Advanced Stocking Techniques Part 2
Hyperstocking – Beware of Bankruptcy?
Make sure to diversify!! If a stock goes bankrupt, you're sure to cut your losses that way.
Is this really true? The answer is yes... and no.
Why do we diversify? Or more importantly, what is diversification?
Diversification is a term that you will encounter many times over in the stock market. It is the investment in a wide variety of companies, as opposed to investing in a select few as in hyperstocking.
Here is an example.
Portfolio 1 contains 100,000 shares of stock A and 50,000 shares of stock B.
Portfolio 2 contains 10,000 shares of 15 different stocks.
Obviously Portfolio 2 is the more diverse portfolio, since it has 15 different companies. Although both have 150,000 shares, they are almost opposite.
So now the question comes up. What is the advantage of a diversified stock?
As said before, a stock can go bankrupt and fall to 0. When this happens, the share price never rises again and you are prompted to "Dump this stock". If this happens, all hope is lost.
Imagine Portfolio 1 when his 100,000 shares of Stock A fall to 0. He has lost a great majority of his portfolio and has to rebuild almost from scratch. He has lost over 1.5 million NP in invested money and much more in potential returns.
Take a look at Portfolio 2 now. It only has 10,000 shares of stock A. The losses are much less (approx. 150,000NP) and there still are many other stocks to recover his losses with.
But we soon hit a snag. A stock has not gone bankrupt in over 2 years. It is widely believed the possibility and risk of a bankruptcy is a thing of the past.
In addition, there is a common misconception that all hyperstockers only invest in a one or two stocks. This is not really true, as there may be some days where buying the stock is not possible. I would consider a diversified stock portfolio as having over 10 different stocks. Anything less can be called hyperstocking, or in other words, if any stock in your portfolio accounts for over 10% of your entire totals, you have hyperstocked it.
Is it now okay to be person 1?
Let us look at the facts to find out.
A stock can take as little as a month to rise, or it could take more than a few years. To effectively give an example, we must use two scenarios.
In scenario 1, the stock hits 100 in a little over 3 months. That should give the person enough time to build up a decent portfolio. When this stock peaks, he will have a small fortune. Nicely done. You are a lucky one.
In scenario 2, the stock does not peak in over 12 months. Every day that the stock is buyable, the person buys a stock. I estimate this to be about 150 days per year. So by the time the stock peaks, you would have had over 200,000 stocks at a cost of over 3 million NP.
Now the stock has not peaked yet, and you are still waiting. When do you stop investing and move on? How long can I sustain this buying before I go bankrupt? How much is really enough? These are questions you must ask yourself before you start hyperstocking.
Now there is the other side of the story.
In an average month there may be 2-3 stocks peaking at 60. If your sell point is at 60, I estimate that you would have somewhere between 5,000 and 20,000 shares per stock on average. Using those figures, you should be making at least 500,000NP in sales per month if you have 1-2 of the stocks that peak. This should allow you to buy 30 days worth of stocks again, and thus you have a self supporting portfolio.
Now for some logic. Here's how complicated it is:
If I have 100,000 shares of stock A and I sell them at 60, I make 6 million NP in sales.
If I have 100,000 shares of stocks A through J (10 different stocks) and I sell all of them at 60, I make 6 million NP in sales.
Hard, isn't it?
But what is the difference?
In scenario 1
I have a nice portfolio. Big. Classy. People always are amazed at my portfolio. If I decide to sell, I get a nice huge payout in one big lump sum. 6 million in one go. There is the possibility of waiting a few months for this, and there is the possibility of waiting years.
In scenario 2
I have similar totals to Portfolio 1, but my stocks are spread out over 10 different companies. That means that not all my companies will peak at the same time. I will get a steady income each month on average. It isn't as eye catching as Portfolio 1, but it gets me money and returns. I have achieved the self supporting portfolio.
So now for the bottom line.
Hyperstocking is great. You would get the same payout as you would if you had a normal, diversified portfolio. When it does peak, you get a nice big payout and your income spikes. However, you must start over in rebuilding your portfolio.
I would, however, advise that if you are a young investor, stay away from hyperstocking. Unless you have 10 million NP + hidden away somewhere, it is not worth your while. Like said earlier, this type of stocking can tie up millions of NP for years. That is, if you choose the wrong stock.
An example of the wrong stock was EEEEE. A year ago, EEEEE was the best stock around. Many people would stock up when it fell so that they could catch the next peak. Sadly, it never came. Their hard earned money still lies here today. Rest in Peace.
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