Suresh Sadagopan
If you dig in the same spot long enough, you'll eventually find water, goes an old saying. But many people dig in one place for a while, and then get impatient or distracted and start digging in another place, and then another... When they don't find water in any of those, they blame their luck. It's surprising that more people haven't figured out the simple trick. Of course, there's no denying the importance of choosing the best place to dig in the first place.
Many people dart in a new direction randomly. Many get caught up in the latest investing fads. There are broad trends like equity and mutual fund investing. Then, real estate, commodities, and gold. And then there are micro-trends - read 'fads' - like going overboard on mid-caps, banking stocks, the communications sector, and infrastructure. In pursuit of the latest trend, investors churn their portfolio.
These are the people you find glued to the TV, watching business channels, where post-mortems and predictions are doled out incessantly to viewers who wait with bated breath for the latest, as if they could get the news and act on it before anyone else. But what's on the TV channels is 'news ' only to the retail investor. The rest of the investing world usually not only knows about it, but has often also acted on it. The result is that retail investors are often the last to rush in, and get the empty shell, after the kernel has already been eaten by those higher up in the investing food chain.
The investing topography also has its share of whirlpools and quicksand. These feature things like rumors floated by vested interests, and often aimed at retail investors. Trusting investors follow the trail laid out for them. Then the cowboys who floated the rumours unwind their positions and move on to the next pasture, leaving trapped investors bleating plaintively.
Retail investors are fascinated by day trading. Who hasn't heard a story about someone's neighbor or cousin who makes money hand-over-fist on a daily basis? Isn't it remarkable that one hardly ever hears stories about the losses made by these legends? Many investors have great faith that there exist fail-proof methods to become really rich really quick.
They underestimate the risks they take, and rely too heavily on the instincts of themselves and of others, often at the expense of plain logic. The tide of optimism exposes their gambling streak, and they end up making bets that may not be as sound as they first appeared. Fact is, it's very difficult to predict equity markets, because there are simply too many variables involved
For those who want to get rich fast, investing time frames are measured in days rather than years. All those talk about wealth creation over time - how boring! What could be tamer than returns of 12-15 percent a year? The hot-blooded investor will settle for nothing less than doubling his money in six months. But the fact is that risk and return normally have a direct correlation - the higher the risk, the higher the returns. However, the chances of good returns increase - while risk does not - when one gives one's investment time to perform.
When investors burn their fingers, they leap to the conclusion that investing is dangerous, and swear they will never return to it... until the next fad comes along. Drifting from one investment to another without any strategy will not help anyone reach their long-term goals. It amounts to digging in too many places for water.
If there's no strategy for achieving goals, it may never happen. Many simply chase money. But that money is required for achieving certain milestones, fulfilling aspirations and meeting goals. Making money is fine - who could argue against that! But just chasing money, and letting oneself be led in any direction that seems appropriate at a given moment, will render the whole exercise futile.
Investors need to work with goals in mind, and work towards reaching them in the appropriate time frame, which is what financial planning is all about. There is no compelling reason to arbitrarily gun for some high threshold of return (say 40 percent a year) which will only drive the investors towards riskier options. Responsible investments made over a period help in achieving goals, even if they give modest returns. Investors need to give them time. Like everything else in life, it takes time for an investment to bear fruit.
Less is more. There's no need to keep moving your money around. If you have invested in good options in a diversified manner, just let it be. That way you don't have to constantly look around for options to shift to.
Remember, if something seems too good to be true, it probably is. Schemes which promise stratospheric returns deserve your skepticism.
So do those who claim to be sure about which way the stock market will turn, which stock will do well this year, and the like. When someone is that sure, take their views with a proportionately big pinch of salt.
As for knowing where to dig for water, you would consult a hydrologist, engineer, or some other professional, wouldn't you? Why should it be different with money? Find a consultant you can trust, who will guide you responsibly
Sunday 25 May 2008
5 not to do's in stock market
1. Not to give in to greed and fear: This is an important point, which you, as an investor, must keep in mind owing to its great influencing ability in equity investment decisions. This point simply means that in a bull run - control the greed factor, which could entice you, the investor, to compromise with your investment principles. By this we mean that while an investor could get lured into investing in penny and small-cap stocks owing to their eye-popping returns, it must be noted that these stocks have the potential to wipe out almost the entire invested capital. Another way greed affects investor behaviour is when they buy/hold stocks above the price justified by its fundamentals. Similarly, in a vice-versa scenario (bear market), investors must control their fear when stock markets turn unfavourable and stock prices collapse. Panic selling would serve no purpose and if the company has strong fundamentals, the stock is more than likely to bounce back. It is apt to note here what Warren Buffett, the legendary investor, had to say when he was asked about his abstinence from the software sector during the tech boom, "It means we miss a lot of very big winners but it also means we have very few big losers.... We're perfectly willing to trade away a big payoff for a certain payoff".
2. Not to time the market: This is one factor, which many experts/investors claim to have understood but are more often wrong than right. We believe that it is rather impossible to time the market on a day-to-day basis and by adopting such an approach, an investor would most probably be at the losers' end. In fact, investors should take advantage of the huge volatility that is witnessed in the markets time and again (and will be in 2008). In Benjamin Graham's words, "Basically, price fluctuations have only one significant meaning for the 'true' investor. They provide him an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times, he will do better if he forgets about the stock market".
3. Not to act based on rumours and sentiments: Rumours are a part and parcel of stock markets, which do influence investor sentiments to some extent. However, investing on the basis of this could prove to be detrimental to an investor’s portfolio, as these largely originate from sources with vested interests, which more often than not, turn out to be false. This then leads to carnage in the related stock(s) leaving retail investors in the lurch. However, if we consider this from another point of view, when sentiments turn sour but fundamentals remain intact, investors could take the opportunity to build a fundamentally strong portfolio. This scenario is aptly described by Warren Buffett, "Be fearful when others are greedy and be greedy when others are fearful".
4. Not to attach emotionally with stocks: It is very much possible that the company you have invested in fails to perform as per your expectations. This consequently gets reflected on the stock price. However, in such a scenario, it would not be wise to continue to hold onto the stock/buy more at lower levels on the back of expectations that the company's performance may improve for the better and the stock would provide an opportunity to exit at higher levels. Here it is advisable to switch to some other stock, which has promising prospects. In Warren Buffett's words, "Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks".
5. Not to borrow and buy stocks: This behaviour is typical in times of a bull run when investors invest more than what they can manage with the hope of making smart returns on the borrowed money. Though this move may sound intelligent, it is smart only till the time markets display a unidirectional move (i.e. northwards). However, things take a scary turn when the markets reverse direction or move sideways for a long time. This is because it leads to additional margin calls by the lender, which might force the investor to book losses in order to meet the margin requirements. In a graver situation, a stock market fall could severely distort the asset allocation scenario of the investor putting his other finances at risk.
2. Not to time the market: This is one factor, which many experts/investors claim to have understood but are more often wrong than right. We believe that it is rather impossible to time the market on a day-to-day basis and by adopting such an approach, an investor would most probably be at the losers' end. In fact, investors should take advantage of the huge volatility that is witnessed in the markets time and again (and will be in 2008). In Benjamin Graham's words, "Basically, price fluctuations have only one significant meaning for the 'true' investor. They provide him an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times, he will do better if he forgets about the stock market".
3. Not to act based on rumours and sentiments: Rumours are a part and parcel of stock markets, which do influence investor sentiments to some extent. However, investing on the basis of this could prove to be detrimental to an investor’s portfolio, as these largely originate from sources with vested interests, which more often than not, turn out to be false. This then leads to carnage in the related stock(s) leaving retail investors in the lurch. However, if we consider this from another point of view, when sentiments turn sour but fundamentals remain intact, investors could take the opportunity to build a fundamentally strong portfolio. This scenario is aptly described by Warren Buffett, "Be fearful when others are greedy and be greedy when others are fearful".
4. Not to attach emotionally with stocks: It is very much possible that the company you have invested in fails to perform as per your expectations. This consequently gets reflected on the stock price. However, in such a scenario, it would not be wise to continue to hold onto the stock/buy more at lower levels on the back of expectations that the company's performance may improve for the better and the stock would provide an opportunity to exit at higher levels. Here it is advisable to switch to some other stock, which has promising prospects. In Warren Buffett's words, "Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks".
5. Not to borrow and buy stocks: This behaviour is typical in times of a bull run when investors invest more than what they can manage with the hope of making smart returns on the borrowed money. Though this move may sound intelligent, it is smart only till the time markets display a unidirectional move (i.e. northwards). However, things take a scary turn when the markets reverse direction or move sideways for a long time. This is because it leads to additional margin calls by the lender, which might force the investor to book losses in order to meet the margin requirements. In a graver situation, a stock market fall could severely distort the asset allocation scenario of the investor putting his other finances at risk.
Monday 5 May 2008
Systematic Transfer Plans (STPs)
The functioning of STPs is quite similar to that of SIPs in terms of depositing a fixed sum into a fund at regular intervals. The difference here is that a lump sum can be invested in debt funds with nominal risk, and periodically, a specific amount can be transferred to a diversified equity fund.
STPs score over SIPs in a situation where you have the money to invest, but are wary of the turbulence in the market. In such a scenario, it’s better to park your money in debt funds that give decent returns, rather than opting for short-term fixed deposits/savings accounts that earn lacklustre interest. Also, the regular flow of your money into equity funds will ensure that you don’t lose out on the attractive returns they offer.
STPs score over SIPs in a situation where you have the money to invest, but are wary of the turbulence in the market. In such a scenario, it’s better to park your money in debt funds that give decent returns, rather than opting for short-term fixed deposits/savings accounts that earn lacklustre interest. Also, the regular flow of your money into equity funds will ensure that you don’t lose out on the attractive returns they offer.
Sunday 4 May 2008
Ten golden rules of Dalal Street
Dinesh Thakkar
Currently, the Indian markets are in doldrums and nobody is talking of stocks or investments. You may think justifiably so, as the markets are headed in no direction. Is it not exactly the opposite of the exuberant times we were witnessing a few months back. Conversely, bottoms are made in turbulent times.
It is difficult, if not impossible, to say when the markets will halt their southward journey and change direction for the better. Who knows, we might have already hit the bottom and the markets may soon return back to their upward trajectory.
My empirical observation and research have proved it that wealth making in the market has more to do with discipline and the power of time to compound growth than being smart at stock picking and timing the markets just right. To help you in your quest to make wealth in our markets, I suggest you follow the 10 golden rules of markets that will virtually ensure reasonable, steady wealth appreciation.
Bear in mind, you cannot have your cake and eat it too. Saving and consumption do not go hand-in-hand. You need to plan today for the lifestyle you want after you stop working, i.e. the finances you will require after you retire. Accordingly, save the necessary portion of your income to invest in equities. Equities, or stocks, may appear risky, but they are just volatile, they go up and down, and time is the perfect hedge against volatility.
Therefore, Rule No 1: Plan for tomorrow, today. Start saving for it now! Stagger your investments throughout your earning phase. Invest regularly and invest for the long term to buy in at an average price that includes both markets’ up and down ticks.
Never wait until you have large amounts of money to invest. However small the amount you are able to save, start early. The earlier you start, the better are your chances of making great wealth. Remember to make great gains. Time is a crucial factor, as wealth creation is a factor of both the power of compounding and the returns on your investments.
Accordingly, Rule No 2: Start early so that the power of compounding begins sooner; time is the magic that converts paise into rupees. In exuberant phases, when we have earned good money from our investments, most of us get greedy, and derivatives and futures provide an outlet for the expression of human greed. While such instruments often satisfy the whims of human greed, if taken to unrealistic levels, irresponsible investment in these securities can lead to financial ruin.
Hence, Rule No 3: Do not leverage, it is difficult, if not impossible, to predict short-term trends. Buy markets, not stocks. We all know that our economy is in a secular phase of rosperity and the stock market is the best proxy for the growth of an economy. To benefit from our oaring economy, buy the market as a whole and not any single stock.
Consequently, Rule No 4: Buy stocks that mirror the broader indexes, but never buy a single, or a handful of stock exposures. This means that you need to spread your risk across various market segments in the event a particular stock does not perform for reasons beyond the company’s control. It is easier to predict company earnings, but difficult to predict stock prices of the same company in the short run. Ironically, over the long term, stock prices mirror growth in a corporation’s earnings.
Therefore, Rule No 5: Look at company earnings, not at stock prices. Stock prices may tempt or give the wrong impression of a company’s welfare. But to build real wealth in equities, you must always rely on declared profits and facts, rather than make decisions based on stock movements. We all tend to sell stocks when we have made profits and keep the ones that have not appreciated. Eventually, we end up holding a portfolio of companies that are not performing! It is only human to sell for profits and not to want to take losses.
Hence, Rule No 6: Keep the winners, sell the losers. Stay on top of your investments. Check constantly for stocks that are not performing and eliminate them from your portfolio if the outlook does not seem promising. This way, you will have all winners left in your portfolio to take you to your goals.
In exuberant times, we all tend to believe that the good times will last longer than they actually will. And before D-day, we will be able to sell our investments that were bought at unjustified levels. Just then, it happens that the markets turn and before we can sell out, we are left holding the bag.
For this reason, Rule No 7: Avoid being the “Bigger Fool;” it is imperative that you recognise the difference between price and value. Buy value and not momentum. When investing in stocks, your head should prevail over your heart. Resist the urge to get consumed by market chatter. Ignore hot tips from dealers and friends. It is advisable to do your own home work.
As the result, Rule No 8: Pick stocks with your brain, not your heart. Large-caps are the ones that have already proven themselves over longer periods of time and have the balance sheet acumen, strong cash flow and brains to manage businesses effectively according to prevailing situations and realistic opportunities available.
Hence, Rule No 9: Prefer large-cap stocks to small- and medium-caps. Investment in small and mid-cap stocks requires expertise and strong tracking abilities, that without, your portfolio will under-perform. Do not short sell a stock just because it is going up, and thus, one day it must come down. Newton’s law is not applicable to the markets. What goes up does not necessarily come back down! If companies are able to sustain earnings’ growth for long periods, then its stock may go up, up and up, or it can even remain high without any reason for a long period of time.
Because of this, Rule No 10: Markets can remain irrationally up, or continually climb for the right reasons. Therefore, never go short. It will expose you to unnecessary risks.
Currently, the Indian markets are in doldrums and nobody is talking of stocks or investments. You may think justifiably so, as the markets are headed in no direction. Is it not exactly the opposite of the exuberant times we were witnessing a few months back. Conversely, bottoms are made in turbulent times.
It is difficult, if not impossible, to say when the markets will halt their southward journey and change direction for the better. Who knows, we might have already hit the bottom and the markets may soon return back to their upward trajectory.
My empirical observation and research have proved it that wealth making in the market has more to do with discipline and the power of time to compound growth than being smart at stock picking and timing the markets just right. To help you in your quest to make wealth in our markets, I suggest you follow the 10 golden rules of markets that will virtually ensure reasonable, steady wealth appreciation.
Bear in mind, you cannot have your cake and eat it too. Saving and consumption do not go hand-in-hand. You need to plan today for the lifestyle you want after you stop working, i.e. the finances you will require after you retire. Accordingly, save the necessary portion of your income to invest in equities. Equities, or stocks, may appear risky, but they are just volatile, they go up and down, and time is the perfect hedge against volatility.
Therefore, Rule No 1: Plan for tomorrow, today. Start saving for it now! Stagger your investments throughout your earning phase. Invest regularly and invest for the long term to buy in at an average price that includes both markets’ up and down ticks.
Never wait until you have large amounts of money to invest. However small the amount you are able to save, start early. The earlier you start, the better are your chances of making great wealth. Remember to make great gains. Time is a crucial factor, as wealth creation is a factor of both the power of compounding and the returns on your investments.
Accordingly, Rule No 2: Start early so that the power of compounding begins sooner; time is the magic that converts paise into rupees. In exuberant phases, when we have earned good money from our investments, most of us get greedy, and derivatives and futures provide an outlet for the expression of human greed. While such instruments often satisfy the whims of human greed, if taken to unrealistic levels, irresponsible investment in these securities can lead to financial ruin.
Hence, Rule No 3: Do not leverage, it is difficult, if not impossible, to predict short-term trends. Buy markets, not stocks. We all know that our economy is in a secular phase of rosperity and the stock market is the best proxy for the growth of an economy. To benefit from our oaring economy, buy the market as a whole and not any single stock.
Consequently, Rule No 4: Buy stocks that mirror the broader indexes, but never buy a single, or a handful of stock exposures. This means that you need to spread your risk across various market segments in the event a particular stock does not perform for reasons beyond the company’s control. It is easier to predict company earnings, but difficult to predict stock prices of the same company in the short run. Ironically, over the long term, stock prices mirror growth in a corporation’s earnings.
Therefore, Rule No 5: Look at company earnings, not at stock prices. Stock prices may tempt or give the wrong impression of a company’s welfare. But to build real wealth in equities, you must always rely on declared profits and facts, rather than make decisions based on stock movements. We all tend to sell stocks when we have made profits and keep the ones that have not appreciated. Eventually, we end up holding a portfolio of companies that are not performing! It is only human to sell for profits and not to want to take losses.
Hence, Rule No 6: Keep the winners, sell the losers. Stay on top of your investments. Check constantly for stocks that are not performing and eliminate them from your portfolio if the outlook does not seem promising. This way, you will have all winners left in your portfolio to take you to your goals.
In exuberant times, we all tend to believe that the good times will last longer than they actually will. And before D-day, we will be able to sell our investments that were bought at unjustified levels. Just then, it happens that the markets turn and before we can sell out, we are left holding the bag.
For this reason, Rule No 7: Avoid being the “Bigger Fool;” it is imperative that you recognise the difference between price and value. Buy value and not momentum. When investing in stocks, your head should prevail over your heart. Resist the urge to get consumed by market chatter. Ignore hot tips from dealers and friends. It is advisable to do your own home work.
As the result, Rule No 8: Pick stocks with your brain, not your heart. Large-caps are the ones that have already proven themselves over longer periods of time and have the balance sheet acumen, strong cash flow and brains to manage businesses effectively according to prevailing situations and realistic opportunities available.
Hence, Rule No 9: Prefer large-cap stocks to small- and medium-caps. Investment in small and mid-cap stocks requires expertise and strong tracking abilities, that without, your portfolio will under-perform. Do not short sell a stock just because it is going up, and thus, one day it must come down. Newton’s law is not applicable to the markets. What goes up does not necessarily come back down! If companies are able to sustain earnings’ growth for long periods, then its stock may go up, up and up, or it can even remain high without any reason for a long period of time.
Because of this, Rule No 10: Markets can remain irrationally up, or continually climb for the right reasons. Therefore, never go short. It will expose you to unnecessary risks.
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