How to manage risks and control positions when subscribing to new stocks in the Hong Kong stock market?

Buffett has publicly stated that the secret to success consists of three points:

Important things are said three times. From this, we can also see how crucial risk control is in Buffett's investment system.

In fact, in the eyes of investment masters, all investments, including IPOs, are fundamentally games of managing and controlling risks rather than games of pursuing profits. Risk control is paramount; once the risks are managed, profits naturally follow.

So how can we manage risks in Hong Kong IPOs and control risks by controlling positions? This is actually a systematic process that can be broken down into 4 steps.

The first step is to determine the maximum single loss rate acceptable for a Hong Kong IPO.

Everyone's risk preference and financial situation are different, and the maximum acceptable loss is also different. Some people say they don't want to lose a cent, then they should not participate in any investment, including new shares, because behind every investment opportunity lies risks. The lower the willingness to bear the risk of losing money, the lower the potential investment returns may be.

For those with higher risk preferences, the maximum loss ratio can be set at 10% or even higher, while those who are more conservative can set it at 5% or lower. The specific ratio varies from person to person, but a specific number must be defined.

Secondly, estimate the potential maximum price decline of new shares.

Note that we are talking about the extreme downside risk in extreme scenarios, which would not occur in 99% of cases. However, the vast majority of investment risks actually come from that 1% extreme situation.

How to estimate specifically? This requires consideration of the quality of the new shares and the market environment:

For new shares with average or lower quality, assume a maximum price decline of 40%.

For new shares with medium to high quality, in a bull market environment assume a 10% maximum price decline, and in a bear market environment assume a 20% decline.

For new shares with the strongest fundamentals and not too expensive valuations, in a bull market environment, assume a maximum decline of 5%, and in a bear market environment, assume a maximum decline of 10%.

Step three, calculate and estimate the allotment rate.

Mainly includes the allocation rate of Group B and the allocation rate at each level of Group A. As for how to calculate and estimate the allocation rate, we have explained it in detail in the previous lessons, so we will not repeat it here.

Generally speaking, there will be some deviation in the allotment rate, but as long as the method is appropriate, the deviation can be controlled within 50%, which is also within an acceptable range.

Step four, determine the final position for IPO subscription.

Position control is the most crucial part of risk management in Hong Kong IPO subscriptions. The first three steps are all preparations for determining the final IPO subscription position.

We know that with Futu, IPO subscriptions can use high leverage, and bank financing is interest-free. Therefore, the positions we mention here also include positions with the maximum available financing leverage.

So how do we specifically determine the position? Let's take a new stock A as an example.

Step one, we assume that the maximum loss ratio we can accept is 5%, which means if the principal is 0.1 million, the maximum loss that can be tolerated is 5000 dollars.

Step two, IPO A is a very good quality IPO, but in a bear market environment, let's assume its maximum limit decline is 10%.

Therefore, we can only hold a volume of 0.05 million shares at most (not considering commission fees), as a 10% loss on 0.05 million is exactly 5000.

Step three, by calculating the allotment rate, we find that with a principal of 0.1 million in a fully leveraged situation, we can be successfully allotted 0.1 million.

Step four, determining the final new fund position. Since we can only hold a maximum of 0.05 million shares, while in a fully leveraged situation we can hold 0.1 million shares, we can only use half of the fund position to participate in the new IPOs. In reality, taking into account commission fees and the factor that less funds may lead to a higher allotment rate, the actual position may need to be even lower.

The above are the 4 steps on how to manage risks and control positions in Hong Kong IPO subscriptions. As long as we strictly follow these steps, it's less likely for us to incur significant losses. However, some investors may be blindly optimistic, believing that a particular new stock will not fall or underestimating the potential decline, resulting in an overweight position and exceeding the acceptable loss percentage. In such cases, more cultivation is needed in investment mindset. Perhaps the best mentality for new IPO subscriptions is: better to miss out than to incur heavy losses.