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.

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.

Trading Rules

These are some of the TRADING RULES,which are universally valid for stock trading.

Rules:

Never risk more than 10% of your trading capital in a single trade. Always use stop loss orders.( Here you should know your loss you can give in a situation where the trade starts going against you.) Never do overtrading. Never let a profit run into a loss. Don't enter a trade if you are unsure of the trend. When in doubt, get out, and don't get in when in doubt. Only trade active markets. Distribute your risks equally among different markets. Never limit your orders. Trade at the markets. Extra monies from successful trades should be placed in a separate account. Never trade to scalp a profit. Never average a loss. Never get out of the market because you have lost patience, or get in because you are anxiously waiting. Avoid taking small profits and large losses. Never cancel a stop loss after you have placed it. Avoid getting in and out of the market too soon. Be willing to make money from both sides of the market. Never buy or sell just because the price is low or high. Never hedge a losing position. Never change your position without a good reason. Avoid trading after long periods of success or failure. Don't try to guess tops or bottoms. Don't follow a blind man's advice. Avoid getting in wrong and out wrong; or getting in right and out wrong. This is making a double mistake. When you lose don't blame it on luck.

Four golden rules for today's investor

One year ago, this column ran a contrarian view on mutual funds entitled, “When the tide ceases to rise”. I raised some disturbing ideas: “A bull market has the wonderful property of making ordinary investment managers look like geniuses” and “How many of these apparently gifted money managers will spot the first signs of a mega-shift of the economy into a downturn?”

And here’s the line that puts me up there with Nostradamus: “I find the combination of severely low levels of cash in equity funds, and (over) confident bullishness on the economic prospects of this (often blighted and blundering) country a little too unrealistic for my liking.”

Today, it certainly looks like the contrarians are one up on the systematic investors. Stock markets, not only in India but around the world, are staring at the spectre of recession. Not surprisingly, mutual funds have been hit, perhaps a little worse than what could be imagined a year ago. What’s happened in the interim? Has the tide turned? And if so, what should you be doing with your mutual fund investments?

Here’s some hard thinking by Boom & Bust that will, hopefully, answer these questions and restore some sanity to the way we look at mutual funds.

The world has changed...
Let’s face it. With oil at $125 to the barrel, there’s no way things will be the same again. Even if oil prices were to fall, the one time damage due to the oil shock (as also other commodities like iron ore and coal) will surely take many years to rectify. There’s no way the world can spend an additional 6% of its total income on buying the same quantum of oil, and not feel the pinch, even if it is only for a year.

Countries like India will face fiscal stress, and this will reflect in their currency movements. Our government will also find it difficult to fulfil national development objectives as the fiscal deficit balloons out of control. Off-balance sheet items like additional fuel subsidy, fertiliser subsidy, farmer loan waivers and extra wage costs will eat into the future prosperity.

Secondly, the tsunamis of cheap money have subsided. Money costs more today, and this affects PEs as much as it affects the earnings of all companies, especially those that are leveraged with debt. With central banks tightening the money supply globally, the only people left with any worthwhile cash surpluses are the oil exporters. And they are still not clearly telling us where they will put this money. Meanwhile, the US continues to grapple with the subprime credit crisis, further aggravating the tension in the financial and real economies.

And yet, the world hasn’t changed
In spite of all the pain, India continues to be a country with a growth potential that is staggering. China's position as the manufacturing base for the world has not changed. The new money surpluses (in the Middle East and other OPEC countries) are eager to find the next investment Mecca. If it were cheap Japanese funds and loose American monetary policy till yesterday, it is petrodollars that will chase investment themes and ideas today.

The world will, to a large extent, innovate its way out of the energy crisis by moving towards more efficient usage, alternative energy sources and, perhaps, even finding more oil from where none was expected. (Cairn and Reliance Industries will, in less than a year, add at least two percentage points to India’s GDP from their Indian oil and gas fields).

Meanwhile, your mutual fund investments (shaky as they seem today), will hopefully ride out the rough weather that has suddenly hit the world of investing. For that to happen, you will have to stick to the golden rules of mutual fund investing. These are:

1. Mutual funds are for long term
No matter how many times you hear this homily, you are not going to take it as seriously as you should. If your investing game is all about spotting the fund with the best returns and switching over every six months or a year, you will lose. Over time, the performance evens out. So a bad year with a great fund management house (or fund manager) is hardly a reason to quit. Mutual funds are a bit like marriage.if you don�ft consider divorce as an option when you begin, chances are that your marriage will last.

2. Choose greatness over punting
The emphasis on a great fund management house is intentional. Does your fund manager show this greatness in the way he (or she) picks and rotates stocks? The telltale signs include, but are not limited to, the following:

• Picking sector leaders in terms of size, growth, capability and return ratios
• A studious avoidance of momentum stocks (the safety versus sexiness debate)
• Moderate diversification (less than 50 stocks), especially in a large-cap fund
• Low, but regular churn, especially with non-core holdings
• A consistent approach, as elucidated in their portfolio and market reviews

3. Persist, but don't be suckered
Even the best fund managers have a bad year. And, at times such as the present, everyone might have a bad year. As a mutual fund account-holder, you should be able to distinguish between a bad year that is an exception (in an otherwise impeccable record), and a bad year that�fs routine. You will also find that the really great fund managers are those who lose lesser in bad years, although they might not outperform during good times. By all means, persist with this breed, even if their performance in the recent past has been uninspiring. But don’t make the mistake of being fooled by a worthy candidate in the opposite category just because you made an extra buck during easy times.

4. Believe in equities
Finally, you really must have that conviction in the asset class called equity. Remember, that in the long run, equities are slaves of earnings. If you think businesses (especially the listed ones) are going to lead the world into innovation, growth and wealth, you cannot ignore the opportunity for wealth creation that equities offer. And what better way to reduce risk than by investing through mutual funds?

12 Golden Rules

The following materials describe an investment in futures. You should be aware that Futures & options trading is not suitable for all individuals. The degree of leverage available can lead to large profits as well as large losses. Past performance is not indicative of future results. If you do not acknowledge the risks described above, the following materials should not be used for the purposes of making an informed decision regarding an investment in futures or options.

1. Adopt a definite trading plan.

Because of the emotional stress that is inherent in any speculative situation, you must have a predetermined method of operation, which includes a set of rules by which you operate and adhere to, thus protecting you from yourself. Very often, your emotions will tell you to do something totally foreign or negative to what your market trading plan should be. It is only by adhering to a preconceived formula that you can resist the emotional temptations and stresses that are constantly present in a speculative situation.

2. If you're not sure, don't trade.

If you're in a trade and feel unsure of yourself, take your loss or protect your profit with a stop. If you are unsure of a position, you will be influenced by a multitude of extraneous and unimportant details and will probably end up taking a loss.

3. You should be able to be right 40% of the time and still show handsome profits.

In speculating, it would be folly to expect to be right every time. An individual with the proper trading techniques should be able to cut his losses short and let his profits run so that even being right less than half the time will show excellent profits. This point is re-emphasized in Rule Four.

4. Cut your losses and let your profits ride.

The basic failing of most speculators is that they put a limit on their profits and no limit on their losses. A man hates to admit he's wrong. Therefore, an individual will often let his loss ride, becoming larger and larger in hopes that eventually the market will turn around and prove him correct. Then after a while, he begins hoping for a small loss and gives up hoping for a profit. Human nature also dictates that an individual wants to take his profit right away and thus prove himself correct. There is an old saying, "You never go broke taking a small profit." But you'll certainly never get rich that way. Being satisfied with small profits is the wrong mental approach for making money in speculation. If you are correct when entering a speculative situation, you will know it almost immediately and will show a profit quickly. However, if you are wrong, you will show a loss and you should remove yourself from the situation quickly. Taking a small loss does not necessarily mean you were wrong in your thinking. It simply means that your timing was perhaps incorrect and that you should wait for the correct timing and situation to allow you to reenter the market. Remember, in any speculative situation, the market is the final judge. An individual must let the market tell him when he is wrong and when he is right. If you show a profit, ride it until the market turns around and tells you that you are no longer right, and, at that time, you should get out...but not before! On the other hand, the market will also tell you if you are wrong and it would be a serious mistake to argue with what it is saying.

5. If you cannot afford to lose, you cannot afford to win.

As we have stated in Rule Four, losing is a natural part of trading. If you are not in a position to accept losses, either psychologically or financially, you have no business trading. In addition, trading should be done only with surplus funds that are not vital to daily expenses.

6. Don't trade too many markets.

It is difficult to successfully trade and understand a specific market. It is next to impossible for an individual, especially a beginner, to be successful in several markets at the same time. The fundamental, technical, and psychological information necessary to trade successfully in more than a few markets is more than the individual has either the time or ability to accumulate.

7. Don't trade in a market that is too thin.

A lack of public participation in a market will make it difficult, if not impossible, to liquidate a position at anywhere near the price you want.

8. Be aware of the trend. ("The Trend is your friend")

It is vitally important that a trader be aware of a strong force in the market, either bullish or bearish. When this force is at its height, it would be folly to attempt to buck it. However, one must learn to recognize when a trend is about to run its course or is near a period of exhaustion. By an ability to recognize the early signs of exhaustion, the trader will protect himself from staying in the market too long and will be able to change direction when the trend changes.

9. Don't attempt to buy the bottom or sell the top.

It simply can't be done unless you have the aid of a crystal ball or some other tool which could be peculiar to the mystic. Be content to wait for the trend to develop and then take advantage of it once it has been established.

10. Never answer a margin call.

This rule acts as a stop loss when your position has weakened considerably. By dogmatically and arbitrarily adhering to this rule, you will be forced to get out of the market before disaster sets it. It is often difficult to admit you're wrong and get out of the market (which you probably should have done well before you received a margin call). However, the presence of a margin call should act as a final warning that you have let your position go as far as you conceivably can (unless the initial margin is out of line with the volatility of the contract).

11. You can usually sell the first rally or buy the first break.

Generally, a market which has just established a trend either up or down will have a reaction and good interim profits can be made by recognizing this reaction and taking advantage of it. For example, in a bull market, the first reaction will generally be met by investors waiting to buy the break. This support generally causes the market to rally. The reverse is true of a bear market.

12. Never straddle a loss.

A loss by itself is difficult enough to accept. However, to lock in this loss, thus making it necessary for you to be right twice rather than the once (which you previously found impossible) is sheer absurdity.

While the following are not specific trading rules, they are general observations which will aid the speculator in formulating an understanding of markets:

You must retain control of the situation and yourself. Do not allow your position to control you. It is a mistake to find yourself in a position larger than you can reasonable handle. When this occurs, you will find that the sheer size of the position, rather than the facts of the situation itself, affects your judgment.

The commodity does not know that you own it. You must remain impersonal in your trading. When you take a position and you are wrong, remember it is better to get out immediately! The market will not feel badly about it if you do, but you will if you don't.

The market always looks its worst at its bottom, and the best at the top. It is important to remember that before the market turns around, it is at its very worst. Therefore, be prepared to treat each day objectively by not allowing the emotional fever to carry over and cloud your judgment.

Equity...Equity...Equity...Not Cash. If a man is long from 100 points below the market and you are long from the opening that day, you both had the same amount invested in the market from the time both of you were long. Therefore, if the market goes up ten points, you each have made the same amount that day. If the market goes down 10 points, you have each lost the same amount. You should not be confused by the fact that someone has taken a position before you. You must be concerned with your own situation primarily. Each day, start fresh. Your paper profits or losses from previous days should not enter into your decisions regarding the course of action you will take.

Treat paper profits as if they are your own money. They are! Naturally, the opposite also holds true..

Golden Rules For Buying Mid Cap & Small Cap Stocks

Investors wanting to get best returns out of their investments in stocks always want to buy stocks falling in mid cap and small cap category. Here are few rules to spot best mid cap stocks to buy.

Growth Rate
Before selecting mid cap stocks, an investor must examine the growth rate. Growth rates can come through either financial engineering or operational expertise. An investor has to take caution if there is growth through financial engineering that includes inflated profit levels through income from other sources. Experts suggest, a CAGR of 30-40 per cent through operational growth in last 5 years in mid caps makes a strong case for buying.

“When an investor buys a midcap stock, he takes more risk than in large cap stocks. This risk has to be compensated by good returns,” said Amitabh Chakraborty, president - equity, Religare Capital Markets; who advises investors to get into mid cap stocks not with a target price but a target return in mind. Once he achieves that return, he should sell stocks.

Religare’s Chakraborty suggests that target return should be at least 50 per cent within a year. Further, an investor should also examine whether the current pace of growth is sustainable in the next 3-4 years through the outlook of the business vertical.

Promoters
Promoters’ credibility is another important aspect to look at. Promoters’ holding in a mid cap company should be sizable (at least 25-50 per cent) enough which underscores their accountability for the company.

Look at the history of company’s promoter’s holding. If any company dilutes its stake at a higher price followed by buying warrants at a lower price, it does not augur well for investors.

Low P/E Ratio
Mid cap stocks with low PE ratio is recommended while those with capital intensive bearings should be avoided. “A mid cap company with huge forex losses and outstanding dues is not worth investing,” added Yogesh Kalwani, head - advisory, BNP Paribas Investment Services, who feels, as and when credit flows come back, 25 per cent allocation mid caps is reasonable for retail investors.

The BSE Midcap Index has appreciated by 17 per cent over the past one month, while the 30-share benchmark - Sensex has gained just over 17 per cent during the same period. Correction in the market is around the corner. The moment it happens, one should start investing in right kind of mid caps.

SMC’s Jain suggests investors to make a basket of mid cap stocks and keep close watch on their movement next one month after investment. Explaining an investment strategy, Jain epitomized, “If you buy 10 mid cap stocks and 5 of them performs good after one month, get out of two worst performing stocks and invest the proceeds in some other mid cap stocks.”

“Buy mid cap stocks at 20 per cent discount from their current level after judging their credentials. A correction will cater to that opportunity,” concluded Chakraborty.

Some of the mid caps stocks to buy at this time as suggested by Religare are Jain Irrigation, Voltas, GVK Power, Bata India, IRB Infrastructure, HDIL etc.

Source: Indian Stock News

Indian Stock Market Trading Golden Rules

We are mentioning few golden rules for trading and investing in Indian stock market or in any other Stock market.

If you want to be a successful intraday / day trader or Positional / Delivery investor then simply follow these golden rules.

"Trading runs in cycles; some are good, some are bad, and there is nothing we can do about that other than accept it and act accordingly"
Think in terms of probabilities and act upon them. There are no certainties in trading. You can keep yourself out of trouble by thinking in terms of probabilities. Get comfortable with approximate predictions and interpretations.

"To trade/invest successfully, think like a fundamentalist; trade like a technician"

Along with economic fundamentals that will drive a market higher or lower, but we must try to understand the technical as well.

"Don't be a hero. Don't fight the trend. Follow the money flow"
You should forget the news, remember the chart as chart already knows the news is coming and buy on rumors; sell on news.

"In trading/investing, an understanding of mass psychology is often more important than an understanding of economics"
Trading is a psychological game. Most people think that they're playing against the market, but the market doesn't care. You're really playing against yourself. Hope, fear and greed are not strategies: they are emotions. Simple emotions are not an effective strategy. Positive emotions could cause us to fail to apply risk precautions. Negative emotion could cause us to hesitate.

"Learn to monitor yourself and draw conclusions from your mistakes. "
Predetermine maximum losses in every potential trade. Do not risk more than 5% of your capital on any trade. Don't average your losses.

"Buy that which is showing strength - sell that which is showing weakness"
The public continues to buy when prices have fallen. The professional buys because prices have rallied. This difference may not sound logical, but buying strength works. The rule of survival is not to "buy low, sell high", but to "buy higher and sell higher". Furthermore, when comparing various stocks within a group buys only the strongest and sells the weakest.

"Think like a guerrilla warrior."
We wish to fight on the side of the market that is winning, not wasting our time and capital on futile efforts to gain fame by buying the lows or selling the highs of some market movement. Our duty is to earn profits by fighting alongside the winning forces. If neither side is winning, then we don't need to fight at all.

"When you lose, don't lose the lesson!"
Forget the names but remember the events. Those who don't remember the past are doomed to repeat it. Make mistakes with composure and character, without blaming others, and don't dwell on mistakes.

"Evaluate your results at least monthly".
Monitor your P&L, your win/loss ratio, and the relationship between your biggest wins and worst losses. Reviewing these results helps you continually improve your understanding of the markets and yourself.

"When in doubt, get out."
Scrutinize your positions at all times, each day, and you will not be left holding a stock without reason. Be willing to change direction at any time, because your flexibility as an individual investor is a big advantage which should be embraced!

"There is no "genius" in these rules. They are common sense and nothing else, but as Voltaire said, "Common sense is uncommon." Trading is a common-sense business. When we trade contrary to common sense, we will lose. Perhaps not always, but enormously and eventually. Trade simply. Avoid complex methodologies concerning obscure technical systems and trade according to the major trends only".