Thursday, May 27, 2010
Profit on equities - a myth?
When too many investors think alike, nobody is thinking - Marc Faber
EVERY single expert was bellowing that this stock would be a multi-bagger. We picked the right stocks, it went up significantly, it seemed like it will continue to go up – so we held it close to our heart and dreamt of buying a Ferrari.
Just when it was, ‘a lil’ more kind of thing’ everything came crashing down. Our losses mounted and we were forced to sell and book losses. The news flow from every source was negative and so were all the decisive expert views. The markets once again seemed to conspire against us, because in just a little time, the markets were back in form and doing well!
How many of us identify with such scenarios? How many of us have gone through those emotions? What do emotions have to do with contrarian style of investing or for that matter, what does it have to do with investments at all? Well, I would say, a lot!
‘Ill-timed’ investments
The markets do the usual - a heady bull run followed by steep falls when the pundits spell doomsday and finally things falling in place, eventually translating into a turnaround. The human sentiment just does not seem to rationalise on this pattern even in the long run. Given the fact that each of these are inter-related, rational human behavior has the potential to simply kill the volatility of equitymarkets, leaving us with a linear graph!
In fact, we are not the only ones on the wrong side of the market. The graph (on page 2) depicts, how time and again ‘Greed and Fear’ have played havoc on the market, there by creating profitable opportunities for the contrarian investor.
It is a simple rule to make money on markets: ‘Buy Low, Sell High’. Surprisingly from the above graph, people were doing the exact opposite. In fact, a lot of the selling happened at market lows!
EVERY single expert was bellowing that this stock would be a multi-bagger. We picked the right stocks, it went up significantly, it seemed like it will continue to go up – so we held it close to our heart and dreamt of buying a Ferrari.
Just when it was, ‘a lil’ more kind of thing’ everything came crashing down. Our losses mounted and we were forced to sell and book losses. The news flow from every source was negative and so were all the decisive expert views. The markets once again seemed to conspire against us, because in just a little time, the markets were back in form and doing well!
How many of us identify with such scenarios? How many of us have gone through those emotions? What do emotions have to do with contrarian style of investing or for that matter, what does it have to do with investments at all? Well, I would say, a lot!
‘Ill-timed’ investments
The markets do the usual - a heady bull run followed by steep falls when the pundits spell doomsday and finally things falling in place, eventually translating into a turnaround. The human sentiment just does not seem to rationalise on this pattern even in the long run. Given the fact that each of these are inter-related, rational human behavior has the potential to simply kill the volatility of equitymarkets, leaving us with a linear graph!
In fact, we are not the only ones on the wrong side of the market. The graph (on page 2) depicts, how time and again ‘Greed and Fear’ have played havoc on the market, there by creating profitable opportunities for the contrarian investor.
It is a simple rule to make money on markets: ‘Buy Low, Sell High’. Surprisingly from the above graph, people were doing the exact opposite. In fact, a lot of the selling happened at market lows!
Risk versus Returns
Every investment has an attached risk
'Just buy this blue-chip stock, there's no risk at all.� For most people who invest in shares there is a good chance that you've heard someone say this before. For most people who just put their money away in bonds or deposits, one of your main reasons for this probably is -I don't want to take any risk at all, I just want my money safe.
re these statements true? Is investing in bonds or deposits completely risk-free? Or investing in blue-chip stocks necessarily very low risk? NO.
Whenever more than one outcome is possible from an investment, there is always some amount of risk. Only the level of risk is different.
Use risk to analyse expected returns
While investing, risk is measured to evaluate the kind of returns you should expect from the investment. Or your return expectations should be based on the level of risk you can bear. In principle, the higher the risk, the higher the returns that should be required.
Empirically returns across various asset classes show that investment in equity shares give the highest level of returns in the long-term, followed by corporate bonds and deposits and lastly bank deposits and government debt. Not surprisingly, the level of risk is also in the same order.
You might be saying - how can debt be risky? It is.
Companies that run into financial trouble could delay your interest payments or even default on paying back your money. Even government debt has some amount of risk. How? Simply put, governments like companies also face the risk of financial problems. However, lack of funds for a company could result in the company defaulting on a loan repayment. But a government can always print more currency and repay its borrowings. So you will get your money back. BUT, there is a hidden cost (risk). Printing more currency is likely to lead to higher inflation and hence lower real returns on your investment (see our article Impact of Inflation to understand about real returns).
Agreed that the chances of governments or well-managed companies getting into serious financial troubles are low. But that is only difference in the level of risk. There is a risk attached, and that cannot be questioned.
Understanding risk vs return essential for good financial planning
You might ask - why is it so important to understand the risk versus return relationship? Because if you don�t, it is quite likely that your investment returns will not match your risk profile and consequently you are not managing your hard-earned money well. A wasted opportunity, as even a small difference in your investment returns (at the same level of risk) can make a BIG difference to your financial wealth (due to the astounding Power of Compounding ).
To understand the importance of managing your money well read Guide To Financial Planning . This article highlights why financial planning is not as difficult as it sounds and how you can easily make your hard-earned money work for you.
Also you can use our Risk Analyser to understand your risk profile (both your risk-taking capacity and your risk tolerance level) and read The Need To Diversify to understand how you can increase your expected returns while not increasing your level of risk.
'Just buy this blue-chip stock, there's no risk at all.� For most people who invest in shares there is a good chance that you've heard someone say this before. For most people who just put their money away in bonds or deposits, one of your main reasons for this probably is -I don't want to take any risk at all, I just want my money safe.
re these statements true? Is investing in bonds or deposits completely risk-free? Or investing in blue-chip stocks necessarily very low risk? NO.
Whenever more than one outcome is possible from an investment, there is always some amount of risk. Only the level of risk is different.
Use risk to analyse expected returns
While investing, risk is measured to evaluate the kind of returns you should expect from the investment. Or your return expectations should be based on the level of risk you can bear. In principle, the higher the risk, the higher the returns that should be required.
Empirically returns across various asset classes show that investment in equity shares give the highest level of returns in the long-term, followed by corporate bonds and deposits and lastly bank deposits and government debt. Not surprisingly, the level of risk is also in the same order.
You might be saying - how can debt be risky? It is.
Companies that run into financial trouble could delay your interest payments or even default on paying back your money. Even government debt has some amount of risk. How? Simply put, governments like companies also face the risk of financial problems. However, lack of funds for a company could result in the company defaulting on a loan repayment. But a government can always print more currency and repay its borrowings. So you will get your money back. BUT, there is a hidden cost (risk). Printing more currency is likely to lead to higher inflation and hence lower real returns on your investment (see our article Impact of Inflation to understand about real returns).
Agreed that the chances of governments or well-managed companies getting into serious financial troubles are low. But that is only difference in the level of risk. There is a risk attached, and that cannot be questioned.
Understanding risk vs return essential for good financial planning
You might ask - why is it so important to understand the risk versus return relationship? Because if you don�t, it is quite likely that your investment returns will not match your risk profile and consequently you are not managing your hard-earned money well. A wasted opportunity, as even a small difference in your investment returns (at the same level of risk) can make a BIG difference to your financial wealth (due to the astounding Power of Compounding ).
To understand the importance of managing your money well read Guide To Financial Planning . This article highlights why financial planning is not as difficult as it sounds and how you can easily make your hard-earned money work for you.
Also you can use our Risk Analyser to understand your risk profile (both your risk-taking capacity and your risk tolerance level) and read The Need To Diversify to understand how you can increase your expected returns while not increasing your level of risk.
John Templeton's 16 investment rules
SIR John Templeton, the founder of Templeton Funds was a multi-faceted personality, a legendary investor, fund manager and an astute philanthropist. He wrote 16 rules of investment success, which can be found here.
They are the crux of his investment ideas and philosophy. Let us examine their relevance in the Indian context.
Rule 1: Begin with a prayer
Prayer helps you think clearly and make fewer mistakes. Meditation is known to reduce anxiety and stress, helping in better decision making.
Rule 2: Invest for maximum total real return
It is important to only consider the total real return i.e. the money you make in your investment lifetime after inflation and taxes. Many investors get carried away by short-term movements. They tend to ignore the long-term opportunities. Thus, it is wise to invest for total real returns.
Rule 3: Remain flexible and open-minded
Flexibility comes from being agile. Open-mindedness is learning from new ideas and perspectives. Many old-timers missed India's IT sector growth in the early 90s, which gave multi- bagger stocks like Infosys and Wipro. Cut to early 2005, many people were enamored with IT sector. They neglected the infrastructure and banking sectors, whose stocks multiplied within a couple of years. Hence it is important to be flexible and open-minded.
Rule 4: Invest, do not trade or speculate
Almost all successful people in the stock market are investors and not traders. They invest for long-term and are patient. There are many investors who have become millionaires solely on return of one stock in their portfolio over a decade. Sure they bought lot of other stocks which went nowhere but the one or two stocks that did well made all the difference. Traders think of the market as a casino where you play daily to win, investors think of markets as a long-term wealth building exercise.
Rule 5: Search for bargains
Just as we buy garments at discount sale, we need to buy and not sell stocks when markets are crashing. In October 2008, many high dividend yielding stocks were sold for meager amount. People who bought them have reaped huge profits.
Rule 6: Don't buy market trends or economic theories
Remember the India story told when the sensex was at 21,000 and markets dipped to 7,500 within a year. The boom gave way to gloom, economists and market experts were expecting a correction not a crash. Thus, you should not rely on economic theories and market trends while investing as they are told only after the event has occurred.
Rule 7: Diversify across assets and across markets, there is safety in numbers
Last year, when stocks dipped, gold and bond mutual funds thrived, an investor who had invested across all three assets would have got negative return in stocks but would have made good returns in bonds and gold. Thus, it is advisable not to put all eggs in one basket.
To spread risk, investments should be diversified across assets such as:
- Stocks / equity mutual funds
- Bonds/ bond mutual funds
- Gold/ gold exchange traded funds
- Real estate
- Foreign mutual funds
- Traditional assets such as fixed deposits and public provident funds
Investment opportunities come with risks. When markets are high, investors want 100 per cent equity exposure and forget the downside risk. When markets have crashed they want 100 per cent safety and ignore the upside potential.
Rule 8: Do your homework or hire experts who will do it for you
Some of us invest based on tips and rumors, that is speculating not investing. You should read and research all investment ideas well, take time to understand the upside and downside of each investment before buying. Or else, you must engage quality financial advisors before investing.
Rule 9: Aggressively monitor your investments
No investment is forever. Expect change and react to it. There are no permanent bull market and bear market.
Way back the BSE Sensex had bluechip companies like Scindia Steamship, Asian Cables, Crompton Greaves, Mukand Iron, and Premier Auto.
Today, these companies have become small or midcaps. Some are not even quoted. Indices and markets keep changing. Investors should be on guard always.
Rule 10: Don’t Panic
Many people panic and exit the market when there is a dip. It is better to sell before a crash not after. Panic and euphoria are the two facets of same investors. Both selling after a crash and buying after a huge rally make no sense.
Rule 11: Learn from your mistakes
The only way to avoid mistakes is not investing which is the biggest mistake of all. Those who didn't invest after losing money in 1994 crash wouldn't have made money in 1999 boom. Those who lost money and exited in 2000 would have missed one the best times to invest in India from 2002 - 2008.
Rule 12: Beating the markets is a difficult task
Even professional fund managers have tough time doing it. Hence, an investor should remember that getting above market returns year after year is difficult.
Rule 13: Buy low
So simple in concept, yet so difficult to practice. Humans tend to think in herds and not alone. Only a brave person would have invested in October last year when people were shell shocked and wanted to forget about stocks.
Must read: Buy low, sell high: How Buffet does it
Rule 14: Anyone who has all the answers doesn’t even know the questions
Markets make even the most brilliant fund managers humble. We have seen big fund managers make wrong decisions. An investor who thinks he knows everything doesn't usually know anything. Success is a process of seeking out answers to newer questions.
Rule 15: There is no free lunch
Never invest based on a tip or rumor. Everyone talks about their profits however small and no one talks about their losses however big.
Rule 16: Do not be fearful or negative too often
There will be corrections and crashes in the markets, but markets do recover and reward diligent and patient investors. This century or next it's still buy low and sell high.
This article is based on Sir John Templeton’s 16 Rules of Investment Success, while the rules are Sir John's, the commentary has been adapted to Indian context.
They are the crux of his investment ideas and philosophy. Let us examine their relevance in the Indian context.
Rule 1: Begin with a prayer
Prayer helps you think clearly and make fewer mistakes. Meditation is known to reduce anxiety and stress, helping in better decision making.
Rule 2: Invest for maximum total real return
It is important to only consider the total real return i.e. the money you make in your investment lifetime after inflation and taxes. Many investors get carried away by short-term movements. They tend to ignore the long-term opportunities. Thus, it is wise to invest for total real returns.
Rule 3: Remain flexible and open-minded
Flexibility comes from being agile. Open-mindedness is learning from new ideas and perspectives. Many old-timers missed India's IT sector growth in the early 90s, which gave multi- bagger stocks like Infosys and Wipro. Cut to early 2005, many people were enamored with IT sector. They neglected the infrastructure and banking sectors, whose stocks multiplied within a couple of years. Hence it is important to be flexible and open-minded.
Rule 4: Invest, do not trade or speculate
Almost all successful people in the stock market are investors and not traders. They invest for long-term and are patient. There are many investors who have become millionaires solely on return of one stock in their portfolio over a decade. Sure they bought lot of other stocks which went nowhere but the one or two stocks that did well made all the difference. Traders think of the market as a casino where you play daily to win, investors think of markets as a long-term wealth building exercise.
Rule 5: Search for bargains
Just as we buy garments at discount sale, we need to buy and not sell stocks when markets are crashing. In October 2008, many high dividend yielding stocks were sold for meager amount. People who bought them have reaped huge profits.
Rule 6: Don't buy market trends or economic theories
Remember the India story told when the sensex was at 21,000 and markets dipped to 7,500 within a year. The boom gave way to gloom, economists and market experts were expecting a correction not a crash. Thus, you should not rely on economic theories and market trends while investing as they are told only after the event has occurred.
Rule 7: Diversify across assets and across markets, there is safety in numbers
Last year, when stocks dipped, gold and bond mutual funds thrived, an investor who had invested across all three assets would have got negative return in stocks but would have made good returns in bonds and gold. Thus, it is advisable not to put all eggs in one basket.
To spread risk, investments should be diversified across assets such as:
- Stocks / equity mutual funds
- Bonds/ bond mutual funds
- Gold/ gold exchange traded funds
- Real estate
- Foreign mutual funds
- Traditional assets such as fixed deposits and public provident funds
Investment opportunities come with risks. When markets are high, investors want 100 per cent equity exposure and forget the downside risk. When markets have crashed they want 100 per cent safety and ignore the upside potential.
Rule 8: Do your homework or hire experts who will do it for you
Some of us invest based on tips and rumors, that is speculating not investing. You should read and research all investment ideas well, take time to understand the upside and downside of each investment before buying. Or else, you must engage quality financial advisors before investing.
Rule 9: Aggressively monitor your investments
No investment is forever. Expect change and react to it. There are no permanent bull market and bear market.
Way back the BSE Sensex had bluechip companies like Scindia Steamship, Asian Cables, Crompton Greaves, Mukand Iron, and Premier Auto.
Today, these companies have become small or midcaps. Some are not even quoted. Indices and markets keep changing. Investors should be on guard always.
Rule 10: Don’t Panic
Many people panic and exit the market when there is a dip. It is better to sell before a crash not after. Panic and euphoria are the two facets of same investors. Both selling after a crash and buying after a huge rally make no sense.
Rule 11: Learn from your mistakes
The only way to avoid mistakes is not investing which is the biggest mistake of all. Those who didn't invest after losing money in 1994 crash wouldn't have made money in 1999 boom. Those who lost money and exited in 2000 would have missed one the best times to invest in India from 2002 - 2008.
Rule 12: Beating the markets is a difficult task
Even professional fund managers have tough time doing it. Hence, an investor should remember that getting above market returns year after year is difficult.
Rule 13: Buy low
So simple in concept, yet so difficult to practice. Humans tend to think in herds and not alone. Only a brave person would have invested in October last year when people were shell shocked and wanted to forget about stocks.
Must read: Buy low, sell high: How Buffet does it
Rule 14: Anyone who has all the answers doesn’t even know the questions
Markets make even the most brilliant fund managers humble. We have seen big fund managers make wrong decisions. An investor who thinks he knows everything doesn't usually know anything. Success is a process of seeking out answers to newer questions.
Rule 15: There is no free lunch
Never invest based on a tip or rumor. Everyone talks about their profits however small and no one talks about their losses however big.
Rule 16: Do not be fearful or negative too often
There will be corrections and crashes in the markets, but markets do recover and reward diligent and patient investors. This century or next it's still buy low and sell high.
This article is based on Sir John Templeton’s 16 Rules of Investment Success, while the rules are Sir John's, the commentary has been adapted to Indian context.
Make crores. Right NOW
IF you had bought 100 shares of Wipro at the rate of Rs 100 per share in 1980, they would be worth Rs 200 crore (Rs 2 billion) today.
If you had invested Rs 10,000 in Infosys shares in 1992, you would be richer by Rs 1.5 crore (Rs 15 million) today.
If you had invested Rs 1,000 in Ranbaxy in 1980, you would have got Rs 1.9 crore (Rs 19 million) today!
And not so far back in time, if you had invested Rs 40,000 in Unitech during the lows of 2004, your bank account would see a whopping Rs 1.1 crore (Rs 11 million) today!
Some guy out there knew this. Today, he is laughing all the way to the bank. So what was the magic strategy that made this guy so rich? Simple.
He bought, he waited:
Waited for all those share splits and bonus declarations.
Waited for the company to grow from strength to strength.
Waited even when the shares teetered only to recoup in a few years' time.
Just as a child takes time to realise his/ her full potential, so does an investment need time to reward you handsomely.
Sure, the times are uncertain now. But let that not scare you to sell for a loss.
Patience pays:
Look back. You will notice that selling in such times makes no real sense in the longer run. Those who didn't sell their stocks during the May 2006 crash but had, in fact, bought more would be a very happy lot today.
Investing long term is like that: it rewards you handsomely. Always. Exercise patience. As champion broker Rakesh Jhunjhunwala said recently, if you want to learn more about patience, get married!
The way I see it, you don't really need to get married to learn patience. Just look back in time. All these stocks have been multi-baggers for those who stayed on for the long term. They would have fetched you unimaginable returns today.
Do your research:
You will learn a thing or two about making crores from a few lakhs. You can still make those crores!
Turn a deaf ear at the sceptics; look at beaten down sectors.
Consider aviation and hospitality. Today, aviation stocks are way below their lifetime highs. But, as India grows, so will travel. And within the next three years, they will reward you handsomely.
Most people ignore aviation and hotels. And that is why they merit my attention.
Pick up stocks that others are ignoring. People who create wealth do things that others do not. I am sure you could make crores if you do too!
If you had invested Rs 10,000 in Infosys shares in 1992, you would be richer by Rs 1.5 crore (Rs 15 million) today.
If you had invested Rs 1,000 in Ranbaxy in 1980, you would have got Rs 1.9 crore (Rs 19 million) today!
And not so far back in time, if you had invested Rs 40,000 in Unitech during the lows of 2004, your bank account would see a whopping Rs 1.1 crore (Rs 11 million) today!
Some guy out there knew this. Today, he is laughing all the way to the bank. So what was the magic strategy that made this guy so rich? Simple.
He bought, he waited:
Waited for all those share splits and bonus declarations.
Waited for the company to grow from strength to strength.
Waited even when the shares teetered only to recoup in a few years' time.
Just as a child takes time to realise his/ her full potential, so does an investment need time to reward you handsomely.
Sure, the times are uncertain now. But let that not scare you to sell for a loss.
Patience pays:
Look back. You will notice that selling in such times makes no real sense in the longer run. Those who didn't sell their stocks during the May 2006 crash but had, in fact, bought more would be a very happy lot today.
Investing long term is like that: it rewards you handsomely. Always. Exercise patience. As champion broker Rakesh Jhunjhunwala said recently, if you want to learn more about patience, get married!
The way I see it, you don't really need to get married to learn patience. Just look back in time. All these stocks have been multi-baggers for those who stayed on for the long term. They would have fetched you unimaginable returns today.
Do your research:
You will learn a thing or two about making crores from a few lakhs. You can still make those crores!
Turn a deaf ear at the sceptics; look at beaten down sectors.
Consider aviation and hospitality. Today, aviation stocks are way below their lifetime highs. But, as India grows, so will travel. And within the next three years, they will reward you handsomely.
Most people ignore aviation and hotels. And that is why they merit my attention.
Pick up stocks that others are ignoring. People who create wealth do things that others do not. I am sure you could make crores if you do too!
What stock brokers don't tell you
DO you find yourself quoting proverbs or famous last words when teaching a child something important? You would rather fall back on their instinctive sense and the shared universal meaning.
It is much the same for stock markets. To learn the fundamentals of the market, the easiest approach would be to use often used maxims from our everyday life.
So here are 11 of them. The knowledge behind each is gained from several excellent books on the vast, fascinating subject of stock market investment such as Peter Lynch's One Up On Wall Street and Beating The Street; Zulu Principle by Jim Slater; and Robert Hagstrom Jr's The Warren Buffet Way.
The application, however, is entirely mine.
1. No gain without pain
This is the base level fundamental of equity investing. There is a close direct relationship between risk and reward. The higher the reward, the greater the risk. Fairly simple to understand, but it is most difficult to live by.
Where there is profit, there is always risk. The greater the opportunity of profit, greater the possibility of loss.
2. Slow and steady doesn't always win the race
Gentlemen who prefer bonds don't know what they are missing! On bonds, there is no return on money; there is only return of money.
Bonds being debt instruments, unlike equity, yield only fixed return. And, with inflation and income tax factored in, there is often no return at all.
(INFLATION METER: Did you know that your expense of Rs 10,000 today will be equal to Rs 46,609 in 2028? That's because inflation is at 8% today! Use our 'cost of living ' tool to find out how inflation will affect your budgets!)
3. United we stand
Investing in equity shares of companies is risk related because returns are linked to the company's profits unlike investing in bank deposits or bonds or debentures where the returns are fixed and accrue to investors regardless of the company's profits.
In the stock market, you are tying yourself to the company's fortune.
4. It takes all kinds to make the world
Stock market behaviour is not unpredictable as it is commonly believed. It simply depends on human behaviour which, as we know, can never be predicted with any reasonable accuracy.
Hence, we have fluctuations in prices of commodities, things and stocks based on greed, emotions, hopes, fantasies, fear and dreams of millions of people, resulting in opportunities of making money out of such fluctuations!
5. Common sense isn't all that common
Not all common stocks are common. Though equity shares as an investment class is one, each company has a distinct identity and performs differently and, therefore, rewards its investors differently.
6. Ignorance is bliss
Investing is nothing but an arbitrage of ignorance. Investing is basically profiting from pricing and difference in market perception of a given product at a given point of time.
Stock market is one place where the buyer and the seller both think that they are smart in their decision.
7. Elephants don't gallop, zebras do
Stock prices of big companies with large capitalisations move up or down rather slowly compared to smaller companies because there is not much market ignorance on big companies to capitalise on.
Hence, smaller companies tend to reward its investors more handsomely.
8. Be a braveheart
You need 'cash' and 'courage' to be an equity investor. If you are prone to panic at losses, remain invested in fixed deposits with banks and government bonds.
If you don’t know who you are, the stock market is too expensive a place to find it out!
9. If you throw peanuts, you get monkeys
Investors make the mistake of not buying good stocks at high prices as also buying bad stocks at low prices. A lay investor tends to buy unsoundcompanies at cheap prices instead of solid companies at high prices.
10. Lose the battle, win the war
Equity investment cannot maximise your income, but it can maximise your wealth. The actual yield by way of dividends on equity shares with reference to their market value is often as low as one per cent on investment.
But capital appreciation in equity values can be insanely high. Ask the initial investors of Infosys or Pantaloons.
11. As you sow, so shall you reap
Saving for investment is not a punishment. Investing is making conscious choices about how you will use your money. It is not about choosing to live rich or die rich.
It is about how you want you and your dear ones to live during your lifetime and thereafter.
Here are a few more pointers.
i. There is no 'high' price or 'low' price of a stock. There is only the 'market' price.
ii. Absolute price of a stock is not relevant. What is important is whether it is underpriced or overpriced.
iii. You can't control the market but you can control your reaction to the market.
iv. Intelligent investing is knowing 'what' to buy; smart investing is knowing 'when' to buy.
v. Your profit is determined by your purchase price and not your sale price.
vi. Don't ask the price of the stock, ask the worth of the company.
You are ready to go and need to search for a broker. Keep these in mind.
a. Don't expect your broker to help you to earn 'for' you. He is there to earn 'from' you.
b. The sub-broker makes money. The main broker makes money. Two out of three making money in a single transaction is not a bad bargain.
c. Never ask a broker whether you should buy a particular stock. It is like asking a barber if you need a haircut!
It is much the same for stock markets. To learn the fundamentals of the market, the easiest approach would be to use often used maxims from our everyday life.
So here are 11 of them. The knowledge behind each is gained from several excellent books on the vast, fascinating subject of stock market investment such as Peter Lynch's One Up On Wall Street and Beating The Street; Zulu Principle by Jim Slater; and Robert Hagstrom Jr's The Warren Buffet Way.
The application, however, is entirely mine.
1. No gain without pain
This is the base level fundamental of equity investing. There is a close direct relationship between risk and reward. The higher the reward, the greater the risk. Fairly simple to understand, but it is most difficult to live by.
Where there is profit, there is always risk. The greater the opportunity of profit, greater the possibility of loss.
2. Slow and steady doesn't always win the race
Gentlemen who prefer bonds don't know what they are missing! On bonds, there is no return on money; there is only return of money.
Bonds being debt instruments, unlike equity, yield only fixed return. And, with inflation and income tax factored in, there is often no return at all.
(INFLATION METER: Did you know that your expense of Rs 10,000 today will be equal to Rs 46,609 in 2028? That's because inflation is at 8% today! Use our 'cost of living ' tool to find out how inflation will affect your budgets!)
3. United we stand
Investing in equity shares of companies is risk related because returns are linked to the company's profits unlike investing in bank deposits or bonds or debentures where the returns are fixed and accrue to investors regardless of the company's profits.
In the stock market, you are tying yourself to the company's fortune.
4. It takes all kinds to make the world
Stock market behaviour is not unpredictable as it is commonly believed. It simply depends on human behaviour which, as we know, can never be predicted with any reasonable accuracy.
Hence, we have fluctuations in prices of commodities, things and stocks based on greed, emotions, hopes, fantasies, fear and dreams of millions of people, resulting in opportunities of making money out of such fluctuations!
5. Common sense isn't all that common
Not all common stocks are common. Though equity shares as an investment class is one, each company has a distinct identity and performs differently and, therefore, rewards its investors differently.
6. Ignorance is bliss
Investing is nothing but an arbitrage of ignorance. Investing is basically profiting from pricing and difference in market perception of a given product at a given point of time.
Stock market is one place where the buyer and the seller both think that they are smart in their decision.
7. Elephants don't gallop, zebras do
Stock prices of big companies with large capitalisations move up or down rather slowly compared to smaller companies because there is not much market ignorance on big companies to capitalise on.
Hence, smaller companies tend to reward its investors more handsomely.
8. Be a braveheart
You need 'cash' and 'courage' to be an equity investor. If you are prone to panic at losses, remain invested in fixed deposits with banks and government bonds.
If you don’t know who you are, the stock market is too expensive a place to find it out!
9. If you throw peanuts, you get monkeys
Investors make the mistake of not buying good stocks at high prices as also buying bad stocks at low prices. A lay investor tends to buy unsoundcompanies at cheap prices instead of solid companies at high prices.
10. Lose the battle, win the war
Equity investment cannot maximise your income, but it can maximise your wealth. The actual yield by way of dividends on equity shares with reference to their market value is often as low as one per cent on investment.
But capital appreciation in equity values can be insanely high. Ask the initial investors of Infosys or Pantaloons.
11. As you sow, so shall you reap
Saving for investment is not a punishment. Investing is making conscious choices about how you will use your money. It is not about choosing to live rich or die rich.
It is about how you want you and your dear ones to live during your lifetime and thereafter.
Here are a few more pointers.
i. There is no 'high' price or 'low' price of a stock. There is only the 'market' price.
ii. Absolute price of a stock is not relevant. What is important is whether it is underpriced or overpriced.
iii. You can't control the market but you can control your reaction to the market.
iv. Intelligent investing is knowing 'what' to buy; smart investing is knowing 'when' to buy.
v. Your profit is determined by your purchase price and not your sale price.
vi. Don't ask the price of the stock, ask the worth of the company.
You are ready to go and need to search for a broker. Keep these in mind.
a. Don't expect your broker to help you to earn 'for' you. He is there to earn 'from' you.
b. The sub-broker makes money. The main broker makes money. Two out of three making money in a single transaction is not a bad bargain.
c. Never ask a broker whether you should buy a particular stock. It is like asking a barber if you need a haircut!
How a nimbu paani owner conquered the markets
IT's amazing how many people believe that the stock market is an extremely complicated, boring and difficult to understand monster.
Of course, they are the ones who have never invested in the markets.
You, however, don't need to know alien terms to understand the stock market. I believe in keeping things simple.
In fact, I often try to make sense of what some analysts are saying on business television!
Let me tell you what I often tell some of my first-timer clients. It is about my first venture, The Indian Lemonade Company. I initiated it when I was at school in the Middle East.
I was 12 years old then. My school had organised a fair, where students could take a stall on rent and sell whatever they liked.
I liked the idea -- I could make money from it. A few days later, I was sipping nimbu paani, thinking what to do. That is when I got the idea of setting up a nimbu paani stall.
To rent the stall, including purchasing ingredients, I needed around Rs 1,000 (I have converted the currency to Indian Rupees to simplify it).
With Rs 1,000, I could make 1,000 glasses of nimbu paani. Each glass would be sold for Rs 5. So if I sold all the glasses, I would easily make Rs 5,000. But I didn't have the cash to start off. I had Rs 100. So I approached my dad with my plan. He liked the idea, but suggested sharing it with my friends and getting money from them. He said if my plan was so good, anybody would give me money.
I went to my friends, excited, and showed them a roughly written plan on a piece of paper (a prospectus in the real world). I told them the Indian Lemonade Company was raising money (or making a public offer). It was issuing the stock at Rs 100. Every Rs 100 invested by them would be Rs 500 if I sold all the glasses of nimbu paani.
The plan looked something like this:
The Indian Lemonade Company - Drink Nimbu Paani to become rich.
The Indian Lemonade Company, started by Yogesh Chabria, is giving you an exciting chance to multiply your money without even working. It needs Rs 1,000 in all to start a stall for the school fair, where it will sell 1,000 glasses of lemonade. If all the glasses are sold, the Rs 1,000 will be multiplied to Rs 5,000. Each glass of lemonade costs Rs 1 but will be sold for Rs 5.
Many of my friends liked the idea and gave me money. In fact, more people wanted to invest (in the real stock markets it is called over-subscription), but I couldn't accept every investor so I let only my close friends invest.
I gave them a piece of paper with my signature along with the details of their investment (what used to be share certificates earlier are now dematerialised shares). This paper was proof that they had invested in my company. They were the shares of my company.
With the money collected from my friends, I started the Indian Lemonade Company and sold all the glasses. The Rs 1,000 did become Rs 5,000.
All my friends made profits of 500 per cent (every Rs 100 invested had become Rs 500), on their investment. They didn't have to work at all. They just had to invest in my company and I took care of the rest.
This is exactly how the stock market works. A company or entrepreneur who knows how to run the business raises money from people by issuing stock. They can put as little or as much as they want. If the entrepreneur makes money they, too, benefit in the ratio of which they have invested. It helps people without the time and skill to make money.
A stock makes you part owner of the company. Just like the people who invested in the Indian Lemonade Company, you too will benefit if you invest in a company which is growing and making profits.
Over the last 100 years, stock markets have been known to give more returns than any other investment tool. It will continue to do so, according to me.
All you need to do is drink nimbu paani, invest and watch your wealth grow!
Of course, they are the ones who have never invested in the markets.
You, however, don't need to know alien terms to understand the stock market. I believe in keeping things simple.
In fact, I often try to make sense of what some analysts are saying on business television!
Let me tell you what I often tell some of my first-timer clients. It is about my first venture, The Indian Lemonade Company. I initiated it when I was at school in the Middle East.
I was 12 years old then. My school had organised a fair, where students could take a stall on rent and sell whatever they liked.
I liked the idea -- I could make money from it. A few days later, I was sipping nimbu paani, thinking what to do. That is when I got the idea of setting up a nimbu paani stall.
To rent the stall, including purchasing ingredients, I needed around Rs 1,000 (I have converted the currency to Indian Rupees to simplify it).
With Rs 1,000, I could make 1,000 glasses of nimbu paani. Each glass would be sold for Rs 5. So if I sold all the glasses, I would easily make Rs 5,000. But I didn't have the cash to start off. I had Rs 100. So I approached my dad with my plan. He liked the idea, but suggested sharing it with my friends and getting money from them. He said if my plan was so good, anybody would give me money.
I went to my friends, excited, and showed them a roughly written plan on a piece of paper (a prospectus in the real world). I told them the Indian Lemonade Company was raising money (or making a public offer). It was issuing the stock at Rs 100. Every Rs 100 invested by them would be Rs 500 if I sold all the glasses of nimbu paani.
The plan looked something like this:
The Indian Lemonade Company - Drink Nimbu Paani to become rich.
The Indian Lemonade Company, started by Yogesh Chabria, is giving you an exciting chance to multiply your money without even working. It needs Rs 1,000 in all to start a stall for the school fair, where it will sell 1,000 glasses of lemonade. If all the glasses are sold, the Rs 1,000 will be multiplied to Rs 5,000. Each glass of lemonade costs Rs 1 but will be sold for Rs 5.
Many of my friends liked the idea and gave me money. In fact, more people wanted to invest (in the real stock markets it is called over-subscription), but I couldn't accept every investor so I let only my close friends invest.
I gave them a piece of paper with my signature along with the details of their investment (what used to be share certificates earlier are now dematerialised shares). This paper was proof that they had invested in my company. They were the shares of my company.
With the money collected from my friends, I started the Indian Lemonade Company and sold all the glasses. The Rs 1,000 did become Rs 5,000.
All my friends made profits of 500 per cent (every Rs 100 invested had become Rs 500), on their investment. They didn't have to work at all. They just had to invest in my company and I took care of the rest.
This is exactly how the stock market works. A company or entrepreneur who knows how to run the business raises money from people by issuing stock. They can put as little or as much as they want. If the entrepreneur makes money they, too, benefit in the ratio of which they have invested. It helps people without the time and skill to make money.
A stock makes you part owner of the company. Just like the people who invested in the Indian Lemonade Company, you too will benefit if you invest in a company which is growing and making profits.
Over the last 100 years, stock markets have been known to give more returns than any other investment tool. It will continue to do so, according to me.
All you need to do is drink nimbu paani, invest and watch your wealth grow!
Why the stock market isn't a casino
THE fear of buying and selling shares arises from the belief that the stock market is a casino. Therefore, a vast majority of investors in India tend to keep away from the stock markets. Because of this belief, they opt for 'safe and assured return' products like bank deposits, Public Provident Fund, National Saving Certificate, post office etc.
For a select few, however, the greed is more powerful than their fear. They therefore, dare to take a plunge in the stock markets though not with very encouraging results. Fear and greed can often cloud our judgment and reasoning. As it is, investing demands one to be rational, disciplined and patient. Therefore, when we act due to our emotions, we only increase the probability of taking wrong decisions. Let's see how one can overcome these fears to profit fromthe stock markets.
The fear of loss
Because one can lose money in the stock markets, most people don't invest in shares. But the questions we need to ask are:
1. Is investing in stock market same as gambling?
2. Does making money depend on one's 'luck'?
3. What is the probability of making a loss?
Let's think rationally. What does buying a share mean? It means being part of a business and sharing its profits and losses. If businesses make profit, the share prices will rise; if not, the prices will fall. Now, does a business run on luck?
No! It runs on hard work. It runs on efficient management. Therefore, more often than not, a well-managed business will make money and consequently the share price will rise. Hence, if youinvest in say 10-15 good businesses, majority of them will make profits and hence your probability of making money from such a portfolio will be much higher. Hence, stock markets are not a casino. Luck has a very little role to play. A portfolio of good companies will give good returns with high probability.
One more important point. Can a business double its' profits in a few days? No. Businesses take time to grow. Therefore, keep your return expectations in line with the business growth. If businesses are growing at 15-20 per cent pa today, don't expect to double you money in six months or one year.
Be patient. Give time for the businesses to grow. Also, look at making money from the portfolio as a whole and not from each and every share.
The fear of being left out
Besides people who fear loss and keep away from stock markets, there are those who sit on the fence. They are ready to jump in when the markets show a consistently rising trend, so that they don't miss the opportunity.
Just because everyone seems to be making money, they too join the party. They get in at high prices and without proper thought and study. This paradoxically increases the very probability of loss they were hoping to avoid by sittingon the fence.
The fear of losing the profit
Assuming you have overcome your fear of loss and invested in the markets. You have invested very rationally and thoughtfully in some good companies. These companies have done well and your share prices have appreciated. Does it mean that the job is done? No!
Most people fear that the markets might fall and they will lose all the profits that they have made. Therefore, they tend to get out too soon. As such they lose out on the opportunity to make big money. They have to be content with small profits.
Yes, it is important to book profits. But to book profits just because a share has been appreciated by a certain per cent is not usually the right way to decide.
The better way is to check whether at current prices the stock is still undervalued or at least fairly valued. If yes, then one should hold on. Only when the price becomes overvalued, should one sell it.
For a select few, however, the greed is more powerful than their fear. They therefore, dare to take a plunge in the stock markets though not with very encouraging results. Fear and greed can often cloud our judgment and reasoning. As it is, investing demands one to be rational, disciplined and patient. Therefore, when we act due to our emotions, we only increase the probability of taking wrong decisions. Let's see how one can overcome these fears to profit fromthe stock markets.
The fear of loss
Because one can lose money in the stock markets, most people don't invest in shares. But the questions we need to ask are:
1. Is investing in stock market same as gambling?
2. Does making money depend on one's 'luck'?
3. What is the probability of making a loss?
Let's think rationally. What does buying a share mean? It means being part of a business and sharing its profits and losses. If businesses make profit, the share prices will rise; if not, the prices will fall. Now, does a business run on luck?
No! It runs on hard work. It runs on efficient management. Therefore, more often than not, a well-managed business will make money and consequently the share price will rise. Hence, if youinvest in say 10-15 good businesses, majority of them will make profits and hence your probability of making money from such a portfolio will be much higher. Hence, stock markets are not a casino. Luck has a very little role to play. A portfolio of good companies will give good returns with high probability.
One more important point. Can a business double its' profits in a few days? No. Businesses take time to grow. Therefore, keep your return expectations in line with the business growth. If businesses are growing at 15-20 per cent pa today, don't expect to double you money in six months or one year.
Be patient. Give time for the businesses to grow. Also, look at making money from the portfolio as a whole and not from each and every share.
The fear of being left out
Besides people who fear loss and keep away from stock markets, there are those who sit on the fence. They are ready to jump in when the markets show a consistently rising trend, so that they don't miss the opportunity.
Just because everyone seems to be making money, they too join the party. They get in at high prices and without proper thought and study. This paradoxically increases the very probability of loss they were hoping to avoid by sittingon the fence.
The fear of losing the profit
Assuming you have overcome your fear of loss and invested in the markets. You have invested very rationally and thoughtfully in some good companies. These companies have done well and your share prices have appreciated. Does it mean that the job is done? No!
Most people fear that the markets might fall and they will lose all the profits that they have made. Therefore, they tend to get out too soon. As such they lose out on the opportunity to make big money. They have to be content with small profits.
Yes, it is important to book profits. But to book profits just because a share has been appreciated by a certain per cent is not usually the right way to decide.
The better way is to check whether at current prices the stock is still undervalued or at least fairly valued. If yes, then one should hold on. Only when the price becomes overvalued, should one sell it.
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!
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!
4 golden rules of equity investing
IF you want to invest in equities, there are only four things you need to remember.
1. Choose the right company
Look for superior and profitable growth. The company should earn at least 20% return on its shareholders’ capital.
Ideally a long-term investment perspective (more than five years) allows you to participate in the company’s growth. At the short end (3-6 months), share performance is driven more by market sentiment and less by company fundamentals. In the long run, the relevance of the right price diminishes.
2. Be disciplined
Stock investing is a long, learning experience. You will make mistakes, but also learn from them. Here is what you can do to ensure a smooth ride.
--Diversify your investments. Do not put more than 10 per cent of your corpus in one stock, even if it’s a gem. On the other hand, don’t have too many – they become difficult to monitor. For a passive long long-term investor, 15-20 is a healthy number. Use this asset allocation tool to find out if you need to invest beyond equities
--Research and analyse your company's performance through quarterly results, annual reports and news articles.
--Get a good broker and understand settlement systems
--Ignore hot tips. If hot tips really worked, we'd all be millionaires.
--Resist the temptation to buy more. Each purchase is a new investment decision. Buy only as many shares of one company, as fits your overall allocation plan.
3. Monitor and review
Regularly monitor and review your investments. Keep in touch with quarterly results announcements and update the prices on your portfolio worksheet at least once a week. This is more important during volatile times when there can be great opportunities for value picking! Find out how you can buy 1 rupee coins at 50 paise !
Also, review the reasons you earlier identified for buying a stock and check whether they are still valid or there have been significant changes in your earlier assumptions and expectations. And use an annual review process to review your exposure to equity shares within your overall asset allocation and rebalance, if necessary. Ideally, revisit the RiskAnalyser at every such review because your risk capacity and risk profile could have undergone a change over a 12-month period.
4. Learn from your mistakes
When reviewing, do identify and learn from your mistakes. Nothing beats first-hand experience. Let these experiences register as `pearls of wisdom' and help you emerge a smarter equity investor.
1. Choose the right company
Look for superior and profitable growth. The company should earn at least 20% return on its shareholders’ capital.
Ideally a long-term investment perspective (more than five years) allows you to participate in the company’s growth. At the short end (3-6 months), share performance is driven more by market sentiment and less by company fundamentals. In the long run, the relevance of the right price diminishes.
2. Be disciplined
Stock investing is a long, learning experience. You will make mistakes, but also learn from them. Here is what you can do to ensure a smooth ride.
--Diversify your investments. Do not put more than 10 per cent of your corpus in one stock, even if it’s a gem. On the other hand, don’t have too many – they become difficult to monitor. For a passive long long-term investor, 15-20 is a healthy number. Use this asset allocation tool to find out if you need to invest beyond equities
--Research and analyse your company's performance through quarterly results, annual reports and news articles.
--Get a good broker and understand settlement systems
--Ignore hot tips. If hot tips really worked, we'd all be millionaires.
--Resist the temptation to buy more. Each purchase is a new investment decision. Buy only as many shares of one company, as fits your overall allocation plan.
3. Monitor and review
Regularly monitor and review your investments. Keep in touch with quarterly results announcements and update the prices on your portfolio worksheet at least once a week. This is more important during volatile times when there can be great opportunities for value picking! Find out how you can buy 1 rupee coins at 50 paise !
Also, review the reasons you earlier identified for buying a stock and check whether they are still valid or there have been significant changes in your earlier assumptions and expectations. And use an annual review process to review your exposure to equity shares within your overall asset allocation and rebalance, if necessary. Ideally, revisit the RiskAnalyser at every such review because your risk capacity and risk profile could have undergone a change over a 12-month period.
4. Learn from your mistakes
When reviewing, do identify and learn from your mistakes. Nothing beats first-hand experience. Let these experiences register as `pearls of wisdom' and help you emerge a smarter equity investor.
Retire Rich Invest Rs 40 a day
TAKE away the terms asset allocation, long term and compounding from a financial advisor's vocabulary and he is pretty much tongue-tied," remarks a friend.
But those are the exact three words that can help you retire with Rs 40 a day. Let me show you exactly how. Say you can set aside Rs 40 every day for your retirement. Where do you get Rs 40 a day? Why not cut down on those cigarettes? Then, let's see what could happen.
But those are the exact three words that can help you retire with Rs 40 a day. Let me show you exactly how. Say you can set aside Rs 40 every day for your retirement. Where do you get Rs 40 a day? Why not cut down on those cigarettes? Then, let's see what could happen.
Let's also make some assumptions (do allow for the fact that all may not be valid). Let's also suppose that these are valid for the next 30 years.
| Instrument | Yield (%pa) |
| PPF | 8 |
| Sensex | 18 |
| Equity | 21 |
Retirement Chart
| Money saved per day | Rs 40 | Rs 80 | Rs120 |
| Money saved per year | Rs 14,600 | Rs 29,200 | Rs 43,800 |
| Money earned if invested over the next 30 years | |||
| Sensex | Rs 11,547,841 | Rs 23,095,681 | Rs 34,643,522 |
| Equity | Rs 21,099,200 | Rs 42,198,399 | Rs 63,297,599 |
| PPF | Rs 16,53,935 | Rs 33,07,870 | Rs 49,61,805 |
Nice chunk of change, eh?! Doesn't that make your retirement look so comfortable?
Of course, if you spend Rs 120 per day on cigarettes, you probably won't live for 30 years!
Ah, now you are saying you don't smoke? Maybe you're a frequent restaurant-hopper? That would easily mean Rs 2,000 per week. Keep at it for 30 years and you would have said goodbye to Rs 15 crore. Think of the holidays you could have afforded with that kind of moolah!
Gastronome's chart
| Money spent per day | Rs 750 | Rs 1,500 | Rs 2,000 |
| Money spent per year | Rs 39,000 | Rs 78,000 | Rs 104,000 |
| Money earned if invested over the next 30 years | |||
| Sensex | Rs 30,846,972 | Rs 61,693,943 | Rs 82,258,591 |
| Equity | Rs 56,360,876 | Rs 112,721,752 | Rs 150,295,669 |
| PPF | Rs 44,18,045 | Rs 88,36,090 | Rs 11,781,454 |
Don't fit into the smoker or the gastronome's category? But you have one weakness -- you love shopping. Say, you spend about Rs 10,000 per month on retail therapy.
Hmm. Over 30 years, a Rs 10,000 investment in an equity fund could fetch you Rs 17 crore. I won't even go into what you can do with that kind of money!
| Money spent per day | Rs 3,500 | Rs 5,000 | Rs 10,000 |
| Money spent per year | Rs 42,000 | Rs 60,000 | Rs 120,000 |
| Money earned if invested over the next 30 years | |||
| Sensex | Rs 33,219,816 | Rs 47,456,879 | Rs 94,913,759 |
| Equity | Rs 60,696,328 | Rs 86,709,040 | Rs 173,418,080 |
| PPF | Rs 47,57,895 | Rs 67,96,993 | Rs 13,593,985 |
Why do you think the otherwise smart, educated people fail to understand this? Allow me to tell you what I think.
Your life is a function of your habits, not common sense. It's tough to change your habits. Consider this. Most smokers know the damage that 54,750 cigarettes can do to their health. But that 'one' cigarette never seems to matter. Ditto for that 'just one' cold drink of Coke or chocolate.
Most people don't care about small numbers and wait for that big amount to come by for them to save. Funny thing is, if I tell you saving money is very simple and needs very simple methods to make large amounts of money, most people, including you would laugh at me. But it's just so easy. Start small. Start simple. Save big! They need complicated tools such as day trading, brokerage accounts, futures and options, etc.
When you tell them that they can make a lot of money by just being disciplined they will just not believe it!
Rush! Shares are on discount
IF there was one question that people would pay a million bucks to have the answer to, it would be -- How do I get rich? The answer is really obvious -- if you have a million to spare then why waste it on a foolish question. Invest it and over the years you'll surely get your millions.
But that's not the answer they are looking for. Surely there has got to be something more to it -- some deep insights, some invaluable pearls of wisdom, some magic!
Not really. It's often just simple common sense. Like Robert Kiyosaki's best selling book Rich Dad, poor Dad that should be made the Bible of the financial world. Here are four points from there on how you can do it:
1. The value of learning
Go back to your earliest memory. When you wanted to ride a bike on your street, the first thing you had to do was learn how to ride. Or when you wanted to pass your Maths exam, you had to learn your tables. Then why is it that when we want to make money, do we not understand that we have to learn good investing?
Instead we tend to just pick up the phone, speak to our stockbroker, buy a stock and start dreaming of becoming rich. That's exactly what rich investors don't do.
Instead, they 'learn' to 'invest'. They learn all there is to know about the art of investing in stocks. All about the stocks they wish to buy and only then do they take the plunge. Above all, they keep practicing what they have learnt. They keep sharpening their saw. This single factor of learning before hand separates the rich investors from the poor investors,
2. Shop at a discount
Another bit of common sense -- What do you do when your neighborhood super market announces a SALE? You flock into the stores and buy up every little item and build up at home piles of grocery, soaps, etc. But when stock markets reduce the prices of shares and announce a 'crash' every investor rushes in to 'sell' and runs away from the market.
Again, conversely, when Super Markets raise their prices, customers shy away and refrain from buying till the next 'sale'; but when Stock Markets announce rising prices, every investor rushes in to 'buy'.
This is not the way rich investors behave. They follow the same principle of buying at the super market. They buy stocks only when the stock markets crash. Ask Warren Buffet!
3. Define asset
If you own it, it's an asset. If you owe it, it's not. The rich never keep their wealth in the form of liquid money in a bank account. They always keep acquiring assets while the poor acquire liabilities, which they mistakenly believe are their assets.
A house bought on a loan is not an asset, it's a liability. The same goes for paying for groceries through credit card. So you need to learn the difference.
In life what is important is not how much money you 'make' but how much of that money you succeed in 'keeping' and 'multiplying'. The rich know how to keep it because they know how to invest it. Money well invested is money well kept. Good investing is often more rewarding than good earning.
4. Make real money
Real money is made when you 'buy' an asset and not when you sell that asset is yet another gem from the author. Be careful of the price you pay when investing in an asset. Don't rush into buying any investment at any price. Wait till the prices come down the way. The 'price' of the asset when you buy is the sole determinant of your profit on that asset when sold. If you buy that asset cheap, your profit on sale is obviously larger.
All these four seems rather straightforward now that you think about it. We known all this instinctively and we only have to apply it to the stock markets -- it's really common sense. The only problem is that common sense isn't really all that common!
But that's not the answer they are looking for. Surely there has got to be something more to it -- some deep insights, some invaluable pearls of wisdom, some magic!
Not really. It's often just simple common sense. Like Robert Kiyosaki's best selling book Rich Dad, poor Dad that should be made the Bible of the financial world. Here are four points from there on how you can do it:
1. The value of learning
Go back to your earliest memory. When you wanted to ride a bike on your street, the first thing you had to do was learn how to ride. Or when you wanted to pass your Maths exam, you had to learn your tables. Then why is it that when we want to make money, do we not understand that we have to learn good investing?
Instead we tend to just pick up the phone, speak to our stockbroker, buy a stock and start dreaming of becoming rich. That's exactly what rich investors don't do.
Instead, they 'learn' to 'invest'. They learn all there is to know about the art of investing in stocks. All about the stocks they wish to buy and only then do they take the plunge. Above all, they keep practicing what they have learnt. They keep sharpening their saw. This single factor of learning before hand separates the rich investors from the poor investors,
2. Shop at a discount
Another bit of common sense -- What do you do when your neighborhood super market announces a SALE? You flock into the stores and buy up every little item and build up at home piles of grocery, soaps, etc. But when stock markets reduce the prices of shares and announce a 'crash' every investor rushes in to 'sell' and runs away from the market.
Again, conversely, when Super Markets raise their prices, customers shy away and refrain from buying till the next 'sale'; but when Stock Markets announce rising prices, every investor rushes in to 'buy'.
This is not the way rich investors behave. They follow the same principle of buying at the super market. They buy stocks only when the stock markets crash. Ask Warren Buffet!
3. Define asset
If you own it, it's an asset. If you owe it, it's not. The rich never keep their wealth in the form of liquid money in a bank account. They always keep acquiring assets while the poor acquire liabilities, which they mistakenly believe are their assets.
A house bought on a loan is not an asset, it's a liability. The same goes for paying for groceries through credit card. So you need to learn the difference.
In life what is important is not how much money you 'make' but how much of that money you succeed in 'keeping' and 'multiplying'. The rich know how to keep it because they know how to invest it. Money well invested is money well kept. Good investing is often more rewarding than good earning.
4. Make real money
Real money is made when you 'buy' an asset and not when you sell that asset is yet another gem from the author. Be careful of the price you pay when investing in an asset. Don't rush into buying any investment at any price. Wait till the prices come down the way. The 'price' of the asset when you buy is the sole determinant of your profit on that asset when sold. If you buy that asset cheap, your profit on sale is obviously larger.
All these four seems rather straightforward now that you think about it. We known all this instinctively and we only have to apply it to the stock markets -- it's really common sense. The only problem is that common sense isn't really all that common!
Stock market lessons to learn from housewives
WOMEN are often accused of being relentless hoarders. They keep everything from shopping bags, to used wrapping paper, old clothes, even older utensils and even the odd broken toaster. Men deplore this habit but they have to sit back and accept it.
Especially in a household where women called the shots. Yes, there are some matriarchal families like that of Mr Madan Rao (name changed) where women wear the pants. No these women don't go out and work, they are simple housewives who command enormous respect from the household.
Mr Rao approached me to help him save for his daughters' weddings. He is 52 years old and his priority was the wedding of his two daughters and he had estimated a cost of Rs 15 lakh (Rs 1.5 million) as on today for each of them. So he would need around Rs 40 lakh (Rs 4 million) in about eight to 12 years after accounting for inflation to give them a wedding as per his community standards. He also wanted to know if he had enough to ensure a completely non-compromising retirement.
Mr Rao belonged to the mid-cadre of management and had worked for about 25 years in the same company. His financial status currently was as follows:
1. He earned about Rs 35,000 per month and could save Rs 10,000 per month i.e. about 30% of his income after all his expenses and taxes.
2. He had no debts so liabilities were zero and for assets, he had a small house in which he would continue to live post retirement.
3. He had accumulated around Rs 8 lakh (Rs 800,000) in his provident fund (PF).
4. His public provident fund (PPF) was worth about Rs 5 lakh (Rs 500,000),
5. Fixed deposit (FDs) were around Rs 4 lakh (Rs 400,000).
6. And postal savings of around Rs 3 lakh (Rs 300,000).
7. Finally his bank balance was approximately Rs 40,000 to Rs 50,000.
Offhand, he mentioned that he had invested in 70 odd companies since 1980 but he hadn't really sold any of them because the women, who instinctively hoarded everything, forbid it and held on to the share transfer certificates without letting him get his hands on them. So without really understanding much he invested in a flurry of IPOs or Initial Public Offers and from whatever meagre savings he has had over the last 26 years and has held on to them ever since.
I scanned the list, not expecting much since it wasn't an actively managed portfolio. There were a lot of missed opportunities, so many companies that had shut and quite a bit of money that was lost. With the shares that were still active I could see the market value of his holdings in the range of Rs 20,000 to Rs 80,000. There were hardly two to three company stocks he had that were worth over Rs 1 lakh (Rs 100,000) and suddenly my eyes fell upon a few stocks who had seven figure market values.
I was shocked and could not believe what I was seeing. I continued scanning and much to my amazement I saw the total value at the bottom of the fourth sheet. His stock portfolio was worth Rs 1.4 crore (Rs 14 million) and his total investment cost in this portfolio was barely Rs 1.5 toRs 2 lakh! (Rs 150,000 t0 Rs 200,000)
With his blind investment strategy, his performance had put the most savvy fund managers to shame. He had his fair share of losses but his gains were phenomenal - and all because he was made to follow the hoarding instinct ofthe women of the house.
I'm not saying what he did right or wrong. I am once again only convinced once again of the power of patience in the stock markets, and the innate
Especially in a household where women called the shots. Yes, there are some matriarchal families like that of Mr Madan Rao (name changed) where women wear the pants. No these women don't go out and work, they are simple housewives who command enormous respect from the household.
Mr Rao approached me to help him save for his daughters' weddings. He is 52 years old and his priority was the wedding of his two daughters and he had estimated a cost of Rs 15 lakh (Rs 1.5 million) as on today for each of them. So he would need around Rs 40 lakh (Rs 4 million) in about eight to 12 years after accounting for inflation to give them a wedding as per his community standards. He also wanted to know if he had enough to ensure a completely non-compromising retirement.
Mr Rao belonged to the mid-cadre of management and had worked for about 25 years in the same company. His financial status currently was as follows:
1. He earned about Rs 35,000 per month and could save Rs 10,000 per month i.e. about 30% of his income after all his expenses and taxes.
2. He had no debts so liabilities were zero and for assets, he had a small house in which he would continue to live post retirement.
3. He had accumulated around Rs 8 lakh (Rs 800,000) in his provident fund (PF).
4. His public provident fund (PPF) was worth about Rs 5 lakh (Rs 500,000),
5. Fixed deposit (FDs) were around Rs 4 lakh (Rs 400,000).
6. And postal savings of around Rs 3 lakh (Rs 300,000).
7. Finally his bank balance was approximately Rs 40,000 to Rs 50,000.
Offhand, he mentioned that he had invested in 70 odd companies since 1980 but he hadn't really sold any of them because the women, who instinctively hoarded everything, forbid it and held on to the share transfer certificates without letting him get his hands on them. So without really understanding much he invested in a flurry of IPOs or Initial Public Offers and from whatever meagre savings he has had over the last 26 years and has held on to them ever since.
I scanned the list, not expecting much since it wasn't an actively managed portfolio. There were a lot of missed opportunities, so many companies that had shut and quite a bit of money that was lost. With the shares that were still active I could see the market value of his holdings in the range of Rs 20,000 to Rs 80,000. There were hardly two to three company stocks he had that were worth over Rs 1 lakh (Rs 100,000) and suddenly my eyes fell upon a few stocks who had seven figure market values.
I was shocked and could not believe what I was seeing. I continued scanning and much to my amazement I saw the total value at the bottom of the fourth sheet. His stock portfolio was worth Rs 1.4 crore (Rs 14 million) and his total investment cost in this portfolio was barely Rs 1.5 toRs 2 lakh! (Rs 150,000 t0 Rs 200,000)
With his blind investment strategy, his performance had put the most savvy fund managers to shame. He had his fair share of losses but his gains were phenomenal - and all because he was made to follow the hoarding instinct ofthe women of the house.
I'm not saying what he did right or wrong. I am once again only convinced once again of the power of patience in the stock markets, and the innate
If Buffet can, you can!
THE world loves nothing better than a success story. And Warren Buffet, one of the richest men in the world, fits the bill perfectly.
How did a quiet man from the American Midwest start with USD 100,000 and build it to $35 billion? The answer is terribly simple.Through stubborn adherence to the time-honoured fundamentals of value investing.
If you had invested $1,000 in Warren Buffet's Berkshire Hathaway stock in 1965, we would be worth roughly $5 million today. If you missed this investment opportunity, author James Pardoe gives you a step-by-step guidebook to follow Buffet's footsteps in the book, How Buffet Does It.
Here are some pointers from it with my comments as well.
1. Choose simplicity over complexity
When investing, keep it simple. Do what is easy and obvious. If you don't understand a business, don't buy it.
2. Make your own investment decisions
Don't listen to brokers, analysts or pundits. Figure it out for yourself. Become a value investor. It has proven to be a very rewarding technique over the long term.
3. Maintain the right temperament
Let other people overreact to the market. To succeed in the market, you need ordinary intelligence. But you also need the temperament to help you ride out the storms and stick to your long term plans. If you can stay cool while those around you are panicking, you can surely prevail.
4. Be patient
Think 10 years rather than 10 minutes. Don't dwell on the price of stocks. Instead, study the underlying business, its earnings capacity and its future.
If you ask, 'How long must I wait?', Buffet would say, "If we're in the right place, we’ll wait indefinitely."
5. Buy business, not stocks
Once you get into the right business, you can let everyone else worry about the stock market. Business performance is key to picking stocks. Study the long term track record of any company on your buy list.
Buffet looks for following five main things before investing in a company.
~ Business that he can understand
~ Companies with favourable long term prospects
~ Business operated by honest, competent people
~ Businesses priced very attractively
~ Business with free cash flow
Don't think about stock in the short term. Think about business in the long term.
6. Look for a company that is a franchise
Some businesses are franchises. A franchise generates free cash flows. And free cash flows are one of the requisites that Buffet has listed above. Go for it.
7. Buy low tech, not high tech
Successful investing is rarely a gee-whiz activity. It is less often about rockets and lasers and more often about bricks, carpets, paint, shaving blades and insulation.
Do not be tempted by get-rich-quick deals involving relatively complex companies. For example, high tech companies. They are the most unpredictable in the long run.
Look for the absence of change. Look for the business whose only change in the future will be doing more business. Example: Gillette Blades.
8. Concentrate your stock investments
Follow the Noah's Ark style of investing. That is, a little of this and a little of that. Better to have a smaller number of investments with more of your money in each.
Portfolio concentration -- the opposite of diversification -- can also focus your mind. If you are putting your eggs in only a few baskets, you are far less likely to make investments on impulse or emotion.
9. Practise inactivity not hyperactivity
There are times when doing nothing is a sign of investing brilliance. As hard as this is to believe, it is true. Sometimes, it is hardest to just sit by and watch. Be a decade's trader, not a day trader.
10. Don't look at the ticker
Tickers are all about prices. Investing is about a lot more than prices. It is about value. It is about wealth. Abstain from looking at share prices every day.
Study the playing field and not the scoreboard. Know the value of something rather than the price of everything.
How did a quiet man from the American Midwest start with USD 100,000 and build it to $35 billion? The answer is terribly simple.Through stubborn adherence to the time-honoured fundamentals of value investing.
If you had invested $1,000 in Warren Buffet's Berkshire Hathaway stock in 1965, we would be worth roughly $5 million today. If you missed this investment opportunity, author James Pardoe gives you a step-by-step guidebook to follow Buffet's footsteps in the book, How Buffet Does It.
Here are some pointers from it with my comments as well.
1. Choose simplicity over complexity
When investing, keep it simple. Do what is easy and obvious. If you don't understand a business, don't buy it.
2. Make your own investment decisions
Don't listen to brokers, analysts or pundits. Figure it out for yourself. Become a value investor. It has proven to be a very rewarding technique over the long term.
3. Maintain the right temperament
Let other people overreact to the market. To succeed in the market, you need ordinary intelligence. But you also need the temperament to help you ride out the storms and stick to your long term plans. If you can stay cool while those around you are panicking, you can surely prevail.
4. Be patient
Think 10 years rather than 10 minutes. Don't dwell on the price of stocks. Instead, study the underlying business, its earnings capacity and its future.
If you ask, 'How long must I wait?', Buffet would say, "If we're in the right place, we’ll wait indefinitely."
5. Buy business, not stocks
Once you get into the right business, you can let everyone else worry about the stock market. Business performance is key to picking stocks. Study the long term track record of any company on your buy list.
Buffet looks for following five main things before investing in a company.
~ Business that he can understand
~ Companies with favourable long term prospects
~ Business operated by honest, competent people
~ Businesses priced very attractively
~ Business with free cash flow
Don't think about stock in the short term. Think about business in the long term.
6. Look for a company that is a franchise
Some businesses are franchises. A franchise generates free cash flows. And free cash flows are one of the requisites that Buffet has listed above. Go for it.
7. Buy low tech, not high tech
Successful investing is rarely a gee-whiz activity. It is less often about rockets and lasers and more often about bricks, carpets, paint, shaving blades and insulation.
Do not be tempted by get-rich-quick deals involving relatively complex companies. For example, high tech companies. They are the most unpredictable in the long run.
Look for the absence of change. Look for the business whose only change in the future will be doing more business. Example: Gillette Blades.
8. Concentrate your stock investments
Follow the Noah's Ark style of investing. That is, a little of this and a little of that. Better to have a smaller number of investments with more of your money in each.
Portfolio concentration -- the opposite of diversification -- can also focus your mind. If you are putting your eggs in only a few baskets, you are far less likely to make investments on impulse or emotion.
9. Practise inactivity not hyperactivity
There are times when doing nothing is a sign of investing brilliance. As hard as this is to believe, it is true. Sometimes, it is hardest to just sit by and watch. Be a decade's trader, not a day trader.
10. Don't look at the ticker
Tickers are all about prices. Investing is about a lot more than prices. It is about value. It is about wealth. Abstain from looking at share prices every day.
Study the playing field and not the scoreboard. Know the value of something rather than the price of everything.
Buy low, sell high: How Buffet does it
BUY low, sell high.
This is the most popular theory in stock market investing. But the question is -– how would you know when a stock's price is ‘low’?
The key: Compare a stock's price with its ‘value’.
How is price different from value?
-- Price is what the market is willing to pay for the share at a given time. It fluctuates from minute to minute.
-- Value of a stock is the worth of its underlying business. It is more stable as fortunes of a company do not change overnight.
Buy when price is lower than value
If a share's value is Rs 150 and price is Rs 125, then you get the stock at a discount of Rs 25.
While there is no guarantee that the price will not go below Rs 125, the probability is low.
This principle is called the 'margin of safety' and finds it roots in the teachings of legendary investors -- Warren Buffet and Benjamin Graham.
How to find out a share's value?
To begin with, you can read financial statements and understand the nitty-gritties of stocks.
If you are willing to walk that extra mile, then pay heed to these valuation methods that Warren Buffet swears by:
Method 1:
Look at the net liquid assets per share.
Net liquid assets per share = Current assets (cash, debtors, liquid investments etc) - liabilities
Number of shares
Thumb rule: Warren Buffet prefers paying not more than two-thirds of such value for a stock.
Method 2:
Look at the PE (Price to earnings) growth ratio.
PE growth ratio = Market price/ Earnings per share
Annual EPS growth
where Annual EPS growth = Current year's EPS – previous year's EPS x 100
Previous year's EPS'
Thumb rule: A PE growth ratio of 1 indicates a fairly valued share; less than 1 means undervalued; and more than 1 means overvalued.
PE: an indicator of margin of safety
Let's assume you buy a share at Rs 550 whose EPS is Rs 50. In one year, you earn Rs 50 on an investment of Rs 550, that is, a return of about 9 per cent.
You can earn 8-9 per cent risk-free returns on bank deposits as well. So, the margin of safety in this case is practically nil.
To reduce the risk, we must have a higher gap.
Thumb rule: Warren Buffett recommends this gap to be at least 1.25-1.5 per cent.
Last word: During a bull run, investors pay a high price for any and every share. So, it becomes difficult to find stocks with a high margin of safety.
It is in bear markets, as the one we are in now, that there are opportunities to spot the gems.
Top seven most common investing
EVER watched any saas bahu sagas on television? How many blunders the protagonists in these serials make! And for their howlers, they are beaten up, jailed and even murdered (only to miraculously become alive again!).
But, alas, life is not an Ekta Kapoor soap where you can make umpteen blunders and get away with it.
For your investments, you might have to pay a heavy price for even small mistakes that you do. Here are the seven most common blunders that investors make.
1. Believing that trading is the same as investing
When you buy and sell stocks and mutual funds at the drop of a hat (read – without any research or planning), you are essentially ‘trading’. This will not help you to build long-term wealth. Yes, this is a fantastic way to make money, but for your broker, not you!
2. Being too conservative with your money
‘Real returns’ is the keyword here. These are returns post inflation. Putting away money in safe options such as bank deposits, Public Provident Fund (PPF) and so on might give you a negative real return. This is true especially in times of high inflation, such as now
3. Being too aggressive with your money
This is just another way to lose money. Pumping money into high risk avenues, such as equities, without understanding can prove dangerous. A Warren Buffet saying sums it all up -- To finish first, you have to first finish!
4. Keeping the ‘duds’
I know of a person who had invested in unheard companies such as Patheja Forging, Shaan interval and Silverline. He refused to sell on the belief that he would earn good returns over the long term. Now, all the promoters of these companies are absconding!
It is important to invest in good quality stocks, choose a good fund manager, invest small amounts at regular intervals through Systematic Investment Plans (SIPs) and hold for along term. That will make money for you.
5. Incorrect asset allocation
Too much of debt for the long term or too much of equity for the next quarter, is a sure fire way to leave you with little returns. It is wise to build a portfolio based on your risk capacity and financial goals.
6. Timing the market
Even experts cannot time the markets, leave alone investors. No one knows where the markets are headed in the short to medium term. Hence, it is foolhardy to time the markets. Instead, a disciplined investing, irrespective of market levels, pays off in the long run.
7. Overconfidence
If you hit a couple of ‘home runs’ (as the Americans say), you start to believe that you will continue to hit home runs regularly. This is true for most of us -- we attribute our recent success as our creation and therefore we think we can repeat it. This overconfidence can lead to a big portfolio disaster.
So, the next time you see the vamp taking over the good guy in the serial, think of your investments and promise yourself not to fall prey to these mistakes.
Happy investing!
But, alas, life is not an Ekta Kapoor soap where you can make umpteen blunders and get away with it.
For your investments, you might have to pay a heavy price for even small mistakes that you do. Here are the seven most common blunders that investors make.
1. Believing that trading is the same as investing
When you buy and sell stocks and mutual funds at the drop of a hat (read – without any research or planning), you are essentially ‘trading’. This will not help you to build long-term wealth. Yes, this is a fantastic way to make money, but for your broker, not you!
2. Being too conservative with your money
‘Real returns’ is the keyword here. These are returns post inflation. Putting away money in safe options such as bank deposits, Public Provident Fund (PPF) and so on might give you a negative real return. This is true especially in times of high inflation, such as now
3. Being too aggressive with your money
This is just another way to lose money. Pumping money into high risk avenues, such as equities, without understanding can prove dangerous. A Warren Buffet saying sums it all up -- To finish first, you have to first finish!
4. Keeping the ‘duds’
I know of a person who had invested in unheard companies such as Patheja Forging, Shaan interval and Silverline. He refused to sell on the belief that he would earn good returns over the long term. Now, all the promoters of these companies are absconding!
It is important to invest in good quality stocks, choose a good fund manager, invest small amounts at regular intervals through Systematic Investment Plans (SIPs) and hold for along term. That will make money for you.
5. Incorrect asset allocation
Too much of debt for the long term or too much of equity for the next quarter, is a sure fire way to leave you with little returns. It is wise to build a portfolio based on your risk capacity and financial goals.
6. Timing the market
Even experts cannot time the markets, leave alone investors. No one knows where the markets are headed in the short to medium term. Hence, it is foolhardy to time the markets. Instead, a disciplined investing, irrespective of market levels, pays off in the long run.
7. Overconfidence
If you hit a couple of ‘home runs’ (as the Americans say), you start to believe that you will continue to hit home runs regularly. This is true for most of us -- we attribute our recent success as our creation and therefore we think we can repeat it. This overconfidence can lead to a big portfolio disaster.
So, the next time you see the vamp taking over the good guy in the serial, think of your investments and promise yourself not to fall prey to these mistakes.
Happy investing!
Sunday, May 23, 2010
Company Selection for Buying Shares in Indian Stock Market
Company Selection for Buying Shares in Indian Stock Market: Here are some of the important tips for getting good long term benefits from investing in fundamentally good stocks for medium or long term.
How to Select Good Stocks?
From among the are thousands of stocks that trade in the stock market how do you know which ones you should buy for medium to long term investing. Here are some of the guide lines to follow.
- Sector - Most of stocks rise or fall based on the sector in which it operates sometimes irrespective of the strength the stock itself. Even weak stocks in a strong sector can some times give you good profits than a good stock in a week sector. So look out for the sectors that have good future. Currently sectors like Infrastructure, Banking, Retail, FMCG, Pharmaceutical are looking good.
- Promoters holding: The higher the promoters holding the better it is for retail investors. High Promoter holding indicates the confidence of the promoters in the future of the business. (Promoters - who run the company). Companies that indicate a constant decline in the promoter holding are not good.
- FII holding between 20 to 25% is safe for retailers. More FII investment means more volatility. FIIs will come and go from the market based on their immediate financial goals. FIIs generally don’t hold long term interests in the company.
- Liquidity - The companies with sufficiently high liquidity (daily trade volume) are good in case you want to exit from the stock.
- Consistent earnings: Your company has to generate profits consistently year after year.
- Earning per share (EPS): EPS indicates the annual earnings of each share of the company. You should look for companies that record constant Y-o-Y growth in EPS.
- P/E Ratio: P/E ratio tells you how much you paid for the stock for every rupee that it earned. For example if you bought a stock at P/E=10, that means, you paid Rs 10 for buying the stock that earns Rs 1 every year. EPS is a great way to compare earnings across companies, but it doesn’t tell you anything about how the market values the stock. That’s why fundamental analysts use the P/E ratio, to figure out how much the market is willing to pay for a company’s earnings. Higher the P/E ratio means more people are convinced to pay high for that share expecting higher growth in coming future. Generally don’t for stocks that have too high P/E ration (generally not more than 20) unless you have a strong reason for doing so.
- Dividend yield: It is calculated by taking the amount of dividends paid per share over the course of a year and dividing by the stocks price. Its percentage return a company pays out to its share holder in the form of dividends. The higher the better.
- Price/Book ratio: The higher the ratio the higher price the market is willing to pay for the company above its assets. Its more useful to value investor than growth investor.
- Price/Sales ratio: As with earning a book value, you can find out how much the market is valuing a company by comparing the company’s price to its annual sales. Low Price/Sales ratios (below one) are usually thought to be the better investment since their sales are priced cheaply.
- Returns on Equity (ROE): It is used as a general indication of the company’s efficiency, in other words, how much profit it is able to generate given the resources provided by its stockholders. Investors usually look for companies with ROE that are high and growing.
- Debt to equity ratio: This should not be more than 1, and less than 1 indicates company has very less debt. This is very important during market down trend as company has to pay lots of interest ratio beside low profitability. So its good sign, if company has less debt and that is debt equity ratio.
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