Thursday, May 27, 2010

Buy 1 rupee coins at 50 paise

If I had a penny for all the times people have asked me the secret for winning at the stock markets, I'd be a millionaire by now. The answer I give them is that to win at the stock markets you need the ability to hunt a bear.

Yes, as strange as it sounds, it's true. No, we're not talking about the kind of bear-hunting done in the wild but the bear hunting done in the city. The 'bear' kind of stocks that haven't been part of the bull run!

Let me explain further:
The much celebrated stock market party has in fact been the work of only a handful of index stocks. So many small investors may not have gained much from this high. For instance, I know of people who have sold stocks such as RPL (Reliance Petroleum Limited) at Rs 100, a few months back and are feeling terrible - because the price has crossed Rs 200 today. Had they remained invested, they could have benefited 100 per cent growth.

The trick is simple: Look for one rupee coins that are being sold for 50 paise. Hunt the bear!

Which only means look for sectors and companies with strong business fundamentals that have under-performed. They may have assets that are worth much more than the entire market cap, great cash flows and aggressive expansion plans. But their stock prices have not moved up due to various reasons like market imperfection in the short term

For instance, a while back this year, some folks invested in a company called Sesagoa, when the price stood at Rs 1,200. Very few were aware that it was a 'hot' stock. The price had stagnated for sometime, but it didn't matter to some because of its strong fundamentals and the iron ore mines it had. It was obvious that if the demand for steel goes up, iron ore prices will also rise.

Today Sesagoa's stock price is over Rs 3,500.

One of the best ways to make your investments grow exponentially is to look for undervalued companies. Stocks which have been ignored by the rest but have strong future can be bought at very low prices today and you can see them giving you multiple returns in the next three or four years.

High Value Low Price has been a strategy used by professional investors such as Warren Buffet and even our very own Rakesh Jhunjhunwala.

* Look at sectors which have not participated in the rally at all.
* Look for companies with strong fundamentals and growing profits.
* Don't just follow the flock that are going up 10 per cent everyday.

Quick tip: Sectors which have under-performed today such as hospitality have some excellent picks which will handsomely reward investors in the near future.

You will find out that this is one of the safest and least risky ways to create wealth. Definitely safer and less riskier than the real bear hunt!

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