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Key lessons in investing
Amar Pandit in Mumbai | March 30, 2009 10:46 IST
Sagar Shah, who works for a leading cement company, was under the impression that he was in the best position to know about his organisation.
As a result, he invested a sizeable amount in his company' shares. In fact, more than 90 per cent of his portfolio was formed by this one firm only. His initial investment had given him a multi-bagger, but he was just not willing to sell when the stock hit Rs 950 levels.
Based on the tips given by his brokers and his own understanding of the cement industry, he bought a lot more stock and averaged his cost to around Rs 600. The stock has been beaten down to Rs 150 levels today.
However, when the going is good, it's very difficult for people who work for blue chip companies to see the big risk that they are exposed to: the risk of exposing their income and a substantial portion of their wealth to their employers' stock.
The logic goes like this, "We work for a blue chip company. What can happen to us? We have been clocking record growth and everything just seems perfect."
This also applies to people who have acquired huge chunks of just one company through investments. Sure, a single company exposure can give amazing returns. But then it has the propensity to sink your financial ship. One of the key lessons is that never have an exposure of more than 10 per cent to any stock.
Even if the stock is a blue chip stock and you are fully confident of its ability, it still makes sense to spread the risk across many companies in different sectors.
Keep the following points in mind
If you have got excellent returns from the stock and if valuations go beyond fundamentals, be ready to sell the stock. There is no need to marry any stock. Fidelity is certainly good, but there are times when you must sell a stock.
Evaluate every company unemotionally at regular intervals of 12 to 18 months and take a view based on the situation at that point of time. Just because Infosys had hit more than Rs 10,000 in 1999 does not mean it will hit these levels anytime soon or in the future.
Encash your holdings at regular intervals and rebalance your portfolio. If need be, book profits and move into debt.
The writer is a certified financial planner.