Chatting with my old research friend, we happened to discuss about Contra Investing! I would like to show some light on this as it is a bit weird technique taught by my Old Stock Market Guru.. He call it as Contra Investing! I will show some light on it.
It is a kind of Guerilla Investing – means you fly against the wind!
When everybody is selling a stock, even the promoter, you will start buying!
What about the risk covering? Interestingly.. You will cover the risk with more risky stocks!
In this style of Investing, Company with Temporary Troubles are Identified. To cover the risk, more companies are Identified. Then, find the potential up side factor for each company & place bet amounts according to the factor.
It arises from a gambling arena of Horse Race, where the wounded horse is betted. There are less chances the horse can run again, but if it runs, then huge profits. The risk is covered by adding more bets on multiple wounded horses.
For example: if we have 3 companies, each with the potential of reaching 5 times, we make a Contra!
Cover one risk with another risk
The probability theory says that adding more risks, reduces the collective risks.
In the positive case: if all companies reached 5 times, it is a Jackpot
In the moderate case: if one company reached 5 times, 2 companies closed, still you are profit of 2x
In the extreme bad case: if all companies closed?? Are Baba.. in stock market, your other stock companies can also be closed.. That is why Stock Market is Risky. We play with risk through Diversification.. So the case is wrong as we add enough diversification.
What about adding Put Options & Minimizing the Losses?
Hmm.. Good Idea.. But not with Contra!
Contra is the set of stocks which could be in Large Cap, Midcap, Smallcap, Penny Stock section, so no Options available! Plus the time horizon is years as the company is in ICU!
It will take years to repair & come out of it.. See the Satyam case, it took years of iterations for analyzing the problems, placing it for purchase by other MNCs, later Tech Mahindra acquiring it. The problem with such companies is that even the Financial Statements can be window-dressed. Company will be earning no profits, but paying dividends.. How? It would be from Capitalizing Expenses Or Dividends are virtual 🙂
Considering the capitalization, derivative availability, long term period, we say Options may not work here..
Contra Investing in Indian Stock Market
We identify Contra Opportunities through Screener web site. Find the companies with market capitalization > 500 crores and 60% corrected from 52 week high. Surely, the price should be a consolidating one saying the stocks have reached a maximum correction. But as the negativity persists, the price is still at lower level.
There are some ready screeners available as: http://www.screener.in/screens/2371/Doubling-Oppotunity/
Following are the companies for above screener:
So there is no research needed?
I did not said that! 🙂 Solid Research is needed. We take each company, find out the problem is temporary or permanent.
We can see Manappuram is down due to Gold price down, not anything directly related to the management of the company. The company delivered loan for 90% price of collateral (gold) and thus resulted in latest quarter of loss. But the same 90% collateral had fetched more business & profits to the company for other quarters in last 2 years. Investors forgot that! That is Investors – We should not forget that! 🙂 So we examine the next quarter to see any improvements in Profit. Like that, we even analyze the balance sheet, current liabilities, financial expenses etc, to draw a conclusion. Right now, we see only threat which is Gold Price. If Gold Price corrects 10%, the stock will crash 20%!
Regarding Opto Circuits, we seen the problems is mainly in the US subsidiary. We receive some emails on our advice about the company. FYI: It crashed from Rs. 180 to Rs. 50. It was a great company with a page in Forbes 2010-2011 fastest growing company. Well managed company, reputed management, corporate governance, plus steady growth in sales & profits. But, some how they went little aggressive with growth, faced liquidity crunch problems. The management is raising short term debts to sail over the current situations.
I would say the promoters of the companies are real stake holders & they are working hard to bring them back.. So it is their job & we have to position ourselves to take advantage from it. Stock Prices crashes heavily due to bad news, plus stock prices goes up very high due to good news. Majority Investors are greedy & thoughtless, they just see prices as the entry/exit criteria.
Placing the bet in a single company is a high-risky scenario. We need to increase the chance of profits by adding High EPS Growth companies to the list.
How much we have to invest?
We can say if you have 10 Lakhs Rupees invested in stocks for long term, which could fetch 20 Lakhs to 50 Lakhs returns, then you are easy to try a 25% High Risk investments. Upto 2.5 Lakhs you can place for the bet. Even if all the companies are closed (extreme case) your loss is covered in the long term. Please remember to see the total investment period.
This is an extremely risky game, Only Tiger Minds are advised to make a move. Believe me, you will face lot of news, reactions, obstacles to sell your positions.
Strong Research, Strong Insights, Strong Long Term Vision, Strong Risk Management Capabilities are needed to ride the position.
Do you think the Financial Analysts, Chartered Accountant guys are non-techie & hapless? NO!!! They are using these types of smart techniques & multiplying their wealth. The techie guys work hard & make money, these guys work smart & make money! 🙂