Can Systematic Strategy Save You From Blowups?

July 21, 2023

Yesterday, one of the stocks in Shooting Stars portfolio plummeted 20% on account of a bad news. As there are integrity-related questions, this bad news is quite different from the regular bad stuff like earnings miss or a fire at a plant. The stock lost another 5% today and it can drop further in the coming days given the nature of the damage. But such is investing.

Value investors might say that the company was never investment worthy and more efforts in checking fundamentals should have been made. While this looks reasonable on the face, the fate of companies like Satyam and Vakrangee tells us that even fundamentals can be manipulated. One can do only so much since forensic audit for each investment isn’t a practical solution!

The availability of time at my disposal allowed me to ponder on this a bit longer and two thoughts emerged. The first one was about stock selection. Should one use discretion and weed out such questionable stocks in systematic investing? If yes, how deep you should go beyond headline numbers available publicly? Remember, we need to do this for 25-30 stocks every month! It rather appears that these kind of surprises form the cost of doing business in India.

The second thought and what really caught my attention was the absence of panic in my own reaction this time. A younger version of myself would go ahead and try to read up everything about the company and how solid its fundamentals are. However, the situation was starkly different this time. I guess knowing that the stock is part of a basket and carries a max weight of around 4% helped the matters this time. I mean, the lowest a stock can theoretically go down to is zero! Although unlikely, such stuff has happened in the past but that 4% is the maximum damage it can do to my portfolio.

Another tailwind was knowing that in absence of a recovery, the stock will be going out of the basket next month to be replaced by a better performing stock.

Whatever may have been the reason, it certainly helped me to think objectively and do what I like the most – nothing.