Thread by @prabhakarkudva

Not all stocks are equal. At any given point, each stock can belong to one of the below categories.

Knowing which category your stock is in can make a big difference to your decision making and eventually your returns.

A 🧵.

Category 1: Stocks which the market likes right now. These are stocks which are being re-rated. The re-rating process typically takes 6-9 months. Over this period you will see these stocks trending up.

Typically these stocks are being re-rated for one or more of the below two reasons:

✅ Surprise earnings in last 1/2 quarters
✅ Some story or narrative that promises good earnings down the road

Your portfolio should have some exposure from this category to outperform.

Category 2: Stocks which the market hates right now. These stocks are being de-rated because :

✅ After good earnings for many q now the earnings have started to turn sour or expected to turn sour.
✅ After so so earnings for a while suddenly there is a big fall in numbers

✅ Corporate Governance issue has surfaced. Expect a major major de-rating
✅ Story stocks where story has not played out. Markets were suckered.

Typically this category will full of mid/small cap stocks.

If you own anything from this category you need to revisit your thesis as these type of stocks will be dead money for a while.

Category 3: Stocks where nothing good or bad is happening. They are just idling back and forth. These are stocks which have gone through category 1 and 2 phases and are now somewhere in the middle.

This is where value investors find value. No one is interested in these stocks. If they go to category 1 it’s a successful value investment and if they go to cat 2 it’s a value trap.

This is also where blue chip stocks will remain after their re-rating. Think HDFC bank, Kotak bank, HUL over last 2-3 years.

Essentially in this category market is waiting for a catalyst which can be either good or bad.

This category is ideal for smart long term investors to pick value or accumulate blue chips. If a not so experienced investor dabbles here it can be very frustrating.

So ideally portfolio should be a good mix of category 1 and 3.

Category 2 is what drives your returns down. So try to ensure that a large part of your portfolio is never in Category 2.

I think this type of clarity of thought about your portfolio will improve decision quality drastically. Let me know if this type of portfolio break down makes sense to you.