Following financial discipline is must for anyone, but several of us may not have clarity on understanding the same & hence the post.
Common statements:
Common statements:
- One should understand their risk levels
- Investment in stock market is always carries risk irrespective of small company, mid cap company or large company.
- Invest only in blue chip companies & don’t invest in small, micro cap stocks.
- Profit booking consider fearing the loss of capital investment
Covering each one of the above in detailed manner is a big task, i will add just few points hoping for adding benefit to novice users.
1. One should understand their own risk levels
Age risk : Risk is certainly depends on age is my opinion, because if one loose money in early 25,30s certainly he can earn once again considering good health, less age, next job opportunities etc, whereas if you loose money after 50 years, surely which is difficult to handle because health issues, lesser job opportunities, dependency on others.
If I am in 25 to 30 years old, I will invest only 40%-50% of my income is equity.
If I am in 30 to 35 years old, I will invest only 40% of my income is equity.
If I am in 35 to 40years old, I will invest only 30% of my income is equity etc..
Planning : Invest only with surplus funds, don’t invest in stock markets with borrowed funds. Which will create hell on earth in one’s life. Plan your short term requirements for next 6 months considering children education, loan commitments, 10% bank balance & invest only the balance in equity after understanding the company. This is 100% required with out any more discussion or second thought for market participants.
2. Investment in stock market is always carries risk irrespective of small company, mid cap company or large company.
I will slightly tweak this as generic statement “Investment in large cap stocks will give high degree of capital protection but difficult to expect multi-bagger returns from them Vs Investment in small cap stocks will provide low degree of capital protection but can provide high percentage of return on investment”. Whether it is small cap or large cap if management have ill thoughts being the share holders we will suffer is the right way to realize and we we should be prepared for the same while investing.
Selection of large cap or small cap should be depended on company fundamentals or other qualitative parameters rather than purely small cap or illiquid counter etc. If market participants feel there is a valuation gap exists in either small cap or large cap, surely the company will be re-rated but no one knows when this will happen keeping fingers crossed. Being the share holder we should be able to hold it for minimum 1-2 years for decent gains. Please don’t think one can become millionaire over night after investing in markets, which is reality Vs several people imagination of becoming crorepathies in a short time.
3.Invest only in blue chip companies & don’t invest in small, micro cap stocks
Several analysts suggests invest only in blue chips & don’t invest in small cap stocks or invest 80% in blue chip & 20% in small cap stocks.
How ever i have different opinion, one can invest either 80% or 100% in small cap stocks if fully convinced after 2 to 3 months of research on any quality stock. Because this time period provides understanding the business, quality of the results,management interest in business, stock price opportunities with market fluctuations.
There is no thumb rule either to invest in small cap or large cap considering market / sectorial dynamics coupled with company specific issues.
One can surely think of taking a calculated risk in any large cap company when stuck with uncertain times.
For ex: Recently Divis laboratories valuation reached to a level not seen in past 15 years, Similarly Coal India kind of players giving decent 9% dividend yield etc these are hard to ignore for the long term players.
Similarly investing in small cap stock will give very high returns, but be prepared for certain losses. If we invest in 10 small cap stocks don’t expect every one to be a 3x or 5x return. Allocate equal amount in every stock and hold it patiently till the underlying story unfolded.
For ex: Recently alankit ltd reached 18 levels and management expects 35% market share in GST segment in the next 2 years, which is its current market share as well is an opportunity.
So market decisions are always dynamic in nature which comes with only experience not by following analysts who apply blanket rules such as buy only blue chips, don’t buy illiquid counters or less market cap stocks. In fact we should question the brokerage compliance team simplified answer on less liquidity ignoring the fundamentals about rejection of orders in small cap companies buy order placement.
4. Profit booking consider fearing the loss of capital investment
This is clearly depends on business understanding, sectorial performance, management integrity & stock price valuation will be a matured investors answer. However one can follow 30% profit booking when share price moves up after 25% to 30%. Reinvest the funds in either in same counter or other company when available at attractive valuations once again. Book additional 30% profit if it further moves 30% more. Similarly average it after 30% moves down if there is no change in fundamentals.
Conclusion: Request novice market participants plan his future mitigating equity investment risk keeping above points in mind. Remember peaceful sleep is 100cr worth of money, we need money but not at the cost of health. Never forget H comes before W between Health & Wealth, with health one can earn wealth but not the vice versa is my uneducated mom advise which i had forgotten after my education. So please don’t get carried away by greed factor in markets.
My intention is to share financial learnings which I experienced over the last 2 decades & I am sure this will help at least some people who are investing in markets.
Notes: Stock names were given for value addition to the concept and strictly not a recommendation.
My intention is to share financial learnings which I experienced over the last 2 decades & I am sure this will help at least some people who are investing in markets.
Notes: Stock names were given for value addition to the concept and strictly not a recommendation.
June 04, 2017 at 07:37AM
from smallcapvaluefind
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