For a full-time investor, investing is not a short-term battle where figuring out right ideas to buy defines the success of your strategy. Rather, it is a war where only one thing matters: Returns. One of the most important factors impacting portfolio returns is exposure management.
A sound exposure management strategy not only curtails risk, but also keeps you aggressively invested in the market when the chances of gains are high. However, it only works well in the long run if the strategy is rule-based. CANSLIM provides a perfect objective system which is summarised below:
1.Never invest all your capital at once in the market or on a particular stock. Divide the capital allocation into three to four steps. Start with 30-40% investment and keep increasing positions as the market to the maximum of 100%.
2.Use market signals to increase/decrease your exposure in overall market. One of the “Buy” signals is an additional follow-thorough day. When the market is in an uptrend, increase your exposure on every additional follow-through day.
3.Reduce your market exposure if index breaches key moving averages (50- and 200-DMA with heavy volume). Also, reduce your position, one step at a time, if distribution days occur in a cluster. More than three distribution days in an eight-day window is one such signal.
4.For individual stocks, if already in profit, use pyramiding strategy – that is, always average on the way up, never on the way down. Increase your positions whenever a stock that had a successful breakout retakes/rebounds from one of the key moving averages (50- or 200-DMA) after a shakeout.
For a stock-specific alternative buy point, take the case of Bata India. After a successful breakout, it exhibited a shakeout, but rebounded from it 50-DMA line. This was the legitimate point to increase positions, after having entered at the initial buy point.
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Disclaimer: Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. It is for educational purposes only.
Performance computations reflect a time-weighted rate of return and includes a brokerage of 0.5%. All holdings are rebalanced to equal rupee amounts daily. Dividends are not considered in computations. Percent gains and losses are calculated for all issues that remain on the “Current Holdings” at the end of the day. For stocks that were added to “Current Holdings”, the basis used to calculate the percent change is the price noted when the issue appeared as a “Current Holdings” in MarketSmith India. For stocks that were removed, the selling price used to calculate the percent is the price note d when the issue appeared as “Removed” in the MarketSmith India. For more information, see our Legal disclosures here.