“One who does not know, does not know that he does not know”
Socrates | 400 Before Christ, Athens
With the surge in return from equities, there is a barrage of new investors who have abandoned real estate or other forms of investment and diverted their money into equities. Most of these investors are first timers and they believe that free hot tips from what’sapp or other informal sources can make them wealthy. Alarmingly, most of them are investing big in “Unknown” small cap stocks by relying on these informal sources. Some have made profit and some have made loss, but the relentless rally in small cap means no one has lost hope. Last year around this time, a friend of mine asked my opinion about a hot tip stock “High Ground Enterprises” which was hitting upper circuit every now & then.
His investment logic was:
- Stock name is not known to many people and it is a brand new stock, no research house is talking about it except his what’sapp group.
- Stock is priced ₹ 30 so it has huge scope to grow to ₹ 100-200 in no time
- Company is involved in government contracts & management has good connections with government officials, so all new orders will go to this company
While it may be a good stock but I tried to convince him about having a proper investment strategy but he was too high on his recent success from hot tips and my advice fell to deaf ears. Later, I had to tell him that he was seeking adventure & should try out new amusement park rather than stock market. Today, the stock is trading around ₹ 10 and he is still sitting with his investment as he does not want to sell at a loss. Two third of his capital has vanished in thin air. To make up for this loss, he attempted few more stocks with partial success. The person on what’sapp group who gave this hot tip has also vanished after sometime and that leaves my friend with no other source of advice for this unknown stock. I recently met him & he was blaming operator for his loss. [Operator is a term used for a group of people who manipulate and artificially pump up stock prices & book huge profits by coordinated transactions]. I told him to book loss and take it as a costly lesson to improve his investment process and stop believing in things like operator. I know this is easier said than done. He told me that since stock was hitting upper circuits, he count not resist his temptation and albeit knowing the risks, he took his chances for search of high returns in quick time.
High Risk, High Return often misleads people to take risks which are non yielding. Taking more risk increases your return but beyond a point, it starts to reduce your return. It’s not linear. If you take high risk, nothing wrong but you should know the nature & potential of those risks. “Known Unknowns” type of risks are still manageable over “Unknown Unknown” type of risks.
Having a sound investment process is key to success. It does not matter if you invest in small cap or large cap but as long as you are able to focus on your process, you will do better. Market moves in cycles and chasing momentum will ensure that you are always a step behind the curve. If you stay true to your process then equity will eventually reward you in due course of time.
While small cap space has hundreds of unknown stocks but you can not invest in all of them since money at hand is finite. It is better to invest in good stocks which are reporting healthy earnings but reasonably priced. Since small cap is a huge space, there are good stocks and still reasonably priced. Also, we should not be speculating on company turnaround which can take ages. For example, people have been speculating a turnaround for Suzlon for many years but it has failed to perform. Another case is MIRC Electronics (Onida Brand) which was also under huge debt but now company is reducing debt levels by selling their real estate and plan to go debt free in next year or so. Stock price has started to move up but it is still too early to invest since management has to walk the talk and it will still take a year or two to get out of debt. Also to note that the debt reduction is not from profitable operations but from selling assets. There is no point in investing and blocking your money for two years where there are so many “Unknown Unknowns”.
As ace investor, you should be better placed and able to take logical investment decisions based on research. Remember a multibagger stock will have to post good earnings for many years which is long enough for you to notice & invest. But in order to notice this firework early, you need to keep focus & have patience to avoid losing your money & energy on free hot tips. We have few probable multibagger stocks under our radar and we are waiting for their valuations to cool down before we can recommend them to our paid members.
Tomorrow, Sunday (8th Oct), we are recommending one such micro cap stock with our paid members. The company caters to FMCG giants (Amway, Dabur, Future Group, Apollo Pharmacy etc). It has reasonable valuations (P/E:10) and strong future earning visibility since they have bagged huge orders from Patanjali as well. Click here to subscribe and join our professional services today itself.
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