Friday, 24 February 2012

Diversification is key for Stock Investment.

Over a small family get together I happen to meet a young guy “Naveen”. An Engineering graduate, who recently joined one of the MNC .This was for the first time I met this guy.  what started with casually "hello” went onto his interests and his new job. Naveen a bubbly guy, sprang off and said that he loves to play cricket, and works for BIG MNC... Once he was done with his narration, it was my turn.
Not knowing where and how to start I said my interests are cooking and personal finance. Hearing the word finance, he quickly kept his tea cup aside and said can you explain me how to invest in stock market?I started with, what you know about stock Market. Naveen responded it’s pretty simple, you buy shares, keep it for few days and sell it for profit. For a moment I felt like I was talking to Junior Buffet.
In all I had 30 min time to brief him about stock maraket,It was next to immpossible. Anyways I had nothing to lose and I wanted to kill my time also. I start with a brief overview. Knowing his response to my previous question I knew that terms like P.E , earnings etc are going to be like Greek and Latin for Naveen.
With a husky voice I started off… Naveen you know Diversification is the key for stock market investments. Naveen gave me strange look and said what?? I could sense that I have touched the wrong nerve. I said Forget Stock Market.
I said let’s talk about cricket; There you go... a smile of Naveen’s face.  I asked him who his fav players were. I continued if you were given a chance to pick 4 players in playing eleven who would you pick? Naveen was very happy to answer this. Here goes Naveen’s response:
The Dashing Shewag,  Sachin the ever green hero,  Dhoni the man with Midas touch and finally its Ashwin.
Naveen continued, these are great cricketer and its must to have them in team. I asked him, Does this mean if these are in the team you would never lose the match? He responded even after having these players you may lose a match but without having them you cannot win the match.
Yea that what I wanted: With Great player you may lose a match but you cannot win a match without them.
I asked Naveen, If Shewag is dashing, why can’t we have 11 shewag’s in the team? Naveen said If team has 11 shewags then the team will miserably fail. You can win matches by having a balanced team. To win a match you need to have players who can bowl, player who can bat, you need players who are all-rounder bat and bowl)
I interrupted Naveen and said Hold on Naveen. This is diversification. Naveen was silent...
I continued. Well Diversification is the key be it for winning matches or be investment in stock market. Now Naveen was able to correlate where I was heading.   When you build a stock portfolio, you need to have variety in your stock picks.
Shewag Type:  Stocks that Fire irrespective of the index moment belong to shewag type. There could be times when everything is going well; these stocks might be on the losing end. But when they are on Fire they are unstoppable. He asked me for example:
I said Sugar Stocks are best example of this type: When they are on song, they are unstoppable. They just keep inching upward irrespective of the sensex.
Tendulkar Type: Tried and Tested or  The Blue Chip stocks like Tata Steel, BHEL, L&T belong to this category. They are long race horses. They might be down for temporary period but in long run they are best. Naveen added, just like “Form is temporary and class is permanent”? I nodded my head to say YES.
Ashwin Type: Ashwin is a candidate who can get you wickets and as well chip in few runs for your team. If he fails to get wickets he might end up scoring decent 30 to 40 runs. So stocks that give decent dividends fall in this category. The stocks might not fire like shewag type stocks but they do consistent dividend year on year basis.  Good Stocks with dividend yield of 5 to 6% come into this category.
Dhoni Type: Dhoni's game is very difficult to predict. He adjusts his style as per the situation. He has immense patience and starts off with singles, and two’s and then opens his shoulder for big shots. He is unorthodox and has cool head on his shoulder. Player like Dhoni is always an asset to the team. You can hate him but can’t ignore him.
Now what are the types of stock that Fit into Dhoni's Type?  I leave it to the readers to think. Let me offer few hints: Once you get this type of stocks preserve them for very long time. You won’t get such stocks easily. You will have to wait for the right time. The right time for buying such stocks is when there is panic in market.
I ended up my conversation saying, optimum diversification and Right Stock Pick is the Mantra for success in stock market. Your portfolio should have stocks that belong to Dhoni, Shewag, Ashiwn and Sachin Type.
Even after having this type of stocks you may lose money but can never make money without having such types of stocks.
P.E is one of the criteria to pick stocks of Dhoni Type. Any Guesses for Dhoni Type stocks? 


justgrowmymoney said...

Excellent one buddy!

P/B is a criteria to pick Dhoni types. Just few days ago I was eyeing Rain Commodities at about 29 with a P/B of 0.7. The earnings growth were just fine. I thought if I can grab some it can eventually go up. Go up it did race to 40 in no time. I dont mean all low P/B stocks are great or will race like this one. However a basket of low PE, low P/B stocks is a goldmine for probable success.

WealthUCreate said...

Thanks JGMM. Bad miss on RainCommodities. Is it a good stock to hold for long term? I never tracked this.Does it have too much of competations?

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