The Hindu Business Line : Strategy

I am a long-term investor. I do not see the "stop-loss" for stock recommendations featured in the pages other than the `Market Watch' page. What is the strategy to be followed on those stock calls, as you have mentioned that one should never invest without a stop-loss? Please explain the stop-loss strategy to be followed by a long-term investor. Shalini Damodaran

Barring recommendations based on technical analysis featured in the Market Watch page and Q & A column, the other recommendations featured in the Sunday edition of "Business Line" are based on the study of the fundamental strengths and long-term business prospects of the company concerned.

As the concept of "stop-loss" is typically associated with investors who believe in technical analysis, you will not find a mention of this concept for all stock calls featured in the Sunday's edition. We would, however, advise to have a stop-loss irrespective of whether you follow technical or fundamental analysis.

We have addressed the issue of stop-loss on quite a few earlier occasions. Please visit the archives section of our Web site www.businessline.in to read them.

As a rule of thumb, investors may settle for a fixed money-based stop-loss if they are unable to arrive at a more scientific method to identify stop-loss levels.

The money based-stop-loss could be a fixed percentage, which would be within the psychological comfort zone of an investor.

This percentage would obviously vary from person to person and sticking to this money based stop would definitely prove beneficial from a long-term perspective.

The importance of the concept of stop-loss will not be felt in a strong bull market similar to the one we have witnessed over the past three years. It would be better appreciated once the stock market gets into a corrective phase or if the stock price moves against expectations.

If a major correction is round the corner, will your views on individual stocks still hold good? To cite an example, you have been bullish on State Bank of India. If the market were to correct sharply, will State Bank survive the correction and will the stop-loss of Rs 870 be valid? Generally, how do I decide on my investment strategy at such critical market levels? Joshua Mathew

Though the majority of the stocks would move in sync with the overall market direction, the degree of the correlation will vary across companies.

Even within the constituents of the index, there will be a set of stocks that would outperform the index. If the stock market gets into a major corrective phase, it does not mean that there will be a vertical fall across the board.

There overall trend would turn bearish and the index would chart a steady downward course, which will be interrupted by brief upward corrective phases.

We feel confident that State Bank would reach our long-term targets provided the stop-loss at Rs 870 is not breached.

If our expectations turn out to be incorrect, the stop-loss will come into play and ensure that investors exit with minimum damage.

Stop-loss should be viewed as an insurance premium to guard against unexpected turn in the stock price. As we have emphasised, never invest without being clear about the entry, exit, and more importantly, the stop-loss levels.

The other crucial aspect is that once the stop-loss is hit, never ignore that stock, especially if you are convinced about the fundamentals and long-term growth prospects. In such stocks, always try to look for fresh entry triggers with a suitable revised stop-loss level. &

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