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Can you hold 500 shares and still do well?

Aug 4, 2015

In this issue:
» Can penny stocks always give good returns
»  What if the stocks of Apple, Google, Facebook, Amazon stagnate?
» RBI maintains status quo
»  ....and more!


00:00
What makes the entire process of investing very interesting is that we are all wired differently, with diverse views on various approaches. While some are long term investors, some like the adrenaline rush that trading provides.

Within the gamut of long term investing, there will be different styles, different risk appetites, and different views on various aspects - be it outlook of companies' business or management style, transparency and integrity, amongst others.

We came across an interesting article in today's edition of the Economic Times. The author interviewed certain 'not so well known' investing veterans - who are believed to be influential names on D-Street - getting their views on their approaches and the reason behind their success over the years.

One thing that was common between this set of individuals was the number of shares they had in their portfolios, which was anywhere between 500 to 3,500 shares! Further, some of them believed in getting only a few calls right - a success ratio of about 20% to 40% - to make money.

Now, when you come to think of it, these are essentially aspects that fly straight in the face of conventional investing, as the aim is to have a manageable portfolio and getting most calls right.

So, what makes these individuals successful investors?

Well, we believe the answer lies in their temperaments - the ability to hold on for long periods. As reported by the business daily, their holding periods stood anywhere between 25 to 45 years!

Now! Imagine holding on to a stock for that long. Or for that matter, even identifying a company that would stay around for such a long period in the future. It would definitely not be difficult to identify a few names out of the thousands of stocks that are listed on the exchange. And when you combine this approach with the power of compounding, the probability of making good money over long term only improves. And more so, such businesses would easily compensate for the duds in one's portfolio over longer periods. And that too, inspite of not having the best success ratio!

Do you believe you are simply at an advantage by extending your holding period? Or can other factors play a more significant role in one's portfolio? Let us know your comments or share your views in the Equitymaster Club.

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02:15
 Chart of the day
Are penny stocks good investments bets? For that one needs to understand what penny stocks are. These stocks are typically stocks priced below Rs 10. As today's chart shows, of the 2,950 such stocks, 40% are priced below Rs 2 and another 25% are between Rs 2 and Rs 4.

In the last 12 months, there has been a lot of interest in penny stocks. Penny stocks are one of the riskiest segments in the Indian equity market. So while the prospect of gains could be huge, the changes of losses are also very high. The last point is something that many investors don't really consider; much to their own peril. Indeed, one of the biggest problems here is that investors get confused between price and value. So when the price is very low, investors assume that this is the best time to invest in the stock. But this is not necessarily the case. Whether the stock is worth investing is determined not by price alone but in conjunction with earnings. This gives the true value of the company. So even if the stock price is low, if there is no earnings visibility, an investor may very well end up having a dud on his hands.

The other factor that makes penny stocks risky is taking a call on management quality and other qualitative aspects of the business. Ultimately, the investing process to be followed while putting money in penny stocks is no different from that in either midcap or largecap stocks. But many a time, investors fail to realize this and burn their fingers in the process.

Do penny stocks always give good returns?

03:25
One of the striking features of the US stock markets has been that prices of stocks have been rising even when the economic fundamentals have hardly been robust. This has not made much sense when it is quite clear that stock markets ultimately are the barometer of the health of the economy. The most obvious reason for this is the money printing actions of the US Fed which has led to inflation of asset prices, stocks included.

There was another interesting factor of the US market that was highlighted in an article on Newsmax Finance. In that, investment strategist Michael Lewitt has stated that there are four stocks that have so far been major contributors to the rise in the US markets. These are Apple, Google, Facebook and Amazon. Should any of these stocks start stagnating, the US markets could considerably suffer. What this also highlights is that stock prices of companies in the energy, commodity-related and industrial materials sectors have hardly been performing. Given that the fortunes of these industries are closely linked to that of the economy, it only reinforces the weakness plaguing the US economy.

04:10
The government is keen to limit the autonomy of the RBI. This at a time when the central bank has proven the merits of being an independent decision maker on monetary policies. But the attempts to clip the powers of the RBI are not new. In fact the attempts of governments to have a bigger say in monetary policies has been evident since 2013. Luckily for India, the RBI has so far done what is in the best interest of the economy, from a long term perspective. That's the very reason why the economy remains relatively well hedged against currency and interest rate risks. And it seems rather unlikely that the RBI will pay heed to the government's demands anytime soon. The RBI's status quo on the cash reserve ratio and the repo rate today did not come as a surprise. With no meaningful signs of growth, the central bank has no reason to ease up on interest rates. And although inflation numbers have so far been benign, below average monsoon and rise in oil prices can very well change the equation. So as the cues from the Monetary Policy suggest, do not be too optimistic about fall in interest rates in the coming months. And so stay away from leveraged companies or ones without pricing power.

04:45
In the meanwhile, Indian stock markets were trading weak, with the benchmark index, the BSE-Sensex, trading lower by 115 points or 0.4% at the time of writing. On the other hand, mid and smallcaps were in favour today with their respective indices trading higher by 0.9% and 0.6% respectively. Amongst the sectoral indices, metal stocks were in favour today, while oil and gas and capital goods stocks were under pressure.

04:55
  Today's investing mantra
"The chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions."- Benjamin Graham.

This edition of The 5 Minute WrapUp is authored by Devanshu Sampat (Research Analyst) and Radhika Pandit (Research Analyst).

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Equitymaster requests your view! Post a comment on "Can you hold 500 shares and still do well?". Click here!

2 Responses to "Can you hold 500 shares and still do well?"

G Darad

Aug 4, 2015

Holding onto something without any reason defeats the very purpose of intelligent investing.It appears that the protagonists in the story are merely trying to rationalise their doing after they have committed it. It's like shooting millions of arrows in the darkness and then rest assured that at least some targets are sure to be hit sometime without caring for the disproportionate amount of time, money and energy spent into it for some small rewards. I have seen a relative of mine struggling to build a castle of 150 rooms for a family of three while his wife struggled to ignite a coal-fired hearth for cooking every evening holding precariously onto the belief thatsome day they'd be happier. This world is a strange abode of myriads of varieties but not everyone of them is worth emulating. As the most exalted creation of the Almighty, at least some amount of sound reasoning is expected of you. I wish some fund manager had given them his reasoning and got their zeal and energy in return. Till then, let the tribe of investors prosper !

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Krishna murthy

Aug 4, 2015

I have burnt my finger by long term investing in Reliance Power, ERA infrastructure and major loss from DLF and also from ESSAR oil. First I did not have much information of these cheating promoters, like Ruhias, Singhs, and Ambanis.

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Equitymaster requests your view! Post a comment on "Can you hold 500 shares and still do well?". Click here!
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Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research Analysts) Regulations, 2014 with registration number INH000000537.

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Definitions of Terms Used:
  1. Buy recommendation: This means that the investor could consider buying the concerned stock at current market price keeping in mind the tenure and objective of the recommendation service.
  2. Hold recommendation: This means that the investor could consider holding on to the shares of the company until further update and not buy more of the stock at current market price.
  3. Buy at lower price: This means that the investor should wait for some correction in the market price so that the stock can be bought at more attractive valuations keeping in mind the tenure and the objective of the service.
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