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Tuesday, September 23, 2008

How to invest in share markets?


Investors were shocked by the movements of stock markets in the last week. BSE Sensex moved from the 12,600 levels to 14,100 in just 2 days. Brave hearts who bought at Thursday morning earned 20% returns in just 2 days. That's way stock markets work. It is almost impossible to time the markets exactly. You always need to take some risk in stock markets. So plan your investments, according to your risk profile. It is waste of time to look for bottom.

Easy to quote but difficult to implement: "Buy when others are selling and sell when others are buying".

Believe in your convictions. I recommended and bought metal stocks for long term at throw away prices in the last week. Why? I believe in the long term story of India and China. Is it possible for these countries to grow without consuming the metals? I have not expected this kind of quick recovery in Sesa Goa and other metal stocks. I bought the company as it is trading at a forward P/E of 3 for FY2010 earnings. So it will at least give 150% returns in 2-3 years.

5 simple tips for stock market investors:

1. Investment is very easy if you approach stock markets with an open mind. Don't clutter your mind with numbers like support, resistance and volumes etc. Those are meant for traders. We are investors then why should we waste time in thinking about them.

2. Invest in good companies with sound business prospects at reasonable valuations and give management sufficient time. Treat every short term fall as an investment opportunity. Sincerely believe in fundamentals.

3. Read every good article on businesses and companies. Listen to every expert. Analyse them in your own way then invest in good stocks. Don't follow any one blindly. I daily spend 6-8 hours in reading and 1-2 hours in listening about stocks and companies. I am passionate about stocks and companies. So I enjoy every moment of reading.

4. Never follow herds and broker tips. Buy good companies when no one is talking about them and sell the scrip when all are buying it. Quarterly results and balance sheets will help you in picking good companies. I bought metal stocks, Bartronics and Tanla Solutions in the last week in spite of steep fall as I believe in their fundamentals and growth prospects.

5. Allocate 25% of money to buy emerging stocks and contra stocks. Those who bought sugar stocks? (Select companies) in 2007 got more than 100% returns in just 10 months. Emerging stocks will take 3-5 years but sometimes give more than 500% returns.

Note: I don't recommend investments in penny stocks. Still I bought IKF technologies in significant amount at Rs 6. I did this as an experiment. I will put my money in the company for 6-7 years. I will see whether my experiment will succeed or not. I buy this stock as I am enthused by the plans of the young management of IKF Technologies. Will these young guys make IKF another Indiabulls? Will they succeed in implementing their business ideas?

Management plans of IKF Technologies:

FY2008 sales: Rs 29 crore.
Target sales for FY2016: Rs 3,000 crore.
Sectors: Bio Diesels, Wind and Solar Energy, VOIP and BPO services.

How to invest in stock markets?

Stock market investments= Economics + Mathematics/Statistics + Psychology.

These 3 disciplines will play important role in the stock market movements. We need to keep an eye on all the three aspects.

1. Economics: You need to work hard to learn about companies and their business growth prospects. You need to track your companies regularly to know about latest good/bad news, quarterly results, organic/inorganic growth prospects and sector trends etc. You should never forget about fundamentals.

Examples:

A. Ranbaxy: It is a very good company but FDA allegations are stunning and unbelievable and will have severe consequences. They can change the company future in a dramatic way (negatively).

B. RNRL: It rose to 250 without any significant news but now it is not moving much despite trend setting news. Its future over short term will depend on KG Basin court case but it is a must buy stock for long term investors who can hold it for 3-4 years. Anil Ambani has big plans for this company to make it a manufacturing giant. He is planning to invest more than Rs 30,000 crore in this company which may propel this stock to 500 levels within 3-4 years. So I bought RNRL for long term at around Rs 75. If it loses case in the court, stock may fall to below 40 levels in short term; It Anil wins the case, stock may move to above 150 levels. That's why I don't care about stock movement over short term. I believe in the long term story of RNRL. That's the way one should invest in stock markets.

Advice to investors:

A. Decide yourself whether you are a trader or investor or both. I am an investor. I will never do trading but invest for short term. See the difference.

Ex. I first bought Gujarat NRE Coke at 82 in small quantities and bought in moderate quantities at 72. I used my money for these investments as I thought that this stock is a good buy for long term at these prices but it is a risky one for short term. At that time, I am sitting on huge cash from investment offers (I received good investments from 1 NRI and 2 north Indian investors just 4 days back). Suddenly, stock fell to 53 which is a steal. Here is a stock with bonus news, rights offer, good promoters and good quarterly results. Stock was trading at unreasonable valuations. Then I deployed my investment offers money. Why? I need to give just 40% returns in 6 months. Stock needs to reach just 75 to get that money in 6 months. As per fundamentals, I thought that it will easily reach that level by the time of bonus date (1 month). I don't believe in the technical details like moving averages, resistances and supports etc. I believe in fundamentals and psychology of investors only.

If my company has good fundamentals and my entry price is reasonable, I don't care about its short term movements.

B. Plan your investments for short, medium and long term. Allocate money accordingly.

C. "Derivatives are weapons of financial mass destruction" – Warren Buffett. Never look at them as investment vehicles. Derivatives are responsible for most of the stock market suicides. Derivatives are invented by the brokers for the benefit of brokers.

 
 2. Statistics: Go through the balance sheet and spend some time to get a complete idea on the company top and bottom lines. Keep an eye on OPM, debt, ROCE and expenses etc. Compare the company with peers in the same sector. Keep an eye on the stock moment over the last 1 year. Finally arrive at a reasonable price.


3. Psychology: This is the most crucial stage. Never chase hot stocks and broker tips. It is very easy to say that buy when others are selling and sell when others are buying. It is very difficult to implement this strategy. Herd mentality is responsible for most of the losses. This is the reason why good stocks are now trading way below their fundamentals still no one is accumulating them. They will buy them once Sensex crosses 16,000. Harshad Mehta scam, IT bust, Ketan Parekh scam and 2008 collapse etc will occur mainly due to these innocent investors.

EX. Take GMR Infra and Bartronics. Both are growing on steroids. Both are sitting on huge orders if you compare their current turnover with orders of their respective companies. GMR Infra is a big company and is trading at a P/E of 100 while Bartronics is a small niche company and is trading at a P/E of 10. I invested in Bartronics while many of my readers are invested in GMR Infra. I am expecting 100% returns from my company (Bartronics needs to touch 300) in 15 months. Is it bad? I will buy more without hesitation on every fall. Single most reason for my decision for not investing in GMR Infra is herds along with high valuations. I may exit Bartronics if all are talking about it.

About Moserbaer: Sometimes unexpected things happen. I invested in Moserbaer at 92 as a long term investment but it gave 35% returns in 1 month. I don't know why this stock is rising over short term. That's the way stocks move.

Final note: Learn from failures. Be patient. Work hard on research. There are no shortcuts for success in stock markets. Read and analyse the data. Be responsible for your investment decisions. Enjoy every moment in stock markets. I cannot live without these unpredictable markets. I like the challenges posed by stock markets that's why I am in love with stocks and companies. Are you in love with stocks? Never neglect your lover.

Two things that will ruin your investments: Fear and Greed. Please try to overcome them. Simple to say but difficult to master.

Exerpts: Stockmarketguide
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