How to INVEST in STOCK MARKET?- A CRUDE strategy for happy investing

Has the stock market crash eaten up more than 40% of your portfolio? Would you like to minimize the effects of such disasters in the coming year? Are you confused about what investment strategy to follow, where to invest in 2009, how to build your portfolio etc. In this post I will outline one simple effective investment strategy which will help you make the most of your stock market investments.

Using a 'tough criterion' for selecting stocks

Before we start discussing our basic investment strategy, it is important to fix a tough and strict criterion for selecting stocks to invest in. What criterion to use is for you to decide. But it has always helped to have a criterion in place before making an investment decision. Some criterion I or many other investors use are: The company must be running for at least past five years, must not have made a loss for two consecutive years, an average growth of at least 15% over the past five years, no history of fraud by managers, etc. etc. In order to avoid 'accidental' investing in overvalued stocks, it is also common to put a cap on P/E ratio. For e.g. I avoid investing in stocks with P/E ratio greater than 50.

Making a list of 'High Growth' stocks

If the economy is doing well, almost all stocks do well. But there are some sectors which usually perform much better than other sectors for example Steel, Real Estate, Retail, Capital Goods. Let us call such stocks belonging to such sectors as 'High Growth' stocks. Make a list of your favorite High Growth Companies and make sure to follow the strict selection criterion you have decided to follow. Be ready with this list and now lets go to the next step.

Making a list of 'Safe' stocks

There are some sectors which may not perform as well as our high growth sectors above, but they perform reasonably well even in the case of an economic downturn. For example Pharmaceutical Sector and Fast Moving Consumer Goods, Tea Companies, etc. The idea is no matter how bad the economy is, but people dont stop buying toothpastes do they? Or they dont stop buying medicines. Make a list of your favorite SAFE STOCKS again based on a strict criterion and preferably choose only market leaders.

Juggling your portfolio

If the economic outlook seems to be getting worse - then decrease the proportion of 'high growth' stocks and switch to 'safe stock'.

If the economy seems to be improving - then let your portfolio have more taste of high growth stocks.

So far so good. The main question is: how to judge if the economy is going to do well or not? there are so many indicators and numbers to watch. Unemployment, Housing data, industrial production and plus economic condition of other countries which are trading partners. Is there a simple indicator for judging where our economy is going? Hooray!! there is....

Using CRUDE OIL prices to judge the economy

The answer to the above question is 'price of CRUDE OIL'. A healthy economic activity leads to more power and fuel consumption and conversely any economic slump results in demand destruction of crude oil. Thus crude oil prices provide a litmus test to your expectations about the economy. Please also remember to take into account the fluctuations in crude oil prices caused due to changes in production or artificial reasons like cyclone, pipe burst, threat of attack on Iran, etc.

The above simple idea combined with basic investing disciplines like respecting stop losses, booking profits regularly, not ignoring fundamentals, not blindly believing stock tips will make your portfolio perform much better than before.

I wish you all the best and happy investing for the coming new year!

Best Stocks to Invest in 2009
How to invest in a recession?
Make money in the next bull run!

This post was selected for inclusion in Carnival of Personal Finance #185