Sowmay Jain

The best and worst metrics to track in order to grow your stock portfolio

Sowmay

I don’t know about you, but when I first started my investment, I would check my “portfolio’s stock price” about 20 times a day.

Got excited with price hike and despair with price drop.

It was exciting to see that my unrealized profit was increasing (even if only a teeny bit) or that gasp when some stock perform extremely well which I just speculated with no fundamental base.

I even got caught up in looking at the number of volume traded and news at moneycontrol site on a daily basis, as if my worth as a newbie investor could be measured by how many people had recommended the stock I already have in my portfolio.

Now, I know better.

And it’s not that you should completely give up on tracking your statistics, but it’s that you should focus more on tracking the things that matter so that you don’t waste time tracking metrics that are getting you nowhere.

So which stats DO matter?

And what should you focus on in order to grow your stock portfolio?

(Note – This answer contains affiliates)

Well, the matrix I mentioned above: your stock price, volume traded, news….. Don’t get me wrong, you’ll want to have some idea of where you’re at in this realm, but I do not recommend obsessively checking your Demat account each day or refreshing moneycontrol site to see if anyone dashing happen to stock.

Why?

Because constantly eyeing your “vanity metrics” is not going to help you grow your profit or income. Rather than simply seeing how much well does your portfolio stock perform, it’s your job to figure out why those stocks perform well.

So, at the end of the day, you should look for patterns and stocks rates in your metrics, which will help you invest better in future, make more money, and understand what to focus on and what to ditch.

But if tracking your stock price, news and stock volume isn’t the right way to go, what is? Which metrics SHOULD you pay attention to? Let’s talk.

If stock diversification are part of your investing strategy, then obviously you’ll want to track data that lets you know whether or not your overall portfolio are actually profitable, and to what extent.

Don’t just stick to one or two hot trendy stock. See your portfolio as a unique stock identity. Return On Investment (ROI) can help you to figure that out. Here’s the formula:

You’ll get the ratio by applying above formula. Multiply it with 100 to get the percentage (%).

So, suppose you invested all of your funds in 6 stocks (followed by a strong analysis) and 4 of them performed positive and remaining gone against. What would be your next step?

You’ll start selling red stocks, right?

But don’t do that.

Why? I said earlier, see your portfolio as a unique investment vehicle which consist many stock, just like Mutual Funds. The only difference is, they charge you for doing this and here you’re your own master.

So even if some stocks are red and if you believe on the analysis you did before buying that stock then retain that stock with you, sooner or latter it’ll attract some traction and people would be dying to buy it.

Notable point is, you did a strong analysis before buying that stock. Want to know what parameters one should consider before buying a stock? Section 3 of this blog-post may help you.

Here’s the step by step instruction that you should follow:

It may possible that you invested in a stock. Later you find that it was your bad investment. What most people do is they retain it further more in the hope that it’ll recover the amount. But it’s not the right decision. Instead of waiting for any bad stock like A to get recover, invest the same sell off amount in a good stock say B.

I highlighted this point clearly in this article, where an uncle of mine once bought a huge amount of shares of Jaiprakash Associates and now its price dropped by more than 90%.

That’s it.

Rather than simply tracking your overall portfolio, I also recommend tracking the individual stocks that brings traffic to you. Tracking profit often comes in the form of seeing how many shares had had individually performed and how much % of return you got.

Mark it, I used % instead of any money term, why?

Because if you notice that a stock ABC bought for 100 and has returned you 50 INR p.a. while stock XYZ, bought price 200 has returned you 80 INR p.a., here you’ll easily locate out that stock XYZ more profitable…… but hold on! relatively stock ABC is more profitable.

Reason behind this is % return. ABC stock has 50% whereas XYZ has 40% return. In simple words, you had earned more if you invested the whole amount in stock ABC.

So at the very least, just don’t run behind money unit instead seek % return.

Like I mentioned at the beginning of this post, part of your job when tracking your investment is to find patterns in your stock or portfolio. If you notice that certain stock with x ROE, y Dividend payout or anything else (discussed in last section) consistently have more return then this is a good indication that you should invest more in the stock like that, give high weight to that metrics, and perhaps even create a spreadsheet for same.

Tracking one or two stocks may be easy, but how do you track overall portfolio with segregated returns of each stock?

You’ll want to use some sort of trading tool that actually tracks your statistics, like Zerodha Kite. I personally recommend this platform for this task. You can actually see Social Warfare in action on my own site, too. It includes social sharing buttons, but also displays the number of times each particular post has been shared on the web.

In order to accurately calculate ROI, It let you know how much return you had, how many stocks are green or red, and even how how much each stock contribute to your portfolio, and even net gain/loss, even day’s gain or loss…….. phew! long list. Following image can clear out the point.

It’s a platform full of statistics.

However, I’ll receive small amount of commission if you trade through Zerodha but I promote….. But that’s not the reason I’m promoting it. It’s really a good platform.

It’s other platform (Q) also provides a number of other cool stats, like which part of the how much charges are deducted from your profit, weekly, monthly gain/loss (giving you the opportunity to spice that section up for future investment in order to increase your return rate).

If you wanted to get fancy with this, I’d recommend creating a spreadsheet with three columns: the name of your stock, buy price, and the total net return. That will make it easy for you to go back and see how your stocks is lookin’ and will likely breed decent investment ideas for you!

Of course, you’ll probably want to go back each quarter and update your stats inside your spreadsheet, since your numbers will fluctuate over time.

Cool, right? Let’s talk about next metric.

In this section I’m going to cover 2 crucial points where most of the investors lose their track.

Many investors (indeed 99%) are not aware how much government charge taxes for their investment’s profit. Even you may not know it.

So now follow closely because there are only 2 points in this section which are crucial enough to understand to get a good margin on your investments.

Let’s dive in.

Tax rate

Suppose you bought stock XYZ @100. Being optimist towards share future you kept it for exactly 365 days and gone 11 times of its price that is 1,100. Yeah, 11 multi-bagger stock.

You were on cloud nine and decided to retain stock with you for one more year.

Suddenly GOD (Of cause real) came down specially for you (may be you did some good deeds) to tell you the future that –

“the stock will drop down by 100 points tomorrow and never going to rise again”

Sounds ugly, soon you’ll understand the reason why I’m assuming such a ugly situation.

Now what will you do?

The information source is reliable, as GOD tell you the future and they knows future.

Exactly, you’ll start selling it but if I would have been in your situation, I’ll go against GOD instead I’ll sell it tomorrow.

GOD may know future but may be they didn’t know the ugly tax system.

If you sell your stock under 1 year after you bought it, government term it as a short term investment and charge 15% tax on your profit. That simply mean, if you a earn a profit of 1 lakh, government will keep 15k and remaining amount is also deducted by many other charges like brokerage, DP charges, STT etc.

So what kind of charges in your hand?

Brokerage & tax, rest other are charged on fixed basis irrespective of the fact from which broker, what time, which place you’re trading.

How can one reduce them?

Stock kept for 1 year is termed as long term investment and tax rate for that is 0% (if you paid STT, don’t worry every NSE/BSE trades are STT deducted at source).

So this means you’ll get 1 lakh for 1 lakh profit (excluding other charges)

Let head back to above GOD case, share gone 100 points down on day after tomorrow.

Let’s analyse both situation.

You remain with a profit of 1000 (1100 – 100) but as 1 year is not completed, you’ll be charged 15% on your profit. So finally your profit would be 850 (1000*0.85)

As the stock drop by 100 points, your remaining profit would be 900 but kudos! no taxes.

So even if the stock drop by 100 points, you’re on good side.

Nerdy statistics to the rescue, am I right?

One more benefit you’ll get is your other charges will also get reduced by almost 90%.

Why?

Because you retain stock for long so you traded less. And less you trade less you’ll be charges. If you trade on daily basis, you’ll charge daily but if you trade with a difference of 1 year, you’ll only charged at buying at the start of year and at selling at the end of year.

Isn’t it cool?

So always retain your stock for almost one year. Now let’s switch to second point.

Brokerage charges

If you ever gone through your charge sheet, you may have figure out that brokerage account for almost 80% of all charges. But I’m not even charged a penny.

Why? How? Or probably CEO of the company is my friend?

Because I trade on delivery basis.

What the heck I’m saying?

Yeah! exactly you heard it right. Even though delivery transactions charges are more than intra day charges but I trade through a broker which provide free delivery transactions.

I had already talked about Zerodha discount brokers earlier. They are first known discount and technological broker in India. Also first to announce free delivery trades.

I’m a great fan of their Android trading app and their q, kite, pi etc platforms are just awesome. Get some glimpse of their trading platform here.

However, if you generally trade on F&O or intraday basis (which I don’t suggest) then their are many other brokers which provide less charges than Zerodha like SAS online, RSKV etc.

Do some research and find broker as per your requirement, weather you need an app or not, how much margin do your expect, calling customer support….etc.

Fisrt section talk about which metric should one follow in order to track profits and growth of overall portfolio.

Second section deals with individual stocks performance checking.

Third stated the charges that can be reduced with less or no extra work.

This section will talk about the metrics that you should look over before putting your money in any stock deal. don’t simply invest on expert advise and pray.

Currently, I’m reading a book by Joel Greenblatt – The Little Book That Still Beats the Market.

Greenblatt explains the concept using 6th grade math, plain language and humor. He shows how to use his method to beat both the market and professional managers by a wide margin. He highly emphasis on 2 metrics which are first in my line of metrics too. Here we go….

(I also stated the ideal rate I consider before examining a stock. However it’a personal matter of fact. You can change it as per your requirement)

I would suggest you to catch any commerce student to understand the terms used in the formula. If you’re a master, carry on.

  • Return on capital employed > 18%

It is a financial ratio that measures a company’s profitability and the efficiency with which its capital is employed. It shows the percent of return business is getting with the actual money fueled in the business (debt + equity). Formula:

  • Average return on equity 5 Years > 16%

It shows how much of the shareholder funds are optimistically used in business. It measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. Formula:

  • Price to Earning < 16

It’s the basic metrics used by many pundit. Simply a ratio between price and earning. It state how much you’re paying for each money earned. Formula:

  • PEG Ratio < 1.8

The PEG ratio (price/earnings to growth ratio) is a valuation metric for determining the relative trade-off between the price of a stock, the earnings generated per share (EPS), and the company’s expected growth. In general, the P/E ratio is higher for a company with a higher growth rate. Formula:

  • Up from 52 week low < 20%

I usually trade in shares which are trading at around 20% more on 52 week of low. It gives a great margin and reduces the risk to a great extent. Formula:

  • Dividend Payout Ratio > 15

The part of the earnings not paid to investors is left for investment to provide for future earnings growth. Investors seeking high current income and limited capital growth prefer companies with high Dividend payout ratio. Formula:

  • Market Capitalization < 8000

Market capitalization (market cap) is the market value at a point in time of the shares outstanding of a publicly traded company, being equal to the share price at that point of time times the number of shares outstanding. Formula:

  • Debt to equity < 2

The debt-to-equity ratio (D/E) is a financial ratio indicating the relative proportion of shareholders’ equity and debt used to finance a company’s assets. Closely related to leveraging, the ratio is also known as Risk, Gearing or Leverage. Formula:

  • Price to book value < 2

The price-to-book ratio, or P/B ratio, is a financial ratio used to compare a company’s current market price to its book value. It is also sometimes known as a Market-to-Book ratio. The calculation can be performed in two ways, but the result should be the same each way. Formula:

  • Profit growth 3 Years > 9

This metrics imply weather company shows any growth trend in last 3 year profit or not. Formula:

You can find all these metrics on Moneycontrol site in financial ratios at the bottom of the particular stock screen.

………but beyond above metrics, we might also want to know something about the nature of the business itself. In short, are we buying a good business or a bad one?

Of course, there are plenty of ways we could define what makes a business either good or bad. Among other things, we could look at the quality of its products or services, the loyalty of its customers, the value of its brands, the efficiency of its operations, the talent of its management, the strength of its competitors, or the long term prospects of its business.

Obviously, any of these criteria, either alone or in combination, would be helpful in evaluating weather we were purchasing a good or a bad business.

As always, leave a comment if you have a question! And if you’ve got metrics of your own that you like to track, I’d love to hear about ’em.