Hello Sir,

Hope you are doing well.

As an investor in stock market, our primary aim is to create wealth in the long term. The wealth gets created by making profitable investments and ultimately booking profits at an opportune time.

Our strategy of identifying profitable investment opportunities is based on 'Growth at reasonable valuations'; however we don't believe in buy and forget or buy and hold forever.

To improve our selling, we have started using Trailing Stop Loss or you can call it Profit protection strategy and we will discuss it briefly here with an example at the end.

 

Before that, if you are interested in investing in our Latest Stock Recommendation which could benefit from the massive growth expected in the CNG segment and still available around 10 times earnings, you can read about it here - LINK  

 

Trailing Stop Loss/Profit protection strategy

As a value investor there comes a point when you start finding the valuations high or start thinking in terms of selling.

However, valuations are very subjective and we have come to realize that in a good market a 25 PE stock can start trading at 40 PE or say 50 PE.

We believe, trailing Stop losses can be helpful in such cases.

So, what you do is, suppose you start finding the stock expensive at 100, yet you believe the earnings trajectory is good or the market is in an uptrend, you put a SL at 90 or say 80 depending on your comfort level.

If you have some knowledge about charts or patterns, you can determine the SL level based on the same as well.

If the stock corrects to 90, you sell out; however, if the stock moves to 130, you move the SL up to 117 or 110 and keep repeating the process as the stock moves upwards without hitting your SL.

Pros and Cons of this strategy - In rising markets, trailing SL strategy looks good as the stocks continue rising above your SL point. This way, instead of getting sold out at 100, you may end up selling at 150 or even higher depending on the momentum in the stock and the overall market

In bad markets though, you will feel bad as the stock breaches your SL level and you decide to sell.

Why will you feel bad?

Because now you will be selling at say 10-30% lower price than the peak price depending on your SL.

As a value investor, it would be counter intuitive to sell a stock which is down 20-30% because we are attuned to think in terms of finding value as the stocks correct.

Also, a lot of times there would be cases wherein the stock hits your SL and then starts moving upwards.

However, the bottom line is to bring in discipline in selling because this is what most investors lack.

It's not easy to follow it to the tee because of our own biases, but surely something to work on.

Let me share with you an example - We recommended Maithan Alloys to our members in Jan'20 around 550 odd levels. In May'21, while evaluating the stock, we believed the potential for growth is limited due to capacity constraints and therefore suggested SL of 700 when the stock was quoting around 750.

Post that the stock moved upwards and in our next review we suggested SL of 900 when the stock was quoting around 935. Luckily the stock continued moving upwards and in our Feb'22 review we suggested SL of 1050 when the stock was quoting around 1,150. Finally, in May'22, our SL got executed around 1,040 and we closed the coverage on the same.

If you are looking for investment opportunities do check out our premium subscriptions.

 

 

Disclosure: I don't have any investment in Maithan Alloys.

 

Best Regards,

Ekansh Mittal
Research Analyst
Web: https://www.katalystwealth.com/

 

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