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Thursday, August 2, 2012

How to use Growth-share matrix to invest in Stock Market

How to know what stocks to buy. Boston Consulting Group (BCG) Growth-share matrix may help. Let me explain.

I learned this BCG Growth-share matrix during my college days. It is to be applied in Business but I came out with an idea and started to use it in stock market since early 2010. I think it may be helpful to some people in stock market.

Basically the Growth-share matrix is a chart divided into four sections:
2)Cash Cow
3)Dogs (Pet)
4)Questions marks

This is where the stock that we bought is performing or has very great potential and recommended by many analysts. The company is announcing growth in profit. The share price is increasing. We all are very happy. Although sometimes due to poor market sentiment, the share price may drop, but because the company is achieving growth in profit, we know sooner or later, the share price will increase.

This is where the stock that we bought is paying very high dividend. Many prefer to buy Stars stock, but Cash Cow has its own advantage.
Stars stock price increase may take time, but as for Cash Cow stock, we receive good dividend very fast.
Some people may use Share Margin Financing to buy shares. Therefore, we need some cash to service the interest. If we buy all Stars stocks, if the price drop temporary due to poor market sentiment, we may be subject to margin call or foreselling.

Cash Cow also provides us with the cash flow to buy stocks that we have newly identified. If we had bought all Stars, we may not have the necessary cash flow when opportunity arises.

Sometimes, during poor economy the Stars may be hit and may suddenly make much lower profit or even loss. Cash Cow stocks are in business that are quite stable. Also, the Cash Cow stocks generally the prices are quite stable, even during poor market sentiment.

Therefore, we buy many Stars stocks and buy some Cash Cow stocks as a defensive strategy, and reinvest the dividend we receive.

This is the kind of stocks that is very risky, but if successful the reward can be extremely good.
You just don't know whether to buy or not. Example many trouble penny stocks if successfully turnaround, the stock price will shot up sharply. But if not, then it may be delisted.

Another example is where the Company may be having some risky project and if successful, the profit can be very great.

Many may want to buy some of these stocks due to the potential great profit. But due to the high risk involved, you may just buy smaller amount because you cannot risk losing most of your money.

Other examples are takeover, pending restructuring, new company, small company, new projects or venture, penny stocks, call warrant, etc.

Dogs are the stock that you know probably you will lose money if you buy it, but you still want to buy. Based on past experience, you know that if you trade speculative stocks, chances of making money is lower than making losses.

But due to emotion, you have no choice and you still buy. You saw other friends are buying and you want to follow. You heard tips and rumours.

Many people will tell you don't buy and just focus on fundamental stocks. Do you think is easy to control our emotions? That is why so many people make losses in the stock marker. Especially remisiers and dealers who sit in front of the stock prices screen very day, it is not easy to control their emotion.

Can buy, but use very small amount to trade.
In business, Dogs are for examples, doing charity, continue loss making business for the overall Company Group image, etc.

If you lose money in stock market by buying Dogs shares, consider it as learning, charity, and playing games. By the way, not all the times you lose. Sometimes dogs share price can increase sharply and you can make very good profit.

If we buy all Stars, sometimes we may have some problem.
If we buy all Cash Cows, profits are not so great.
If we buy all Question Marks, and if not successful we will lose a lot of money.
If we buy all Dogs, chances of making losses are high.

In my view, I think for non-expert investors, we can allocate our portfolio into the four BCG Growth-share matrix . Buy many Stars, then some Cash Cows and Question Marks. And finally, use very small amount of money to buy/trade or speculate dogs. If you can control your emotion, then no need to buy Dogs.

Sometimes it is very hard to differentiate between Stars and Question Marks. Dogs and Questions Marks. If in doubt, put them in Question Marks because you are having a question on where to put and the name is already being called "question marks".

BCG Growth-share matrix in stock market is something that I came out with and I have been applying it for few years and has been successful so far. Hope it can help non-professional or non-expert investors in stock market.

Please note that the above is just my opinion and a case study for myself and is not an advice. Please read the disclaimer clause in my blog. Please consult your investment financial adviser.

Two years ago I already have plan to write this article. The reason of waited for two years is because I normally post short article and I considrer this is long. I was quite lazy to start writing. I really hope there is at least one person who like this article.

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About Me

Dollar Cost Averaging and PEGGY Method. Sharing info on cheap (low PE) company with high growth, low Gearing or Net Cash and High Dividend Yield.



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