Individual stock selection is only one part of successful long-term investing; how a particular holding fits within an investor’s broader portfolio often matters just as much as the merits of the stock itself. This principle applies especially well when considering companies associated with the Suzlon Share Price and the Idea Share Price, both of which represent genuine turnaround stories carrying above-average volatility and company-specific risk. Rather than debating whether either stock deserves a place in a portfolio in isolation, it can be more useful to examine how such high-conviction, narrative-driven holdings should be sized and managed alongside other, more conventional investments.
Recognising the Nature of These Holdings
Both companies featured share prices that have historically exhibited significantly greater volatility than an average blue-chip holding with consistent earnings. They are both highly subject to the whims of catalysts such as regulatory changes, large orders, and funding announcements, capable of seeing their share prices violently fluctuate on potentially unrelated news in a way that would be abnormal for more established companies.
This does not mean either stock should be avoided outright, but rather that they should be approached with different expectations than one would bring to a diversified holding of blue-chips and large-cap growth stocks.
Position Sizing for Higher-Risk, Higher-Potential Stocks
A common rule of thumb among investors is that positions in higher-risk, higher-potential securities should comprise a smaller portion of one’s overall holdings than a safer, more stable company with consistent earnings and growth prospects.
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It may be reasonable, for instance, to limit one’s exposure to any given high-growth turnaround stock to no more than 10% of one’s overall portfolio to avoid exposing too large a portion of one’s net worth to a single security.
It allows some degree of exposure to the potential upside offered by these intriguing stories, whether it is the continued growth of the renewable energy sector or the stabilisation of a major telecom operator, while also protecting the broader portfolio from large losses caused by a sharp downturn in either company’s fortunes.
A smaller position size also affords greater psychological benefit, as it helps prevent panic selling or excessive doubling down in the face of large swings in either direction.
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Diversification Across Related and Unrelated Themes
In addition to limiting one’s position size in any given risky security, diversification is another key consideration in the case of stocks such as these.
An investor who has already allocated a substantial portion of their portfolio into the broader renewable energy sector, for example, may want to consider limiting their exposure to the wind energy manufacturer to avoid concentrating too much risk into a single theme.
Likewise, an investor considering the telecom operator should think about their overall exposure to the telecom sector as a whole, including alternative operators besides the one being considered for purchase, rather than considering their investment in a vacuum.
Balancing High-Conviction Bets With Stable Core Holdings
A balanced portfolio should not consist solely of high-risk, high-reward securities with uncertain prospects, but neither should it be entirely made up of safe, slow-growth companies with predictable but unexciting returns.
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Instead, a combination of the two – a barbell strategy of sorts, with a stable core of reliable large-cap stocks alongside smaller, more speculative positions in high-growth industries such as those outlined above – can allow the long-term benefits of both safe and risky stocks to be realised.
The exact split between the two should be dictated by individual circumstances, as an investor with a longer time horizon ahead of them may be willing to take on more risk in the form of a larger speculative position than one nearing retirement who needs to protect their capital.
Regular Review and Rebalancing Discipline
Due to the potential for large swings in the value of positions in either of the two stocks mentioned above, regular portfolio reviews are necessary to avoid overexposure to either security.
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If one of the aforementioned stocks happens to have a banner year and greatly appreciates in value, the increased position size relative to one’s overall portfolio needs to be taken into account to ensure that the potential risks are still acceptable.
Trimming one’s position back to size on a regular basis, or selling off shares in favour of other holdings as one’s overall risk tolerance decreases, is necessary to ensure that exposure to any given risky security does not grow out of hand.
On the other hand, if a stock happens to have a poor year, a disciplined approach should be taken to any further investment in the security to ensure that it still fits within one’s risk tolerance framework.
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The fundamentals of the investment thesis for either stock should be reassessed in light of new information rather than blindly averaging down one’s purchase price.
A Thoughtful Approach to Compelling, Risky Stories
Ultimately, both of these companies represent intriguing investment opportunities, as potential turnaround scenarios for both have been identified based on actual developments taking place within the companies.
They should not be shunned due to their volatility or association with the turnaround label, nor should they be embraced uncritically due to the allure of the potential upside and recent gains, but rather should be incorporated into one’s portfolio with care.
By using a combination of smaller position sizes in line with one’s risk tolerance, diversifying across similar themes as well as entirely unrelated fields if applicable, and reviewing one’s approach periodically, investors can take full advantage of the opportunities presented by these stocks while still retaining the stability and security afforded by a more traditional portfolio.
