Watch this Before Hunting for the Next Suzlon 

Hello everyone, Rahul Shah here, trying to make investing accessible and profitable for the average investor.

There are three things that I look forward to every Diwali. Eating great food, meeting friends & relatives, and last but not the least, watching market pundits share their views on business channels.

While the first two met my expectations and I am still recovering from their after-effects, let's focus our attention on the third one i.e. market pundits.

These are the people who come dressed in their ethnic best and dispel some great stock market wisdom. I particularly liked the discussion around turnaround stocks. It was a part of an editors' roundtable on one of the leading business channels.

Of course, when it comes to famous turnarounds of the last one year, no discussion can be complete without Suzlon Energy.

The stock was arguably on the top of the list of every market pundit.

For perspective, the stock is up a whopping 412% in the last one year, far outperforming the close to 40% returns earned by the BSE Small Cap index.

By the way, it is up a huge 20x from its March 2020 lows. Talk of life changing investments!

One of the panelists on the show gave an interesting perspective on how to identify a huge wealth creator and a turnaround stock like Suzlon.

He highlighted three points.

• Can the business access capital more easily now than earlier and can it tide over its working capital or other funding issues?
• Has the market opportunity changed in a big way?
• Is there a genuine intent from the promoters to get the business back on track?

I believe all three are great points and were certainly true in the case of Suzlon.

Access to funding became much easier for the company in recent years.

The market opportunity also changed in a major way owing to regulatory changes that supported wind power generation.

Lastly, the promoters of Suzlon did want to make a break from the past and did genuinely want to turn the company around.

Kudos to the panellist for pointing out that not all turnarounds which are showing these three tendencies may go on to become multibaggers.

But this framework will certainly help separate a lot of the genuine turnaround candidates from the false ones and tilt the odds in the favour of the investor.

Now, on to the next big question? How much should one invest in a turnaround stock like Suzlon?

Should one bet big, or should one allocate only a small percentage of one's portfolio in stocks like Suzlon?

Well, to each his own but here's how I think about it.

I will start by asking whether Suzlon is an investment or a speculation albeit an intelligent one?

One way to answer this would be to look at the stock's historical performance and then come to any definite conclusion.

Would you invest in a loss-making company that has a lot of debt and even negative net worth no matter how bright its future prospects?

I certainly won't as I don't think my capital would be safe investing in such companies. Please note that your decision should be based more on facts than opinions and predictions.

That Suzlon was a loss making company and was struggling to stay afloat was a fact. That it will turnaround was an opinion.

Since I rely on facts and not opinions, Suzlon will go into my speculative basket. Suzlon would be a speculative bet in my view.

Next, I would segregate the investment portion and the speculative portion of my portfolio in the ratio of 90:10 i.e. 90% in investment worthy stocks with clean balance sheets and strong track record of profitability and stability. The remaining 10% in speculative stocks like Suzlon.

Now, here, one can put the entire 10% in Suzlon or perhaps split it equally into 4 stocks that have the same characteristics as Suzlon, and which qualify on all the 3 parameters as highlighted earlier.

I strongly believe that speculation is fine as long as one knows that it is a speculation, restricting it to only a small percentage of the portfolio, and also not mixing it with the investment portion.

This way, even if you incur a huge loss on the speculative side, the other 90% is still safe and growing profitably.

Now I know what you are thinking. Investing successfully or earning big wealth from stocks is all about identifying the next Suzlon or the next big turnaround story. And to win big in investing, you have to take risks in stocks like Suzlon.

Well, I don't think that's true.

There are stocks like GMDC, IRCON, and even Mazagon Dock Shipbuilders, which may not be up 5x like Suzlon but are still up a huge 3x or close to 3x, in the last one year, and were not speculative in nature.

There was low risk of a huge downside or a permanent loss of capital in these stocks as they all had strong fundamentals, strong balance sheets, and attractive valuations.

Therefore, they were investments in the way I define the term. They were certainly not speculative.

Hence, it will be wrong to say that one can make big money only on speculative bets.

Yes, Suzlon was speculative based on how I define it and it did end up giving fabulous returns.

But not all speculative stocks end up giving fabulous returns.

Based on my experience, the vast majority of them end in disasters. Thus, there's a much greater risk of permanent loss of capital in them.

On the other hand, stocks with good track records like GMDC, IRCON and Mazagon Dock, very few of them end in disasters.

Always remember Warren Buffett's two rules of investing. Never lose money and always remember rule number one. In stocks like Suzlon there's a greater chance of losing money.

Stocks don't have to be all or nothing.

If you think that's the case and if you think you may lose your entire capital, then call it a speculative investment and invest accordingly.

This way while you may still enjoy the upside, you wouldn't lose a lot of capital as well as your sleep if the speculation goes south.

So yes, investing in turnaround stocks and following the three principles that one of the panelists highlighted is all good. But do make sure that you don't lose a lot of capital if things don't work out as expected.

And this is where my segregation of investment vs speculation may come in handy.

Also, there are safer ways to invest in multibaggers as I just highlighted. It doesn't have to be a zero or a hero stock.

Happy Investing.