If you have a subscription with a paid stock advisory service in which you are getting new stock recommendation every month, there are chances that after a year or two, your portfolio will swell up to 40-50 stocks with similar weightage assigned to each of them. Even if half of them gives you good returns, the other half will drag your returns back to normal. In this article, we will explain how to invest under “new stock per month” kind of service. This approach is specially designed for small and mid cap stocks. We highly recommend you to use this approach even for our monthly stock recommendation service Tiny CAPS
- Returns for MultiCAP Multibagger: 63% CAGR
- Returns for Tiny CAPS: 82% CAGR
Let’s assume Mr. X has multiple subscriptions which recommend new stock every month. Being a firm believer of SIP (Systematic Investment Plan) in mutual funds, Mr. X was approaching these investments by investing ten thousand rupees every month in their new recommendations. Worst, the stocks usually rallied up on the next day of recommendation and then retracted back by 5% or 10% after a week. This resulted in Mr. X’s investment starting at -10% after the first week itself. He did not mind these minor blips as he was a long-term investor. Since he had subscription with three different services, after two years he had almost 90 stocks in demat account, each having around ten thousands rupees as my investment amount. After two years some stocks generated 3x returns, so 10 thousand became 30 thousand, but many of them either remained around the same level and some went into losses. This resulted in overall portfolio giving average returns since most of the profit was eaten away by loss making stocks.
The Root Cause
After wasting two years, Mr X realized that overall portfolio returns is a function of weightage assigned to each stocks. In the long run, it is not possible to generate good returns from all stocks, only a few of them would become multibaggers while many of them would fizzle out. This is more enhanced in case of small & mid cap stocks. Being a small cap investor, Mr X had to invest in lot of stocks to get hand on couple of multibaggers. Since money at hand was limited but stocks were plenty, this limited Mr X’s investment amount to each stock to only few thousands.
Desperate, Mr X designed a solution on his own since he could not find anyone providing a solution to the needs of small cap investors. There were people advocating SIP but their approach which was more aligned to a mutual fund. He understood that since it’s a game of weightage, he must give his top performers more weightage while bottom performers should have least weightage in order to build a “V” shaped portfolio which is top heavy and bottom lean. So, with new approach he started only a probing investment of three thousand rupees every month in new stocks and planned to invest rest of the money once it performs well. Also, he pruned or completely exited previous loss making stocks. There was a fear that he might miss out on big returns since he was investing only three thousands in the beginning. Then he realized that real multibaggers do not stop at merely 100% returns, they will keep on performing which will provide him enough time to invest more at comfortable pace. This approach requires patience and is little slower initially since it takes some time for stocks to perform and become worthy of fresh rounds of investment.
After next two years, his portfolio had few lakhs invested into top performing stocks and only three thousands trapped into bad stocks. The result was a huge improvement in the overall portfolio performance. This process ensured that Mr X never had 10x returns at stock levels but healthy returns at portfolio level. The point to note is that even 100% return on one lakh is far better than 300% return on ten thousands. Not to mention the peace which comes, when you step up investment with a cushion of 100% on your side.
Another thing observed with this approach is that even though Mr X had more than 100 stocks in my portfolio, tracking was easier since he was only focusing on top performers and letting other stocks take their own time to come good in future. In case anything went wrong with some of the stocks which he was not actively tracking, advisory service helped Mr. X, as they gave timely exit calls for bad stocks.
At AI, we also advocate this style of investment for small cap services like Tiny CAPS where you have to invest in new stock almost every month. For portfolio services, it is a different scenario since we keep on pouring more money into the same set of stocks of a portfolio or a mutual fund and hereby averaging them. So SIP works well for a portfolio service but not for new stock every month kind of service since every month you buy new stock and there is no averaging there.
If you want to read more about executing this strategy, please read our previous post here. If you like this article, feel free to share using sharing buttons at the bottom of this page.