Case 008Client situations and behaviourCore

A client calls wanting to put Rs 1 crore, a quarter of his portfolio, into a small-cap stock that has just tripled. What do you do: how do you size it, what is the downside in rupees, and how does the conversation go?

The situation

Your client, a 52-year-old business owner, has a Rs 4 crore portfolio with you, built over fifteen years. He calls on a Monday: the invented Zenvora Infra, a small construction company, has tripled in eighteen months, a friend on its supplier list says the order book is exploding, and he wants Rs 1 crore in it today, 25% of everything he has with you.

His risk profile is moderately aggressive. In your review last year he said he could live with losing about 3% of his wealth on any single idea. Zenvora trades an average of about Rs 2 crore of shares a day.

Your task

Work out the downside at 25% and at a smaller size, set a position size from his own loss limit, and describe how you run the call.

Quick check

Using his own limit of losing about 3% of his wealth on one idea, and assuming a stock that has tripled could plausibly fall 60%, what is the largest sensible position?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

Offer about 5%, Rs 20 lakh, sized so that being wrong is survivable. At 25%, a halving of Zenvora costs him Rs 50 lakh, 12.5% of his wealth; at 5% it costs Rs 10 lakh, 2.5%. His own 3% loss limit against a plausible 60% fall caps the position at 5%. On the call, ask why before discussing how much, show both outcomes in rupees, and record his decision.

Step 1What is the first thing you say on the call?

A question, not a number. Ask what he knows about Zenvora, where the view comes from, and what would make him sell. A client who feels heard will listen to the numbers; a client who feels blocked will place the trade elsewhere. The answers also tell you what you are dealing with: a researched view, a tip from a supplier, or the fear of missing a rally everyone at the club is talking about. A stock that has tripled has already priced in a great deal of good news, and the question is what is left, not what has happened.

Step 2What is the downside in rupees at each size?

Show him both sizes against the same outcomes. At Rs 1 crore, a halving costs Rs 50 lakh and needs a 14.3% gain on the rest just to get back; at Rs 20 lakh it costs Rs 10 lakh and needs 2.6%. A 70% fall, which small caps that have run hard do suffer, costs Rs 70 lakh at 25% against Rs 14 lakh at 5%. The upside is symmetric in the arithmetic, a doubling adds 25% or 5%, but it is not symmetric in his life: he can recover from being wrong at 5% and may not at 25%.

If Zenvora halves: the weight decides whether being wrong is survivableRs 1 crore, 25% of the portfolioBefore400Zenvora halves350LossRs 50 lakh12.5% of wealthTo get backneeds +14.3%on what is leftRs lakh; lime = Zenvora, paper = the restRs 20 lakh, 5% of the portfolioBefore400Zenvora halves390LossRs 10 lakh2.5% of wealthTo get backneeds +2.6%on what is leftRs lakh; lime = Zenvora, paper = the rest
If Zenvora halves, a 25% position takes the Rs 4 crore portfolio down Rs 50 lakh to Rs 3.5 crore, a 12.5% loss, while a 5% position loses Rs 10 lakh, 2.5%, and leaves Rs 3.9 crore.
ScenarioAt Rs 1 crore, Rs lakhShare of wealthAt Rs 20 lakh, Rs lakhShare of wealth
Zenvora halves-50-12.5%-10-2.5%
Zenvora falls 70%-70-17.5%-14-3.5%
Zenvora doubles+100+25.0%+20+5.0%
On a Rs 4 crore portfolio, the 25% position moves wealth by 12.5% to 25% in either direction, while the 5% position keeps every outcome between 2.5% and 5%.
Step 3How do you turn his own limit into a position size?

Work backwards from the loss he has already said he accepts. Maximum position equals the loss budget divided by the plausible fall: 3% divided by 60% is 5%, about Rs 20 lakh. The 60% is a judgement, not a forecast; for a small company after a threefold run it is a reasonable bad case to plan around. This is a household rule in another form: never lend a friend more than you could bear to lose, however sure he is. It also answers the liquidity worry. Rs 1 crore is half of Zenvora's daily trading; selling it at a tenth of daily volume takes about 5 trading days in normal markets, and longer in a falling one.

Step 4What if he insists on the full amount?

It is his money, and a client can take a decision you advise against. Your job is to make sure it is an informed one. Offer a path: 5% now, a review in three months, and a staged addition only if the business, not the price, confirms the story. If he still wants Rs 1 crore, record that the trade is at his instruction and against your advice, with the downside you showed him. Documenting the conversation protects the client relationship as much as the firm, because it shows he decided with the numbers in front of him.

Where candidates lose it

The usual loss is a flat refusal, or a lecture on small-cap risk, before asking a single question. Interviewers running a client-facing scenario are watching whether you keep the client talking while still protecting him.

The second miss is talking in percentages only. A 12.5% drawdown sounds abstract; Rs 50 lakh, and a 14.3% climb just to get back, is what makes the client pause.

What the interviewer asks next

  • Zenvora doubles after he buys the 5%. He calls to add more. What now?
  • The tip came from a supplier with inside knowledge of orders. What changes in your response?
  • How would you size the idea if he wanted to fund it with a loan against his other shares?

Company names and figures are illustrative.