Stock markets always provide wonderful opportunities for those investors who work hard and carefully analyse the news and emerging trends. Bear markets always provide safe investment opportunities for long term investors but they need to bear extreme pain before earning those rewards. Those who invested in the last bear market (2001-02) earned exceptional returns in the next 5 years. Current bear market will also test investors’ patience before making Bull Run. If you can able to face short term shocks and can look beyond 2009, one can find bright picture. New sectors and stocks will find favour in the next Bull Run but not outdated sectors like IT.
How to pick stock market investment opportunities?
1. Reactions:
A. Over reaction: Bear Sterns went bankrupt and sold all its holdings without thinking about the fundamentals of the stocks just out of necessity. Orchid Chemicals lost 50% of value in single session and sent panic waves among investors. This fall is no way relevant to stock fundamentals. But very few investors utilised this simple opportunity to get 200% returns in 20 days. Stock touched 340 from 113 in just 20 days. But you rarely get such riskless opportunities in stock markets.
B. Irrelevant reaction: Ranbaxy share lost 60% of its value due to FDA allegations and ban. This is a serious concern for the company and its investors due to drastic fall in prescriptions and serious dent to its image. In such testing times, investors generally tend to stay away from that sector due to dip in overall sentiment. Some stocks in that sector sometimes fall even though there is no impact on their sales. Investors should look for such opportunities. Same thing will also happen on positive side also. Had you remembered the boom in real estate stocks before DLF listing? This is all about psychological aspect of stock market investment.
2. Cyclical sectors: Metals, Real Estate, Sugar, Automotives and other commodity based stocks generally move in cycles. If you are on the positive side of cycle, rewards tend to be very high. If you are a late entrant, it will take 3-4 years to recover your investment. I knew many people who invested in SAIL and Tata Steel when they are trading at 9 and 80 respectively.
3. Fear Psychosis: “There would be no stock market in 1940” – Popular perception among Americans after 1929 Great depression. Current credit crisis is the second most severe economic turmoil after 1929 depression. Fear Psychosis will spread among investors in such times and stocks even good ones will make new lows (unbelievable levels) to provide good investment opportunities for courageous patient investors. Do you have guts, patience and vision?
4. Emerging sectors: There will be huge investments in the coming days in sectors like Wind Energy, Solar Energy, Bio-fuels, Water Management, Waste Management, Nuclear Energy, Animation, Power Solutions, Electric Vehicles, Mobile VAS, Micro irrigation, Plastics, Semiconductors and other niche segments.
Ex. Most of the American stocks are trading at 1-year lows while Solar Energy stock “First Solar” is trading near 1-year high. Americans and Chinese are already taking big steps to take leadership position in these sectors. Lack of visionary leaders is our bad luck. Don’t expect quick returns in these stocks as these companies will take 3-5 years to give exceptional returns.
5. Contra stocks: Rakesh Jhunjhunwala invested in BEML when it was trading at Rs 11 when no one was talking about PSU stocks. Some stocks will not be in lime light at certain point of time. Legendary investor Templeton invested in Japanese stocks when they were reeling under severe financial crisis. But these contra investments will give very good returns once they come into limelight which will generally happen. But this strategy is suitable only for patient long term investors.
6. Natural resources: Mines and oil are precious resources whose reserves will continue to decline while demand will continue to rise. Those companies who hold these resources will command huge valuations in the coming days. After 2020, agricultural lands will also command similar valuations due to increase in demand and lack of availability of sufficient cultivable lands.
7. Buy backs, open offers and acquisitions: Companies aggressively announce these offers in bear markets to benefit from low valuations. Investors should not miss such chances as they generally provide safe investment opportunities to get quick returns. Have you invested in Spice Communications and Zandu Pharma?
A. In America, promoters of Microsoft, HP and Nike announced buybacks to increase their stakes and save their stocks from free falls. These are classic bear market opportunities.
B. Yahoo is now trading at $ 18.9 and may fall to $ 12- $ 15 levels due to weak growth and lack of vision from management. But stock has so much intrinsic value and Microsoft is willing to acquire it by paying around $ 35. There lies investment opportunity even though stock is not good basing on fundamentals. So bad stocks also give good returns.
8. Why this stock is falling? This is the most frequent question that is come to your mind in bear markets. Why good stocks like ICSA, Opto Circuits and SREI Infra etc are falling? Why Punj Lloyd touched 190 just 3 months back? In bear markets, any stock will touch any low level. It almost impossible to predict exact lows in these markets as investors tend to move in herds. Instead of getting panic, one should treat them as investment opportunities.
Ex. Will Larsen and Toubro fall to below 2,000 levels? Impossible basing on fundamentals. My answer is “may be” basing on bear market reactions. Any level is possible in bear markets but those lows are not sustainable. That is crucial for long term investors.
9. Rallies: As I said in my previous posts, short term rallies are the characteristic feature of bear markets. You will get so many investment opportunities if you can satisfy with those 10-15% returns. If American Congress accepts bailout package, another short rally is on the cards.
10. Short sell: Out of exuberance, short term rallies will take some stocks to unreasonable levels which provide short selling opportunities. DLF reached 567 in September first week. Any sage investor will buy that stock at such levels means short it.
Conclusion: One can get so many such investment opportunities if one works hard on research and upcoming news. Large caps will lead the rallies in the initial days of bull market but battered mid caps and small caps will give exceptional returns over long term. When will stock markets make Bull Run? It is impossible to predict at this stage of credit crisis. Just accumulate good stocks with 2 year investment horizon.
Investment ideas:
1. Do you think that cash rich Indian Railways will stop spending due to current economic slow down?
2. Do you think that people stop purchasing medicines for their illnesses?
3. Do you think that Indian Government will not encourage agriculture based industries like food processing?
4. Do you think that nuclear deal will immediately provide opportunities to private sector companies?
5. Do you think that falling sugarcane output will have no impact on sugar stocks?
Please share your investment ideas through comments on the blog.
About IT stocks: IT companies are either masking the crisis or underestimating the severity of American credit crisis. They may be saved from crash temporarily due to this bailout package but one will see the real impact on IT stocks and on Indian economy (due to IT job losses) in the next 3-4 months when barrack Obama takes aggressive steps on outsourcing (out of necessity). Niche IT companies will be saved due to their positioning and vision. Big IT companies need to take aggressive cost cutting measures to save their investors but they are still waiting while things are moving from bad to worse.
About PSU stocks: I generally stay away from PSU stocks. I missed investment opportunities in good companies like BHEL and SBI due to this policy. But my faith is vindicated by Gujarat Government by its 30% profit sharing policy. Gujarat Government is planning to expand this policy to Gujarat based private companies like Reliance etc. What will happen if all state Governments opt for similar steps? All Indian companies will need to share 30% of their profit before taxes with Government. Who is advising Narendra Modi (if he is not a mad man) to take such mad decisions? Will they really use it for poverty eradication?
Analysis of portfolios of legends:
Outlook Profit magazine published portfolios of legends like Rakesh Jhunjhunwala, Mankekar and Nemish Shah Etc. I am surprised by their stock selection. If they think that those are the best stocks in the stock market, I may hesitate to call them as legends. There are some very good stock picks like Pantaloon India, CRISIL, Lupin, Ion Exchange and Praj Industries etc. There are so many bad selections in their portfolio. These bad stocks will also give very good returns as they are long term investors (3-5 year duration).
Ex: Rakesh Jhunjhunwala portfolio: He always says that scale and market leadership are important. How can he justify investments in Geojit Financial services, Karur Vysya Bank, Nagarjuna Constructions, Dwarikesh Sugars, Kajaria Ceramics, Mid Day and Viceroy Hotels etc? If Rakesh is thinking that these stocks are the best ones in their sectors (scale and leadership), it is very difficult to understand.
These legends successfully picked the emerging trends of the last decade but miserably failed to find the next emerging trends like alternate energy etc (except Ion Exchange India). I don’t know their exact stock holdings in various companies. I am commenting according to the portfolios published in the Outlook Profit magazine. Another interesting aspect of their portfolios is their belief in mid and small caps. Why? Large caps generally give safe and reasonable returns but will rarely make you a millionaire. Their way to become crorepati is “pick an emerging company with strong management, buy a large stake and give the management sufficient time”. Are you following the similar strategy?
Verdict: Indians stock markets got some oxygen from positive news like bailout package, interest rate cuts by many central banks and passage of nuclear bill by House of Representatives. Outflow of foreign funds will be slowed down at least in short term. If American Congress rejects bailout package (which is an unlikely scenario), what will happen? I don’t want to think about such situation even in my wild dreams.
Latest statistics: 50-80% of American start-ups will be killed by current credit crisis. More than 300 American banks are on the edge of bankruptcy.
How to pick stock market investment opportunities?
1. Reactions:
A. Over reaction: Bear Sterns went bankrupt and sold all its holdings without thinking about the fundamentals of the stocks just out of necessity. Orchid Chemicals lost 50% of value in single session and sent panic waves among investors. This fall is no way relevant to stock fundamentals. But very few investors utilised this simple opportunity to get 200% returns in 20 days. Stock touched 340 from 113 in just 20 days. But you rarely get such riskless opportunities in stock markets.
B. Irrelevant reaction: Ranbaxy share lost 60% of its value due to FDA allegations and ban. This is a serious concern for the company and its investors due to drastic fall in prescriptions and serious dent to its image. In such testing times, investors generally tend to stay away from that sector due to dip in overall sentiment. Some stocks in that sector sometimes fall even though there is no impact on their sales. Investors should look for such opportunities. Same thing will also happen on positive side also. Had you remembered the boom in real estate stocks before DLF listing? This is all about psychological aspect of stock market investment.
2. Cyclical sectors: Metals, Real Estate, Sugar, Automotives and other commodity based stocks generally move in cycles. If you are on the positive side of cycle, rewards tend to be very high. If you are a late entrant, it will take 3-4 years to recover your investment. I knew many people who invested in SAIL and Tata Steel when they are trading at 9 and 80 respectively.
3. Fear Psychosis: “There would be no stock market in 1940” – Popular perception among Americans after 1929 Great depression. Current credit crisis is the second most severe economic turmoil after 1929 depression. Fear Psychosis will spread among investors in such times and stocks even good ones will make new lows (unbelievable levels) to provide good investment opportunities for courageous patient investors. Do you have guts, patience and vision?
4. Emerging sectors: There will be huge investments in the coming days in sectors like Wind Energy, Solar Energy, Bio-fuels, Water Management, Waste Management, Nuclear Energy, Animation, Power Solutions, Electric Vehicles, Mobile VAS, Micro irrigation, Plastics, Semiconductors and other niche segments.
Ex. Most of the American stocks are trading at 1-year lows while Solar Energy stock “First Solar” is trading near 1-year high. Americans and Chinese are already taking big steps to take leadership position in these sectors. Lack of visionary leaders is our bad luck. Don’t expect quick returns in these stocks as these companies will take 3-5 years to give exceptional returns.
5. Contra stocks: Rakesh Jhunjhunwala invested in BEML when it was trading at Rs 11 when no one was talking about PSU stocks. Some stocks will not be in lime light at certain point of time. Legendary investor Templeton invested in Japanese stocks when they were reeling under severe financial crisis. But these contra investments will give very good returns once they come into limelight which will generally happen. But this strategy is suitable only for patient long term investors.
6. Natural resources: Mines and oil are precious resources whose reserves will continue to decline while demand will continue to rise. Those companies who hold these resources will command huge valuations in the coming days. After 2020, agricultural lands will also command similar valuations due to increase in demand and lack of availability of sufficient cultivable lands.
7. Buy backs, open offers and acquisitions: Companies aggressively announce these offers in bear markets to benefit from low valuations. Investors should not miss such chances as they generally provide safe investment opportunities to get quick returns. Have you invested in Spice Communications and Zandu Pharma?
A. In America, promoters of Microsoft, HP and Nike announced buybacks to increase their stakes and save their stocks from free falls. These are classic bear market opportunities.
B. Yahoo is now trading at $ 18.9 and may fall to $ 12- $ 15 levels due to weak growth and lack of vision from management. But stock has so much intrinsic value and Microsoft is willing to acquire it by paying around $ 35. There lies investment opportunity even though stock is not good basing on fundamentals. So bad stocks also give good returns.
8. Why this stock is falling? This is the most frequent question that is come to your mind in bear markets. Why good stocks like ICSA, Opto Circuits and SREI Infra etc are falling? Why Punj Lloyd touched 190 just 3 months back? In bear markets, any stock will touch any low level. It almost impossible to predict exact lows in these markets as investors tend to move in herds. Instead of getting panic, one should treat them as investment opportunities.
Ex. Will Larsen and Toubro fall to below 2,000 levels? Impossible basing on fundamentals. My answer is “may be” basing on bear market reactions. Any level is possible in bear markets but those lows are not sustainable. That is crucial for long term investors.
9. Rallies: As I said in my previous posts, short term rallies are the characteristic feature of bear markets. You will get so many investment opportunities if you can satisfy with those 10-15% returns. If American Congress accepts bailout package, another short rally is on the cards.
10. Short sell: Out of exuberance, short term rallies will take some stocks to unreasonable levels which provide short selling opportunities. DLF reached 567 in September first week. Any sage investor will buy that stock at such levels means short it.
Conclusion: One can get so many such investment opportunities if one works hard on research and upcoming news. Large caps will lead the rallies in the initial days of bull market but battered mid caps and small caps will give exceptional returns over long term. When will stock markets make Bull Run? It is impossible to predict at this stage of credit crisis. Just accumulate good stocks with 2 year investment horizon.
Investment ideas:
1. Do you think that cash rich Indian Railways will stop spending due to current economic slow down?
2. Do you think that people stop purchasing medicines for their illnesses?
3. Do you think that Indian Government will not encourage agriculture based industries like food processing?
4. Do you think that nuclear deal will immediately provide opportunities to private sector companies?
5. Do you think that falling sugarcane output will have no impact on sugar stocks?
Please share your investment ideas through comments on the blog.
About IT stocks: IT companies are either masking the crisis or underestimating the severity of American credit crisis. They may be saved from crash temporarily due to this bailout package but one will see the real impact on IT stocks and on Indian economy (due to IT job losses) in the next 3-4 months when barrack Obama takes aggressive steps on outsourcing (out of necessity). Niche IT companies will be saved due to their positioning and vision. Big IT companies need to take aggressive cost cutting measures to save their investors but they are still waiting while things are moving from bad to worse.
About PSU stocks: I generally stay away from PSU stocks. I missed investment opportunities in good companies like BHEL and SBI due to this policy. But my faith is vindicated by Gujarat Government by its 30% profit sharing policy. Gujarat Government is planning to expand this policy to Gujarat based private companies like Reliance etc. What will happen if all state Governments opt for similar steps? All Indian companies will need to share 30% of their profit before taxes with Government. Who is advising Narendra Modi (if he is not a mad man) to take such mad decisions? Will they really use it for poverty eradication?
Analysis of portfolios of legends:
Outlook Profit magazine published portfolios of legends like Rakesh Jhunjhunwala, Mankekar and Nemish Shah Etc. I am surprised by their stock selection. If they think that those are the best stocks in the stock market, I may hesitate to call them as legends. There are some very good stock picks like Pantaloon India, CRISIL, Lupin, Ion Exchange and Praj Industries etc. There are so many bad selections in their portfolio. These bad stocks will also give very good returns as they are long term investors (3-5 year duration).
Ex: Rakesh Jhunjhunwala portfolio: He always says that scale and market leadership are important. How can he justify investments in Geojit Financial services, Karur Vysya Bank, Nagarjuna Constructions, Dwarikesh Sugars, Kajaria Ceramics, Mid Day and Viceroy Hotels etc? If Rakesh is thinking that these stocks are the best ones in their sectors (scale and leadership), it is very difficult to understand.
These legends successfully picked the emerging trends of the last decade but miserably failed to find the next emerging trends like alternate energy etc (except Ion Exchange India). I don’t know their exact stock holdings in various companies. I am commenting according to the portfolios published in the Outlook Profit magazine. Another interesting aspect of their portfolios is their belief in mid and small caps. Why? Large caps generally give safe and reasonable returns but will rarely make you a millionaire. Their way to become crorepati is “pick an emerging company with strong management, buy a large stake and give the management sufficient time”. Are you following the similar strategy?
Verdict: Indians stock markets got some oxygen from positive news like bailout package, interest rate cuts by many central banks and passage of nuclear bill by House of Representatives. Outflow of foreign funds will be slowed down at least in short term. If American Congress rejects bailout package (which is an unlikely scenario), what will happen? I don’t want to think about such situation even in my wild dreams.
Latest statistics: 50-80% of American start-ups will be killed by current credit crisis. More than 300 American banks are on the edge of bankruptcy.
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