Losing sleep over market crash? Shankar Sharma’s 80-20 rule may help you survive

Nifty has already corrected by around 15 per cent from its 52-week high. Sensex is down over 9,300 points from its peak reached on October 19. Further, Nifty Smallcap 100 is in firm bear grip by slipping down 28 per cent from its record high. Investors are puzzled about headwinds related to inflation, weakening economic growth outlook, prolonged Russia-Ukraine war, volatility in commodity prices, declining rupee and rising bond yields.

As the carnage grows deeper in the broader market, Dalal Street is now full of pessimism. Amid heavy FII outflows, retail and other domestic investors have not been able to save Sensex. Market veteran Shankar Sharma says in situations like this, one should keep it simple – buy strength and not weakness.

Explaining his 80-20 formula for rejigging your portfolio in hard times, he said 80 per cent of your portfolio should be reshuffled into stocks and groups which are exhibiting strength and only 20 per cent should be in stocks which have really crashed a lot but you believe that due to fundamental reasons, they represent good value.

“The typical mistake that all of us – seasoned or unseasoned investors – make is that we do the opposite. We keep our losers and sell our winners and that is usually a recipe for disaster because when markets recover, and they will inevitably, it is really the strength group which would have delivered you positive returns even in a bear market while the weakness group will remain down and probably might even go lower,” Sharma told ET Now.

Giving a recent example from his own US portfolio, he said he wrote a put on Peloton for $62 when the price was $150. “It got exercised because the price fell to $40-45 at the expiry which was like a 6-8 months out option and it was inconceivable that a stock as storied as Peloton could fall so much! What are you supposed to do then? This stock should not have fallen so much. I am unfortunately long this stock at $60 and I have to sell. There is no point in waiting for it to recover back to go beyond $60, which is my purchase price. The mistake we all make is that we hang on to such losers.”

He said one must buy stocks that are holding up well in this carnage. “Buy those and only 20 per cent should go into the really 90 per cent down stocks or 95 per cent down stocks if you believe that fundamentally they do not deserve to be there.”

Sharma asked investors to build a portfolio for the next five years. “Instead of fretting over the losses, start thinking constructively where can I recover these losses and you may not be able to recover it from your existing portfolios.”

Giving the example of ITC, which has gone up by 15 per cent year to date, he said the cigarette stock may be a good place to hide. “I do not think you are going to make 30-40-50 per cent on that but it may not fall…. It is the high fliers which actually take a beating in the kind of market we are in.”

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