Speaking of the obvious? Absolutely not. Having more capital does not mean that you can turn a greater profit proportionately. That was what I believed as well but it was very much untrue. The truth is that capital does very little in increasing your profits proportionately once you have reached the threshold of your tranche size. This means that if you have predetermined that your maximum tranche size is $10,000, then regardless of how much cash you have left, you would probably deploy capital in those tranches rather than increasing the tranche size. In today’s post, I would like to debunk what most investors think about those who have larger amounts of capital. Actually, the only guaranteed increase when you have more capital is the risk associated with stress and fear so do not envy blindly.
Larger amounts of capital increase your investible range
This is basically the crux of my article because I feel that most people will probably not agree with me at first. What I am trying to say is that when you have more capital to deploy, you basically have more funds to buy when the price movements are large and fast. For example, if you bought your first tranche of Stock A at $1.00, then it falls progressively to $0.80 in 2 weeks. Your larger war chest will probably allow you to buy more at a decreasing price to a greater extent without requiring you to liquidate other assets. But why does this only increase the range and not the profits significantly? The reason is simple, deploying more capital also means that your capital risk is much higher. At that point, recovering your capital might be more crucial for you rather than waiting for a V-shaped recovery. before selling
Larger amounts of capital enable you to take on more risk
To reiterate, having more capital also means that you will have to deploy more capital that in turn result in higher capital risk. The reason why this is important is that this opportunity of being able to deploy more capital is often seen as a privilege until you are caught in a difficult situation in the market. Imagine if you have already accumulated hundreds of thousands in paper losses but still have more than $1 million left in assets. Would you believe that it will feel worse than a person who has only a hundred thousand in their bank account but with no losses? The point I am trying to make is that although having more capital allows you to invest more, you must constantly remind yourself that it is indeed a privilege. Otherwise, such circumstances are no better than hurting yourself with a double-edged sword.
Diversification into multiple counters instead of focusing on the few
One of the more obvious benefits of having more capital is the ability to invest in multiple counters. I would like to appeal to you that although it seems like this is a no-loss benefit. It sometimes also complicates things when you diversify into multiple sectors including those that might be under constant fire. The reality when you diversify extensively might also feel like your portfolio might never appear positive until you sell more than twice. (experienced investors will know what I mean) Basically, diversification does nothing but allow your funds to flow unevenly into different sectors and causing some to be down or up depending on market conditions and sentiments. Therefore, it is also hardly a benefit unless you learn how to sell and not harp over losses made due to missed upside. (Again, something that only experienced investors will understand)
Closing Thoughts
This post tries to show you both sides of the coin when it comes to having higher amounts of capital to invest. If you have realized by now, there is no real benefit when you are investing more unless you have done decently well and consistently over a long period of time. Otherwise, every ”windfall” is probably nullified by the losing counters and your paper profits will always stay as attractive numbers on the screen that come and go as they please.
