Formal education will make you a living; self-education will make you a fortune. – Jim Rohn
DAD had been into the markets for more than past 25 years. He successfully surfed the tides when others struggled. Being a broker cum investor for more than past 25 years, he has more experience than many books might teach. Below are his “5 Trading Mantras” which you probably have never read in any book of investing.
1) Small /Micro Caps
Nothing fascinates Dad more than a small or micro cap stock with large hidden value in it. He mostly looks for the small cap stocks which have the advantage of operating leverage. Low P/E ratio and an even lower market cap (usually below 100 Crores) with a special business niche and a high book value is what he likes. One thing he is strict about in such shares is the promoters holding (should be at least 50%) and a good management.
2) Rule of 1%
“How much quantity should I buy ?” is what most people ask. Dad has the rule of 1%. He says that the minimum target of an investor should be of 0.01% of the equity of the company which should be increased to 0.10% and targeted at 1% (using bargaining power). A good holding in a stock not only gives you a great bargaining power, but also keeps your interest in the stock. Thus 0.01% of the equity of the company is the minimum, what each investor should try to invest in. Also, the favourite stock should occupy atleast 10 to 15 % of ones portfolio.
3) Bargaining in the market / Using the powers of hiding quantities
Dad learned from the times when there were no computers and the trades were used to be done physically. In those days, when an investor went to buy, the seller told the higher prices, and decreased the prices largely if he knew the person wanted to sell. The trick to bargaining was to never let the trader know what you wanted to do.
Dad still uses this principle. In an illiquid stock, he spreads his orders in various ways to get the bargain price. There is an option to hide the actual quantity in an order up to 90%. One should always make use of it (or simply get a good broker asking him to spread your orders at bargain).
4) Operator Theory
Isn’t it often that you buy a stock and it starts going down ? Dad believes that it is not your bad luck but the will of an Operator. An Operator is person who has a large quantity of a stock and can control the prices of that stock. Thus mostly in illiquid small cap stocks, it is common to find such price movements. The Operator pushes the price down on seeing a buyer hoping to buy it back at lower prices(often leading to continuous fall in the stock price). In such situations, Dad advises to you to keep faith in yourself and try to spread your orders (put the orders of both selling as well as buying but disclosing lesser quantity in what you actually want to do – thus never letting the operator know if you are a seller or a buyer.)
5) Markets are also a “Going Concern”
One thing that I have never heard from Dad is the pessimistic view of market. In a long run, Dad believes, that the markets will always be bullish. India being one of the most potential country, enough public is yet to enter into the markets. With the continuous additions of new terminals, balanced government, lower average age (which was once of USA) it is not very wrong to say that the markets will be bullish in a long run.
Share your views and queries about the above “Mantras“ via comments.