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Wednesday, June 23, 2010

Is Sensex heading for moon & give me tips…

I hate to answer this question. But this is the most often (2nd) asked question to me. Will the Sensex move up further?

My answer to this is whether Sensex goes up or down; one should invest all the times with a long term horizon of at least 5 years. One should not try to time the market rather one should analyze the stocks, identify margin of safety in the stocks and put in the money. If margin of safety is built in the stock then even if market goes down with a prolonged downward journey then also it will not impact the investment. It’s bound to bounce back and you would naturally be earning dividend incomes.

However, after saying this much also I still get the same question asked again. So this time I decided to analyze the market to answer if it’s fully valued, overvalued or undervalued.

I looked at 3 parameters of the BSE Sensex - the Current PE Ratio, Price to Book Value and Dividend Yield %. The present P:E Ratio is 19.96, Price to Book Value is 3.56 and Dividend Yield is 1.15%. These parameters definitely do not indicate that the market is the normal zone. But these parameters are also not indicating excessively overheated situation; however, it’s close to that. It other words markets are almost fully priced. If market goes down then it would simply offer an attractive investment opportunity.

The market has a tendency to be extremely euphoric at times and fearful at other. Because of this not even Brahma can predict where the market will be heading in next 6 months (forget about tomorrow). However, one can definitely & safely predict, including me, that the market will go up in next 5 years’ period. So if we can identify stocks which are undervalued then that’s the best way to protect our investment even if the market takes a prolong downturn journey.

This leads to the most often (1st) asked question to me. What are those stocks where I can put my money?

I hate even more to answer this question. Because it means asking for tips and tips take you to pits. Howsoever I hate this; I have to still answer this question. Which are the stocks in which I should invest my money in?

The answer is to understand the inherent value of the company and then take investment decisions. How to identify the inherent/intrinsic value? I have recently taken up two sessions on this topic where we discussed more than 10 parameters to qualify an investment opportunity. These are the same set of parameters described by masters, Benjamin Graham and Phil Fisher, in their books. These parameters cover various aspects of the company including strength in the balance sheet, governance, future growth prospects, profits and losses, and margin of safety and help you protect your investment in all the times. These parameters are simplified version of investment analysis where analyzing these parameters does not require one to be a rocket scientist but just a 5th grader with an understanding of internet & highly disciplined approach. The data is also available in the public domain free of cost and it does not require more than 2 hours a week to analyze the stocks. So why to ask for tips, make your tips now available to others.

Happy investing.

Share your thoughts.

Niteen S Dharmawat

IMPORTANT DISCLAIMER: Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective. The information contained herein is based on analysis and up on sources that I consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it & take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations above.

Investment in stock market… without losing sleep, happiness and money…

Swami Vivekanand while defining Poison said excessive of everything is poisonous. This rule is equally applicable to the stock market.

The investment in stocks in based on the principle of fear and greed. The common-man always finds him at the center-stage of this pendulum. He is either too fearful to selloff everything at loss or too greedy to keep everything near his chest and suddenly finds himself in an uncomfortable situation.

I have been myself an investor for more than 14 years in stocks. I have seen all the types of days and have my share of mistakes where I have lost and earned good amount of money. I have even traded on the floor of the stock market in those old days when the computer based trading system was unheard of.

First of all let’s understand the difference between investment and speculation. Investment is made for specified time duration with very clear objectives after careful analysis of the stocks. On the other hand speculation is based on the whims and fancies of the individuals and sometimes based on the advice of the so called gurus of the stock market.

I am sorry to say but almost 90% of the common investors fall in the second category. They had never been smart enough to do the analysis of those stocks in which they are putting their money. They loose the money faster then they loose their pants. We have witnessed three very prominent scandals in last 15 years. These are named as Harshad Mehta, CR Bhansali and Ketan Parkeh scandals. In all these three scandals it was only the common man who burnt his fingers because of his excessive fear and greed.

When we buy vegetable we tend to bargain with that poor vegetable vendor for a sum as small as Rs 2 but when it comes to stocks we forget everything. Why? It’s nothing but an example of excessive greed and the same is equally true when we are to sell the stocks in the market.

So how should we protect our interest in the market? First of all never invest for shorter duration and always invest in the quality stocks when they are offering attractive valuations. What does an attractive valuation mean? It simply means that we will not invest in a stock or industry which is much hyped and already seen a rally. Like in IT stocks in year 2000-01 or in Retail and Real Estate before the crash of 2008 started.

If I have invested in the stocks after making all the relevant analysis based on the study of the books of the company I will not sell just because the stock has seen a short term loss.

If someone bought 100 shares of a company in 1992’s IPO at an investment of Rs 9500 today it’s worth in crores. You may like to know the name of the company. It’s Infosys but how many of the common investors have been able to locate this? Alas I do not know a single of them… But I know many of them who have invested in penny stocks and lost their pants.

So friends have lots of patience, less of greed and fear and smart understanding to get the best out of stock market.

Happy investing….

Please feel free to share your views/thoughts...

Niteen S Dharmawat