Sunday Stocks Newsletter

When to sell?

2007-02-18T21:54:00.000+05:30

Refer to some of my previous posts, where I suggested the new strategy of fundamentally looking at longer term investments.

The whole effort in doing these investments is to identify those stocks and pick them, and hold them, based on their projected earnings, over the next few years.

And now I am in a predicament to which I am not sure, I have the right answers.

Some of the stock picks have reached the basic target price levels, faster than I would have expected. Based on projected earnings, if the prices were to reach certain levels in a couple of years, and they have already reached now, in a matter of months, what do I do??

Obviously they seem to have some momentum behind them, and prices are likely to go up further. These are all 'good' stocks, by the way. We are talking of no speculative stock picks, just for now.

I think it may be a good idea to book profits and yet, I might be missing out on some even bigger story behind the stocks.

Working on an answer to this.. !

Multi-baggers??

2006-10-29T22:45:00.000+05:30

When you read about some investors who made a lot of money in the stock market, you usually find that their earnings came from picking some really big winners. Stocks where they made multiples on their original investsments - also referred to as multibagger stocks!

Is it possible for a retail investor to get a multibagger pick?
It certainly is not easy. We talk about making 15% or 20% and if we are lucky, we may get an odd pick where we make 40% or 50%. But making multiple of our investment, seems like a far cry.

One would imagine it to involve taking calls on less known small stocks that could perhaps be big winners in time to come. A strategy frought with danger. Simply because not a lot is known (in terms of track record, their own past performance, the management quality, etc.) and due to which, a pick of this kind can have a lot of risk.

There have been more 'visible' stocks that have appreciated more than 100% in recent past. For example, Unitech. Besides being a rare exception, few retail investors would have kept holding the Unitech stock as it went to dazzling heights. Most would have chosen to book their large profits before it became the multibagger!

What could possibly be a multibagger at this time? My simplistic take on this is as under:
1. You certainly need to hold a stock for a few years to expects such returns,
2. Then, the stock that you pick has to have contiuning value over that time - I mean, it cannot be great today, but in 1-2 years, before it makes it BIG, it loses its sheen, because of sectoral or global economy conditions changing, in that period.
3. You need huge conviction on the stock to hold it for that period.

If I have to pick some stocks that could possibly qualify to meet these requirements, my logic to pick these would be as under:
1. According to me, whatever else happens, the situation on energy in not going to get better in the next few years, by any chance,
2. In that case, companies involved in non-conventional sources of energy are going to be in demand, over the years,
3. Specifically if there is a company that can scale up rapidly to meet increasing demands, if the company has great management, if it has already demonstrated its ability to grow rapidly, execute well, etc., then I would believe that such a company can potentially grow multifold and also be a multibagger stock!

Some of you might have guessed my pick. Yes, I do believe that the wind energy leader, Suzlon, is perfectly set up to pick that place. Even at its present price, we may invest in Suzlon and hold it. In 3-5 years, you should be able to get multiple times your investment, I would believe. And if you hold it longer, you should get even better returns.

The energy situation is not going to get better and hence the chances of anything going wrong in Suzlon's prospects, is very remote.. !

Till next week.. take care!

In a perfect world, EPS it is..

2006-10-23T19:00:00.000+05:30

So you want to target a specific return on your stock investments.
Say, 20% a year.

Will it help to pick good looking stocks (fancy names, popular companies, etc.), or is there a more 'sure-fire' way to bet on getting your returns?

This could be at anytime, but even more so, at the present juncture, when markets seem to be rightly priced or almost bordering to an overpriced position.

Well, assuming that we trust the P/E ratios to correctly reflect the confidence level in a company or a sector, how do we make sure that our investments at today's prices, will give us a steady 20% target return?

Simply by ensuring that the earnings of the company at an EPS level, also go up by at least 20% per annum! As long as the denominator is going to increase at that rate, and as long as the P/E ratio does not change (the company or the sector does not get "rerated", so to say), then the numberator or the stock price will also rise at the same level. And you are home on your targetted 20% ROI requirement!

And how do you know if over the next 1-2-3 years or so, the company's earnings ARE going to grow at that rate? Surely, there are no guarantees on this. But more and more companies and analysts' following these companies, tend to give out projections of the company's performance. About where its headed, and specifically in terms of the company's financials. And many companies have an excellent track record of meeting or beating their own projections, e.g. Infosys.

Thus, what you need to look for, are companies that have been growing at a PAT (profit after taxes) level, at a rate more than your target returns rate, and also are projecting similar or higher growth, over the next few years. In that case, their EPS will grow at that rate, and the price will also grow at the same rate, resulting in your ROI to that extent.

Of course, this is a simplistic explanation. But reality is not too far away. First of all, if you are targetting a nominal rate like 15-20%, then there are a lot of companies that will meet the above requirement. Today, if you see the results that keep coming out, there are several companies reporting growth in PAT on YoY (year-on-year) basis, to the extent of 40% to even 100% and beyond. You have to find a few whose numbers and projections you can trust more than others' and you are more likely to get your desired targets!

The Tata Steel takeover of Corus

2006-10-21T14:21:00.000+05:30

Just a bit offtopic post, in the sense, this is not strictly about investments. Why, you may ask? Since this takeover can certainly have an impact on the Tata Steel stock, and perhaps other Indian steel stocks as well.

Well, I have to admit that I have no idea as to what impact this takeover will have on the Tata Steel stock. The situation is complex, and various views have been bandied about. I have to admit that I don't quite get it, and would not venture to open my mouth. From a pure gut feeling, the takeover will probably bleed Tata Steel for a while (and hence impact the stock adversely) before it starts delivering and pushes its stock up again. But this is guess work. And that is not, what this post is about.

What I am impressed with, is the smooth and easy takeover itself. I am sure the discussions and efforts must have been going on for many months now. But the day the news broke in the media, and from then, to the date of actual confirmation, was a real short period and went off easily.

When the news came, most media reports said that Tata Steel will have to up its offer by at least 20% and it will be a long drawn affair, and it will not happen so easily, and that the Russian company was also going to make life difficult for the deal to happen, etc. Perhaps all these ideas were a consequence of the earlier Arcelor-Mittal long drawn, bitter struggle. And the media was quick to believe that Tatas could not have it any easier.

But I presume that far better preparations must have gone into this deal, and due to which ultimately, the deal went through cleanly and beautifully.

Have to raise the hat to Ratan Tata. He's a man on a mission these days. To take Tatas to a serious global position. Whether its TCS or Tata Steeel or Tata Tea or Tata Coffee or Tata Motors or Indian Hotels, all of them have seen ambitious and almost outrageous acquisitions, and which have put these companies in the global limelight, and with huge opportunities.

Cheers to the Tatas!

"Can't Go Wrong" Stocks!

2006-10-15T22:57:00.000+05:30

As I have been in the process of restructuring my entire portfolio, I have been identifying good stocks under various categories - sector wise, mid-cap / large-cap wise, etc. To ensure that there is a fair mix, and trying to identify winners from various places.

No, I am not seriously diversifying. I may have a complete absence of several sectors from my portfolio. That indeed, is the new learning for me.

But from the sectors that I identify as worth investing into, I will try to pick the best winners and hope to have a decent mix from those identified sectors.

Now, as I am doing this, and as I study various companies, for their fundamentals, their performance, the management, their prospects for the next few years, etc., I find a new "category" emerging for me, amongst these stocks.

Thats the category that I call "Can't go wrong"!

Earlier in the 'good old days' when the stock market had few stocks and there were few companies that would actually reward shareholders, there were a few stocks that were called bluechips. Many an old rich person owes his riches to having bought and not sold for many many years, stocks like Tisco, Colgate, Hindustan Lever, Century, etc. Those were th bluechips of those days. Come what may, those stocks delivered!

In present times, picking such long term winners is more difficult. In a dynamic and ever-changing world that we are in, great stocks can suddenly go out of favour, and others may become bluechips of the day. Far reaching factors can influence these changes.

Well, inspite of such changes that are happening all the time, I am looking at a few stocks that have amazing performance, a fantastic future, at least for the next few years, and who reward their shareholders well, year after year.

Such few stocks are what I would refer to as the Can't Go Wrong stocks. In other words, should you purchase these and keep, and as long as you are not worried about short term blips, you really can't go wrong in your investments in these. In 2-3 years, you will certainly be well rewarded in terms of stock appreciation.

The list that I have come up with, in this CGW category, is:
1. Infosys
2. Reliance Industries
3. TCS
4. Bharti Airtel

There are others that are approaching this status, but I would like to observe them for a little longer time, before qualifying them into this list. This is really a premium positioning and I don't want to crowd it with "pretenders".

Will love to discuss other shares that could possibly qualify in this list, or discuss the merits of these 4 itself, with anyone interested!

Till next Sunday then...

When the bulls run again..

2006-10-08T20:22:00.000+05:30

So what do you do when the bulls run rampage again?

Is there anything worth purchasing at this time, then? Are the markets overpriced?

Reality is that companies are doing well, results are good.
Reality also is that, for most companies, and at least for the average of the markets, the prices are close to the year opening levels (financial year, I mean - Apr 06). So its not like new highs have been reached everywhere.

In the interim, i.e. from April till date, what has happened is that the companies have reported one more set of results and which have been good. So the prices of April, available today, have better justification today - or lower P/E levels.

So you are still better off, in terms of opportunities to buy, today - than you were in April. But that does not mean that stocks are cheap today.

With liquidity returning a plenty, in the markets, what we are seeing is a run for good quality paper, and which pushes up prices of those. The net result is that today's prices already discount future earnings, in most cases.

So sure, you can purchase today, but then be prepared to wait out for a year or two, to get any decent returns. And in that period, you WILL get those returns, as the performance of the companies cannot really be denied.

In the midst of this, there are some companies whose stock prices have been lying low in recent past. Perhaps due to one ordinary quarter or something like that. Fundamentally strong companies, but which have suffered only in comparison to some contemporaries. One example is Hero Honda. In the two-wheeler race principally between Bajaj Auto and Hero Honda, its been the former that has had a tremendous run in recent past. Both as a performer as well as on the stock market, Bajaj Auto has far outrun Hero Honda. To the extent that on projected FY08 earnings, Bajaj Auto has a P/E of 24.6 while Hero Honda has a P/E of only 11.8. Now, Hero Honda is slowly but surely returning back to better times and this huge difference in P/E cannot remain. Then, today would be a good time to pick up Hero Honda and certainly get a decent appreciation within a year or two.

There are other similar opportunities - but that does require extensive cherry picking efforts!

Cheers..

The new strategy..

2006-10-02T02:13:00.000+05:30

When the market took a downturn post May-11, was the time to seriously focus and try and understand, as to what worked and what didn't, in these last several months. And come up with a revised methodology.

Here then, is the new strategy that I have in place:

1. I learnt that if I want a diversified portfolio, then the best place to be invested in, is the diversified mutual funds. Once we pick the better ones of the lot (and there is a method to doing this), we are well served with some of the best brains in the industry, ensuring that we get the best of diversification.

2. So really, if diversification and a decent long term hold is what we are looking for, park the money into good mutual funds, and leave it there.

3. But this is where, we as an amateur investor with an itch to do it ourselves, are not satisfied with what a mutual fund delivers. So we try to make our own direct picks of stocks.

4. This is when we usually try and repeat exactly what the mutual fund does. Get diversified. This is what the experts would tell us, and have us believe.

5. However I disagree on this now. Yes, diversification is indeed a good idea. But I do not believe that we can do a better job in creating a diversified portfolio, as compared to a thoroughbred mutual fund. And we will almost always suffer in comparision, in terms of returns.

6. What we CAN do differently, as compared to the mutual funds however, is to NOT diversify too much. Ideally, if we can study and identify a few good companies, and put larger chunks of our money into these, there is a good chance to make good money out of it.

7. The way to get those few good companies, is to really study their numbers, their management teams, the industry scenario, etc. If the company is doing well, has a great 'run rate' in terms of performance, is likely to keep pushing the EPS higher, and as such, we are likely to get an improved share price, then thats the share to own. There may be few picks that qualify well, but those are the few that you want to buy and keep. Once you have studied these, and you are confident of the longer term picture, you should not worry about intermediate dips on the stock. Hold on to the share, as it is bound to get into investors' eyes sooner rather than later, and then you would see the price start picking up.

So thats the new strategy now!

Will discuss more over the next few postings.

- Sanjay

Gone around a full circle..

2006-10-02T01:55:00.000+05:30

It is clear that if we keep working at the stock markets with some strategy, keep thinking about what we are doing, what is working, what is not, we are bound to learn a lot, and manage to continuously refine our strategy for the markets.

In my case, over time, life has come a full circle, as regards the stock market investments strategy goes.

Here is how it had gone so far:
- Random investments, typically based on tips and the like; serious burnt fingers during Harshad Mehta and Ketan Parekh days,
- Off the markets for a long time,
- Return to the markets, with a better strategy this time. Starting say, 2004 or so. Much improved returns. Strategy based on catching the cyclical movements of stocks, essentially via graphs. Small holding periods, either for booking profits quickly, or cutting losses too.

Most of the postings in this blog prior to this one, advocate the above strategy. It worked fine for me. Perhaps on account of the excellent bullish phase that the Indian stock market was in, I managed good returns, with the above strategy.

But the real validation of a strategy is realised only in benchmarking your performance with some other reference points. Now, using the above strategies, when I compared my performance with some known benchmarks (say, diversified mutual funds performances), I realised that I was not doing so great after all.

That led me to ask the question, "Why?":
1. I was after all, still, an 'amateur' investor, with limited research access. And due to which, my diversified picks tended to average out, in terms of having winners and losers. And net-net, I was making lesser progress.

2. In over diversification, my stakes in individual entities was lower. Due to which, even when a stock did remarkably well, its impact on the total portfolio was nominal. So the portfolio would not zoom up! Of course, if the stock fell too, it would have lower impact on the portfolio, since each stock constituted a small part of the total portfolio.

3. I was being repetitive in the strategy - my Mutual Funds were also into diversified stocks, and I was also investing directly, into diversified stocks. There was only one strategy, and I was not giving myself any new or better chances.

Learning from some of these, I have been working hard on correcting the strategy, and have an entirely new one in place, at this time. And from the learnings till date, feel a lot more confident venturing out with this new and improved strategy!!

Check the next posting, for this new strategy.

Understanding Concept or Annualised Earnings

2005-11-20T23:34:00.000+05:30

We had yet another week of the rampaging market, with growth right through the week. On the back of a subdued crude oil market internationally, the oil stocks and automobile stocks made huge gains. And IT continued to gallop away.

As a retail investor, once you are going to put your money into this market, you may like to make out 'something' from the broader macro happenings. Like what sectors get affected if the oil prices go up (or down). Your investment decisions may or moy not be taken on that basis, but you start to get a feel of the market movements, based on external events, and this can only prepare you better, for your own decisions.

One of the key decision making tools that we are going to discuss this week is what is referred to as annualised earnings.

To understand and appreciate this factor, lets start from the very original presumption that you are investing in the stock markets, to get a better return than you get with bank fixed deposits, and the like. Most of these typical investments give you returns in the range of 4% to 8%....per year! This is a crucial factor to understand. The period within which these returns are earned. So if you put Rs. 10,000 in a bank deposit that gives your 5% interest, at the end of the year, you will get Rs. 500/-.

Now with this clarity lets understand why annualised returns are important to know and monitor in equity investments as well.

Again, as example will illustrate this point well.

Say, you purchased 100 shares of company A, at Rs. 100/- each, on 1st January.
On 1st April, the stock price had reached Rs. 110/-.
Then it started falling, and on 1st June, it had reached a level of Rs. 100/- again.
But like most cyclical stocks, it started rising again, and on 1st October, it reached a level of Rs. 115/-.
And then finally on 31st December, the stock reached a level of Rs. 120/-.

Thus, the returns earned are like this:
1st Jan... 100/-
1st April, i.e. 0.25 years...110/-, or +10%
1st June, i.e. 0.5 years...100/-, or 0%
1st Oct, i.e. 0.75 years.. 115/-, or +15%
31st Dec, i.e. 1 year...120/-, or +20%

Now consider the concept of annualisation.
If you earned 10% growth in a matter of 0.25 years, its an equivalent of 40% per year!
And 15% in 0.75 years, is again equivalent of 20% per year.
And 20% in 1 year, is actually 20% per year!

While this is a simplistic example, just to make the point, what I want to emphasise is the need to monitor not just absolute returns, but also the period within which these returns are earned.

Let me give you a live example, now.
One could have purchased Mahindra&Mahindra at Rs. 430/- on November 23rd, and sold it at Rs. 460/- on November 26, i.e. in 3 days flat. The apparent gain of only 30/- or even about 7% on the original investment of 430/- in in fact, an equivalient of 848% on an annualised basis!!

Both of the above numbers of M&M price are for real.

Okay, so moving on once again, in very heady times, with the sensex at nearly 8900, on the special trading Saturday (Nov 26th), what's the right approach?

When sensex hits new highs of this kind, there are usually a lot of investors who get jittery and start booking profits. This often leads to the markets pulling back. Normally in a bull run, each new run will push the sensex to new highs, upto a point. And then there will be a pull back, a correction. Whether that new high this time, will be 9000 or 9500 is not known. But 8900 is a high enough level.

My recommendation at this stage would be that, if you have stocks which have grown rapidly in these last few days (such as M&M mentioned earlier), you might want to book profits on that stock, at this time. Even if the stock has value left in it, and you believe that it will rise again. It is very likely when the correction comes, that the stocks that have moved up the fastest, will also lose steam quickly. Say, the same M&M stock could be pulled down, again to a value of 430/-. That should happen usually, in the course of the coming week or so. Then, if you have an opportunity, you can sell M&M now, at 460/-, and pick up the stock once again, when it reaches 430/-. Within 7-15 days, you would have become richer by 7% without much effort! It is also possible that M&M will scale upto 480 - 490, before retreating to 430-440. But you cannot time the peak perfectly. So if you have made enough, in a hurry, book the money and stay out for a while, and come back at the next correction.

Most people do the wrong thing - because the sensex is zooming up, they get tempted to buy (absolute wrong time to buy at the high), and when things start coming down, they panic and sell (again, the wrong time to sell). When in fact, the right thing to do is to sell when high, and buy when low.

So go out and sell some, and wait for the pull back, to pick them back again.. !

Till next week, happy investing...

A Housewife’s Formula for the Stock Market

2005-11-15T08:49:00.000+05:30

Many a housewife might have some savings to invest. And while the current rise in stock markets might tempt her to invest there, she may well be overwhelmed, not knowing where to start. When she might have money lying in bank deposits and RBI bonds at 5-6% p.a. returns, the stock market can conservatively deliver to her, returns of 15 to 20% per annum. But how does she make her way through the maze that is the stockmarket?

Even as I completed this newsletter, intending it to be a short and simple one, by the time I was done, I found out that it’s become a longish one, anyhow. As an alternative, for those of you who are based in Mumbai, and would like to understand this ‘formula’ more easily, I would not mind having 3-4 smaller interactive sessions, in Mumbai, where we can meet and I can share these principles of investment with you. Feel free to write to me, at sanjaypmehta@gmail.com, if this is of interest.

Of course, the term ‘housewife’ is symbolic in the context of this newsletter. What I refer to is, a retail investor who does not want to break her head too much, keep it very simple, and yet ride this wave of huge opportunity, that is represented by the equity markets. Before I get into the ‘how’ of this, lets answer the fundamental question – is it really that kind of a ‘wave’, will it deliver good returns over the next few years, as it has done in the last few, and due to which reason, is it worth attempting to understand a method of investments, without getting too deep into the market understanding?

My answer is yes. The fact is that India is on a huge rollercoaster ride, with a tremendous upside, where the economy is growing amazingly, and companies are reporting phenomenal growth results quarter after quarter. And from all indicators, it is clear that this trend will continue for at least the near future, of around 3-5 years, if not more. That represents corresponding high growth opportunities for investors in these markets. And if one is still not into the markets, it is still not a bad time to get started and ride the wave over the next 3-5 years.

Having said that let me try and evolve a simple formula for those who want to keep it simple and yet make money in these markets.

Right from the first of these newsletters, I have focused on giving an easy to understand methodology for investing in the stock markets and in mutual funds. Yet, when I look back at those initial newsletters, I can see that my methods demanded a reasonable time input from the investor, to track and monitor their investments. Also as I wrote about the large number of stocks and mutual fund options, maybe that extent of homework and number crunching might not be everyone’s cup of tea.

With that in mind, I am going to try and give a simple formula for ‘housewives’ to follow, and make their small fortune, in these booming times!

Pre-requisites for following this strategy:
1. Basic familiarity with a stock market portal like Equitymaster, which you can refer to see how your stocks are doing, on a regular basis,
2. An understanding of a simple portfolio tracker, covered in this series earlier,
3. Of course, other fundamentals like having a demat account, a stock broker (offline or online) and a bank account, are necessary requisites, which I need not elaborate much about.

Now coming to the simple formula:
1. Let’s look at a few sectors of high growth: Automobiles, IT, Infrastructure, Engineering, Pharmaceutical and Oil & Gas. All of these are excellent sectors with very good growth prospects over the next few years. So these are safe sectors to pick.

2. Now let’s pick 2 companies from each of these sectors. My formula would suggest picking amongst the better known and better acknowledged of companies from each of these sectors. Stay away from obscure or lesser known companies, at all costs!

3. I will give you a choice of 3-4 companies from each of these sectors, and you can pick 1-2 of your favourites from amongst these. I will insist that you have a mix of companies across different sectors, as diversification is one of the key factors for retail investors. Sectors move up and down cyclically, and by having a diversified portfolio, you give yourselves a chance irrespective of some sectors doing well and others doing not too well.

4. Now the picks from these sectors:
• Automobiles: Telco, Maruti Udyog, Mahindra & Mahindra, TVS Motors
• IT: Infosys, TCS, Wipro, I-flex
• Infrastructure: Gammon India, Hindustan Construction, IVRCL Infra
• Engineering: L&T, BHEL, Siemens, Bharat Electronics, BEML
• Pharmaceutical: Biocon, Cipla, Aventis, Ranbaxy
• Oil & Gas: HPCL, Indian Oil, ONGC, GAIL

5. With a pick of 1-2 companies from each of these sectors, I am looking for you to choose between 8 to 10 companies, from this list. One thing that you would ensure with this list of companies is that you are choosing from amongst the best of breed of Indian companies. And then, if you believe in the fundamental premise of growth of the Indian economy, there is a very good chance that the above companies will be participating in that growth, and will in fact, be responsible for it!

6. The most important step is now! Having selected these 8-10 companies, I want you to forget the rest of the thousands of companies that are listed on the stock exchanges! Yes, for a ‘housewife’, it is as important to select few good stocks, as it is to forget the rest of the stocks and not let the mind get diverted. This part is tough because once you start investing, you will also talk about it, you with chat with friends, you may develop an interest to read about stock, perhaps watch CNBC TV18, and with all that, you will get hundreds of other ideas! But if you want to keep it simple initially, get into a habit of the stock market, and develop a sense of confidence (which incidentally comes, once you start earning some good money), then for now, stick to the few stocks that you pick here. And stay with them, for at least 6-12 months.

7. When I talk about picking the 8-10 companies, I am certainly not asking you to go out and purchase these stocks tomorrow! All I am saying that at this time, you make these as your short list, and you will purchase these at an appropriate time, as described hereafter.

8. First of all, you need to be clear about what is your target. What is it that you want to achieve. Say, you decide to invest Rs. 1 lakh. You are transferring this money out of a bank deposit, say, where you are earning say, 6% per year. Which means that if you had put this Rs. 1 lakh in the bank on 1st April, then on the next 31st March, you would get Rs. 6000/- as interest, and your capital will be Rs. 1,06,000/-. For the purpose of this discussion and understanding, I am not bothering about things like tax deduction at source (TDS). Now, when you invest in the stock market, you obviously want to do better than this. If you have a reasonable target of around 15 to 20%, that would be big improvement on the bank interest that you would earn. Does that mean however, that each time you invest in a stock, you should earn at least 15 to 20% before you sell the stock? No, that is not how it needs to work. Let me illustrate. Say, you invested the same Rs. 1 lakh on 1st April, in stocks, by purchasing, say, 1000 shares of company A at Rs. 100/- each. On June 30, the price of the stock was Rs. 110/- (very modest growth, by today’s standards). You are getting a 10% earning. You choose to sell the stock. You now have Rs. 1,10,000/- which you invest in another stock B. The price of that share on July 1 is Rs. 10/- say. And you purchase 11,000 shares of this company. Now, on September 30, the price of the stock is Rs. 10.75. Again, a very modest increase. You see a rise of 7.5% and decide to sell the stock. Then on September 30, you get Rs. 1,18,250/- (11000 x 10.75). Again on October 1, you see an opportunity to invest in company C, which is trading at Rs. 50/-. Thus you are purchasing 2365 shares at Rs. 50/- and investing the amount of Rs. 1,18,250/- in this company C. On December 30, the price of the share of C is Rs. 57/-. You choose to sell it. And get 2365 x 57/- = Rs. 1,34,805/-. And on January 1, you not purchase company A again, which has by now, again gone to a level of Rs. 100/-. This time, you are able to get 1348 shares of this stock. And by March 31, the stock again goes to the level of 110/- and you sell it that time. Now you get 1348 x 110/- = Rs. 1,48,280/-.

Thus in the same period of 1 year, your Rs. 1 lakh has gone to Rs. 1,48,280/- as against Rs. 1,06,000/- that it would have reached if it was in the bank. In fact, this example shows an annual return of nearly 48%. Is that possible? Yes and no. A 48% increase by itself sounds very high. Yet, if you are asked, can a company’s share go from 100/- to 110/- in 3 months, or from 10/- to 10/75, or from 50/- to 57/- as per the samples seen above, we would believe that certainly that is possible. In the above examples, we have not expected the stock price to go from 100/- to 140/- (although in today’s times, that and more is happening to many stocks, regularly!). So we have looked at moderate growth of stock prices, happening quarterly. And yet, as long as we have moved our investments from one stock to another, and made those modest gains from each stock, cumulatively our money has grown by as much as 48%. That is the power of cumulative growth!

9. How realistic is the above scenario? Very realistic! Why?
• The stocks that we have selected definitely have room to move up and down to the extent that I have mentioned above,
• The stock prices do have a cyclical movement. They rarely go only one way – up or down. For the stocks selected above, watch them and see if the price is close to its highest levels of recent times. If it is so, then hold on. Don’t purchase just yet. Due to the cyclical movement, you will find sooner or later, that the stock may slide down a bit, say to the extent of 5 to 10% lower. If the entire market is correcting (“going down”), there is a chance that the stock price may slide down further. Watch for that. Keep observing the stock as it goes down. Either the stock has slid down sufficient, say 10 to 15% from its high, or it has slid down, and is reversing back to start rising again. At either of these points, would be a good time to purchase the stock. There will be a good chance that from that point on, that the stock will rise up at least to the level of its previous high. So you have clear room to get the kind of growth levels that are mentioned in the example cited above,
• Of course, that level of growth may come in 3 months or it may take a little longer. OR it may come much earlier than 3 months. The quarterly movement example mentioned above was just an example. In reality, the time can be less or more than 3 months.
• You don’t HAVE to sell at a 5 to 10% profit. You need to evaluate if the stock is rising up sharply and has a good chance of growing further. Or it has reached a higher level than you targeted / expected (say, more than 15%) and now some kind of correction is setting in, and price is starting to just move down. You may like to sell off at that time, so you are at least clearly in the plus, maybe with just 10% or say, even 7.5%. As illustrated in the above example as long as you can do this few times within the year, the cumulative growth that you get, is much larger, and you are conveniently in the plus.

10. In fact, you will not be investing in just one stock, as shown in the example above. You will earmark the amount that you want to invest, and you will distribute that, in purchasing shares of the companies that you shortlisted. And you should try and distribute the amounts almost equally amongst those companies. Remember that with demat system, you can even buy just 1 share of a company. So if you are deciding to allocate Rs. 1 lakh for this purpose and you have chosen 10 companies, you should apportion around Rs. 10,000 for each company. If a company is quoting a price of Rs. 5,000, you can purchase just 2 shares of that company. That is perfectly fine. You are concerned about how your investment of Rs. 10,000 goes to Rs. 12,000 and for that it does not matter if it comprises 2 shares of a company or 2000!

11. You would have not invested in all the companies simultaneously. But you will wait for the opportune time, to invest, for each of the companies. But let’s assume that if you started on April 1, by May 15th, you managed to find the opportunities and invest in all the 10 companies. You might have purchased shares of the 10 different companies, at different times. And likewise, you will look at the prices of these 10 companies independently, for purpose of selling too. You might find opportunities to sell a few of the companies, within 1 month, few in 2, and few in 3-4 months. Does not matter at all. In treating each company in its own merit, you take the decision for that company, and don’t worry about the others. Its at the end of the year that you will review your investments and see where you stand. As long as you have been making 5 to 15% (if you make more, its bonus!), each time you sell, you are likely to be sitting on a nice profit, at the end of the year.

12. What can go wrong? The stocks that you pick don’t climb up as expected. Or they take too long. They remain stagnant. Or worse – they go down. If the stock remains stagnant, or takes longer to climb up, your net return on investment may be lower. But you do need to protect yourself in event of a sharp downward movement. The one thing to keep in mind then, is the concept of ‘stop loss’. So that you don’t get caught in a steep downward slide, you keep a target price in mind, and if your stock moves below that price, you sell it off! Even if it’s at a loss. If your stock purchase of Rs. 10,000 moves to a value of Rs. 8,000, it may be better to keep that Rs. 8,000 (by selling the stock at that time), then to be stuck with Rs. 6,000, if the stock continues to go further down. You can always reinvest your Rs. 8,000 into some other stock and try to recover your loss of Rs. 2,000 from that.

13. But here is where your diversification on stock picks will help you. Having taken the best of breed companies in your short list, you are fundamentally protected from big time losses, hopefully. And by diversification, you are assuring that even if 1-2 of these companies (or sectors) don’t deliver the adequate growth, the rest of them will grown enough to compensate, and give you good returns, overall.

14. How do you find out if a stock is going up or down, whether its at its high level or close to its high level, or what? Here is where a site like Equitymaster gives you good information. Simply go to www.equitymaster.com and put in the stock name at the top, and look for its detailed quote. You will see a graph and you will see information like 52 week high / low levels. Both of these details put together, give you an idea about where the stock stands on the day. If the graph appears to be basically heading upward and current price is like to top of a cliff, the price is close to a high level (which can be also confirmed from the 52 week high / low levels). That may tell you to hold on and wait for a better time, to purchase. But if you had purchased the same stock sometime earlier, and you are now seeing this graph after having already made your target growth level, you may consider selling at this time, and booking your profit on that stock.

The ONGC graph seen above, shows an upward movement from April 05 to September 05, and then a retreat in September to October 05. But you can see that its restarted an upward movement. You can also see that its current price is 991/- whereas, it has seen high levels (refer 52-week High Low as well as the graph itself) of upto 1100. This represents an opportunity to buy as there are good chances of reaching a 5 to 10% plus on current prices, in the near term.

The Telco graph above also shows a broad upward movement from June 05 to Oct 05, after which there was a sharp drop. But it has restarted the upward movement now. At its current price of 513/-, you can again see the potential of reaching its earlier high level of around 576/-, thereby representing a more than 10% potential of growth. A buying opportunity, for sure.

The above graph of Wipro shows that the stock is close to its high level at this time. Its current price is 403, whereas its high level is 413. Also from the graph its apparent that the stock is peaked, and a further rise from here, will demand the stock to penetrate new high levels. By the earlier described formula, you would be better served to wait and see if the stock drops a little, and then purchase when you see at least a 5% reduction from its maximum levels.

So what are your “take home” points from this exercise? If you get these fundamentals right:

1. You will have made some money – certainly more than what you were making with that money in the bank.
2. You would have got the confidence to be able to invest in the stock markets on your own; the initial list of stocks that you would have worked with can then be expanded, to pick other stocks.
3. You would have ridden this amazing wave of growth that is represented by the Indian economy and you would have got your share of that pie.
4. You would have developed a decent additional income source.

So let me know if you follow this advice and go ahead and invest as I suggest. And let me know how your stocks do. If there is any specific guidance that you then want, for your picks, write to me at sanjaypmehta@gmail.com.

Next week, I will explain the concept of annualized earnings, and how to monitor these, in case of your investments.

Till then, take care, and happy investing.

- Sanjay Mehta

VALUE Investing

2005-11-06T03:22:00.000+05:30

When I wrote last week that "The Time to Buy is NOW", even I did not dream that the "now" was really "NOW"! Stock markets raced up soon after I put out my last week's post, and if you had really bought, as per my suggestions, you would be sitting on some very smart short term gains.

Lets look at some specific stocks that zoomed last week:
L&T had been rising steadily right from April 05 (around 900) till Sept 05 when it reached levels of around 1600. It was a strong infrastructure based growth story, for one of India's best engineering companies. Then, in the correction that came recently, the stock retreated to levels closer to 1300, from the high of 1600. Those who believed in the Indian growth story would have seen this reversal as a great buying opportunity. And indeed it was. Even if you had bought L&T as last as the beginning of last week, you would have got a price of around 1325 or so. And it ended the week at 1510, which translates to more than 10% growth in a matter of 3-4 days!

Or look at a stock like Titan Inds. From April 2005 when it was around 230 levels, the stock has had a sharp upward rise till it scaled nearly 550 by July 2005. After oscillating between 470 and 530 for a couple of months, the stock dropped sharply to a level of around 400, in Oct 2005. There again, there was a great opportunity to buy. And if you had done so, even early last week, you would have got the stock at around 410 or so. Titan ended the week at around 510. If you would have picked it at 410, this spells more than 20% rise!

You would have got these and similar opportunities if you were following my guidelines of tracking select stocks even if you don't buy them, just to watch out for opportunities to buy, that come up, like this, all of a sudden sometimes!

What makes a good stock to pick? Easily a stock that has a large potential to grow from its present value. That, in simple terms, is referred to as value investing!

So you buy a stock, not because the company is doing well, not because the sector is doing well, not because its a low priced share, not because its a high priced share... But because, at the price you will purchase, there is ample room for the stock to grow.

In the above examples, at those levels, L&T and Titan, both promised to be strong value picks.

A benchmark on ascertaining the value of the stock, is its P/E ratio. We have covered this in detail, earlier.

When markets are very bullish and generally in the overtraded zone, what we see is that most companies are running at very high P/Es, which make its current price appear to be very high.

So how does one justify the high P/E ratio? Well, the explanation given by the pundits, is that the stock has been give an appreciation well beyond its current value or its current P/E, and it is based on it "forward P/E". What that means is that the expected higher earnings are factored into the stock, so that current price already covers what the stock will be worth, when the earnings are much higher later.

To understand this, lets assume that the Earnings factor in a P/E ratio of a share is 20. And the price of the stock is 400. That gives the P/E ratio for that stock to be 400/20 or 20. For the sector that the company belongs, an average P/E is say, 10. Then the P/E ratio is certainly much higher, at 20.

So how is that justified?
Well, it is likely that the company has projected improved earnings in the next quarter or the next year, perhaps. Say, the earnings factor is going to increase to 40 from 20.
Then when the earnings reach that level, if the price was still 400, then the P/E ratio at that time, would be 400/40 or 10. At that time, the stock will be priced correctly, at the industry average P/E of 10.

But the problem lies in the fact that the stock carries the price of 400 TODAY. When the earnings are only 20, and not 40. Which means, what SHOULD be the price when earnings go to 40, is ALREADY given to the stock today!

That is what happens in an aggressive, overheated bull market.

The problem happens when over the projection period, due to some or other reason, the company does not perform as well as it was expected to. Then the already appreciated price of the stock is found to be too high at that time, and the stock price crashes.

That has happened to stocks like Geometric Software and Ranbaxy Labs, in recent times. Both companies are fundamentally very strong, and yet suffered this fate, because the basic prices were overheated!

It is in this perspective that a value pick still needs to be found. In this context, thanks to research provided by Equitymaster.com, I can suggest the following few stock picks, which offer value, as on date, and show scope of good appreciation, by the end of this financial year, itself.

Hindalco
Oriental Bank
IDBI
HPCL
MTNL
Tata Motors
Aventis Pharma
Zee Telefilms
ONGC
TVS Motors
Essel Propack
Tata Power

You might see some stocks in the above list, like HPCL and MTNL, which have been very subdued in recent times. But the fact is that the high profile stocks have already appreciated significantly, and have lower value left. So indeed, picks that are lower profile, lesser in the limelight, are probably stocks, which have decent value left. Also when the stock is fundamentally good, but due to some factors, it is lingering low, that is a good time to buy it, and wait for decent appreciation (VALUE!) from the stock, later.

Till next week, take care..

- Sanjay Mehta

The Time to Buy is NOW!

2005-10-30T23:59:00.000+05:30

Mayhem, bloodbath, disaster, crash.. such have been the adjectives used to describe the Indian stock market crash in recent weeks. And with the ferocity with which the markets have retreated, many of these strong adjectives may not really be out of place.

So what does the amateur retail investor do at these times? I am sure this is an important question, and to try and answer the same, I felt it worthwhile to restart my weekly postings, after a long break.

When the going was good (translated: it was a one way ride, going up, up and up..!), it did not take any science to suggest the next move. If I had suggested to sell at that time, no one would have listened. And I don't think I would have asked anyone to sell, anyway! In other words, when the market was zooming up, there was no place nor need for me to suggest anything to the retail investors.

It is only at a time like the present one, when suddenly a lot of steam has gone out of the markets, is there again a question mark. What do do next?

Well, I would start with classifying the retail investors, thus:
1. The ones who entered the market reasonably early, and the recent losses in the markets have reduced their profits, but they are still very much in the plus,
2. Those who have STILL not dared to invest, as they hesitated when the prices were going up so fast, and they never got a chance to get it, at reasonable levels, and
3. Those who waited and waited and finally invested in the last couple of months or so, when the market was very high, and are already repenting, because they are sitting on huge paper losses!

While fundamentally, a "what do do now" question has a common answer in all of the three cases above, however, the mental makeup of investors will be very different, depending on which category of the above three, that the investor falls in.

In more cases than fewer, there is going to be a sense of insecurity and / or panic. Are the markets crashing? If I am invested, do I risk a wipe out, of my portfolio?

Why do these thoughts come? They basically come because of the 'noise factor'. The noise factor is the enlightened media, who seem to have a post-event explanation for everything. And who have their own crystal balls, to justify the further future.

When markets were going great guns, closer to Dusshera, they were talking of the sensex approaching 9500 or even 10000 closer to Diwali. And now when its made a U-turn, the same guys have no hesitation to predict a 7500 number for the sensex, very soon.

These pundits and their pronoucements scare the retail investor away.

Well, the game is to shut out the noise! When noise is cacophony and not beautiful rhythm, then its best shut out. Be your own decision maker.

And on what is your decision based? Here are some mantras:
1. How confident are you about the Indian economy in general? They talk about it being India's moment, India's decade, India's tryst with destiny, finally! I couldn't care whether China is ahead of India in the race or not. Even if we are in second place, its still huge business from where we are today, and Indian companies and Indian people will certainly benefit, over the next few years. Your investment in the markets today, needs this fundamental conviction. If you are not convinced about this, then you may be better off, being out of the markets, or playing a very selective short term game!

2. With this conviction in place, the next factor is to ignore the sensex or the broad generalities, and focus on specific stocks. The sensex may go up or down, but what you are concerned about is, the stocks that you own, or want to own. Look for clear value - the innate ability of the stock to deliver good appreciation for you, from where it is today. Invest in those.

3. How do you find value stocks? When the market gets beaten up the way it got beaten up last few trading sessions, there are losses to most stocks - good and bad ones. And some get beaten up more than others. Perhaps on account of some 'news' about the stock. The news may not be critical to the performance, and might have only a marginal impact, but when stocks are at stratospheric heights, any small piece of negative news, can cause a huge shakedown. Look for such stocks. These can be great buys. A few examples that I can think of, are stocks like Ranbaxy (dropped from 510 to 350 in 3 weeks), Geometric Software (dropped from 125 to 85 in 4 weeks) and India Cements (dropped from 115 to 78 in 2-3 weeks). Note the percentage reductions in these. These companies have not become terrible companies, from being great companies earlier. Its just the market sentiment that has punished some adverse news of these companies, very hard. These stocks, according to me, cannot go down much more from this point, and as against that, they present a huge opportunity for growth, from hereon. These, then, are good value picks.

4. The Q2 results of companies, continue to dazzle. Corporations are doing well, and very well. So the recent drop in prices is a genuine correction that had to happen, when the market had gone up one way, for such a long time, before that. Most genuine investors were waiting for this long overdue correction. It gives a moment to catch the breath, it gives a chance for people who have booked profits earlier, to pick up their favourite stock again, at lower levels. The India Inc growth story being real, the results being great, this in fact, is the time to buy stocks. You can never get the exact bottom to buy at, just like you cannot wait for the perfect max high to sell at. I think the present levels are excellent for making fresh purchases, if you have the liquidity. And if you have not booked profits earlier, selling now, can be the perfect mistake that most retail investors do - they enter a market when its very late and prices are high, and they keep holding when the market slides down, and then sell when it has retreated by a long way! Don't make that mistake now.

5. The other breed of investors who has suffered a lot recently is the one who got really greedy. And went and bought shares that were unheard of. And which were being swayed big time, by speculators and insider trading. The greed of making multi-bags, on these kind of stocks, might have left many an investor holding duds in their hands. If you are one of those, you don't have my sympathy. In a very early pieces of this series, I had warned to never buy stocks that you could not recognise, or just because they were cheap. If you bought for those reasons and are stuck with them now, you dug your own grave, I am afraid.

All in all, I would strongly recommend to look for some good value picks and purchase fresh stocks now, as there is now again, good value that has become available at current levels, in the stocks.

I hope to keep up the weekly series once again now. This is a fresh start, and hope to receive your comments on this and further pieces. If there is anything specific that you would like me to cover, please comment or write to me.

Till next week, then.. ciao!

A Tale of Two Sectors

2005-03-06T14:45:00.000+05:30

So the budget has come and gone. All the brouhaha related to the budget has died down. On day one, the budget was praised by most people. Next day, they figured the loopholes that were left by the budget, and they ran the budget down. And after all that, they proclaim that the budget was 'okay' - neither here nor there!

So much for the analysts and the experts.

As far as the markets go, traditionally, the markets have tended to go down, after the budget, basically on account of expectations not being met to the desired level. It would have been the case this time too, and in fact, for the first few days, it looked like the trend was being followed. However subsequent trading days have shown that the retreat in the markets was momentary and short lived. Thanks to FIIs showing yet again, a vote of confidence, and increased money coming into the markets, stocks kept zooming ahead, and the sensex touched new highs! And the upward movements seems to be going unabated.

As far as retail investors are concerned, the fundamentals remain the same. Sense a buying opportunity, as per the fundamentals covered earlier, then buy. Work with profit targets and stop loss targets, and you will not get hurt! Simple fundamentals do not change, whether sensex is at 3000 or at 7000.

This week, I wanted to highlight a couple of sectors, and some interesting observations that I have about these sectors.

Normally in any market sector, there are a multiple number of companies. Say, cement or steel or pharma or whatever. In each sector, one finds a few companies. And if we look at the stock movements of the different companies in the sector, we find few might be doing well, few others might be flat, and still a few which may be the lagards in the sector. This kind of mix is the reality in most sectors. Even when a sector is seeing very good times, not all companies are doing as well, and even when a sector is doing badly, there may be a spark or two from the sector, which does better than the rest.

What I have observed this time around, especially post-budget, is that there are two sectors where all the major players of the sector, seem to be showing similar and good stock price movements. The two sectors that I am referring to, are the Infrastructure industry and the Sugar industry.

In the infrastructure industry, the key players today are:
Gammon India
IVRCL Infra
Hindustan Construction
Nagarjuna Construction
Simplex Concrete
Unitech

As you will see by clicking any of the above names, the stock graphs of all of these, show a sharp rise.

Likewise, in case of Sugar industry, the following companies are better known today:
Balrampur Chinni
Dhampur Sugar
Sakthi Sugars
Bajaj Hindusthan
Bannari Amman
E. I. D. Parry

Again, if you click and see any of the stock graphs of the above stocks, you will find that they follow a similar pattern, of high growth, at this time.

It is very interesting that all key players in these two industries are doing well, and the same is reflected in the stock graphs. Getting into these two sectors, will then give you attractive returns. Also the way things are, you do not need to pick a specific company, and wonder if you have made the right choice or not. As it stands, all companies in these two sectors seem to be rewarding the shareholders well.

Still if you would like to pick 2-3 companies from each of these sectors, you can pu the following criteria:
a. Identify the company/ companies that you can recognise, of the various ones listed above. Chances are that the better known company is also better established, and you may not go wrong by picking that one,

b. Look at the P/E ratio. I did explain the P/E ratio in an earlier article. If in the same industry, you can pick a stock with a lower P/E, chances are that it has a longer room to grow, in as much as its stock price goes, till it catches up on the average P/E of the industry. So you have more room to increase your returns, as a consequence, then.

So, go for infrastructure, with a little sugar in your mouth, and make your fortunes! Till next time..

- Sanjay Mehta

Budget Blues

2005-02-20T12:53:00.000+05:30

If it ain't the Earnings Season, it is the Budget Blues...!

The market needs some or the other reason to be excited about, and push stocks up or down based on some frenzy.

'Tis the budget season then, right now.

CNBC has a topic to fill up a lot of minutes. Business papers don't have to worry about features that they need to create - the budget can fill up a lot of columns.

Yes indeed, in India, the budget is not just a financial exercise to project and balance the year's expenses and incomes, but in fact, it is a major policy making time. And hence it has significance to the market.

Which industry sector will get a boost? Which one will get some new tax burdens? Will there be any politically inspired policies which may adversely impact the economy, or at least a sector? All these are realities in India, and therefore so much attention is given by so many people, to the budget exercise.

As a retail investor, do you need to be concerned about the budget?
Here is my take on it.

Invariably, the market has a lot of expectation out of the budget. You typically see a huge run up on certain sectors or a profit booking on some other sectors, pre-budget. All of this is inspired by unverified insider information, or rumours coming out of the Ministry of Finance, about what is going to transpire in the budget. In fact, the actual budget is usually a very confidential matter, and actual information is not so easily available as it is made to appear. Having said that, in today's times, we see Finance Ministers having a lot of interaction with industry in a transperent manner, and also dropping clear sound bytes as to what direction they are broadly headed, before the budget. These noises are enough to inspire some 'calls' that the market takes with regards to the budget.

For example, this year, there has been so much written about and heard about, with regards to investment in infrastructure. There is news coming that serious money will be allocated to the sector, and that money will be utilised from the burgeoning forex reserves that India has built up in recent times.

Due to this, industry sectors related to infrastructure, have been racing up, on the expectation of better times ahead. Companies like Gammon, IVRCL, Hindustan Construction, Simples Projects, Unitech, and others have risen up on this account. Of course, infrastructure will also benefit cement and steel, among other industries. And these two sectors also show a tremendous push in last few weeks.

So sure, keeping you eyes and ears open, not to mere rumours or tips, but to trends in a more broader sense, will give you some investment ideas. The specific companies that you think of, as a consequence, must still be vetted for being good buying opportunities, on basis of what we have covered in earlier weeks.

But as I was mentioning earlier, there is just so much speculation about the budget, BEFORE the budget that people have already taken their calls on sectors and companies,based on what they expect to see in the budget. As a result, when the budget actually comes out, there is almost always, a sense of disappointment. That there was nothing 'new' or that the extent of change that they were expecting did not quite happen. One or the other way, the market almost always goes down in the post-budget period, for a while. There may be rare exceptions to this phenomenon.

But assuming that the scenario may pan out, like it has done on most occasions, what do you do?

If you would like to play on the budget song, for a short term option, you may check your portfolio and identify specific picks that have run up well, in recent weeks, mostly on account of budget expectations. You might be seeing a decent positive in these stocks anyway. Perhaps you may want to sell some of those stocks and wait till after the budget, when the expected correction comes, and at that time, you can buy them back. If a stock is at 100 now, and you sell it, and if you pick it back, post budget, when it has slid say, to 92, you would have made 8% in a few days.

Alternately, if you believe that you have good stock picks and you do not want to worry about this budget play, then just stay put. Don't worry about the budget. Let the highs happen now, let there be some sliding down post-budget, but then, after things quieten down, your stock will pick up pace once more, and rise up again.

I am pleasantly surprised to find more and more people think in this manner these days. Perhaps its got something to do with the overall bullish feel about the Indian markets. More people seem to be willing to play a longer term game, rather than focus on the short term, with the budget factor.

As a broker friend when asked about the market's future commented, "The future is good. Not just till this budget, but for the next 10 years. You can be assured of good things till 2015, at least"! That was HIS call. But you can well imagine the sense of optimism and feel good factor that is prevalent in the marketplace these days.

Take care.. Happy Investing..
- Sanjay Mehta

The Myth About Mutual Fund IPOs...

2005-01-24T22:19:00.000+05:30

Or Why the NAV of a Mutual Fund Plan is not so relevant?

Before getting into the controversial sounding subject matter as mentioned above, let's take a quick look at how the week went by and changes if any, for the investment strategy.

Well, the week went volatile, with large swings up and down, but more down than up. It appears now that there is a sense of restlessness in the market, and this jittery behaviour may well continue till close to the budget. This inspite of the great India story. So what do we do?

Well, there are many suggestions floating around at this time. Many tell you that equities are anyway 1-3 years investment scenarios ideally, so in the midst of these losses, you need to just hang on, and things will certainly improve. Many suggest to not sell in panic. I agree with the concept.

Sure, there should not be any panic. If you are in this business now, you have to expect losses as you would expect gains. So panic is the last sentiment that you can experience. Having said that, it does not mean that you do not have a clear strategy. If you have a clear strategy of profit booking and stopping losses, you would have sold if your stop loss targets have been reached, no matter how many theories tell you to hold on for 1-3 years. It is your money, after all. And if your stock has not reached the stop loss level, and you are holding it, that is also perfectly fine.

Let's look at it in yet a different way. It is agreed that stocks are going down at this time, and it is also agreed that after reaching a certain low point, or perhaps triggered by some external factors like FII inflows or the budget, the stock will start climbing back again. Say, you purchased a stock at 150,which has started slipping and is now 130. And it is still going down. Perhaps it will reach 100 and then it will resume a upward movement. And then, over time, it may go beyond 150 too. So, as those theories say, you are okay to hold on to the stock, as it may go up once again, later if not sooner. Now, if you had a stop loss target of 130 and so you sold the stock at 130. You kept tracking it, and saw it sink right upto 100. And then you saw it reverse back, and you could also sense the external factors change, and you could see that the markets have started moving back up, once again. Then you may like to repurchase that stock again, at 110.

So you had a stock when it was 150, and you have a stock now, when it is 110. That part is common in both scenarios. What is different in the second case is that you in the meantime, sold the stock at 130 and bought it at 110, or made a cool 20 without much ado. That is the opportunity that you could have when you follow a clear strategy. Remember: profit booking, stop loss, tracking, discipline..etc.

Okay, now coming to the week's controversial sounding topic, that it does not matter what is the NAV of a mutual fund, and hence it does not matter if you purchase a fund in its IPO stage, or another stage. How so?

There is an unfortunate misunderstanding amongst retail investors that like equity, if you get allotment in a MF IPO, perhaps at par value of Rs. 10, there is a chance that you will make immediate profits, as soon as the MF "lists" (like in case of equities). Or that you cannot lose from that Rs. 10 level. Or that you have more chances of making money than if you buy the same MF at a higher NAV. ALL OF THESE ARE matters of gross misunderstanding of Mutual Funds.

Via an IPO, a mutual fund collects its base corpus for the fund. Say, by selling 10 crore units of Rs. 10, a fund collects Rs. 100 crores. With this fund, it goes out and invests in equities, AT PRICES currently prevailing in the market, of course, where the fund manager sees potential. If all of the market is heated, like it is right now, he will get most of the stock at fairly expensive levels, compared to say, the levels of a few months back. Potential for the stocks to rise from present levels is lesser than it had to rise, from levels of few months back. Hence the potential of the MF NAV to rise to much higher levels is also limited to that extent, never mind that it started with an NAV of Rs. 10.

As against that, say you invested in an existing MF whose NAV was Rs. 95, few months back. Apparently, this would have seemed to be a much higher level to invest in, in terms of the MF NAV. However this MF was purchasing stocks, at levels of those days, and from where the potential to grow was much better than it is today. If you wanted to invest Rs. 9500, you were better off purchasing 100 units at that time, than purchasing 950 units of Rs. 10 today. What you are concerned with is that your Rs. 9500 grows, right? With the investment in the Rs. 95 NAV units, chances are that your Rs. 9500 could become Rs. 13000 also (as stocks could grow by 50% or so beyond its value of few months back), whereas your investment of Rs. 9500 in today's MF IPO may go to Rs. 10,500 say, as potential to grow much beyond current levels is less.

I hope that the above is clear.

When investing in a Mutual Fund, you have to be least concerned about its NAV value in an absolute sense. What should be more important to you?

> what are the future prospects of the fund, from where it is today?

In order to arrive at that answer also, you really want to study the growth pattern of the Mutual Fund, i.e. what is the %NAV appreciation in say, 1 month, 3 months, 6 months, 1 year, 3 years, 5 years, or since inception. It is the NAV APPRECIATION that is the key, and not the absolute NAV. If I have to invest Rs. 10000, it does not matter (to exaggerate) if it is invested in 1 unit of Rs. 10,000. As long as I believe that it is going to appreciate beyond it at a rate that I will be happy with.

What I have conveyed in this piece is in fact, a very trivial matter, for anyone who is familiar with mutual funds. Still I felt it worth devoting an entire article to it, only because I have come across so many people who do not understand this point, and are taken in by lower NAVs or IPOs of Mutual Funds.

Till next week, then..
- Sanjay Mehta

Let’s get a little technical…

2005-01-16T22:54:00.000+05:30

So the carnage continues on the market! The week that went by, saw more correction on the markets, and even though there was some recovery, all in all, it was a downward movement. If you ask a dozen experts, you will get a dozen different reasons to explain this. From the dollar-rupee rate, to the FII money drying up, to a bear grip on the market, reasons are many. The bottom line for a retail investor is that the market is slipping ground. There is every likelihood of recovery, and maybe sooner rather than later. But for the moment the market has moved southwards.

So as a prudent investor, what do you do? The answer lies very clearly in one of my early articles. The answer is that you need to have a target profit number, which if you reach, you are better off selling and booking profits. And likewise, you have a stop loss target, so that if the stock starts moving down, and reaches that target, you will sell off, and ensure that you stop your losses from increasing.

It takes a lot of discipline and focus to follow the above principles. When the stock is moving upwards, one tends to be greedy to want more, and does not sell off, and book profits. Only to see the market going down later, and the paper profits disappear. Likewise, when the stock moves below the purchase price, there is a strange attachment that many investors get to their stock, and they refuse to let it go, even as the receding price of the stock keeps eating away on their capital. It is even more important to sell to stop losses, than it is to sell, to book profits.

If you HAVE followed these fundamental principles, without getting panicky or desperate, you will be sitting with a cool head, and calm comfort, waiting for the next opportunity to buy or sell. For the rest, who did not follow the simple advise, well, I presume you may not be left with much nails on your fingers, as you might have bitten them all off, as markets kept sliding down in front of your eyes!

Anyway, let’s get to the main topic of this week’s article. And as the title says, we are going to get just a wee bit technical this week. Yes, I remember my promise from the first article, that I am addressing amateur retail investors, and I will refrain from using any technical terminology. And all of the last several weeks’ pieces have strayed away from the technical issues. And in a way, you are sufficiently well equipped even without the technical knowledge, to invest and make money from the stock markets. However, for the benefit of those who want to understand one simple term, viz. P/E ratio, I am going to devote this piece to the understanding of that. And I promise to make it so simple that as an amateur retail investor, you will surely get it!

Lets forget the stock markets for now, and just look at a company, where you may consider investing. Say, the company has given out 1000 shares. And this company makes a profit of Rs. 10,000. Very simply put, if this profit had to be distributed to individual shareholders, how much would each shareholder get? Rs. 10, right? Well, then Rs. 10 becomes the ‘earnings per share” or EPS as it is known.

Now if there is someone owning a share of this company, and he wants to sell it to you. What will be the minimum price that you will be willing to pay? Well, it has to be Rs. 10 again, as that is the ‘earnings per share’ and conceptually that amount is yours for the taking. So indeed the minimum price that you will be willing to pay for the share is Rs. 10.

However, note that you are going to become a shareholder by purchasing this share, and you will not just get the fruits of this year’s earnings, but of future earnings of the company as well. So you may be willing to invest a little more than Rs. 10. How much more will you invest? That will depend on your perception of how the company is likely to do in the future. You may believe that the company may continue to earn the same amount for at least 3 more years, and you are willing to take your bets up to that period. Then, you may be willing to purchase that share for Rs. 30, rather than just Rs. 10. On the other hand, you may have a feeling that the company is not only going to make profits for future years, but it is poised to increase its profits substantially, over the next few years. Say, you may estimate that the profits will be 3 times the next year, 5 times the year after, and 10 times the year thereafter. In such a case, you may be willing to pay a much higher sum for that share, say, even Rs. 100 or Rs. 120, as compared to the original Rs. 10. Whether it is Rs. 30 or it is Rs. 100 or it is Rs. 120, what you are paying is a MULTIPLE of the present “earnings per share”. Remember that in the above example, the present earnings per share were Rs. 10. When you pay Rs. 30 for that share, you are paying a multiple of 3 times the EPS, and when you are willing to pay Rs. 120 for that share, you are willing to pay a 12 times multiple of the EPS.

I trust that you have understood the above. As soon as you nod in confirmation, you have also understood then, the concept of P/E ratio. Yes, in the P/E ratio, P stands for the price of the share, and E stands for EPS or earnings per share. And hence, the P/E ratio is nothing but the multiple to the EPS that the price commands. When you were willing to pay a PRICE of Rs. 120 for the share, whose EPS was Rs. 10, the share had a P/E ratio of 12.

In the real world of companies whose shares are listed on the stock markets, the scenario is same, but at a larger scale. Instead of the 1000 shares that the company in the above example had, most listed companies will have lakhs of shares that have been issued. But the principle of EPS and P/E ratio remains the same.

The other thing to appreciate is that out of the two factors in the P/E ratio, the “E” part, i.e. the EPS, does not change on a day-to-day basis. Even though the company operates its business daily, it does not release it’s accounting information on a daily basis, so we only know the EPS based on the last declared financial results. Also in reality, the earnings of the company generally move as per some gradual movement that has already been envisaged and predicted. Large variations in the EPS are unlikely. So in the ratio P/E, the E part remains largely steady. It is the P part of the price of the share, which is dynamic and will tend to change daily or even hourly, based on the perception that investors have, about the company, and where it is headed. Change in the price, then gives a change in the P/E ratio. Or knowing some facts about the company, its present P/E ratio, an investor could hazard a guess as to its likely movement on the P/E ratio, and then, you can take an educated guess, whether it’s a good time to buy the stock or to sell it, or to just stay put.

How does that happen? Let me give you some idea of this.

1. Typically an industry sector may have an average P/E. Say, for example, the 2-wheeler industry has a P/E of 15. Which is nothing but an average of the P/E of the various industry players. Now, if Bajaj Auto has a P/E of 14 and Hero Honda has a P/E of 16, what does it say? It would say that for some reason, perhaps due to the future prospects that the market perceives, they have given a better appreciation to Hero Honda stock than to Bajaj Auto. Now if Bajaj Auto comes out with good results, then there is a good chance that its share price may rise to make its P/E at least 15, if not beyond that. On the other hand, for Hero Honda to appreciate further, it must come out with something more outstanding, and substantial, for the market to give it a multiple even beyond the premium that it has already given to the stock. Moreover if there is any adverse news about Hero Honda, the stock is likely to slip sharply to levels where its P/E goes down to 15 or 14 (Bajaj Auto’s level) or maybe even lower than that.

2. There is a chance that due to some bad years of performance, in an industry sector, a particular company has got badly hit, in terms of its share price. Where the industry average P/E is say, 15, this share price has been hit so badly, that its P/E is dwindling at 5. Now suppose there is news that due to some restructuring or whatever, this company is turning around in its performance. And if it is believed that it will soon come close to the rest of the industry peers, then just imagine the room that this stock has to grow. Since its P/E is only 5 and the industry average is 15, then the price can move significantly up, before its P/E level reaches somewhere close to 12-15. That may suggest a great buying opportunity then. This, in fact, is what has happened to many PSU companies whose shares are quoted on the stock market. PSU banks’ stocks are also examples of this type.

3. The P/E ratio also explains the astronomical rise of some stocks in the ‘new-age’ industries like say, IT, Media, Biotech, etc. The market somehow believes that the earnings of these companies will rise at a very fast pace, as compared to more traditional old economy companies. Which means that over the years, the “E” part of the P/E ratio is going to keep going up rapidly. That being the case, the market pre-empts the scenario and gives a big premium of the price multiple today itself, and that results in a high P/E ratio. The IT industry commands a P/E of more than 50, the pharma industry commands a P/E of around 32 and the FMCG industry (on account of the expected growth in this sector due to the large buying power of India’s middle class, perhaps) has a P/E of around 34. This is compared with P/E of 18 for cement industry, 10 for engineering industry, and 6 for Power sector companies. You can well see what the market believes about the future prospects of these industries. By the way, all this information of P/E for individual company or for an industry sector, is available on the website of equitymaster.

4. Sometimes when our stocks are rising to great heights, we may question the logic for the same? Do these stocks justify such a price level? One way to validate these doubts is to again look at P/E levels. What is the average P/E in a developed market like the US stock market? What is the average P/E level in some other emerging markets, like say, Brazil? What is the P/E level say, for the leading bank stock on the Wall Street? How does that compare with the P/E level of India’s leading bank stock, State Bank of India? Comparisons of this nature can give us answers as to whether our markets are overheated or in fact, they are slowly catching up with the world, in terms of the P/E multiples that we have given. The latter may point to a maturing of the markets, in fact. To give you the actual answer, indeed, our markets are maturing, and our P/E levels on an average have been lower compared to the better markets of the world, and in fact, there is still a lot of room to catch up with the world P/E multiples. Again then, if we believe that the India story is happening, we should not be surprised that our stock prices are rising, as we are only closing in to the P/E levels commanded in other world markets.

5. A note of caution about understanding P/E. Where the above guidelines are theoretically correct, there is a question of understanding what data you are seeing. You may see an EPS of a company today. Do you know clearly, if that EPS is of April 1, 2004 results, or based on quarterly results for quarter ended on December 31, 2004 or in fact, these are the projected EPS for year ending 31st March 2005? When you compare P/E for different companies or in an industry sector, are you sure if the EPS taken for comparison is the same period one, for both? There are times when analysts refer to “forward P/E”, there are times when the P/E is based on last year ended results, etc. It is important to be clear of the data behind the P/E ratio to ensure that the correct comparison is made, and action taken based on the data, is also correct.

Yes, it is a technical issue that we have covered this week. Those of you who are able to understand and utilize this understanding well, will have an additional weapon to combat the markets. Those who choose to let it pass, are also okay, as the earlier discussed principles which are simpler to understand, will still carry you through the minefield of the marketplace!

Till next week, then. Take care….
Sanjay Mehta

Testing Times

2005-01-09T21:09:00.000+05:30

At the outset, I am sorry for having missed out on the newsletter last week. I was traveling and did not get a chance to make and send the newsletter. In fact, I was out for the whole week, attending a workshop in Delhi. I was keen to make the most of the workshop, and was very keen to stay away from any distraction. Which is the reason why I resisted all temptations, all day long, to look up the stock market positions while the trading session was going on. Yes, I was taking a risk, but with the innate confidence in the markets, I thought all would be well, and let me concentrate on what I have come here for! But at the end of the day, when I returned to the hotel room, I could not stop myself from tuning in to CNBC to catch up on the news of the day. And that is when, in the middle of the week, I kept getting the shocks of the sharp reversals in the market.

For all the wisdom that I have spilt over the last few weeks in this newsletter, I should have been far more confident and assured, in spite of these reversals. And in fact, I had mentioned a couple of weeks that a correction was overdue, so I should have also not been surprised, but when it happens, it scares the best amongst us, and I was no exception. However, I am glad to say that my fundamental bullishness about the markets prevailed over my fears, and I relaxed and continued with my workshop in all earnestness, and without calling my broker in panic asking him to sell off everything that I had!!

But indeed, when the long awaited correction happens, it’s indeed a testing time. It questions your belief in the market, your convictions about the present prices of the markets, whether these are justified or these are overpriced, or what. Its these times when the late comers will panic and lose money all over again, and reconfirm their worst fears that the stock market is not for them!

But what’s the reality? What does one do at such times? Let me share with you, some examples, to make two important points here:

I reviewed my portfolio at the end of this week of correction. I had lost over the week, both in the equities as well as in mutual funds. My losses on my equity portfolio were about 3% whereas I lost about 1.8% on the mutual funds portfolio. A no-brainer here: it pays to be invested in mutual funds as they will have a better understanding of the markets, diversify their portfolio well, and at the least, they will minimize their losses.

It may be noted that the markets lost about 3% over the week, so my equity portfolio performed on par with the markets, whereas, the mutual funds portfolio did better. Interestingly, when almost all mutual funds lost over the week, there was one specific mutual fund that maintained its NAV, which is impressive, isn’t it? It was the Sundaram Select Midcap Fund.

Likewise, where almost all my stock picks suffered over the week, there were a couple of interesting exceptions. Tata Cofee went from 260 to 300 over the week, while Sterlite Opticals went from 75 to 88 in the same period. The point to appreciate here is that diversification over industry sectors; diversification over company size, etc. does help. Even when the market is in bearish phase, not all the money is coming out of the market. Investors still look for a good buy at such times, and it could easily be another stock that you are holding, giving you a sense of balance in your portfolio!

So what happens now? Times are testing for sure. If you are a sensitive type, and do not have as much confidence in the India Inc. story, then you may reconsider investing in the markets at this time. There is expected to be a fair amount of up and down over the next few weeks. Some more tumbling, some recovery.. as we approach the budget in February. Of course there is another animal that is unpredictable, and which has surprised us over the last few months. And that animal is the FII investor. These foreign institutional investors have surprised everyone by their increasing exposure to our Indian markets. In earlier years, we have seen them to get little quiet and even book profits, in December, as they head for their Christmas holidays and their year endings. However this year, in December, we saw a continuous flow of investment that raised the market to new highs. And with this correction, the FIIs may see good value in our markets all over again, and who knows, we can see a spurt in the markets, all over again!

But if you choose to stay out of the markets, that is your choice. And in that case, do not worry about what comes further here. If you are the one who believes in the fundamental India Inc story, and you agree with me, that this correction is an aberration, then the strategy for the next few weeks can be as under:

Look at value in mutual funds. Some good mutual funds have slipped a bit under this correction and their NAVs will be attractive to get in right now. In fact, you can expect 3-4% immediate gains, in such cases, as they will surely get their act together and recover from the losses that they have suffered. Franklin India Prima Fund (drop of about 1.7%), Franklin India Bluechip Fund (drop of about 2.5%), Alliance Equity Fund (drop of about 2.2%), HSBC Equity Fund (drop of about 2.3%) are some such Funds that you may wish to look at.

If a stock that you hold, has appreciated a lot, and has now corrected a bit, you may like to book profits in the same. And track it thereafter, to pick it up again when it slides some more. At least you will have the satisfaction of actually monetising the larger profits on that stock. If the run up has been large, there is a likelihood that it may not keep pushing up as much, in the near future now, with the slightly bearish phase going on.

And then there are opportunities to buy stock. There are several good and strong stocks now that have slipped by at least 10%, from their recent highs. Some have slipped more than 10%. You may want to pick up some of these at this time, or observe the market to see if its going to go down some more, and then pick up these stocks, at even lower levels. If we believe in the fundamental India story, there is an extremely good chance that these stocks will revisit their recent highs, within the next 3-6 months. A sampling of few such stocks is as under:

You will appreciate that the selection is also well diversified in terms of industry sector, size of the company etc. If you want to build a fresh portfolio at this time, the above may be stocks worth considering, as a start!

Signing off, till next week, then..
- Sanjay Mehta

IDENTIFYING THE BEST AMONGST MUTUAL FUNDS

2004-12-27T01:03:00.000+05:30

Last week, I suggested you to get familiar with some mutual funds information such as the list of best performing mutual funds over a certain period of time, looking up the fact sheets of mutual funds and the like. I hope that you have taken time to do this, as this data becomes our primary source of research to identify our best picks amongst mutual funds.

In case you had not seen the data, you can have a quick look at the following links, for understanding the same:

1. Here is where you can play around and see the best performers over different periods,
amongst different types of funds, etc. For example, you can query for the Top 10, gainers over the last one month, amongst open ended, equity-diversified funds, and you would see results of the following type:

Likewise you can query for a different period, different types of fund schemes and the like.

2. Factsheets for mutual funds are available to research specific schemes. A typical
factsheet would look something like this:

The above two data factors are excellent starting points for deciding on the mutual funds to invest in.

For the present discussion, I will continue to focus only on the mutual funds that are open-ended, diversified equity based ones. There are ample options amongst this type, to choose from.

In other words, what I am filtering out, for the present decision making, are debt funds, short term liquidity funds, and even balanced funds. For information, balanced funds balance their investments between debt and equity. While these are good investment bets at certain times, for the present, especially for purpose of our discussions, why dilute the equity based
investments, even with a small percentage of debt? As such, I am looking at pure equity based mutual funds, for now.

Before we get to the decision making process, let me explain some more fundamentals with regards to mutual funds:

Mutual funds, as you would appreciate, reflect the value of the overall investments made by the fund. If most of the equity picks of the mutual funds are doing well, the mutual fund appreciates. However typically mutual funds spread their investments in several shares, and not all of them go up each day. Due to the slight balancing that happens
between the winning and losing stocks from the mutual funds portfolio, the increase in the value of the mutual fund is usually a gradual one, even in good markets. To be more precise, you may find a particular share streak up by 10 to 20% on a single day, but that kind of streak is less likely to happen with a mutual fund value.
On the other hand, the right picking of stocks by the investment managers of a mutual fund, usually ensures a steady movement upwards. In a longer phase, say 3 months and upwards, a retail investor may generally find better rewards in a mutual fund, than in his own direct equity investments.
The price of a share is often subject to some 'resistance' levels. For example, a share hovering in the Rs. 80-90 range may inch up towards Rs. 100, but may not penetrate the Rs. 100 level. It may reach Rs. 99 and again retreat down. This is on account of Rs. 100 being a resistance level for the stock. In other words, a lot of investors could have put "sell" orders for Rs. 100 levels, and the price keeps falling down, as it approaches Rs. 100. In case of mutual funds, since the price is never directly determined, but is always a "net asset value" based on the prices of the individual stocks invested in, therefore, there is no question of any resistance levels. If the individual stock investments of the mutual fund are doing well, the NAV of the mutual fund will keep increasing irrespective of the value it is at.
Some mutual funds do well in the short term (say, 1 to 3 months or so), and others do well in the longer term (6 months - 3 years, say). This performance would be on account of the specific nature of the mutual fund, in terms of its investment profile, as also on account of market factors. To explain more clearly, a mutual fund may have a steady, long term investment style (e.g. Franklin Bluechip Fund). Pick some good picks, and stay invested for 1-3 years, say. Not much of a churn in their investments. They believe in the stocks that they pick, and are sure that in the 1-3 years perspective, those stocks are going to deliver good returns to them. Then, such mutual funds will almost certainly do better than other mutual funds, in that longer term perspective. They may rank high on the
'best gainers in 1-3 years' period. However as they do not churn their portfolio much, they may miss out on some shorter term opportunities that get created. They may not feature in the best performing mutual funds in the 1-3 months period, then. Likewise, say a mutual fund has a stated investment objective of investing in mid-cap stocks (e.g. Franklin Prima Fund). Then, if it so happens that the market gives a sudden, tremendous appreciation to mid-cap stocks, then this fund is likely to zoom up in the shorter term. As
has happened with that fund, few times, in fact. You would therefore find this fund to be amongst the better performers in the short term (1-6 months) in such periods.
As a retail investor, you MAY be sure as to what is the time frame that you want your returns in. Say, you want to get good returns in a year, then it may logically follow that you look at the 'best performers in the 1 year period' list to start with. However to this, I have to say that it is quite likely that the best performers in the one year that went by may not be the best performers in the coming year, when you are investing. It is possible that the last one year say, was good on mid-cap stocks. And now, since the mid-caps have already appreciated a lot, then, the coming year may not see that growth, and could even see some retreats. Then a mid-cap mutual fund that has done well in the last year, may not necessarily be the top performer over the next year. And you may make a mistake by investing in that fund.
Another factor to look at, from the factsheet of the fund, is the overall mix of investments of that fund. There have been funds which, at times, have had a very large exposure to a single stock, or to a single industry. Your very purpose of investing in a mutual fund (as
against, making direct investments into equity markets yourself) is to hedge your bets. Not to bet heavily on a single stock or a single industry. Then, if the mutual fund that you invest in, has a high exposure to one stock or one industry, it is that much more susceptible to a sudden drop in its value, should that stock or that industry go down suddenly. Not more than 7-8% exposure to a single stock, and not more than 20% exposure to a single industry is a good idea, and you may look for the same, in the factsheet of the mutual fund.
The fund house is also an important factor in the selection. There are many new fund houses that have come up in recent times and they have not proven themselves in the long run yet. Also they may not have large corpuses of assets to weather some storm, if it comes about. Likewise, one may also look at the ethical background of the fund house.
Like in case of equity markets, where I had suggested to stray away from any equity where the promoters or management have any negative factors associated with them, so also in case of mutual funds, if the fund house has any 'negativity' associated with it, stay away. Simply because there are other options on offer, so as a retail amateur investor, why play with fire?!

This is good time to recoup on the fundamentals discussed so far. Above are the various factors that you would look at while shortlisting your mutual fund picks. Further the data for your research comes from the list of top performers and the mutual fund factsheets, referred at the beginning of this article.

Considering this ammunition, I would suggest you to start by shortlisting the fund houses that you 'approve of'. In short, make your first selection, based on your "feel" about mutual fund houses. You may think that Alliance Fund has been in the news for some wrong reasons and you do not want to consider it, or you may think that with the Ambani problems, it is a good idea to stay away from Reliance fund house too. And you may think that the Sahara Mutual Fund is too new for consdering at this time. And so on. This part of the selection is your own 'feel' as each one may have their own perceptions on these factors.

Doing such pre-selections, say you end up with the following fund houses as your approved ones:

Birla, DSP Merrill Lynch, HDFC, HSBC, Sundaram, Tata and Templeton.

With this pre-selection, now we do some simple spreadsheet work. Yes, even an amateur investor is expected to be comfortable with basic MS-Excel working!

What we do is to look for schemes from the short listed fund houses, and record their NAV growths, over different period of time, like, 1-month, 3-months, 6-months and 1-year. This data is tabulated in the spreadsheet. (** Before you start wondering if this is going to be a weekly
exercise that I propose, rest assured it is not. It is a first time activity to select the initial investments, and something that you may want to review once in 6 months or so.**)

Once this data is tabulated, use this great and simple feature in Excel which is to fill the cell with a colour. Identify those performers which are ranked in the top-3 or top-5 (whatever benchmark that you may like to choose) and for such cases, fill the cell with a certain colour.
What you will get is a table that looks something like this (this table is made for data on Oct 10th, 2004):

The purpose of the colouring of the cells is to give a quick visual impact, as you can see from above. What has been done is that all the schemes that rank at the very top in a period have the cells coloured in blue, those that rank second level are coloured in orange, and those that rank
third level, are coloured in yellow.

As mentioned earlier, for a retail amateur investor, it may be a hard call to take in going for specific period targets, and following the best performers in that period, e.g. investing with a one year perspective and hence picking the best performers in the one year period category. As conveyed earlier, last one year's best performers may not be the best performers over the next one year.

Then what I would look for, is which funds have done reasonably consistently well. Which funds have the most coloured cells, or in other words, their performances have figured in top 1-3 position levels, over different durations of time. What I would read from that is that the investment team of that fund is able to sufficiently tweak its investments, to maximise
returns over different periods of time. As a retail investor, I would find most comfort in such funds, then. In the above table, of course, if a fund had all blue rows, it would be a dream come true. That not being the case, one looks for most blues, oranges and yellows, in that order. One can even give weightages to the colours. Say, 3 points for blue, 2 for orange and 1 for yellow, and see which row has the highest score. And based on that, pick your favourites. Once that choice is made, a further evaluation of the portfolio of the fund (from the factsheet) to ensure that it has reasonable diversification leads you to the final selection.

From the above list, it would appear for example that, the following funds are best picks:
Tata Equity Opportunity
HDFC Capital Builder Growth
Tata Select Equity
HSBC Equity Growth
Sundaram Select Midcap
Tata Pure Equity
Birla Midcap Growth
Franklin Prima Fund Growth

Just to remind you, the above exercise is not of recent NAV values, but of Oct 10th, 2004. But the conclusion that you draw such an exercise gives enough conviction to opt for these funds for investment.

Pardon for a little excess technicality in this piece, but I still believe, this is as technical as an amateur investor can understand, and is certainly not beyond him. Do try and appreciate the points made here, even if you need to go through this piece a couple of times. To tell you the fact, I managed to pick HDFC Capital Builder from the above exercise, when none of my
mutual fund agents had suggested the scheme to me yet, and its done very well since, as I would expect from the theory above. When you take decisions based on your own sound thinking, you usually have a lot more confidence, and are likely to stay with your choices, which have come from better conviction than simply having got a referral or a tip from someone!

To conclude now, a take on the markets for the next week. All day today, we have been hearing of the huge natural calamity that has struck Asia and also large parts of India. Where the markets have been able to tide over most other hiccups over the last several months, because of strong fundamentals and huge FII inflows, a natural disaster of this nature is something that the markets may not take too well. Anyway the markets appear to be overheated, and a massive tragedy of this nature is the prompt that may finally drive the markets to a significant correction next week. Add to that, there is the Ambani confrontation in terms of the RIL board meeting, where also more sparks are expected to fly. So brace yourself for some downward movements next week now. Those who are convinced of the fundamentals and the India story
might just look at this correction as an opportunity to buy, and those who panic for their large losses to get wiped out, will sell quickly!

Till next week, then.. au revoir.

- Sanjay Mehta

You can't go wrong with mutual funds!

2004-12-13T09:18:00.000+05:30

As the bull phase continues, and the Sensex scales and maintains levels beyond 6000, I take this opportunity to introduce mutual funds, for the first time, on this forum.

Well, I do not want to make this a primer on mutual funds, as I will be focussing mainly on equity based mutual funds, still, since the subject is a little misunderstood, I will give a brief introduction to it, in this piece.

At the outset, there are what are known as "Asset Management Companies" (AMCs) or Fund Houses. These are organisations who have deposit bases, and they then set up specific "Mutual Funds". Examples of Fund Houses are Franklin Templeton, HDFC Mutual Fund, Alliance Mutual Fund, HSBC Mutual Fund, etc.

A specific "mutual fund" issues units, against payment received for the same, from retail investors. Funds so collected are then invested for maximising returns to the investors, and based on a broad premise that the mutual fund stands for. For example, there could be mutual funds that have their basis, in investments into government bonds and similar instruments. These are typically the "debt" type of mutual funds, and based on the kind of bonds that these invest in, and the timing of their investment, the fund earns returns for itself. The income is basically of "interest" type, and hence is usually stable and limited.

On the other hand, there are the equity based mutual funds. The money they receive from sale of their units, are invested in equity, and the growth comes from capital appreciation of the equity investments as well as dividend incomes that are received from the equity investments. Risk is higher on account of the equity investments, and likewise, the upside can also be much more, as capital appreciation of the equity investments is not limited.

So a basic fundamental difference within mutual funds is debt type or equity type. There are other versions too, including a 'balanced' fund that has an agenda to balance its investments within equity and debt instruments, thereby hedging the risk and returns profile of the fund.

Within the equity based funds also, there are funds with specific focus. Some funds may focus only on investments in blue chip companies. Others will invest only into mid-cap companies. Still others may have sectoral focus like pharma industry or IT industry, etc.

All the details of mutual funds are easily available and fairly easy to understand too, once you get the basics. Again unfortunately, part time, retail investors have not understood mutual funds well, as the only mutual funds popular earlier were those of UTI and few of State Bank of India or Canara Bank. There was no pressure on these funds to perform, and investors were happy to get returns equivalent to the interest rates. Many times, even such basic minimum levels of returns were not met. In between, there was a stir created in the market, few years back, when Morgan Stanley came in as a foreign fund, and mutual fund units were issued by the fund. I still remember the photograph on the front page of national dailies showing the long queue of investors waiting to put their money into Morgan Stanley fund. I do not believe that the investors understood the fund that well, even then, and the queue to invest was more of a marketing success than an investor perceiving it to be a great investment opportunity.

We have clearly come a long way from those days. Today we have a large number of Mutual Fund houses, including some of the respected international names like Franklin Templeton, Merrill Lynch (as DSP Merrill Lynch in India), and respected Indian corporate names like HDFC, Reliance, Tata, Birla and others who have their own Fund Houses and Mutual Fund schemes. We also have very sharp investment brains working for these funds, along with large teams of research analysts, with a lot of transperency, and a lot of regulation, and also a lot at stake, in terms of goodwill and reputation of such respected organisations. With intense competition of this nature, each fund wants to outperform the others, and give the best bang for money, for their investors. The big winner in this scenario is the investor - who now has good choice of great mutual fund schemes on offer, suiting his needs of the time, and aligning with his own risk profile.

Which is why I say, that "you can't go wrong with mutual funds"!

I pointed out to you, the very interesting fact, last week that in an extended period of 10 years, from 1994 to 2004, the top mutual funds of the country have delivered an annualised return ranging from 22% to 28%. This is an amazing statistic considering the fact that in this period, we also had some stock market crashes, and some very dull times on the economy. And yet, inspite of all that, the annualised returns have been at such levels. Need I repeat that 'you can't go wrong...'!!

All mutual fund schemes give out lot of details about the scheme - what is its investment profile, how much is the corpus of funds that they control, etc. Moreover, they come out with periodic fact sheets that also detail the specific investments that they have made, the amount of money lying with them as cash, etc. This information becomes the source for making a decision on which mutual funds to choose to invest in.

Mutual Funds also have another basic differential - they can be growth based, or dividend based. In case of the former, you can opt to not get periodic dividends, but have the fund maximise your capital by keeping all gains to increase the net worth. The dividend option has the fund giving periodic dividends, much like a company does to its shareholders. Depending on one's preference, taxation issues, one may choose either of these options.

In reality, there are many more methods of investing, many more intricate types of funds, on offer. The above brief details cover the most popular types of funds and investment methods, in funds.

Like the share price in case of shares, the benchmark for growth in case of mutual funds, is the NAV value of the fund, or in other words, its Net Asset Value. If you have invested in the mutual fund at time of its IPO, typically you would have purchased the fund units at an NAV of Rs. 10. As the fund invests these monies and either earns or loses, the NAV value keeps changing. That reflects your growth or loss. So if you have 10000 units purchased at NAV of Rs. 10 each, and its current NAV is Rs. 11, your investment has grown by 10%. The NAV of mutual funds is announced at the end of each day. Subsequent to the IPO, all new purchases or sales of the mutual fund units, are at the NAV value.

Elaborate information on mutual funds is available at www.personalfn.com. This site is a sister site of www.equitymaster.com, which I have referred several times, during earlier weeks' discussions, on equity markets.

One of the easiest way to get a short list of mutual funds to consider for investing into, is by researching the top performers amongst mutual funds. At personalfn.com, you can research on basis of type of mutual funds and then look for say, the top 5 or top 10 or top 25 best performing mutual funds, for a period of time that you are interested in - say, in a week, in a month, in 3 months, in 6 months, etc.

Once you come up with such a list, you can dig in deeper into the details of these funds to understand their investment objective, the fund house these come from, and other details, to make a better judgement, and come to a final decision on investments.

I am going to leave you this week, with these thoughts, and suggested homework. Do check out listings of mutual funds via personalfn.com. Get a feel of the type of schemes which appear to be giving best performances. Get a feel of the fund houses which appear to have the best performing funds. Try getting an idea of the returns that are coming from these, in recent times. Look up mutual fund factsheets to get an idea of the kind of information being provided there.

Once you get a feel of the funds, next weeek, I will share my own methodology to pick out the needles from the haystack, and come up with the best performing winners amongst the mutual funds. It will make a little more sense, once you have spent some time browsing around on personalfn.com and got some basic idea of the mutual funds on offer. So hang on till next week, for this.

Leaving you with some final thoughts on the stock markets again. A larger or longer correction has not happened, inspite of the markets scaling new heights. It may not happen quickly too, as more and more FIIs seem to be coming in, with their deep pockets, to get a taste of the Indian markets. We will certainly see small dips, and the sensex flirting with new highs every now and then. Does this make for any new buying opportunities at all?

Yes, very definitely so. If you do not worry about the Sensex number, and if you are tracking specific stocks as I suggested in earlier articles, you are sure to find opportunities. For example, I have seen Tata Coffee swing between 215 and 295 in the course of the last 15 days. With the strong fundamentals in the company, I would believe that if the stock has scaled 295 levels, it will repeat those levels in course of oscillations in the near future again. If anything, it will go beyond these levels. Then if I find the stock at 250 or 260 some day, I see room to grow at least by Rs. 40-50 on that price, and which translates to a cool 15% potential at the minimum. If that is not a buying opportunity then what is? Such are the cases with a whole host of stocks. HDFC has swung between 750 and 900 levels, Polyplex has swung in the range from 230 to 280, and so on and so forth. If you are tracking diligently, as I suggested earlier, you would see strong opportunities in this phase. Do tread carefully, but do not lose out on these opportunities.

Till next week then, take care.
- Sanjay Mehta

Strategy for Euphoric Times

2004-12-05T11:28:00.000+05:30

At the outset, I apologise for a break of two weeks, when I could not produce this weekly newsletter. No, it was not because I was too busy buying and selling stocks that I could not write this column. I happened to be travelling for most of this period, and even though I had good intentions to write the piece while on vacation, in reality that intention remained a pipe dream.

Which in fact, leads me to a question, that some of you may ask: I have advised in previous weeks, that you need to check out your portfolio of investments, preferably once a day, during trading hours, and have a good detailed review, at least once a week. Then how would you manage, if you were travelling (like I was last week)?

Good question. No easy answers!

If you are travelling for extended period of time, say more than 2-3 weeks, you might be well advised to take appropriate measures before you leave. Such as leave some instructions with your broker, giving him limits to sell, signing and leaving blank depository transaction slips with some trustworthy person, or perhaps trimming your portfolio to safe levels, temporarily.

If you are travelling for shorter periods, you may not take that much effort and hope that a dramatic development does not take place during that time, which can have a huge impact on your portfolio.

Of course, if you have a large stake, and if you trade via an online broker, with online demat and banking connections, you can still access your account over the Internet, while on vacation, and transact as if you are doing it from your living room, or from your office. More about such online trading methods in a later piece, over the next few weeks.

In my case, I did not really get much of a chance to follow the markets, while on vacation. But returning back to Mumbai after a week, I did not have reason to complain. The markets had appreciated and appreciated a lot! After scaling a new all time high, the Sensex climbed an additional 100 points the very next day! This inspite of the imbroglio at the Ambani household, affecting a business group that has cumulatively, one of the highest market caps on the Indian stock exchanges.

What does that show?
> That the markets are now mature and do not let one-off specific problems upset an otherwise favourable situation.
> That there are many good options on the markets, beyond the Reliance group of companies, and investments continue to flow into these.
> That foreign institutional investors continue to pump money into India and Indian markets, and India remains a destination of choice, for global investors.

All the above make a lot of logical sense.
And yet, heady times like these generate thoughts of caution and even fear. Is the market overheated? Is any more juice left in the markets at all? Is it worthwhile to purchase at these prices?

Very genuine concerns, very justified ones too.

The unfortunate part of this story is that many investors who did not invest in all of the last 3-6 months, will not be able to control themselves anymore. As the business dailies put colourful headlines and graphs day after day on their front pages, many retail investors who have stayed away from the markets will NOW want a piece of this. And it will be one suicidal move that they will make.

Their exuberance will make them take hasty decisions, without necessary homework, and which may lead them to losses. For example, they will have read too often over the last few weeks, as to how its been a midcap story this time around. That mid-cap stocks have appreciated a lot more than large caps, and this may tempt them to put money into mid-cap stocks at this time.

If you have been following these weekly newsletters, you will be better advised and better prepared than to take such arbitrary steps.

Few of my personal submissions for the present times are as under:

1. Even at present high levels of the Sensex, our stocks are 'valued' at levels less than comparable international stocks. So there is clearly a potential for more world money to come into India and keep pumping the prices to higher levels. Especially at a time when in several sectors, Indian companies are having excellent growth potentials, at this time. So it may not entirely be a case of "irrational exuberance".

2. When there is a one way upward movement as has been the case in our markets over last several days, there is always going to be a correction coming up. If you are holding a stock that has appreciated significantly over the last few days, you have an excellent opportunity to sell it at this time. Even if you believe in the stock on a long term basis. Say for example, you are holding State Bank of India, which ran from 515 to 581 over 3-4 days. You have a good opportunity to sell it at this time. You can be sure to pick it up once again, in a few more days when the correction comes, at levels like say, 525 or so. Look at it this way: You invest 51,500 in 100 shares of SBI, at 515 each, on Nov 17. You had purchased these with a long term investment plan. But does that mean that you should deny yourself an opportunity to make some cash on the way? On Dec 2, you sell these at 58,000. You will get an opportunity to purchase these back for 52500 by Dec 10 or so. So whats your account on Dec 10? Consider your original investment of 51500 as intact, and you still hold the 100 shares of SBI that you wanted to have, for long term investment. In between, over a week, you went ahead and made a small packet of 5500 (58000 - 52500). Should cover the cost of that new Swatch that you were eyeing, right? When the markets have moved up with such acceleration and has scaled new peaks, a correction is not a possibility, but rather a certainty! Thats your opportunity to make some profits, right there.

3. Then there is the mid-cap stocks story. What typically happens in the markets is like this. Before the market hots up, where everyone starts noticing it, in the background, the mid-cap story is anyway happening. Whether it was in last year's big run at the markets, or in the current run as well, before the large cap Sensex stocks started moving up, the mid-cap stocks were already running up steadily. Business dailies were still not putting colouful sensex graphs in their headlines, and retail investors were not quite aware of the opportunity. Then when it appears that the markets are indeed good, focus starts gradually shifting to the large cap stocks. Even the FIIs who come in then, look at large cap stocks only. And that starts pushing the large cap stocks higher. Upto that time, the mid-caps have already moved up significantly. For other Indian investors then, the opportunity is to book profits in the mid-cap stocks and now ride the large cap stock opportunity. That pushes the mid-cap stocks down a bit, or at least slows down their pace of growth. These are such times now. Larger opportunities of growth will now come from large cap stocks rather than from mid-cap stocks. Of course, here I am referring to the average markets. There will always be exceptional mid-cap stocks that will continue to do well, and likewise, not all large cap stocks will zoom away.

4. Inspite of all these, at these high levels, one is never sure if one is investing in a stock that has reached its peak and will only be slipping down hereafter. Then, the safe bet is to get into mutual funds. Some golden nuggets that I got from a friend yesterday, which make so much sense, are:

* For sensible investing, do not try to 'time the market'. Over the last 10-11 years, inspite of the various ups and downs in the market, the annualised returns of the better mutual funds in the Indian market, has been 22% to 27%. So it does not really matter whether you start investing when the markets are high or low, if you are looking for the long term returns. You are reasonably sure to return 20%+ over a longer term period, and you are better off, in that case, to go via the mutual funds route.

* Even in this heated market, there are stocks which present attractive valuations for investing. But can a retail investor with limited ability, pick those? Perhaps not. However you can trust the skills of the expert investment strategists of mutual funds to find those opportunities. It is more likely that they will still post gains in their NAVs, even during further corrections, simply on account of this expertise. Your money is likely to be safer in their hands, then.

But hey, we have not covered in these weekly articles, much about mutual funds. What makes a good mutual fund, how do you select the right ones to invest in, etc.?! So watch this space next week, for this exact subject - an introduction to mutual funds and strategies to pick the ones to invest in. Till next week then, take care.. !

- Sanjay Mehta
sanjaypmehta@gmail.com

On Discipline

2004-11-15T11:06:00.000+05:30

This week’s theme is ‘discipline’. Now before you start wondering if you are in the wrong newsletter, let me assure you that discipline is as important for an amateur investor as it is for a school going child.

From my own experience, I can say that my ‘turnaround’ in the world of stock markets happened on the foundation of this one word, or rather this one practice. Like many others, I had burned my fingers, not to speak of other parts of my body, and my bank balance, in earlier attempts at the bourses. I had virtually sworn off the markets, until I got an opportunity to talk at length with an investor friend of mine, in the course of a relaxed holiday, couple of years back. And his extreme emphasis on the aspect of discipline being the make or break factor, in the world of stock markets, convinced me. It was only after this that I decided to give the markets another chance, and went about it, in a systematic manner. And discipline has been the underlying factor in my foray into the markets, this time around.

Why does a retail investor need to be disciplined in stock market investments? Before I answer that, let me show you what typically happens, when one is not disciplined and ventures out into the markets!

More people get itchy to invest and feel they are missing out on something, when stock market bull runs start hitting newspaper front page headlines. Suddenly people who have not invested so far, feel that they must also now ride their luck. So they go ahead and put money in whatever appears hot at that time. Usually by this time, in fact, the markets are TOO HOT, and one is entering late. Sure, there may still be some steam left to take the stock up, and the investor may get his 10 to 20% appreciation. But that investor has read stories about 100% gains and what not. So he is not impressed by his 10% return. And does not bother to sell. And then the steam lets off. The stock starts retreating. He sees it, but hopes that the stock will recover. He has seen 20% gain, so he cannot sell when its only 10% gain. And then of course, he cannot sell, when its only 5% gain, or when its equal to his original money and certainly not, when it’s a loss!! That way, he’s left holding paper that loses value, and he has yet another bad experience of the stock markets. While he will blame the markets for being so volatile and being a gambling pot, and what not, if you will observe his behaviour from the above incident, you will realize that its he who is to blame and not the markets!

Does the above scenario seem like a “been there, done that” situation? Many of us have been through this. There are other scenarios that some of us have seen. On getting a “tip” we put money into a lesser known stock. And then go about our routine, not bothering to really track that investment. Much later, say after a year or so, we decide to find out what happened to that investment. The stock may be where it was when we purchased, or lower that that too. In the interim period, the stock may have gone up and also come down, and we missed the whole cycle, by not tracking the investment! A good tip does not mean that the markets will home deliver a nice fat cheque to you, simply because you chose to make the original investment. You still need to decide yourself, when to sell it, and make the money for yourself.

Then there are many investors, including some veterans (not just amateurs) who, in a way, get emotionally attached to their investments. They will not sell their stocks at a loss, so what if its their money whose value is deteriorating each day. So what if that money could be better employed in a bigger opportunity elsewhere. They just abhor the idea of selling at a loss. I find this attitude shocking, to say the least.

There is another very dangerous characteristic that some investors have. When the going is good, markets are appreciating, there is a tendency to really get carried away. Losing all sense of discretion, they tend to beg, borrow or steal, and put more and more money into the markets. Many times, its money beyond their means. Many times, its money taken out from some secure investments, meant for the family’s critical needs. At such times of “irrational exuberance” (the term has been used to explain a lot of ‘bubbles’!), investors also lose a sense of control and tend to put money in all the wrong places. So you have a double whammy – over extended on the wallet, and money in the wrong places. A sure fire path to suicide. Read this way, we may all laugh at it, thinking that how can one be so stupid. And yet, believe me, there are many perfectly rational persons who have fallen into this trap!

All of the above reasons point to the fact that discipline is so very important while investing in the stock markets. The key areas where discipline is required are as under:

1. Start with a budget that you allocate to your stock market investments. Decide what portion of your capital you will allot to this risk prone investment. Rest of your capital tucked away in more secure investments, must not be touched, come what may. No amount of temptation should lead you astray from this path. This is the discipline of ‘maintaining capital allotment proportions’.

2. For every stock you decide to invest in, based on your study (as will be covered in the course of these weekly newsletters), decide your growth target. In other words, what you expect to be the gain from the investment, in terms of percentage. Once you achieve that percentage, whether it happens in 1 day or 1 week or 1 month, be ready to sell the stock immediately. You have achieved what you set out to achieve, so take your money and walk out.

3. If you choose not to sell when your target is reached, it should happen in this manner. Say, you found a stock to be a good buying opportunity, at its price of Rs. 100. And you decided to invest in it, with a target of 20%. When the stock reached Rs. 120, you should have sold it. The only time you will NOT sell it is after reviewing that stock afresh, at its Rs. 120 price. Does the stock appear to be a good BUYING opportunity, at Rs. 120. If you had not invested in it, would you have bought it, at Rs. 120? If the answer is yes, then you can continue to hold it. But now, fix your next target. Consider this as a fresh purchase at Rs. 120 and say, you set a target of 15% now. Then you are now going to watch for its price to reach around Rs. 138. If the stock does NOT appear to be a good BUYING opportunity at Rs. 120, then you have no business to keep holding it, as your target is reached, and you must sell out at this time. This is the discipline of ‘profit booking’.

4. Then again there is every chance that your calculated and well researched buying opportunity turns sour, and starts heading downwards, after you purchase. So do you keep watching its free fall? No, you certainly do not. Like you have a profit target, so also, you need to have a target upto which you are willing to lose. So lets look at the same case, of your purchase at Rs. 100. After you purchase, you find the stock going down. Now of course, you cannot sell at the first instance when the stock loses a little bit. There can always be a mild correction and the stock may start moving up once again. So do be prepared to face a little reversal. The key is how much. Set a target. Say, you decide that 10% loss is all you are willing to take on this stock. So if the stock reaches Rs. 90/-, you are going to sell out, and ensure that your loss is limited to Rs. 10 and not more. This is known as ‘cutting your losses’. The target you keep is referred to as a “stop loss” target. In other words, you want to ensure that you loss is stopped at Rs. 10 and not more. This is again a very important discipline to have as fortunes can be wiped out, in holding on to stocks, as they keep going down and further down. This is the discipline of ‘cutting your losses’.

5. If you are in business, you are looking at it every day for several hours, to ensure that its doing well. If you are a professional, you are practicing your profession day in and day out. And from your business or your profession, you are earning money. If you are an investor and expect to earn money from it, you need to put some time to it as well. Ideally it can be a few minutes each day and a couple of hours once a week. That kind of time is the minimum that is required to monitor your investments and ensure that the activity becomes a good money earner for you. The daily routine is to see where your stocks are headed for that day, and if there is a buying or selling opportunity created. While stocks can swing a lot even within the course of a single day, even so, looking at the markets, once a day gives you a feel of the market that day, and as a retail investor, that may be good enough. If you see any targets happening, take a quick call and buy or sell, as the case may be. Likewise, the once a week (say on the weekend) house cleaning act. You can take a slightly more detailed view that time, to review all the investments, look at new stocks to be considered, look at new mutual fund opportunities, do your accounts bookkeeping, etc. This is the discipline of ‘monitoring and tracking your investments’.

I can openly state that this lesson of discipline is the most important one that I am going to convey, and if you can implement this well, you will have your best shot at making good money with low downsides, in the stock markets.

The markets had Diwali muhurat trading last week. The bull run continues unabated, and the Sensex crossed the 6000 level for the first time, in this run. Two of my stocks reached their selling targets in less than 10 days. I had purchased HDFC at 629 and Polyplex at 202, on Nov 1st and sold these at 705 and 254 respectively, in the last week. These may well go further up, but I got my targets, and did not see these as worthwhile ‘buy’ opportunities at 705 and 254, so I had to sell these. I had no complaints with the annualized returns of more than 400% and 900% that I managed to get!

Till next week, then.
Sanjay Mehta

Portfolio Manager: a must-have tool for investors

2004-11-07T20:53:00.000+05:30

The last week was a one way week. One way upwards! Yes, the stock markets pretty much kept going up, all week long. To give you an idea of how the markets have been doing, lets do a quick review of the stocks that we discussed as sample stocks, a couple of weeks back:

Information presented is no. / stock / price on 24th Oct / price on 5th Nov / Gain-Loss%
1. BHEL / 630 / 633 / 0%
2. Bharat Electronics / 538 / 568 / 6%
3. Infosys / 1780 / 1977 / 11%
4. Wipro / 641 / 688 / 7%
5. Aventis / 849 / 1041 / 23%
6. Cipla / 275 / 274 / 0%
7. Bharat Forge / 822 / 869 / 6%
8. MICO / 1735 / 1847 / 6%
9. Gujarat Ambuja / 359 / 346 / (-4%)
10. Madras Cements / 879 / 869 / (-1%)

Its a mixed bag, as you can see. Of course do note that its just been a couple of weeks, and its really too early to make any judgement calls on any of these.

Having seen that, we come to the main topic of the week, viz. a portfolio manager. No, I repeat that I am not referring to that fellow in a suit at your bank, who would like to manage your portfolio for you. I am referring to a software tool, preferably based on an Internet site, that can keep track of the stocks that you wish to track. While there are several sites that offer such a tool, I use the one that is available at www.equitymaster.com.

Using a porfolio manager demands a certain discipline, but the utility of the same is immense. How do you use a portfolio manager? Well, I will tell you how I use it.

I set up at least two different 'portfolios' on the portfolio manager. Lets call these as Portfolio Own and Portfolio Track. As the names suggest, these are respectively, a portfolio to keep a track of stocks that I actually own, and another to keep track of stocks that I am just tracking, but not actually owning.

As soon as a stock becomes of interest to me, I add it as a 'purchase' on the Portfolio Track. Note that I have not actually purchased it. When I do such an addition, I put in the date of purchase (which is the date from which I am starting to track it) and the purchase price (price at which I am starting to track it). At that point, I know that the stock is of interest to me, but I am not sure if its the right time to buy it (remember the earlier pieces about waiting for a buying
opportunity, and also about the cyclical nature of stock prices).

Since I do not own this stock, the purpose of tracking it is that I would like to purchase it, provided I get a good price for it, or in other words, if it goes low enough in its price. So most times, a stock in Portfolio Track is monitored for a dip in its price. If it goes low enough, I may like to actually purchase it. The exceptions are those cases, where the stock keeps rising unabated and one can then view its graph and characteristics, to see if there is a likelihood for further
increase, in which case, one can still buy it, inspite of it not dipping down.

What the portfolio manager shows you is the original purchase price and date, and the current price, whenever you are viewing it. There is an immediate link to view the company details and its graph, from that same location, So its indeed a perfect place to keep track of your investments and your potential investments.

Having mentioned about the Portfolio Track, there is still the other portfolio that I manage, which is the Portfolio Own. When I actually purchase a stock, I take it out of the Portfolio Track and transfer it to Portfolio Own. Here I put the actual purchase date and price. Now, remember here is where you have actually put your money. Ideally you want to now wait for the selling opportunity when you make your target profits. However note that sometimes the reverse movement can also happen. The stock could start sliding down, after you have purchased. So once you have actually put your money on the stock, you need to monitor its movement upwards or downwards. You may decide for example, that your target is 20% on the positive side, and on the negative side, you are willing to lose upto 10% but no more than that. Then you will track the stock both ways. If it moves up 20% (and for your benefit, the portfolio manager, in addition to showing the purchase and current prices, also shows the percentage gain or loss, for immediate view; no need to sit with calculators in hand!), you may like to sell off and book your target profits, and if it goes negative upto 10%, you may still want to sell the stock, and cut your losses.

The trouble in most cases, is that when a stock goes up and reaches one's target profit level, one may get greedy and not sell.

Likewise, when the stock starts sliding down, inspite of seeing that one's capital is getting drained off, one still keeps holding the stock, hoping that the stock will come up!

Both of these are the biggest problems for retail amateur investors, and have everything to do with maintaining a discipline in your investments. Next week, we will talk about this in detail.

For now, coming back to the portfolio manager, as mentioned above, you keep track of your Portfolio Own and Portfolio Track, as described above.

Usually when you have a good stock in hand, it is likely that you may get multiple buying and selling opportunities in the same stock, over time. Lets say, I start tracking HDFC at a time, when its at 620. I see it move up to 690, but do not purchase it. Then, it starts coming down. I recognise from its graph that on a broad base, its still headed upwards, so the temporary movement downwards, represents the ideal buying opportunity. I manage to purchase the stock at 650, say. At this time, I move the stock from Portfolio Track to Portfolio Own. At some point, the stock starts going up again, and reaches 685. Having seen an earlier high of 690, suppose I believe that its a good point to exit the stock, having made a profit of 35 on the share. After recording the sale of the stock, I move it AGAIN to my Portfolio Track.

Now, the share may actually keep rising this time, and go upto say, 710. Thereafter it starts coming down again, as per the cyclical movement. This time, if it comes down to a level of say, 670, I may consider it as a worthwhile buying opportunity. And the stock moves back from Portfolio Track to Portfolio Own.

This sequence is mentioned just to give you an idea about the cyclical movement once again, and the fact that the Portfolios that you set up can be used to keep tracking good stocks, for multiple rounds of buying and selling.

Another very useful feature that is available with a Portfolio Manager is the feature of setting up low and high alerts. Which means that if you are not keen to connect to the Internet and see your portfolio each day, you can still get warned about sudden dips or sharp gains, on your stocks, over email or even on SMS. This requires you to set a low alert value and a high alert value for all the stocks in your portfolio, and which you can typically set to your 'stop loss' and 'target profit' levels. Once that is done, the email or SMS alerts are automatic.

The Portfolio Manager has many other value added features in addition to what I have discussed above. Typically the Portfolio Manager will allow you to track your mutual funds also, in a separate area. So it can become your one stop for investment monitoring.

Next week, we will discuss the very important subject of maintaining discipline in your investments. Till then, let me leave you with an interesting graph - and you decide if you wish to put it in your buying list or tracking list or what?!

Till next week, au revoir..

- Sanjay Mehta

The Cyclical Nature of Stocks

2004-11-01T08:40:00.000+05:30

We discussed several cases and graphs last week, amongst which was Aventis Pharma as well. We had concluded seeing its graph and other details, that while it was growing, the rate of growth was slow (representing an annualised growth expectation of around 72%) compared to the other stocks seen in that list. In an interesting turn, Aventis' stock streaked vertically in the course of last week. It went from 870 to 955 in the course of the week. Well, that is the nature of the markets. There are reasons for such sharp movements, which are typically beyond the comprehension of small retail investors. The whole effort of these newsletters is to suggest ways and means to make money in these markets, inspite of not knowing what causes the sharp ups and downs in the markets!

Today we explore an interesting aspect of the markets - the cyclical nature of stock price movement.

Before we go to the understanding of this cyclical nature of stock prices, lets try and understand WHY this happens.

The price of a stock is a result of the balance found between buyers and sellers. Upto what price are sellers willing to sell, and to what level are buyers willing to buy. Wherever the mean is found, that is where the stock price stabilises, at any given time. When do markets keep rising? Typically when there are fresh funds coming in, to support higher and higher buying prices. At such times, overall, the markets move up. However it is a rare day, if any, when ALL stocks go up (or ALL stock come down). Usually some stocks come down (lose favour) and others go up (catch the fancy). Why does this happen?

Say, the results of Infosys come out and these are better than what the market expected. What this results in, is a sudden demand, not just for Infosys stock, but usually, for other leading IT stocks as well. The market tends to assume that if Infosys has done well this quarter, it must be a trend for the entire industry. So the likes of Infosys, Wipro and TCS are likely to go up, that day. How do market operators pay for this sudden fancy for IT stocks? They do so, by SELLING some other stocks which lose fancy for the day. For example, they may start selling PSU banks stocks, and you will find the likes of State Bank of India, Bank of Baroda or Dena Bank stocks going down that day. This kind of movement happens almost on a daily basis. Some set of otherwise good stocks, may tend to lose some ground, while other stocks will rise.

So does an amateur investor need to understand company results and other such news, which will tend to give such twists and turns to stock prices? No, that is not expected at all.

All that a small time retail investor needs to understand is that stock prices do tend to go up and down, and you can always wait for a stock to go down a little and then pick it up, and you can always wait for a stock to go up a little before selling out. That is the crux of the cyclical movement of stocks.

Lets once again, look at a graph to understand this better:

You will see that from Aug 04 to Oct 04, the stock is broadly on its way up (as indicated by the blue line and arrow). And yet, in this period, its not one sharp upward movement.

Let's understand this movement a little better. Also appreciate that before Aug 04, in the previous 6 months, the stock had reached a high (in May 04) of around 650.

1. The period from Aug 04, from the low of 540 to about 640 (purple square to yellow square), is a good time to buy the stock as its apparent that its running up at a rapid pace.

2. However you may have hesitated if you did not purchase the stock till it reached close to 640 level (yellow square). This is because the previous high in the last 6 months, was close to 650 and it would need large buying interest for the stock to penetrate that level upwards.

3. That explains the drop from 640 to about 605 level, from yellow to bright green squares. In case you did not purchase the stock in the initial run up, then purchasing it during the drop from 640 to 605 makes sense. Say you purchase in that phase at 610. You have reasonably good reason to believe that the stock will revert at least upto 640. That way, you will make 5% sooner rather than later. So in a stock that is moving up sharply, it pays to wait for such small window buying opportunities, to cover at least 5% kind of almost assured upside.

4. Say you purchase the stock either between 540 to 640 run, or during the small downside from 640 to 605, when the next further streak happens (bright green square to brown square), from 605 to 695, that phase certainly gives you opportunity to sell off. Especially if you have worked with specific targets in mind.

5. If you truly believe in the company and the stock, and you sold around 690, you have a quick opportunity to buy the shares back at around 630 (dull green square).

6. With the stock having reached 695, if you pick it up at 630, you have reason to believe that you will get your 10% growth again, soon, when the stock goes back to its peak of 695.

The learning from this is that you may consider holding the purchase, till the right buying opportunity comes up, which can be in the form of any slight reversal.

Likewise, it may be a good idea to sell off, especially if you work with target bases, when the price streaks up. If you wish to "stay in" with the stock, you can always purchase it back, and keep the cool difference, as quick bucks pocket money!

The summary learnings from this are:

1. Whatever be the reason for any sharp upward movement of a stock, there will usually be small dips, in between, and which present an opportunity to buy.

2. The dips may be to the extent of 5% to 10%. So purchasing on such dips gives you a good chance to at least have a 5% to 10% potential upward movement ensured, after you make the purchase.

3. When a stock is climbing up, it hits some levels of resistance. One such level may be its recent (say 6-9 months period) high level. As in above case of HDFC, around 640, the resistance was met. Once that resistance is overcome, then there is usually a further large movement upwards.

4. Other levels of resistance are also typically, some round figures. For example a stock running up from 750-800 onwards, might find big resistance in breaking out to the 1000 level. It may often get stuck in the 990 levels, and retreat to some extent, at that point.

5. Similar is also the case when a stock is headed downwards. It may not just be a one way sharp slide.

6. So if you were thinking of selling a stock, but it headed downwards, you may wait for a small recovery to get a better price, and then sell it. It usually happens. However we will discuss selling strategies and target based investments, at a later stage.

The above mentioned HDFC stock does represent a worthwhile buying opportunity with every chance of going upto its recent peak of 695, from its current price of around 650.

There will be other stocks that will also have similar buying opportunities. Perhaps you may want to go to www.equitymaster.com and check out the graphs for some good stocks identified last week, including BHEL, Bharat Electronics, Infosys, Wipro, Bharat Forge, MICO, Gujarat Ambuja and Madras Cements. These were all identified as being good picks, and now you need to see if its also a good buying opportunity, in which case, it may not be a bad idea to put some money where the mouth is!

But once you make an investment, its important to monitor it. Its also important to monitor the stocks that you short list, but do not invest into, while you wait for the buying opportunity. It is important to monitor a stock that you sell off, to see if you want to buy it back, as it retreated downward after you sold it, and you can pick it up again, and pocket the difference. All these can be done using a good portfolio manager. No, don't worry, I am not referring to any individual whose help you require. Just a piece of software, freely available, and which can help you to monitor your stock investments. So that will be the topic for next week - Portfolio Manager.

I started this piece talking about the sharp upward movement of Aventis. I was having stock of Aventis, which I sold during this week, on this selling opportunity. I continue to track Aventis, to see if there is a retreat, where I can pick it up again!

- Sanjay Mehta

October 31, 2004

Picking Stocks - Part Two

2004-10-25T01:42:00.000+05:30

Sunday, October 24, 2004

This week we will continue from where we left off last week, and try to zero in, on a methodology to pick stocks. Before getting into it, I would like to respond to a question that came up from one of the subscribers of this newsletter, after last week’s piece:

When I talked of large cap and mid cap stocks in last week’s newsletter, one of the readers wrote to me, to ask about the really low priced shares. Where do those fit in? The reference is to shares whose base (par) value is Rs. 10/- say, and which are being traded at Re 1/- or Rs. 2/- or thereabouts. You can even call these as penny stocks. When one purchases such stocks, the logic is that from Rs. 2/- there cannot be much downward movement, and on the other hand, there is lots of room for that stock to move upwards. Well, I would not recommend that to be a strategy for investing. That there is little room for the stock to go down, and there is a possible large upside, does not make it an automatic choice for investment. Say, you purchase 1000 shares at Rs. 2/-, which makes it a Rs. 20,000 investment. Well, the downside is that this Rs. 20,000 can become zero, because many a penny stock of this kind, sometimes just disappear off the markets. Trading stops. And you are stuck holding shares, which you cannot even sell at a loss. So rest assured that there IS a downside, even at Rs. 2/-. When you put in Rs. 20,000 on an investment, it does not matter if that buys you 1000 shares of Rs. 2/- or 2 shares of Rs. 10,000. Your decision has to be based simply and only on one factor: what appreciation you will get on that investment of Rs. 20,000. This is not to say that there are no good opportunities in such penny stocks. Sometimes there are companies which have been in bad shape, due to which the price has reached such low points, but which is currently going through a serious turnaround. Then its future prospects are good, and in that case, you have a really good buying opportunity. But to pick such opportunities in penny stocks requires more effort, which an amateur investor might find challenging. Hence I recommended only large cap and mid cap stocks, last week.

Okay, having got that behind us now, we will continue the thoughts on picking stocks. I left you with some homework last week. To repeat, I suggested you to shortlist some shares of your choice, and look them up at www.equitymaster.com, especially for the way their graphs were going. Hope that you have done this.

Ideally your starting ‘short list’ could well be around 30-40 companies. For example, you may have chosen 5-6 industry sectors that you feel good about, at this time, and you could have chosen 5-6 companies in each of these sectors. Ultimately, whenever you get down to actual investment, I would recommend a total of 15-20 companies to invest in, but at the beginning, when you set out to do some research, you could start with a larger number. So, say your list included the following companies, viz.

* Engineering PSUs – BHEL, Bharat Electronics
* IT Majors – Infosys, Wipro
* Pharma companies – MNCs as well as Indian – Aventis, Cipla
* Auto Ancilliaries – Bharat Forge, MICO
* Cement – Gujarat Ambuja, Madras Cement

Lets see what key information we would get, if we were to look these companies up, at www.equitymaster.com:

Details of the stocks are given hereunder, in the format: No. / Stock / Industry sector / Price as on 21-10-04 / 52-week HIGH price / 52-week LOW price / Remarks on its graph

1. BHEL - Engg PSU - 629 / 685 / 375 / Rising steadily from May 04
2. Bharat Electronics - Electronics PSU - 538 / 648 / 345 / Risen steadily from July 04; slight drop recently
3. Infosys - IT - 1780 / 1836 / 1031 / Rising steadily from May 04
4. Wipro - IT - 641 / 677 / 396 / Rising steadily from July 04
5. Aventis - MNC Pharma - 849 / 900 / 461 / Gradual rise from July 04; drop in early Oct, and apparent retrieval now
6. Cipla - Indian Pharma - 275 / 302 / 194 / Big spurts from June to July 04, and then from Aug to Sept 04; currently big drop
7. Bharat Forge - Auto Ancilliary - 822 / 890 / 475 / Rising sharply from Jun 04
8. MICO - Auto Ancilliary - 1735 / 1779 / 880 - Steady rise fron June 04
9. Gujarat Ambuja - Cement - 359 / 370 / 220 - Rising steadily from July 04
10. Madras Cements - Cement - 879 / 980 / 551 - Sharp rise from July 04; slight drop in recent times.

Let’s look at the actual graphs of these shares here, for better understanding:

Based on the above graphs and details, here are the few submissions that I will make:

1. If a company is part of the original criteria of selection (heard about, medium or large scale, no negative news about management, etc.), and if the stock price graph is fundamentally headed upwards, there is a very good chance that it will continue to move upwards, and it becomes a good stock pick.

2. Volatility in a share is a concern for an amateur investor. For whatever reason, if a share price moves sharply upwards or downwards few times in a year, there is risk for a retail investor. You may not know why it happens, but a sharp drop could happen, any time, after you invest. You may not have time to react and sell before that. A more stable stock price is a better bet for amateur investors.

3. A 52-week high (highest price the stock has been to, in the past 52 weeks) is a useful number. Compared to wherever the stock price is at this time, if the 52-week high is still a factor away, there is a good chance that the present upward trend will at least reach that level. If the present price is close to its 52-week high, then to continue to rise, the stock has to move to new levels, where there is always a chance of resistance (this will be better understood next week, when we talk of the cyclical movement of stocks).

4. Most of the upward stock movements seem to start at a particular point in time. It would be rare for an amateur investor to get in (get in: purchase the stock!) at that early stage. You probably get in a little later, but still theoretically, if we look at the upward movement, from its current start, we can get an idea of the percentage gain, in the current run. That is a good indicator of its growth prospects, going ahead, especially seeing that in most cases, the slope of the graph maintains a certain level, at least in a particular upward run.

With these thoughts, let’s look at the above stocks, one more time, and conclude which of these may be good stock picks. It may be noted that due to the present bullish phase in the market, all of these stocks seem to be on the rise, and you may find many more of this type, so it’s now a matter of finding the best picks from these. As I have mentioned in earlier weeks, it’s a good time to be in the markets!

We can review these stocks again, and now, the details presented here below, are the following information:
No. / Stock / Rise Start / Start Price / Current Price / Gain % / Annualised Gain % / Volatility / Conclusion

1. BHEL - May 04 - 420 / 630 / 50% / 120% / Steady / Good pick

2. BEL - July 04 - 375 / 538 / 43% / 174% / Reasonably steady / Monitor to see if present drop is start of downturn like it had in Dec 03

3. Infosys - May 04 - 1150 / 1780 / 55% / 131% / Steady / Good pick

4. Wipro - July 04 - 500 / 641 / 28% / 113% / Slightly volatile, esp compared to Infosys / Good pick, but watch for any sharp movements

5. Aventis - July 04 - 720 / 849 / 18% / 72% / Steady / What - only 72%; Better opportunities exist elsewhere!

6. Cipla - June 04 - 200 / 275 / 38% / 113% / Volatile / Avoid

7. Bharat Forge - June 04 - 600 / 822 / 37% / 111% / Scratchy earlier, but steady now / Good pick

8. MICO - June 04 - 1200 / 1735 / 45% / 134% / Scratch earlier, but steady now / Good pick

9. Gujarat Ambuja - July 04 - 260 / 359 / 38% / 152% / Reasonably steady / Decent pick

10. Madras Cements - July 04 - 600 / 879 / 47% / 186% / Slightly volatile, esp compared to Gujarat Ambuja / Good pick, but watch for any sharp movements

It is worthwhile to have compared two companies (in reality, you may look at more than two, from the same industry) to get an idea if a company is behaving very differently from the rest in its industry. Certain movements may affect the whole industry and may be discounted to that extent. You will see in the above graphs that some amount of volatility has affected both companies around the same time.

The above conclusions of good picks do NOT mean that they are worth purchasing right away. We will discuss the concept of cyclical movement of stock prices next week. Then you will understand and appreciate that for a good stock pick also, its best to wait for a good buying opportunity!

Earlier this week, I had a couple of bank deposits that came up for renewal. As I stared at the numbers there, I could barely find a difference between the start amount and the maturity amount, especially after the TDS they deduct. A measly 5.25% does not go ANYWHERE! And look at the above percentages! Are you convinced about stocks yet?!

- Sanjay Mehta

On Picking Stocks

2004-10-18T01:13:00.000+05:30

Here we are on one more Sunday when we will be looking to the important task of picking stocks to invest in. But before that, a quick look at the markets, in the week gone by. Last week was an example of the reality of markets – that they also go down and not just up. Yes, if you were invested in the markets, you would have seen your stocks, or in other words, you capital, go down anywhere between 5 to 15%, depending on what your portfolio was like. These are the times when your convictions get tested. Do you panic and start selling, or do you believe that this is only an aberration? Or you do not worry about overall market segments, as long as you have your own stock game plan, with set targets for buy and sell? Well, if I were to tell you this, I would be jumping the gun, as we will come to this later.

For now, let’s get down to the very interesting topic of learning how to pick stocks that you can invest in. Well, there are many technical methods involved, but as this newsletter is aimed at amateur retail investors, and as I promised at the outset that I will not get into technicalities, I am going to suggest simple methods that all of us can understand.

Let me repeat a few tips from last time:
1. Avoid companies that you do not even recognize by name. This is a very simplistic filter to eliminate stocks that you do not purchase. There may actually be gems out there, which you may not have heard of. But as a simple and general rule, staying away from small and unknown companies will be worthwhile.
2. Avoid stocks where the companies or its promoters have negative factors associated with them. Here again, it is a method of elimination. Why take a risk with such stocks, where there may be more chances of random and unpredictable manipulation? There are other fish in the sea, and there are other stocks to pick!
3. There is often a temptation to pcik stocks on basis of one-off specific news about the stock. E.g. good financial results, some news that the company has bagged some business contract, and the like. While such factors do have a relationship to the stock price, it is dangerous for an amateur investor to pick stocks on basis of such one-off factors. The reason being that such news may easily be known to select audiences like financial analysts and certainly, ‘insiders in the company’, before hand. Chances are that the impact of the news has already happened, on account of that, and by the time the amateur retail investor hears of it, it may be too late to purchase the stock then. On the other hand, more generic news like “it being good times for infrastructure industries and hence cement companies should do well” is worth taking into account, as its impact is not one-time, but rather an ‘ongoing basis’ type.

Other than these factors, you can pretty much pick any other stock, and use other guidelines that I explain below.

At the outset, it is necessary to understand a couple of ways in which stocks can be typically categorized: a) Size of company and b) Industry sector. In terms of size of company, there are the very large companies (also referred to as large cap stocks) such as ONGC, Indian Oil, Reliance, Tata Steel, etc. Then there are the medium sized companies (also referred to as mid-cap stocks) such as Thermax, Exide, Sundaram Fasteners, etc. The other way is to classify stocks as per industry sector that they belong to, e.g. Information Technology, Steel, Cement, Auto, Auto Ancilliaries, etc. Due to the special treatment that they get, Public Sector Units demand special attention as well, as a separate group, in their own right.

Now some guidelines with regards to these classifications:
1. While large cap stocks would appear to be more stable and secure, there is no rule to say that you should only invest in large cap companies. In fact, if you do so, you may miss out on the most exciting growth opportunities in mid-cap companies. A mix of large cap and mid-cap stocks in your portfolio, would be quite ideal.
2. While there are investors who invest in few stocks(with large funds committed to those) and stay put, I would not recommend that strategy at all, to retail investors. As a retail investor, with limited research, limited homework, there is just that much confidence that you can have, in a particular stock, or a few stocks, or even in a single industry. Therefore it is important for you to have enough hedges in your stock portfolio. So that if 1-2 do not do as well, you can at least ride high on the other picks. Also the markets have a tendency to rotate their fancy towards industry sectors. In other words, if there is a big demand for say, cement stocks, which raises their prices, it is typically accompanied by some other industry going out for favour, for the time being. So you may well see at that time, that pharma stocks are being sold and prices going down, at that time. This happens cyclically, with tremendous regularity. Which are the industries in favour at a time, and which have lost fancy for the moment is something that keeps changing. However due to this phenomenon, if you have a reasonably diversified portfolio of stocks in terms of industries, you will get the periodic highs in specific sectors, and the losses in some stocks will even out with the gains in some others.

To give you an example, last week, the metal stocks did very badly. I lost a lot of ground in Hindalco and Tata Steel. But then, the markets favoured IT stocks last week, and because I also have TCS in my portfolio, and which went up, my total portfolio had a sense of balancing done.

At this stage, let me recap the specific points made so far, with regards to picking stocks:
• Avoid small, unknown companies; avoid shady promoters / companies,
• Do not pick stocks on basis on one-off news; but do look at industry trends,
• Have a mix of large and medium sized companies (large cap, mid-cap stocks),
• Have reasonable diversification in terms of industry sectors.

Let’s move closer to making the actual selections. To get there, I am going to assume that you read regular newspapers (a financial newspaper would be even better), even if it is only to look at headlines. With that knowledge base, and your own experience (say in the business or profession that you are in), can you pick some industries that are likely to be doing well, in coming months and years? Say, for example, you read that the government is going to invest significant amounts in infrastructure like roads and bridges. That would normally mean that industries like cement, steel, and construction, should do well. Or you read about the BPO wave and how its going to benefit Indian companies, and simultaneously you also see regular and good results from Indian IT companies. You may conclude that its good times for the IT companies. You may pick up other news like how auto ancilliary companies have made inroads into the global auto manufacturers’ markets and how their businesses are doing so well. You might read that Public Sector Units are fast improving efficiencies and its making a big difference to their bottomlines. Etc.

Based on these factors, if you have a gut feel on some industries, you may actually be on the right track to start with. Write down the names of such industries that you short list. Also list out the few top companies in these industries that you can remember. Say, for example, your selection of industries was: Cement, IT, Auto Ancilliaries, Engineering. Then, your further short list of companies could well include ACC, Gujarat Ambuja Cement, Madras Cement, Wipro, Infosys, TCS, Exide, Bharat Forge, Sundaram Fasteners, MICO, Thermax, BHEL, Siemens, ABB, etc. Your short list may well be 15-20 names.

To go further from this point, I am going to introduce you to a typical website, which you can use for reference. The one that I use is http://www.equitymaster.com. If you go to this site, you will see at the top, a field where you can enter a stock name and get a quote (price) for the same. In fact, once you see that price, you also see a link for ‘detailed quote, graph’. The graph is what I find most interesting.

But instead of telling you why, let me leave you this week, with the following ‘homework’:
1. Make the short list of shares as explained above,
2. Look up each of these on equitymaster.com, as explained above,
3. Put stock name and its current price in a small Excel spreadsheet,
4. Besides that, note your observations regarding the graph of that stock movement. This is most critical. So note down what you see here. Is the graph flat? Is it headed upward, broadly? It is headed downward, broadly? Note that you can see the graph over 1 week / 1 month / 3 months / 6 months / 1 year / 3 years. Seeing the graph over 3 months or 6 months gives a fair idea of its current potential. Note your observations for the stocks that you short listed, and we will take it ahead from this point onwards, on next Sunday.

Picking stocks is one of the most crucial areas to learn and understand. So it will take more than the one week’s article. Hence we have to continue this topic next week too!

Till then, take care.
- Sanjay Mehta
Sunday, October 17, 2004

Why Stocks?

2004-10-10T22:59:00.000+05:30

On this Sunday, following another good week at the bourses in India let me start by reminding you that this newsletter is meant for amateur investors, so we will stay with basic fundamentals. To get the ball rolling then, I will take the bull by the horns and try to answer the question as to why stocks make a good investment option. And then I will give you the first few pointers on picking stocks.

SO WHY STOCKS?

1.Stocks or no-stocks: If you did not invest in stock markets, you keep your money in debt instruments like bank deposits or RBI bonds or the like. At an average these will give you about 5-6% per annum today. At best, they will give you in the region of 8%. So if stocks give you better than 8%, they should make a good investment option. The mistake most often made is that we are okay if our money lingers in a bank deposit at 5.5% interest, but as soon as we put it into the stock markets, we start looking for a minimum of 40% returns! And that is where the disappointment can happen. So lets have humble expectations, of say, 10-12% returns, and anything better should make us happier!

2.Yes, India is shining: There are just so many factors that bear this out. Continuously improving corporate results, industries like IT, pharma, auto ancillaries making their presence felt globally, improving public sector units’ efficiencies, international recognition of India as one of two most exciting economies for the future (other being China), etc. tell this story. As far as I can see, at least for the next three years, there is unabated growth for India Inc. And with that growth will come due appreciation at the stock markets. These factors are so strong that in spite of many seeming crisis such as change in government, rising oil prices and what not, the markets have maintained the fundamental upward movement. I believe that you can make money even when the markets are steady, but at this time, when markets are so bullish, you may find it difficult to lose money even if you wanted to!

3.Ample opportunities: There are just so many stocks that are growing at say, 20% per quarter (yes that is 80% annualized). As a retail investor, you may not get in, at its start and you may like to get out before it peaks, but still getting the targeted 10-12% pa, hardly looks challenging, under the circumstances.

4.Risk and Effort vs Reward: Sure, there is a factor of risk, in a dynamic market of this type. But there is risk in your business as well. In our business, we risk dead stocks, bad debts, market loss, and what not. A salaried employee may also risk loss of job, or sudden unexpected expenses. There is a general perception that risk in stock markets is a lot more. But with “circuit breakers” (a market mechanism that stops a share from making a crash landing on any one trading day), a sense of discipline, and ideally one look at the markets in the course of a day, the risk is limited. You can reasonably target to make, say 10% of what you make in your main business or profession, via the stock markets. In many cases, this number can be a larger percentage. Then, correspondingly, you need to put that kind of time to monitor your investment, as well. Stock markets are risky when you invest one day, forget about it, and expect to get big returns when you look at the investment, few weeks or months later. You do need to put in some effort, which will then limit your risk, and in fact, open you to opportunities, for large rewards.

5.And then there are always mutual funds: Here’s a confession. 99 times out of 100, a retail investor is likely to get better returns from good equity based mutual fund investments, than he would get from his own direct equity investments. And still many retail investors, including yours truly, invest directly into the stock markets. This is mostly for the ‘thrill’ factor – identifying your stocks, seeing how they do, and getting the high when ‘your’ stock jumps. But all that takes some time and effort. If you do not wish to put in as much time, and still want the returns from the equity markets, then equity based mutual funds are perfect for you. With good fund houses and schemes, you cannot go wrong with mutual fund investments, at this time. You will still need to put in some time to monitor your investments.

In this week’s action, on Thursday, Oct 7th, I picked up Bhushan Steel at around 110/-. On Saturday, it closed at 127/-, that too, on the upper circuit breaker. If I were to sell it on Saturday, it would have been an appreciation of about 15% right there, in 2 days, which works out to a staggering 2700% annualized!! Just for the record, I have not sold yet.

The important point is that I had Bhushan Steel in my tracking radar for about 6 weeks now. I thought of this stock as a good opportunity for growth all these weeks, but did not jump in and make a purchase. I was waiting for a ‘buying opportunity’. That came by this Thursday, and it was vindicated much sooner than I expected.

In terms of ‘picking’ stocks then, it’s not about just going out and purchasing a share. It is about identifying stocks and waiting for the right buying opportunities to purchase that stock. You also need to watch for selling opportunities for stocks that you own, but that will come later.

For now, lets focus on how to go about picking your stocks?
This is not something that I can cover briefly, so we will continue this over the next week as well. But here are some starting thoughts.

• For an amateur investor, I will recommend sticking ONLY to companies that you can recognize (need not all be ‘blue chips’, but essentially stay away from names you have never even heard of). Avoid dud companies, in other words. Likewise, avoid companies whose promoters have negative factors or fraud association.

• An amateur investor may find it hard to pick stocks on basis of factors like company results, news, tips or the like. This is because, an amateur investor is unlikely to know, if these factors are already accounted for, in the price of the stock.

While we will cover the stock picks next week, for now, let me leave you with some homework till next Sunday. On the basis of your own reading, your own gut feel, identify 3-4 industries (i.e. sectors, e.g. cement or steel or software or pharma, etc.) that you believe, are doing well, at this time and are likely to do well going ahead. Pick industries that you personally believe in. And within those industries, pick 2-3 companies that YOU believe, are leaders in that industry. No, those are not the final picks (hint: these can be a starting point, to find the actual picks).

And one more point: at this time, my suggested picks are for investment horizons of 3-6 months. At this time, I believe that there are enough opportunities to give you targeted returns (say minimum 20%), within this time frame, so that you are better off exiting in anything that takes longer than 6 months to give you that kind of return!

A bold statement, right? Just perfect to leave you, until next week!

P.S. Do not jump the gun. Nothing is achieved and a lot is destroyed, by being impulsive. If you have missed opportunities for so long, 2-3 weeks more will not matter. Hang on to your money. Wait to get a proper strategy in place, over the next few weeks.

MY TWO HOURS ON A SUNDAY

2004-10-03T12:04:00.000+05:30

“Share market?? No way! Count me out! Its all bull… it’s a scam.. I have always lost money there… I have vowed to never step anywhere close to it, ever again!!”

When I talk to many of my friends about stock market investments, the above are the typical responses that I hear. I completely identify with their thoughts. I was in the very same position, not more that two years ago. I had also:
• Invested mostly, on basis of tips and herd movement before,
• Burnt my fingers in previous experiments at the markets, and
• Sworn to be away from the stock markets, for ever.

Then, the following happened:
• Rates of interest kept sinking, and money kept in typical savings instruments like fixed deposits or bonds, stopped giving any decent returns,
• I was busy building a startup company which holds good long term promise. But which, in the short term, was unlikely to give me any sudden boost of personal returns.

I needed an additional source of income, to compensate the above two factors, and it had to happen very clearly, with an effort of not more than a couple of hours per week.

After considering several options, I finally turned to the stock markets and mutual funds. But this time around, I took some advice, got some thought process in place, put in a good three months preparation before putting a single paisa into the market, and then ventured in. And I have not repented!

There is a lot that I learnt in the process.
There is a lot that I keep learning each day.
I want to share this learning with whoever is interested.
I spend a good 1-2 hours in homework each week. Yes, I am very certainly in this, on part time basis only. But my homework is something that I can share.

So what is it that I am suggesting: I will make and email a two page article from my side, each week. The results of my two hours’ homework each Sunday. It will be sent to all those who are interested to receive the same. It may well be considered as an amateur’s primer to equity and equity based mutual funds’ markets. I have named this the Sunday Stocks Newsletter. Besides the email, the newsletter will also be available on my blog, at http://sundaystocks.blogspot.com.

I am clearly talking to fellow amateurs. If you are already into the markets, with your own philosophy of investing, or your own advisors, please do not mix up your strategy with mine. Follow your own methods – I am sure they are good!

But if you are like how I was, a couple of years back, staying away from the markets due to past experiences, you may want to check out my findings.

I have very little understanding of technical issues like P/E, EPS, EVA, book value and what not. I can barely read or interpret a balance sheet. And so, I am not going to touch on these issues. As far as I see it, for retail investors like us, these issues have little meaning. I will prefer to talk a language that an amateur can understand. A simple and common sense approach!

I have no intention to give “tips”. And if you just pick up “tips” from my articles, it will be a gross waste of my time and your efforts!

So what is it that you should look to get, from the Sunday Stocks Newsletter?
1. A retail investor’s strategy with regards to stocks and equity mutual funds,
2. Conviction that the stock markets are a true and viable method of earning money,
3. Stock markets do entail risk. You win some, you lose some. You learn how to have more wins than losses and to come out on the plus side, net-net.
4. Having said that there is risk, is there a risk of losing big time? No, I do not believe so. Not as per my principles. While you will get more details over the next few weeks, a brief response to this is given here. If you invest in fundamentally good companies and stay away from highly speculative or volatile stocks, then there is very low chance of losing big. Unless there is a natural disaster, war, etc.
5. An understanding of picking the right equity mutual funds, for maximum benefit.
6. Get some tips about managing capital gains taxation, on stock and mutual funds investments, and also about how this vehicle can be used to boost minors’ capital.

How would you follow the advice from these articles?
1. If you are not active in the markets at this time, stay away some more time. Also if you do not have spare liquid cash to invest, at this time, it does not matter. Read, watch and learn. You can use the learning later, whenever you are ‘ready’.
2. When YOU feel comfortable, venture out with a small investments. Be prepared to lose about 10-20% of what amount you start with. So pick that amount, which will not hurt, if you were to lose up to 20% of it. Be prepared to also shift stocks in the early days, as you may not pick winners right away.
3. Once you start getting these right, and become more confident, then you can increase the amount that you invest. Thereafter put that kind of amount, where the returns will be something that will captivate your interest, and not mere small change. Of course, as you will read in the course of these articles, resisting greed and overtrading, and maintaining discipline, are the heart of stock market success.

And WHY am I doing this? What’s in it for me? NOTHING! I am not a stock broker, nor a portfolio manager. I have no interest in the money that you make. All that I am interested in is to stick my neck out and give my advice to others, which will make me more sincere and committed to my homework and come up with better strategies.

Necessary disclaimer: You will follow the advice given here at your own risk and cost, and I will not be responsible for any losses that you may incur, on account of following my guidance!
Sanjay Mehta
sanjaypmehta@gmail.com