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Anticipating a looser becoming a winnier vs riding along with the winners

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kwagga
Super Contributor
If been thinking about this a bit, and I think it comes down to greed only. Why are so many of us tempted to go for the small caps and penny's in anticipation of what might happen to their share prices, instead of just backing the obvious winners. Example - Why would you buy shares like Anooraq, Metorex, Sentula, Coal for Africa, Pan African Gold and then watch shares like Aspen, Capitec, Discovery, ABSA, Naspers, make gains month by month? The opportunities you miss because of a temptation to back the speculator shares are huge. There is a time and place for mid caps and pennies, but they are limited and usually only run in extremely bullish times. This is a bad habbit many should rid themselfs of, including I.
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25 REPLIES 25
genie2b
Frequent Contributor
A very valid point...had to learn it the hard way...maybe it is the thrill, the rush when you get it right once out of 200..:)
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Werner_1
Super Contributor
Very valid... i only buy shares in the good businesses, but not at high prices... i get then when they cheap. I own Aspen, Capitec and a bit of Discovery through RMB Holdings. Grindrod is another one thats very good, now people dont think so, but its cheap now... look where it was before the crisis, it will come back though, maybe not with super profits, but they have a solid business running... I think if one can buy these companies for a discount to calculated intrinsic value (this can be tricky as everyone has a different calculation) one is far better off than buying those other spec stocks.
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theyoungster
Super Contributor
Valid point - Why buy junk - profitable companies that have reliable dividend structure in place ...and importance of diversification...satrix are exellent products
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Not applicable
Brilliant argument. However I think if you did your homework and got a few midcap (not smalls or pennies) that are showing extremely good management and business models (you might have to read up on what makes a good business model and what does not), you could be onto the next generation entry blue chips. I take SOL 10 years ago I got at R80 and have never looked back, even in these recessionary times. Divs have been great and the company has expanded extremely tactically and are set to be around for a long long time. Today i think Capitec, Discovery and maybe even GND as Werner points out are the future look outs waiting to be in the next super cycle. I honestly think in 10 years they will still be around and stronger and healthier for it. IMO
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Not applicable
To expand on this question and the answers, why are you buying individual shares if you can by top40 in one go? The answer - a bit of greed but the trophy is actually the psyc side, the " I read it right, I'm up 30%" side. If it was only about the money, a person like a daytrader would disapper. It has been proven over and over that shares give the best returns over time. So the soulution is basically to buy satrix ETF's in the dips and over time it will make you money, however the one question that has not been answered is this: How does buying 40 of your own choice of shares compare to buying the top40 via an ETF? The shares you mention are mostly top40 shares in anycase.
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Werner_1
Super Contributor
Capitec, Aspen and Discovery were always mentioned as being the only true innovative companies on the JSE - i read that on the Capitec annual report from last year...
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Werner_1
Super Contributor
I dont buy 40 shares, currently only have 12, so i think when buying individual shares one can select the winners better than when buying the index, then you just get the basket, so its very hard to outperform the market if you buy the market, but if one buys shares like Capitec, Aspen, Discovery and a few others like solid businesses like RMH, SBK one stands a good chance of outperforming, but one needs to select carefully... And yes, analysing the business model can really show you the winners before they winners, but one needs an understanding in this area then otherwise it will be hard to find any... I like to read books on how successful CEO's operate (Jamie Dimon being my role-model) etc. this makes one think like them if one learns enough, Harvard Business Review is also quite interesting for case studies and innovative ideas on management.
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Not applicable
I know why I buy midcaps and sometime penny stocks - you get more bang for the buck!! A smaller amount get's you a lot more shares. To get real value out of shares, you must own a lot. Having 100 Capitec shares is pretty useless, but having 10000, now we're talking.
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Not applicable
Feeling wealthy as opposed to being wealthy is a different mind set. If you lived in Zim you could have been multi trillionaire but been worth squat....
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kwagga
Super Contributor
Owning penny's don't give you more bang for your buck. It's a % profit/loss game and has nothing to do with the number of shares you own.
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kemp
Occasional Contributor
Just curious snakepit, if you own a 100000 shares in company x and it cost you R10000 and 100 shares in company y and that cost you R10000 now the share prices rise 10% how much is your investment now in both companies, my maths says exacly the same.
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Blik
Super Contributor
Kwagga I agree with you, but not all small caps are risky, and not all top40 are safe, a lot depends on what you decide to buy or sell and when. I am happy with some penny stocks I own and not happy with others, but their total percentage value in my portfolio is still small, so I am happy to adopt a wait-and-see appraoch. For example I bought a small number of MTX 3 years ago for an average cost of around 400. I watched them all the way up and above 3000, and then watched them march all the way back down. Yes I should have sold above 3000, since all indicators told me to sell and I would have made a nice little profit. I didnt, and have learnt a lesson. Still in terms of percentages my penny holdings are small so I can afford to lose 100% - not saying that I want to. Another example is CPL, where I bought a couple of years ago, its paid a nice dividend each year, and the price hasnt really dropped. I am happy to keep these shares. At the moment I hold about 25% of my portfolio in small caps and AltX shares, the rest being in mid and large caps. And at the moment thats about the risk I can manage.
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topgun
Super Contributor
I bought CPI for 135cps in 2002 - now +9000cps - but unfortunately sold them along the way and lost touch with the company. I also bought Scharrig Mining (now SNU) for 120cps in 2004 - they went to 2500cps in 2007 - but fortunately sold them along the way and closer to the top. Other small caps that went on to become giants incl. Discovery, Aspen etc. The point is that you win some and you lose some. Research is the key as is the stage in the business cycle depending on the company that you buy and its value drivers. The comments above favouring the top 40 recognise the strong run they have had (owing to size and institutional backing) and their significant margin of share price outperformance and not actual earnings growth. These shares are accordingly mostly expensive and discounting a significant earnings recovery (resources, banks, retail) while quite a few small- and midcap shares are offering great value provided the economic recovery is sustained. Interestingly, volumes are starting to pick-up in this subsector of the market, indicating some return of institutional interest. Some contrarian thinking (and good stock picking) might well be very lucrative from this point out on an 18-month view.
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Wino
Super Contributor
Nothing wrong in holding some small caps. At least some of them add spice to a somewhat dreary market. MTX I have bought and sold 3 times in the past 12 months and made some nett bucks everytime. It is wild and wooly and everytime one switch on in the morning, one does not have a clue at what level it will be but, here is a prediction, within 24 months it will be a sought after share. So, have some fun in the meantime.
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Werner_1
Super Contributor
well said, i wanted to write the same...
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Not applicable
What about the dividends? Is that not the main reason why anybody would buy a share and keep it for 20 years. Some shares will grow by 3%, but the divs could be mind blowing. If you have 100000 of the one and 10000 your initial capital outlay might be the same, but the divs will swing the vote.
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Not applicable
The one item that everybody ignores is the risk. Is the risk lower with the big boy winners? It should be. They are settled companies. The financial fundies would say " What is your risk profile". Do you have time to let the shares grow or are you close to pention day and want dividends? Let me ask this question. What is the best ratio for a balanced share portfolio? 25% Small cap, 40 % midcap, 35% big buggers. Would that be a balanced ratio?
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Werner_1
Super Contributor
Dividends are normally multiples higher when the share price is higher, not? so that might even balance out, then again shares trading at 1, 2 cents dont seem to pay that very good dividends compared to SBK, etc...
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Werner_1
Super Contributor
I think you right, the larger more settled companies are definately less risky, but then again, if their shares have surged to unbelievable heights they also risky... My method calculates risk based on my calculated value factor, the higher value (cheaper the share based on earnings and book value) the lower the risk in my view. then i dont like really small shares, so only have mid-large cap companies, all that i buy are well established in their respective markets.
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