From net run rate to virtues of a patient inning, the financial firm turns to IPL to give investors some lessons for a match-winning knock.
There are learning opportunities for traders and investors all around, even the Indian Premier League (IPL), the annual cash-rich Twenty20 cricket tournament, has a few lessons to offer.
The concept of net run rate (NRR), which can be the differentiator when teams are tied, in IPL offers an important lesson—while winning, win big, and while losing, lose with minimum margin, financial firm William O Neil India Private Limited has said in a recent report.
In the 2019 IPL, the league stage ended with three teams earning 12 points each. With the top three spots taken, only one out of the three tied teams had a chance to qualify for the playoffs. The NRR came into the picture, and Sun Risers Hyderabad made it to the playoffs. For the top two spots also, higher NRR is important, William O Neil India said.
Winning big and losing with minimum margin is the theory that should be applied for the stock market too.
"The whole secret to winning big in the stock market is not to be right all the time but to lose the least amount possible when you're wrong," said William O’Neil.
"To make money in stocks, you must protect the money you have. Live to invest another day by following this simple rule: always sell a stock if it falls 7–8 percent below what you paid for it. No questions asked. This basic principle helps you cap your potential downside. And it is the simplest way to make sure you never let a small loss become a BIG one," the report added.
William O’Neil emphasised that no stock is immune from market volatility.
"The general market (ie, the major indices, primarily the Nifty and Sensex) exerts a tremendous pull on individual stocks. Even the strongest leaders will have a hard time moving higher when the market is heading south," said William O’Neil.
"If you just blindly hold your stocks and take no defensive action as an uptrend slips into a downtrend, you risk giving back all your hard-earned gains (and then some). If your capital gets blocked during a correction, you might miss investing in new winners when markets rebound. According to our study, mostly every bull run has different stocks and sectors leading it."
The market is driven by just two emotions: fear and greed and succumbing to these emotions can profoundly harm investor portfolios, the stock market, and even the economy, William O’Neil pointed out.
The report cited the recent game between King XI Punjab and Delhi Capitals in which Mayank Agarwal of Punjab, after building his inning with patience, lost his cool and threw away his wicket to a reckless, flamboyant lofty shot. Punjab lost that match.
"Most people want to get rich as quickly as possible, and bull markets invite us to try it. This get-rich-quick thinking makes it hard to maintain a disciplined, long-term investment plan. It's times like these when it's crucial to maintain and stick to the fundamentals of investing," said William O’Neil.
"The secret is to hop off the elevator on one of the floors on the way up and not ride it back down again," said William O’Neil.
The financial firm gave the example of KL Rahul's record-breaking innings against Royal Challengers Bangalore (RCB) in the sixth game of IPL 2020 as he smashed a hundred against them.
The pitch was flat with no grass and no moisture, which made it batting friendly and that worked in favour of batsmen.
A quality player like Rahul capitalised on the batting-friendly conditions, attacked each ball and scored a glorious hundred. He also became the fastest Indian to reach 2,000 IPL runs, William O’Neil said.
Drawing a stock market analogy, the report said investors should look for good quality growth stocks that exhibit explosive growth in quarterly earnings, superior relative strength, leadership quality, and top-notch institutional holdings.
"A standout stock needs both a sound growth record in recent years and a strong current earnings record in the last several quarters. It’s the powerful combination of these two critical factors, rather than one or the other, that creates a super stock, or at least one that has a higher chance for true success," said William J. O’Neil.Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol advises users to check with certified experts before taking any investment decisions.