According to him, a serious investor should consider stock as a part of the business. "When you are buying even 100 shares you are actually taking a stake in that business," Chugh adds.
Also read: Tips to help you diversify into commodities
Here is an edited transcript of his comments.
Q: If a new investor want to enter the market now, what are the few things they should keep in mind? How do they start picking stocks?
A: When somebody is new to investing and he enters a stock market, the focus is on how to make money. That's the end objective. But what the investor has to be focused on is how to not let his capital depreciate. I think one should achieve the first objective and the second part will be taken care of automatically. I am not just talking about first time investors but lot of experienced investors also.
Lot of them when invest in the market they see the stock as just a ticker symbol. That's where they make mistake, they are just chasing the price of the stock. I think for a serious investor it is important to consider that stock as a part of the business. When you are buying even 100 shares you are actually taking a stake in that business. But I would like to caution here while you are investing. I am talking specifically in terms of investing in small and midcap stocks because that's what I do personally.
I think you have to first look within whether your temperament is actually suited for investment in those kinds of stock. Those are stocks where the returns may not come immediately. Returns in midcap and smallcap are not linear or related to the market. It may happen that the stock is consolidating for two years and in one year it goes up five times. So it is very important to have, that frame of mind to hold the stock for two years when it is not making any money.
Q: What are the cautions one needs to take while building a portfolio in midcaps, considering that one had an investment in power sector but had to come out as it turned bad? If the investment on mutual funds is not giving good returns should one liquidate and put the money back into the stocks or rather built a portfolio?
A: While creating a portfolio of small and midcap stocks the first thing you should avoid is getting into the hottest stock in the hottest sector. As a value investor that is a strict no-no. Talking about your stock-loss in the power sector, I believe this would be a time when power sector was booming.
When Reliance Power IPO came most power companies were trading at their peaks. I know many retail investors, who entered into power companies at that point of time, without realizing that this is a business which has got a long gestation period. Power projects do not come in a day. It may take three to five years for power projects to come in.
At this point of time power, infra, real estate they may not be bad sectors to invest into, reason being that they have almost seen the worst phases. If you talk about the real estate company, most investors are clearly out of that sector. Fund houses have liquidated their position thinking that all the promoters are frauds. So there is realignment happening and these sectors are probably lying at their lowest level. So, that is maybe one way which you can start building into sectors which have been ignored as of today but have potential for the future.
Q: How safe is it to invest in commodity trading? Gold is reaching its height right now, how safe it would be if one invest in gold?
A: When one does commodity trading, they have to draw a distinction between trading and investing. Like gold can be a small part of once entire portfolio. But trading is totally different ball game. Probably some guys are working the whole day and may not even get the time to look at the screen, so then trading maybe disastrous. Here one has to take care of number of things. One have to consider the stop losses and other things. So for guys like that what I would advice is to have a diversified portfolio and maybe gold and silver can be just one part of that.
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