Incidents triggered to write this article: Lot of people lost/losing lots of money by following few successful investors investment calls even though those successful investors were earning huge returns from the same investment calls. So, in this article I will try to discuss and explain about five important factors to be considered while following a successful investor’s investment calls and will try to explain how people are losing money without considering those factors.
Five Factors will be as follows:
- Purchase/Entry Price
- % of Portfolio to be allocated for that stock/call
- Risk Absorption Capacity
- Investment Tenure
- Exit Price
From media reports, you can only know about successful investor (SI) have certain % of holding in a particular company. There is a lot of data which you won’t know and even media also can’t know. I will try to put that data in questions as follows:
- At what price that SI purchased that stock?
- What % of his portfolio value have been allocated to this stock?
- What’s his vision towards that company investing in this stock?
- How long will he hold this investment?
- How much % of loss can he bear in this particular investment?
- When he will exit from this investment and how will I know immediately after his exit?
These are all very serious questions which you should ask yourself while following SI’s. And no media company can answer these questions. The only person who knew the answer for this question is SI itself, which they were not at all interested to share. Some of SI’s may provide their vision towards the company. But none can get answers for remaining questions.
Let’s discuss the importance of each factor…
Let’s see the example.
Case 1 | Purchase Price | LTP | Unrealized Profit/Loss |
| SI | ₹ 5.00 | ₹ 20.00 | 300% |
| You | ₹ 12.50 | ₹ 20.00 | 60% |
*SI: Successful Investor
Case 2 | Purchase Price | LTP | Unrealized Profit/Loss |
| SI | ₹ 5.00 | ₹ 7.50 | 50% |
| You | ₹ 12.50 | ₹ 7.50 | -40% |
*LTP: Last Traded Price
Suppose if successful investor purchased the stock of a company ‘X’ at Rs.5 and by the time you got to know about his investment if the stock price of the same company went up to Rs.12.5 and you purchased the stock at Rs.12.50. If the stock price went up as per case 1, you will get only 60% return and whereas SI will get a return of 300%. This is fine as you got a positive return in certain period. Suppose if the stock went down to Rs.7.5 as shown in case 2, even then SI will have a positive return of 50%, whereas you will have a negative return of -40%. So, it is highly important to know about the investment price of SI also along with his investment in a particular company.
% of Portfolio to be allocated: Normally this factor will be dependent on each individuals risk profile. I will try to explain about this factor in detail with an example. Here for understanding purpose we will consider both SI and you purchased at same price which in practical world may not be followed as SI purchase price can’t be known as discussed above.
Here in the below example, I am considering SI whose overall portfolio value of Rs.5 Cr invested Rs.7.5 Lakhs in a Company X, and you having a portfolio worth Rs.20 Lakhs invested Rs.4 Lakhs in the same company at same purchase price. As per calculations SI allocated only 1.5% of his portfolio value for that company whereas you allocated 20% of your portfolio.
Investment Value | Total Portfolio Value | % of Portfolio Allocated | |
| SI | ₹ 750,000.00 | ₹ 50,000,000.00 | 1.50% |
| You | ₹ 400,000.00 | ₹ 1,000,000.00 | 40.00% |
Case 1 with 30% Positive Return | |||
Purchase Price | Total Portfolio Value | Effect on Portfolio | |
| SI | ₹ 975,000.00 | ₹ 50,225,000.00 | 0.45% |
| You | ₹ 520,000.00 | ₹ 2,120,000.00 | 12.00% |
Case 2 with 30% Negative Return | |||
Purchase Price | Total Portfolio Value | Effect on Portfolio | |
| SI | ₹ 525,000.00 | ₹ 49,775,000.00 | -0.45% |
| You | ₹ 280,000.00 | ₹ 880,000.00 | -12.00% |
Let’s see the two possible cases, in Case 1 with 30% positive returns of investment call, effect on SI portfolio will be just 0.45% whereas your portfolio will be increased by 12%. With the blessings of God, if there’s a positive return means this will be good. Instead if fortunes turn down and your investment made a negative return of 30% as mentioned in case 2, you may have to lost 12% of your portfolio value. I mentioned ‘With the blessings of God’ because this investment call is not yours, you’re just following SI. There won’t be any other option left for you rather than believing god and SI. I hope with this explanation, by now you understand the importance of this Portfolio Allocation Factor. If you have any doubts kindly contact me through comments below.
Risk Absorption Capacity: Kindly understand that this factor is completely subjective and each individual will have different risk absorption capacity. Normally any successful investor will do portfolio allocation with respect to his own risk profile and select companies suitable to his own risk profile only. So, if there a difference in his and your risk profiles, chances of earning money by following his investments calls will be diminished for you. Suppose if SI selected a stock by preparing himself to face even a 50% loss in that call, will you be also ready and prepared to face similar loss? And you cannot guess or predict how SI prepared himself for facing unavoidable losses.
Investment Tenure: Normally any successful investor (SI) will have his vision while selecting a company to invest in. This vision will be formulated by various factors like value migration, government policy changes, economical effect peculiar to the country/company, etc. And SI will have a clarity on how much time we should be provided to company to achieve his vision. With these calculations he will establish an Investment Tenure for that investment call. And I am sure SI’s will always be prepared to change this tenure at appropriate times with respect to changes in business environment. As you don’t have any clue on his vision or his calculations while formulating investment tenure, you can’t understand how much time you should wait/hold that investment. Normally SI’s will have a minimum of 7-10 years (Not mandatory) vision for each investment calls. So, here the question is will also wait/hold your investments for such longer tenures?
Exit Price: Even highly successful investors also will face lots of difficulty to decide this factor. Similar to knowing of SI’s investment call after company submitting the shareholding pattern to stock exchanges, Any SI’s exit or decrements in holdings in company X will be known only after company submitting the shareholding pattern to stock exchanges. I mean here also you will not receive fresh data. So, you may not get similar returns as SI.
So, by now you would have understood that your success while following SI’s will be dependent on your similarity of all the above factors with him. And in practical you can’t achieve similarity because majority of these factors were very subjective and no media company also can provide such inputs to you.
Even if there’s a difference in one single factor among all the factors discussed above your returns/success will be different from SI. So, I always suggest you to NOT TO FOLLOW ANY SUCCESSFUL INVESTOR. And I request you to kindly sit with a registered investment advisor (RIA) and discuss about your own financial goals, risk profile and analyse your own risk absorption capacity, etc. I am suggesting you to sit with RIA because his fees for providing this service will be very low compared to your loss if you fail while following SI’s investment calls without considering all these factors.
NOT ALL INVESTMENT CALLS OF SUCCESSFUL INVESTORS WERE SUCCESSFUL
Yes, its true. Kindly know about the investments of Rakesh Jhunjhunwala’s MTNL investment and Porinju velliyath’s Leel Electricals investment. And I can confidently say that they overcame these miserable flops successfully by following all the above factors very sincerely. Especially by ritually following the portfolio allocation factor with respect to their Risk Profile.
Note: There’s no definition for a successful investor, even this definition is also a subjective one. In my view any investor can be called as a successful investor if he can beat returns of benchmark indices over a period of 12-15 years.
Thanks for reading the article and let me know your feedback by commenting below. I request you to kindly share this article especially with the people who were making investments by following investment calls of successful investors and to the people who already lost money by following such investment calls.
Disclaimer:Investments in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BSE and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.
Written By
PVR
SEBI Registered Investment Advisor
Reg No: INA200010904
Mob: +91-9618355264
