Feb 27, 2012

MAKE YOUR INVESTMENT COST ZERO: Practical Lesson for Investing

Making Investment Cost Zero.

This is interesting. You may think that how it is possible to make investment cost zero. This can be done in reality. When the markets are bottoming out and rising to mark the beginning of the run up, the stock prices rise 20% to more than 120% in few weeks and months time period. This is basically because the stock prices are already ruling at multi months and in many cases multi year lows. The stocks which were in triple digits are now available in double of even single digits! These stocks and even the better ones out of this lot attract a lot of investment and trading attraction.

So the prices rise in a manner as told earlier in this paragraph. Now, when you are entering in markets at an early stage of the price rise cycle,
You get the stocks at good price. Suppose you invested Rs.1 lakh in 10,000 Lanco Infratech shares at Rs.10 and it rose to 20 rapidly then you can offload 50% i.e 5,000 shares and thus get back your original investment amount. So now the rest of 5,000 shares that you hold are absolutely cost less as your original investment capital is out of them. Now whatever monetary benefit as to bonus shares, dividends, or price rise you get is absolutely free is can be measures as ‘infinite return’ on investment, as your investment is practically ‘zero’ in it!

Another way your cost of investment can be zero is to hold blue chip investment for a longer duration. For
e.g. those who are holding reliance industries or grasim or even hind unilever for that matter, for more than 10 years now are indeed holding it for free. Because the price appreciation, dividends and bonus shares etc. in aggregate have given them more than their investment amount.
So, the conclusion is that the advice to pull out sum of initial investment capital after rise in share price can be a general advice to retail and fearful investors.  While the cost of investment long term investment in large cap, blue chips, and value investing stocks automatically becomes zero over the longer term if invested at good valuations.

This concept can be explained in some more ways. Any ways, this concept is one of the very essential practicals that an investor should be aware of.