Wednesday, June 4, 2014

Schumacher is right: Small is beautiful (In Stock Investing)...

Schumacher is right: Small is beautiful (In Stock Investing)...

In another article in this blog, I argued just the reverse

In that article, I argued that one of the mistakes that retail investors make is to focus on Number of Shares they own instead of focusing on Return on their investment. My point in that article was that for the same amount of investment, Large Caps provide higher returns to a retail investor than small and midcaps. 

In this article, I am going to argue the reverse. With a BIG CAVEAT.

If you are willing to hold on for long term (5 years to 30 years), if you are able to identify the good midcap, if you are willing to ride the storm of ups and downs in the share price, all the time staying invested to your convictions.....

If you do all that,

Then small is beautiful.

Let us take some examples.

If you had invested Rs.3500 in ICICI Bank in 1998 (which I did) and stayed with the stock till today (which I didn't, I am  a retail investor remember?) that investment would be worth Rs.140000 today.

If you had invested Rs.5000 in SBI in 2000 and stayed with it, that investment would be worth Rs.270000 today.

If you had invested about 10000 in WIPRO in 1980 and stayed with it, that investment would be worth  Rs.480 Crores today !!

An investment in Infosys of Rs.9500 in early 90s would be worth about 12 Crores today !!

Huge returns are possible in stock market if,

You identify the right companies
You buy early
You stay with it for long term across market cycles


If you are plain lucky Like Sridhar's Father in Law

Sridhar is an advertising professional in Bangalore. He is a friend of Nandan Nilekeni. In early 90's when Infosys came out with IPO, Nandan asked Sridhar to invest in Infosys. While he is not into stocks, Sridhar invested Rs.95000 in the stock to purchase 1000 shares of Infosys since he was not able to say no to Mr.Nilekeni.

Those were the days of physical certificates. Sridhar was fully allocated the shares and he got 10 gleaming Share Certificates each for 100 Shares.

That was the time he had got married. He wanted to impress his wife by gifting something to his Father-in-law (men do such stupid stuff all the time). Sridhar gifted his FIL with 500 shares of Infosys. 

Since the shares were in physical form and share transaction costs were high and there was not much demand for Infosys shares early in the 90's and also as a courtesy to Nandan Nilekeni,  the FIL did not sell the shares.

That investment of 47500 (0.05 Million) is worth 60 Crores (12 Million) today !

His Father In Law thinks that Sridhar is the smartest Son-in-Law in the universe.

Sridhar, on the other hand, feels that he is the stupidest Son-in-Law in the universe.

Coming back to the topic, the question is, do you have the courage of your convictions?

I don't. When I buy a share at a low price, I have very modest expectations. If the price goes up by about 50% I sell. I make profit all right, but I don't build wealth.

But you should have. 

So here is my advice. A new bull market is starting in Indian stock market. There are going to be huge opportunities if you are ready to buy good and wait. This is the right time to enter. Once you enter, stay. Do your due diligence (Can you see the product of the company, have you used the product, what others are saying about the product, is the firm making profits....) and buy. Once you buy do stay for at least 3 years. You will make huge profits, I can assure.

This is the best time to buy low and sell high...

Like Schumacher said, small is beautiful in stock investing.

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