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:

  1. Purchase/Entry Price
  2. % of Portfolio to be allocated for that stock/call
  3. Risk Absorption Capacity
  4. Investment Tenure
  5. Exit Price

Before jumping into the explanation part of each factor, I would like to explain few basic procedures of how these investment calls will be known to media people. As a normal investor you will get to know about these investment calls from media posts only or while those successful investors interactions with media channels in some interviews.

Basic Awareness: As per Securities & Exchange Board of India (SEBI) guidelines, every public listed company must submit their shareholding pattern of the company to stock exchanges (NSE, BSE) along with the information of all the shareholders who were holding greater than or equal to 1% of the company shares. This submission process by all listed companies must be done for every quarter and should be completed by end of subsequent quarter. i.e. every company will have a time frame of 90 days to inform the same. These media companies will track these successful investors holdings in different companies from such submitted documents. And that data will be published by them in subsequent quarter. One thing you should understand from the above explanation is that you as normal investor is not receiving FRESH DATA.

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:

  1. At what price that SI purchased that stock?
  2. What % of his portfolio value have been allocated to this stock?
  3. What’s his vision towards that company investing in this stock?
  4. How long will he hold this investment?
  5. How much % of loss can he bear in this particular investment?
  6. 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…

Purchase/Entry Price: Your end return from an investment is inversely proportional to your investment value or the purchase price of the share. It means you will get higher returns if your investment value is low. As per discussion as we don’t get fresh data and will get to know only after end of the quarter, the share price of the company would have been changed from the date the SI invested and it may be increased/decreased. In most of the cases, it will increase by the time you know about the information, because you were not the first one to read/see that article published in media. 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 analyze 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.

Written By

Raviteja Penagaluri

SEBI Registered Investment Advisor

Reg No: INA200010904

Mob: +91-9618355264

Website: http://www.pvradvisory.in

Twitter: @pvrpvr

Youtube: https://www.youtube.com/channel/UC1anhX1_2krpsKoieAE8TNw

Published by Ravitejagruthi

SEBI Registered Investment Advisor || Alumni of Entrepreneurship Development Institute of India || Entrepreneur || Business Consultant || Founder of PVR Investment Advisory.

Leave a comment

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: