How much can you lose in equity?
http://in.finance.yahoo.com/news/how-much-can-you-lose-in-equity-.html
Well just too many people have no rules, limits, …and have no clue on how to invest in equities. These people can, should and do lose their shirt, pants and undergarments…..and deserve it. Completely.
Let us say you are a well qualified, sensible, boy or girl and wish to invest in equities. Well if you do not want to be an active participant, you could choose a mutual fund. If you do not trust fund managers (I trust only 5 out of the 100 odd that I would have met), choose an index fund – the cheaper (and lesser tracking error too) the better.
Ok, you are a little more adventurous. You wish to invest in direct equities. Now comes the challenge.
Let us say you are 35 years and wish to create a portfolio. You are a woman, earning Rs. 8 lakhs, and ARE NOT THE PRIMARY PROVIDER of the house. So you can take a little more risk than a man, WHO IS THE PRIMARY PROVIDER.
So let us say you have Rs. 10 lakhs to invest, and influenced by this site, you decide to put Rs. 8 lakhs in equities.
Rule No.1: NOT more than 80% of the SECONDARY earner’s portfolio will be in equities.
Rule No. 2: NOT more than 5% will be invested in ONE Company, as an initial investment. In case the share does well, we will LET it go up to 25% of one’s EQUITY portfolio. Anything in excess will be constantly sold off.
Let us say you are able to add Rs. 20,000 to the equity portfolio every month, and this share is also going up every month, it will take a real long time to breach the upper limit (unless you have picked one diamond and all other duds!).
Rule No. 3: Industry diversification I will learn or copy from good fund manager’s portfolios, and I will buy only in group A, or B1. I will NOT touch a share in group B2, or T2T….even if Subramoney.com says these are future blue-chips.
Rule No. 4: I will keep a 25% trailing stop loss. Let me explain. You have bought Rs. 40,000 worth of Carborundum Universal (my examples are obviously from my portfolio, and my cost of this share is Rs. 3.59 per share, thanks to split and bonus, so if you want to copy me, go to 1990, or create your own portfolio). Suddenly the shares value falls to Rs. 30,000. You will do nothing. However on the day it falls below 30k, YOU WILL SELL. Knowing how to cut losses is as important as knowing how to let profits run.
Rule No. 5: I will review my portfolio on a quarterly basis. I HAVE NO business managing my own portfolio UNLESS I can beat the index. Clearly if you beat the index for one year, then second year, then 3rd year…you are doing well. If you do not beat it for the first 4 quarters – and are trailing by a huge margin, sell and go to a good fund house.
Now tell me with all these rules in place how much can you lose?
Rs. 800,000 is the total investment, Rs. 40,000 is the maximum exposure to one stock, 25% is the trailing stop loss- so you can lose about Rs. 10,000.
Your liquid net-worth is Rs. 10,00,000.
My dear girl, you can lose about 1% of your net-worth. Neither you nor your husband should lose sleep over this.
Once you get confident, take charge of your husband’s portfolio…and make sure that you invest about 60% of his portfolio – the other portion being in bonds, pf, ppf, some stupid lic policies, …and other debt instruments.
While calculating IGNORE your primary residence, and the loan that you have against it. Cars, golf kit, Asics, Adidas, Nike, Reebok, gold jewellery, Garmin 910, Trek mtb, Canondale Road bike are all expensive, but sorry they are expenses, NOT assets.
IsItPossible
Nice one…
Position sizing with appropriate risk management –
Milind N
Thank You Very Much .Great Reading .Soothing one after yesterdays “Missile Attack “….God Bless YOU !
Guy_who_violated_Rule4
subra,
hypothetically, if someone violated Rule4 and has suffered 80-90% capital erosion on some of his positions, what would you recommend,
— completely exit the position
— take a stock specific call (i.e. weigh the position with all available opportunities and accordingly go with the one with highest payout)
— stick with the position (since anyway what is left is peanuts)
MangoMan
Little surprised to see that, there is no advise on the importance of knowing the business and it’s economic characteristics in which the person is investing.
Is that too much to ask from an individual investor if he is investing into equities directly ?
If the investor doesn’t understand’s or at least has made an attempt to understand that much, then i don’t know if 25% trailing stop loss is good enough.
What if after taking loss of 25% from one share , the amount is reinvested in another share, which goes on to fall 25%, and the investor takes losses then invests into another one and so on and so forth ?
subra
is there anything about how to select a share? Iam assuming all my readers are brilliant and know how to do that 🙂
this is despite being asked “the NSE is 5000 and the BSE is 15000 – does it mean that shares are 3 times more expensive on BSE” and
BSE – is an exchange where Mumbai based companies are listed and
NSE – is an exchange where cos. from all of India are listed.
No comments MangoMan….choose your own stop loss and limits. In 30 years I have sold an investing scrip ONLY once, so really not tried these limits.
gautham
No offense. But this is more of a trading/speculating and not investing. rule 4: why would you want sell off at 25% when you thought it was a good buy at 25% above?. you should instead buy more at that price. (assuming fundamentals haven’t changed): rule 2/3 is bookish: thers nothing wrong allocating more than 5% if you have the conviction in the business. rule 5: you should review the the sales/eps growth on a quarterly basis. (not just your portfolio).
the they key thing in investing revolves around the business. i would say focus on the business model, economic moats, management integrity, past sales/eps growth, future prospects and valuation. remember high quality businesses dont sell at a low valuation.. that doesn’t mean buy at any valuation but have a loot historical p/e and the p/e of peers and more importantly the future prospects.
read books by masters like lynch,phisher and buffet. i am sure you wont any any tips/advices after that.
Siva
Thanks subra, I have been expecting this post for a while now. You read our(my!) mind!
subra
gautham
to take offense I have to at least know you. I can only write what I know and what has worked for me. Some of these rules have, and I have also broken them.
i have not heard of phisher. My ignorance I guess.
Sukumar
Sorry gautham you sound like a wannabe fund guy. This is about investing RULES, not stock picking. Phisher I have not heard of, not sure if Subra has heard of. This post is for people entering the market – somebody investing Rs. 10L. Subra’s transactions are normally bigger than that, and I am talking one leg. He could be on the buy side and sell side on one day in the same scrip.
For a starter who picks scrips by doing research (I do not know of too many such people) these rules will help.
But one thing is certain. When I ask fresh MBAs to explain ‘moats’ they may, be able to, but they may not know what is ‘buy side’ and what is ‘sell side’. I come to Subra’s site to see whether he has any ‘feeling’ for his readers. Hey, he does not. It is still malice towards all. Kudos. Not even Google, Subra? LOL
shrinivas
25% limit is a good limit, I have seen so many stock-prices fall so freely that I have lost 90% of the value and still not recovered. Fundamentals may be good, but once you lose 90% of the value, it takes forever to recover that and you are better off taking loss and investing elsewhere.
Mira D
Good one, Subrabhai. 🙂
I will reserve the rest of my comments.
Jitu
Informative…..liked the article and the last para…well just too good….
Pawan W
Good one, I liked this post and the way you explained.
BTW I am a regular reading on this blog for quite some time and this is my first comment.
MangoMan
Surely the questions are from the brilliant lot 🙂
My own brilliance took center stage few years back, when i invested in a single (yah just 1) share of Subex at 650 odd. Of course the trading/demat a/c was sold to me by icici. I used to work in the same domain as Subex’s business during that time. What could go wrong with that brilliant Lynch concept of investing in what you know.
First thought of stop loss hit me, when the stock was around 300. But icici made my day saying, the amount is lower than what i can sell in a single transaction. So i had to stay put.Now the stock is trading at a princely sum of 20/-. Let’s not bother to calculate the %tage loss.
Also, in the few years while i was just holding the single share i also kept on paying icici for annual maintenance charges (roughly 500/- ?).
Only foolish thing, which i did was, i just bought one share and never averaged. Had i bought shares worth few thousand rupees, am sure by this time i would have already written obituary to stock market and investing in only FD’s and PPF.
Moral of the story for me. I didn’t have stop loss ? Naa…. it is, I didn’t know a damn thing about the company and how to evaluate it’s economic performance.
Regards
gautham
hmmm. its good that those strategies worked for you.. my point was that for readers who wants to start investing (not trading), it may not be the right way to go about it. of course its my opinion and opinions differ. it seemed to have hurt you. my apologies.
i liked what MangoMan mentioned in the moral of the story in his post. that is exactly the majority of the retail investors do.
sorry. for some reasons i am used to refer to fisher as phisher !.
gautham
@Sukumar. somehow I missed your post. even my post was for someone who is entering the market. well, if one doesn’t know what he/she is buying, why he/she is buying and at what valuation, then one shouldn’t take direct equity route. that was what i was trying to say. to identify moat, one doesn’t need an MBA. perhaps lynch’s one up on wall street ?
subra
gautham
to hurt you should love first, right? I am just clarifying – a stranger cannot hurt….To hurt there has to be a financial or an emotional relationship.
A guy passing by CANNOT hurt – as simple as that.
gautham
Subraji,
I assumed so looking at the tone of the responses. Glad it didn’t.
Sukumar, In one of the recent posts he warned users about blindly copying his stock picks. The same can happen with these rules too right?. I was making a point that, the business is the first thing one should look at while investing. This is nothing new. The legends lynch,fisher,buffet advocate on the same. Not so in case of graham who believed mainly in intrinsic value. (which even buffet didn’t like later on)
Anyways looks like you don’t like if someone expresses his/her views.
Btw sorry for dragging this. Just wanted to clarify. My last post here.
subra
http://in.finance.yahoo.com/news/how-much-can-you-lose-in-equity-.html