@nirvana_laha I am just a trader - discretionary & systematic - mostly discretionary as I rely on what “feels” right - the feel is essentially a 1:5 risk:reward (lose 10% max or win 50%, downside of 20% for 2x and so on) within 3-6 months, based on charts, fundamentals and some perception gaps. This has worked exceptionally well in the last 3 odd years especially and most of those charts are in this thread. When I don’t see too many such 1:5 risk:reward trades, I simply sit out like I did mostly between Oct '21-Jun '22. This did exceptionally well and the gains were simply too much to waste on middling trades. I don’t consider myself skilled enough to find great trades when the odds of finding them are slim (Fish where the fish are).
Now most of the trades are in micro/small caps in the last 3 years because that’s where the perception gaps are and where these 1:5 trades often appear (mids/larges are well-covered), especially when liquidity is high and caution is thrown out as most of these that trade at 10x earnings get to 25-30x without the business doing anything special, or pretending to do something special.
I extensively use Kelly Criterion for position sizing (which means most bets can get to 15-20% allocation mark easily when the risk:reward is in favour) - again this is not math driven but intuition driven (you know in your gut when your position size is off), going by liquidity, along with the risk:reward as mentioned above.
With that background - in '20 and '21, there were lot of 1:10 trades that offered 2x or even more with just 10% downside. In '21 there were only 50% sort of upsides I could find but with almost 20% downside. In '22 barely any with the same risk:reward in small/micros. This system works OK and you can have a splendid CAGR, but your turnover is almost 4-6x your capital when you are aggressive and you end up paying a lot of tax as well (which is absolutely fine - good problems to have)
But at some point of time, your capital is bound to grow where the same strategy can’t work. You can’t find enough micro/smallcaps with the same sort of risk:reward in the same 3-6 month time period (again, I speak as a trader - a novice at that). Also there’s a watermark in most of our minds in terms of what’s a good capital base post which we want to take lesser risks. I think I have crossed that limit sometime in the last year and would want to extend time horizon for the same risk:reward of 1:5. This means I churn less, take lesser risks in a overheated market in illiquid scrips.
That’s where this strategy change came in - the only way I could convince myself to get back in the market was to see a bigger picture of where we are heading as a country, in terms of per capita incomes and consumption. Also, our market being a smallcap in the global scheme of things meant a flood of capital coming in due to narrowing of global markets (which I think is bound to happen) was going to go into most liquid midcaps/largecaps (which are global smallcaps). Also, it gives me the opportunity to allocate more of my capital per scrip - which means lesser ideas to hunt for in a dwindling ideas market - and lesser decisions to make, when your hit rate is bound to be poor due to market conditions.
So that’s what it is. I don’t know if its the right thing. I may change my mind as I am also trying to experiment and find out what works best for my temperament and capital. This is probably not the right way and I think everyone should find their own process and see what works.
Disc: I am a novice. Those consumption stocks were bought in early July and unless your horizon is long, now is perhaps not a good time to touch them.
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