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Saturday, November 27, 2010

Should I buy now?


I have received a query from JS (white labeled name to protect the identity). He has asked me if this is a good time to invest in equity. JS, a Chartered Accountant by qualification, is a leading professional in the field of finance.

Since this answer could be of common interest, I thought to post it on the blog.

My take is below:

JS bhai,

Yes, I am anyway cold when it comes to commenting on stocks/equity market. You know that I do not change my views often so do not write frequently... :-)

If you are a long term investor then I would advise you to buy on every dip. This is a common message that we often here from 'experts' but how much and when is something that still puzzles us? So to answer this, I have a simple formula and that might be worth following:

Investment Drop in sensex
10% 10%
20% 20%
30% 30%
50% 40%
70% 50%
90% 60%
100% 70%

The above table will help you to spread your investment. If you had used it in the previous downfall, then you would find it equally effective. e.g. in 2008, you could have accumulated 46% of stocks between the sensex level of 12600-8400 (bottom). The fact is that these levels offered the best value. However, if you have some other method to follow then you can use that as well. But have a disciplined approach in whatever you do. The success rate will be high.

Now in the present case the sensex touched a high of 21000 couple of days ago. So if it goes to 18900 levels or below, which is a drop of 10%, you may invest 10% of total available funds for stocks. If it goes further down then you follow the table given above. If the Sensex goes up then also there is no problem because you have accumulated something to cheer about.

Now let me clarify/add few more points to above:
- Invest in the stocks that you feel are quality stocks (I have given a presentation earlier on this topic, you may use the same to identify the stocks)
- Invest in the stocks which are from long term, low debt, good growth, quality management and are offered at attractive valuations etc.
- Some people have doubts that if a stock is undervalued then it is a good at all levels then why not to buy when the stock was trading at 21000? My take is that yes you can buy at any levels and do not wait for market to crash. But when the market was trading at 21000 level, there were very few (hardly any) which were available at discount. Now as you have dips you start taking exposure in those stocks which you feel are good, offering value and qualify on our parameters.

Warren Buffet has rightly said that invest when everyone is selling. With the above approach our investment approach will be spread over various intervals and it will ensure that we have money to invest when everyone has literally run away. :-)

Trust this is of help.

Niteen S Dharmawat

On 11/26/10 1:15 AM, JS wrote:
It seems that your presence has got cold and snow in UK.

Should I enter in stocks now or wait?


Thursday, November 18, 2010

The fight between my mind and heart…

I have been writing after a long time… Good to write after intermittent timeframe then on a regular basis without any significant updates. :-)

I wanted to write about my Diwali vacations in my home town, my learning from this visit and how Ireland’s economy debacle is quite similar to a potential brewing problem within India. Strange, but true… read this further.

I was spending a full week in the town almost after 3 years so got an opportunity and lots of free time to meet many friends, relatives, everyone… My hometown is famous for all tasty Indian snacks and everyone there gives a nice treat to someone who is in the town. They won’t take you to any tourist place/ museum/ historical places etc. but to typical Indian food bazaars/ food-malls during such visits. But this time a different experience was waiting for me.

Everyone I met there, and with no exception, has not talked about me/my well being as much as they talked about the hot property in and around the city. They have talked about how the rates have gone up in last 3 years, which are the hot places to visit. In fact, it was to this extent that I made visits to at least 3 such ‘hot property’ destinations in the city which have already gone up by 4-5 times in last 3 years, and some cases more than that, and still people were talking about more appreciations for such locations. It was not limited to this extent but when I was using public transport to commute/ while I was at a paan-shop, I found that people there also were talking about property/ land/ flat etc… This was craziness…

The city is a trading place and has two main industrial belts near the city where all the leading companies are present. It is also fast emerging as an education hub with the presence of IIT, IIM and hundreds of colleges which are offering engineering and management qualification to anyone who is willing to grab that. The result is a big boom in the services associated with such market. The people are very industries and have captured this education market opportunity with open hands and now the city has many hostels (from 5-start facilities to road side place)/restaurants/ food-mess etc running in and around the city.

When I met people in the city, I found that they are busy in acquiring plots, vacant land, houses, flats everything more than they need or they have the capacity to hold or buy. The problem is huge appreciation in prices and people’s expectations for further crazy appreciation in a city which is limited to education hub and 2 industrial belts.

But is this the story confined to my home town only? Is it not prevalent across the India – almost the same story only the situations are marginally changed here & there. You visit anywhere in the country, a small city to a metro, it is the same. I have taken the example of my home town since I wanted to write about the craziness for property in India for sometime but wanted to avoid getting myself biased. After visiting my home town, I have got this confirmation that we are now brewing the problem.

It gives me a jittery feeling, especially when I read that the problems in Ireland (a small European country which is heading for bankruptcy) is due to such property bubble. We have seen earlier how US has got entangled with sub prime. We are also hearing the same property bubble getting built up in China. When I quote such examples, people have easy way of telling me that US was different, India is different and Indian market is more demand driven and not investor driven, the banks are not landing easy money to people etc. But if that’s not the case then how come people are acquiring so fast and so easily esp. more than what they need? If it bursts then what will happen? US is saved because they can afford such mistakes, possibly Ireland can afford with the help of European Union but who will come for our rescue? The answer is simple… no one. I see this as a potential problem but many may differ. My heart says that it should not lead to a problem but my mind disagrees. Let’s see who wins. Till then goodbye.

As always you are most welcome to share your thoughts/opinions/criticism/praise etc…:-)