Stocks and Cyclical Stocks. But you don’t know what does it means as the understanding of the meaning can lead to powerful investing. Not only will this help you grow your portfolio during a bull market but it will also help you protect your money in a bear market.

First, let’s start by defining what Secular Stocks are! Secular Stocks are companies that are not as sensitive to economic cycles. When the economy is doing very well, Secular Stocks are likely to be in line with the market. But when the economy is struggling, Secular Stocks will generally outperform the market or will not fall more than the index. Healthcare utilities, food and beverage producers or consumption companies are examples of Secular companies. There is a logic behind this even when the economy is struggling you will buy milk, visit the doctor, and pay for your gas and electric. And when the economy improves, you will still continue doing the above. The result is the profit of secular companies which will end up being much more consistent. Thus such companies are consistent dividend payers to their shareholders.

But, Cyclical Stocks are Stocks that are sensitive to economic cycles. When the economy is doing well Cyclical Stocks outperforms the market. But when the economy is doing poorly Cyclical Stocks performs worst in the market. Examples of cyclical companies would be cement, sugar and metal companies. Once again there is a logic behind this. If the economy is booming you’re likely to buy houses that need cement. But if the economy is doing poorly people generally hold off on such large purchases to save for the future. Profits of cyclical companies undergo variations as they are affected by economic cycles.

At the end of the day, Secular Stocks tend to be more consistent performers and have less volatility than the market. They have a place in most investment portfolios because Cyclical Stocks are more volatile than the market.

The good thing is money can be made by investing in both Secular Stocks and Cyclical Stocks. But it requires understanding, awareness and of course good timing of where the market will be heading. As per macro events such as interest rates, inflation, unemployment, and economic growth. These macro events are very important to consider as they will decide the course of the sector in the coming months.

You should invest more on the secular side. But if there is an opportunity for getting into Cyclical Stocks then make an informed decision as it entails higher risk. For example, if the economy has been in a recession or slowdown for a while and is starting to pull out well, a lot of those Cyclical Stock will pick up. For this, you should be quick to understand when the tide is changing. If you think the economy is bottomed out.

So, that’s sort of the way I look at Secular Stocks versus Cyclical Stocks. My preference is to buy and invest in Secular Stocks as they are more stable. StockBasket is a product that has only secular stocks. It is a platform to invest in baskets of expert-selected stocks curated by considering 25 Intelligent Stock Rating Parameters. Each StockBasket takes into consideration sectoral exposure, risk diversification, single stock exposure. Thus it tries to cut the risk at the same time giving exposure to high return companies to an investor. But you can look for opportunities to find those Cyclical Stocks. As long as there is an understanding of where the economy is and where it might be going.

I guess by now you know what Secular and Cyclical Stocks actually mean and their importance. But before you start investing, you should be aware of your risk-taking capacity. For that, you can visit my previous article on How Hungry are you for the Risks?

Thank You and Happy Investing!

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Educating Investors

What is a Market Cycle?

By Raj Vyas April 1, 2020

Just like the seasons, financial markets go through cycles. By applying basic economic principles and portfolio strategies, you can capitalize on these big market movements. To either ride the wave or weather the storm. In general, each market cycle lasts about four to five years and within each cycle are usually six stages. During each stage certain asset classes outperform others. That’s why it is important to buy the right asset class at the right time. And to always hold a good mix which diversifies your risk. So what are the six stages of the market cycle and what should you do in each?

Let’s start with stage one which begins with the market contracting. This is a good time to buy bonds. As central banks will lower interest rates and expand the money supply to improve the economy thus boosting bond prices.

During the second stage as the market hits bottom you all want to buy more stocks especially in financials. You can buy them cheap and hold on to them as the market turns around as it did from 2003 to 2007. As the bull market progresses into stage three and the economy kicks into full gear. There will be an increased demand for raw materials. This will lead to inflation. Making it a good time to buy inflation sesnsitive products. Such as commodity tracking ETFs.

During the fourth stage as the bull market reaches the late stage you all want to reduce the bond holdings as they will be peaking.

In the fifth stage as the market hits its ceiling and stock prices are maxing out you should look to reduce your stock holdings. In favor of more commodity ETFs. For example when the stock market declined in the late 2007 stocks dropped significantly. But commodity has continued to climb. Meaning if you had swapped stocks for commodities when the market was peaking you would have avoided losses and made a profit. Even as the stock market weakened.
Finally, there’s the sixth stage of a cycle when the economy contracts and all asset classes begin to decline. This is a good time to acquire defensive stocks. Like public transportation and healthcare companies which are less affected during downturns.

Of course if you’re a long term stock investor you may not need to switch around asset classes as long as you’re able to stomach the big market corrections. You can take the buy and hold approach instead. And accumulate fundamentally strong stocks. And profit during stages three and four as the market expands so those are the basic principles of market cycles.

Above we have seen how the markets move in cycles but let’s see what are the factors that govern those movements.

There are many things but they can be grouped into two main categories. fundamental factors like monetary policy, balance of trade, and unemployment and behavioural forces like how people respond to these policies. These two factors are always playing off each other in a series of actions and reactions. Like a cause and effect loop. Now as an investor, the key is to focus on the sequence of events in the business cycle and identify clues to determine what’s coming next. In general the market goes through two phases; an expansion which is generally good and contraction which is generally bad.

During the early stages of expansion the recovery is driven primarily by fundamental factors as economies expand and trade. Employment picks up as central bank usually tighten their policies to keep inflation down which is good for stocks and bonds but not so good for commodities. These fundamental leads to a rise in stock prices which only encourage more people to jump into the market. It is good at first but as this greed and exuberance spreads stock prices eventually outpace their actual value. This leads to inflation which is marked by an increase in commodity prices.

To counteract these behavioural forces, central banks usually step in and increase interest rates which help curb the money supply and decrease inflation. This action signals that the expansion is ending. And stocks will soon beyond the decline. But it also means that the commodity-related products will be going up. If you are aware of these signals you all know that this a good time to switch from stocks to commodities. Then during the recession that follows behavioural forces will become stronger than ever. As more people realize that the stock market is declining fear and panic will spread forcing, even more, to sell of their shares.

During these periods savvy investors will reduce their stock portfolios. And wait for the market to turn around which they will because eventually, central banks will step in and cut interest rates to increase the money supply. These fundamental drivers will lead to a rise in stock prices making it a perfect time to jump back in the market and that starts the cycle all over again.

Now as an investor it is important to recognize these signals and never lose sight of the bigger picture. It is like Warren Buffett once said be fearful when others are greedy and greedy when others are fearful. So keep an eye on the fundamental and behavioral factors that move the market and always stay one step ahead of the game.

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