Thursday, March 09, 2006

An experiment in speculation

Though by definition, I'm a value investor (or at least try to be one ;D ), I'm fascinated by the "dark side" - that is pure speculation. My portfolio, selected based on value parameters is not doing great even in this booming market - looks like there is almost a negative co-relation between my portfolio and sensex. When Sensex goes up, my portfolio goes down and when it goes down, value of my portfolio goes up ;). So I decided to do a little experiment to find out how a layman without any knowledge of stocks whatsoever, based on pure speculation, can invest and hope to make money "investing" in stocks. This little "experiment" was triggered by a query from a colleague, who knows nothing about stocks on advice to buy a "stock" that will guarantee at least 50 % returns in an year or so.

Here is the criteria I followed:

1. Check last one week's news paper (mainstream not business) and choose a company/companies which is/are prominently in the news.

2.Choose the "cheapest" stock in the list. Here, "cheapest" means the stock which has the least market price - after all, the stock should be "affordable" to buy.

3. Invest in the stock, sit back and wait.

For my first criteria, I used "The Hindu" which is the newspaper I read at home - I just went through the past 6 days editions and made a list of companies. Unsurprisingly, "Reliance" was the most prominent in the news.

Then I went and checked as to which was the "cheapest" "Reliance" stock - out popped Reliance Natural Resources Ltd - then trading at 17 bucks a share. (Remember, i do not anything about the fundamentals of this stock - infact, it was just listed a few days back).

Invested in 100 shares of Reliance Natural Resources at an average cost of 18.13 per share.

Now for the result - as of writing this post, the current market price of the stock is - hold your breath - Rs 31.20 - a return of 72.09% in just 3 days !!

Take aways from this little experiement:

1. As they say, in a bullish market, even a donkey can make pots of money.

2. "Investing" in stocks is addictive - just like gambling. No wonder retail investors end up loosing money. Who will not be enthused by a 70 % return in just 3 days and keep on gambling till the inevitable happens ? The "inevitable" being a market crash?

3. It is difficult to be a "value" investor in a booming market. It requires all your pateince and fortitude not to get lured into "gambling" in stocks - especially when people around you are making pots of money.


Value Investor said...

One swallow doth not a summer make.

Value Investor

Prasanth said...

What I'm seeing is not one swallow but a flock of them !!



Shankar said...

You actually tried that ?????

Any more of such adventures, you plan for the future?

Warm regards

Prasanth said...


Yes, I did. After all, ny "investment" was not much - 100 shares at around 18 bucks each came to 1800 or so.



sinnerMan said...

Prasanth, another option would be to create two portfolios. One containing all your value picks and the other containing all the "momentum/news" picks.

I personally devote a certain part of my portfolios (5%) to stocks that I deem risky but could offer large returns. And guess what? They have been the worst performers over the last year.

Anonymous said...

Just get out of the market and chill.

Cricket World cup 2007