Last week i saw following comments from Mark Faber (allegedly called investment guru))on moneycontrol . He is expecting a 30-40% drop in Indian equities from current levels
"According to Investment Guru, Marc Faber, the emerging markets may get oversold in the next six months and then see a rally. New highs are pretty much out of question, he told CNBC-TV18. Some EMs can still drop 30-40% from the current levels, he added.
Precious metals are still relatively attractive, Faber said. The Sensex may test 14,000 before slipping to 12,000 levels he said "
(http://www.moneycontrol.com/india/news/fii-view/sensex-
may-test-14k-then-slip-to-12k-marc-faber/14/24/327434)
I want to share some of his previous comments here .
On June 13, 2006 he gave a sell recommendation on Indian equities and expected a 30% fall from that levels which never happened on the contrary equities gone up by more than 50% in that year " http://www.ameinfo.com/88675.html "
On march 15, 2007 he came with another sell recommendation on Indian as well as Chinese equities and in that year Indian equities were gone up over 50% and Chinese equities were up more than 100% " http://www.ameinfo.com/113715.html "
He gave 5000-6000 target for Sensex in 2006 and 9000 in 2007 and Sensex has beaten his predictions with a margin of over 100% in both cases . I cant understand the wisdom calling a person who is giving such a poor predictions a investment guru , and publishing his comments in headlines.
One thing he consistently advices was to invest in gold . Gold as a asset class historically given least returns. From $850 per ounce in 80's it has fallen to $300 in 2000 . It rallied from then to above $900 at present . If you add inflation to this from last 30 years gold in fact has given -ve returns.
RK
Sunday, 24 February 2008
Wednesday, 20 February 2008
Warren Buffett Quotes
The first rule is not to lose. The second rule is not to forget the first rule.
When you combine ignorance with leverage you get some pretty interesting results.
The market, like the Lord, helps those who help themselves. But, unlike the Lord, the market does not forgive those who know not what they do.
You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ.
Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well.
For some reason people take their cues from price action rather than from values. Price is what you pay. Value is what you get.
Diversification may preserve wealth, but concentration builds wealth.
With each investment you make, you should have the courage and the conviction to place at least ten per cent of your net worth in that stock.
John Maynard Keynes essentially said, don't try and figure out what the market is doing. Figure out a business you understand, and concentrate.If the business does well, the stock eventually follows.
Full-time professionals in other fields, let's say dentists, bring a lot to the layman. But in aggregate, people get nothing for their money from professional money managers.
Diversification is a protection against ignorance. It makes very little sense for those who know what they're doing.
Many corporate managers deplore governmental allocation of the taxpayer's dollar but embrace enthusiastically their own allocation of the shareholder's dollar [to charities of their own choosing]. We've yet to find a CEO who believes he should personally fund the charities favored by his shareholders. Why, then should they foot the bill for his picks?
The professors who taught Efficient Market Theory said that someone throwing darts at the stock tables could select stock portfolio having prospects just as good as one selected by the brightest, most hard-working securities analyst. Observing correctly that the market was frequently efficient, they went on to conclude incorrectly that it was always efficient.
A pin lies in wait for every bubble and when the two eventually meet, a new wave of investors learns some very old lessons.
Occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics is equally unpredictable, both as to duration and degree. Therefore we never try to anticipate the arrival or departure of either. We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
When you combine ignorance with leverage you get some pretty interesting results.
The market, like the Lord, helps those who help themselves. But, unlike the Lord, the market does not forgive those who know not what they do.
You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ.
Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well.
For some reason people take their cues from price action rather than from values. Price is what you pay. Value is what you get.
Diversification may preserve wealth, but concentration builds wealth.
With each investment you make, you should have the courage and the conviction to place at least ten per cent of your net worth in that stock.
John Maynard Keynes essentially said, don't try and figure out what the market is doing. Figure out a business you understand, and concentrate.If the business does well, the stock eventually follows.
Full-time professionals in other fields, let's say dentists, bring a lot to the layman. But in aggregate, people get nothing for their money from professional money managers.
Diversification is a protection against ignorance. It makes very little sense for those who know what they're doing.
Many corporate managers deplore governmental allocation of the taxpayer's dollar but embrace enthusiastically their own allocation of the shareholder's dollar [to charities of their own choosing]. We've yet to find a CEO who believes he should personally fund the charities favored by his shareholders. Why, then should they foot the bill for his picks?
The professors who taught Efficient Market Theory said that someone throwing darts at the stock tables could select stock portfolio having prospects just as good as one selected by the brightest, most hard-working securities analyst. Observing correctly that the market was frequently efficient, they went on to conclude incorrectly that it was always efficient.
A pin lies in wait for every bubble and when the two eventually meet, a new wave of investors learns some very old lessons.
Occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics is equally unpredictable, both as to duration and degree. Therefore we never try to anticipate the arrival or departure of either. We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
Tuesday, 12 February 2008
Be fearful when others are greedy
...and Be greedy when others are fearful.
This is what world's wisest investor warren buffett say about investing.People who are extremly greedy one month before have become over cautious and fearful now a days and taking their money out of stock market . Now almost all the analysts are coming out with crazy predictions upto what extent sensex can fall. Yesterday in CNBC first global Shankar Sharma predicting sensex would go back to 4 digits(http://www.moneycontrol.com/india/news/market-outlook/sensex-may-fall-another-20-by-yr-end-first-global/01/56/325643).I dont know what the analysis he has done but historically sensex has never traded below 13PE even in bear markets.If we can predict 975-1000 EPS for sensex for 09 . Even in bear market situations we may not go below 14000.
Because of these kind of opinions which didn't hold any rationality all the investors are going into panic selling. In the last 3 weeks whatever happend whether it is up or down doesn't really matter as the volumes are quite low in these days, and market may take time to pickup volumes and settle and start its journey.
At that time again same analyst will come and tell you to buy shares at 20K levels.So Beware of the analysts.
As all the analysts are predicting the market would fall deeply , we can safely assume that it is right to buy stocks.
RK
This is what world's wisest investor warren buffett say about investing.People who are extremly greedy one month before have become over cautious and fearful now a days and taking their money out of stock market . Now almost all the analysts are coming out with crazy predictions upto what extent sensex can fall. Yesterday in CNBC first global Shankar Sharma predicting sensex would go back to 4 digits(http://www.moneycontrol.com/india/news/market-outlook/sensex-may-fall-another-20-by-yr-end-first-global/01/56/325643).I dont know what the analysis he has done but historically sensex has never traded below 13PE even in bear markets.If we can predict 975-1000 EPS for sensex for 09 . Even in bear market situations we may not go below 14000.
Because of these kind of opinions which didn't hold any rationality all the investors are going into panic selling. In the last 3 weeks whatever happend whether it is up or down doesn't really matter as the volumes are quite low in these days, and market may take time to pickup volumes and settle and start its journey.
At that time again same analyst will come and tell you to buy shares at 20K levels.So Beware of the analysts.
As all the analysts are predicting the market would fall deeply , we can safely assume that it is right to buy stocks.
RK
Sunday, 10 February 2008
Growth Vs Value Investing
Growth and value are two fundamental approaches in equity investing. Investing in companies whose potential for growth in sales and earnings are better compared to peers or sectors generally called growth investing.
Growth companies usually pay little or no dividends and re-invest their profits in their business for further expansion .These companies generally have high Price to earnings ratios and price to book ratios.Generally growth companies will have very less assets compared to the price of the stock. Companies like RCOM ,Educom,pantaloon etc will come into this category.
In contrast Value stocks are generally fallen out of favour in the market place and are considered bargain-priced compared with book value, replacement value, or liquidation value. Typically, value stocks are priced much lower than stocks of similar companies in the same industry. This lower price may reflect investor reaction to recent company problems, such as disappointing earnings, negative publicity, or legal problems, all of which may raise doubts about the companies’ long-term prospects. These stocks will have relatively low price-to-earnings and price-to-book ratios. These companies generally have huge assets like real estate , inventories,subsidaries etc.Companies like MTNL,Aravind Mills,Hindustan motors etc will come in to this category
Which strategy — growth or value — is likely to have higher return potential over the long term? We cann't conclude any thing but generally growth stocks will have high volatility compared to value stocks and potential to give high returns . In value stocks we can get good returns in some kind of cyclical business like commodities etc .
RK
Growth companies usually pay little or no dividends and re-invest their profits in their business for further expansion .These companies generally have high Price to earnings ratios and price to book ratios.Generally growth companies will have very less assets compared to the price of the stock. Companies like RCOM ,Educom,pantaloon etc will come into this category.
In contrast Value stocks are generally fallen out of favour in the market place and are considered bargain-priced compared with book value, replacement value, or liquidation value. Typically, value stocks are priced much lower than stocks of similar companies in the same industry. This lower price may reflect investor reaction to recent company problems, such as disappointing earnings, negative publicity, or legal problems, all of which may raise doubts about the companies’ long-term prospects. These stocks will have relatively low price-to-earnings and price-to-book ratios. These companies generally have huge assets like real estate , inventories,subsidaries etc.Companies like MTNL,Aravind Mills,Hindustan motors etc will come in to this category
Which strategy — growth or value — is likely to have higher return potential over the long term? We cann't conclude any thing but generally growth stocks will have high volatility compared to value stocks and potential to give high returns . In value stocks we can get good returns in some kind of cyclical business like commodities etc .
RK
Why we should invest in equity market?
Equity is the only investment which gives inflation adjusted tax free high returns over a long period.
For example a person who invests 10000 today in stock market will have 67000 in 20 years assuming a 10% average annual return, where as the same investment in bonds at 6% a year will have about 32000 ,if you consider a 4% average annual inflation he will have less than 15000.That is the irony of so-called conservative investment strategy.
If you consider indian equity returns. Key indices Sensex and nifty had given over 17% annual returns over a period of 20 years (not to mention the 40% annual returns in last 5 years), where as you might have got a maximum of 9% taxable return in fixed deposites.If you consider a inflation of 4-6% people who invested in FD or savings account had really lost a lot of money.
So when any one says investing in equity is risky i feel very awkward , according to the above statistics avoiding equity is a lot more risky and recklessness.
It is quite evedent that just to avoid regret aversion which might happen in short term perople are losing long term potentially high returns in equity markets .
RK
For example a person who invests 10000 today in stock market will have 67000 in 20 years assuming a 10% average annual return, where as the same investment in bonds at 6% a year will have about 32000 ,if you consider a 4% average annual inflation he will have less than 15000.That is the irony of so-called conservative investment strategy.
If you consider indian equity returns. Key indices Sensex and nifty had given over 17% annual returns over a period of 20 years (not to mention the 40% annual returns in last 5 years), where as you might have got a maximum of 9% taxable return in fixed deposites.If you consider a inflation of 4-6% people who invested in FD or savings account had really lost a lot of money.
So when any one says investing in equity is risky i feel very awkward , according to the above statistics avoiding equity is a lot more risky and recklessness.
It is quite evedent that just to avoid regret aversion which might happen in short term perople are losing long term potentially high returns in equity markets .
RK
Deciding not to Decide is a Decision
Decision Paralysis... Status Quo Bias ... Endowment Effect ...Regret Aversion
This explains how human tendencies can lead us to avoid or delay action.
Decision paralysis is the main effect of human tendency to resist change . That is people are almost preternaturally predisposed to the familiar , to keeping things much as they have been. Behavioral economics call this status quo bias.
1)Imagine you are a serious reader of financial times but until recently you have had little money to invest .Now a great-uncle has bequeathed to you a large sum of money. Will you invest in equity?
2)Now imagine that you have got shares of some XYZ company (instead of money)from your uncle . Will you sell the shares?
Most probably in first situation you will hesitate to invest in equity while in the second situation you most probably keep the equity investment.
The above example explains status quo bias. Similarly endowment effect expalins that people place un-realistically high price for which they are holding compared to the things they are not holding ( this is why retailers offer trail periods and money-back guarantees).
The other reason people hesitate to invest in equity is regret aversion ,which means people want to avoid the pain of regret and the responsibility for negative outcomes.And to that extent the desicions to act impart a higher level of responsibility than decisions to do nothing.
But remember Deciding not to Decide is a Decision.
"Why Smart People Make Big Money Mistakes" - Gary Belskey & Thomas Gilovich
This explains how human tendencies can lead us to avoid or delay action.
Decision paralysis is the main effect of human tendency to resist change . That is people are almost preternaturally predisposed to the familiar , to keeping things much as they have been. Behavioral economics call this status quo bias.
1)Imagine you are a serious reader of financial times but until recently you have had little money to invest .Now a great-uncle has bequeathed to you a large sum of money. Will you invest in equity?
2)Now imagine that you have got shares of some XYZ company (instead of money)from your uncle . Will you sell the shares?
Most probably in first situation you will hesitate to invest in equity while in the second situation you most probably keep the equity investment.
The above example explains status quo bias. Similarly endowment effect expalins that people place un-realistically high price for which they are holding compared to the things they are not holding ( this is why retailers offer trail periods and money-back guarantees).
The other reason people hesitate to invest in equity is regret aversion ,which means people want to avoid the pain of regret and the responsibility for negative outcomes.And to that extent the desicions to act impart a higher level of responsibility than decisions to do nothing.
But remember Deciding not to Decide is a Decision.
"Why Smart People Make Big Money Mistakes" - Gary Belskey & Thomas Gilovich
Sunday, 3 February 2008
How Interest Rates Affect The Stock Market ?
The interest rates generally will have inverse effect on the stock market i.e. if the interest rates comes down stock market will go up and vice versa.
The central banks decide the interst rate as part of monetary policy , to maintain inflantation and growth .
Reducing interest rates will have following effects ...
1) Increase in liquidity in the system , and increase in inflantation also as too much liquidity chasing few assets like real estate or equity .
2) Companies earning will increase as the interest burden will come down(considering most of the companies will have considerable part of debt in their books).
3) Companies can look for expansion as they can raise debt with less interest,thus potential increase in earnings.
In the same way increase in interest will control inflantaion and hamper the growth of the companies thus the growth of the country.
Apart from this increase in interest will potentially appritiate the currency too.
Banking , Auto and Real estate are the sectors which are directly effected by interest rates and export sensitives like IT and Textile are indirectly effected by the interest rates.
While allocating capital we should take trend of interest rates into account.
RK
The central banks decide the interst rate as part of monetary policy , to maintain inflantation and growth .
Reducing interest rates will have following effects ...
1) Increase in liquidity in the system , and increase in inflantation also as too much liquidity chasing few assets like real estate or equity .
2) Companies earning will increase as the interest burden will come down(considering most of the companies will have considerable part of debt in their books).
3) Companies can look for expansion as they can raise debt with less interest,thus potential increase in earnings.
In the same way increase in interest will control inflantaion and hamper the growth of the companies thus the growth of the country.
Apart from this increase in interest will potentially appritiate the currency too.
Banking , Auto and Real estate are the sectors which are directly effected by interest rates and export sensitives like IT and Textile are indirectly effected by the interest rates.
While allocating capital we should take trend of interest rates into account.
RK
Sunk Cost Fallacy
This is another form of Loss Aversion by which people tend to take future decissions depending on the money already spent .
In a research for Ohio University theater's 1982-83 season one group of buyers paid normal ticket price $15; another group received $2 discount per ticket and another group received $7 discount per ticket. Logically there should not be any difference in attendance but the result shows that the attandance is directly proportional to the money spent.
This is another psychological trap in which we can easily fall in stock market. Many times we will hold or average stocks which we think fundamentally strungling just because we have bought them at high price even the stock continues to fall. At any time if we think the stock is not worth a buy at current price then it is better to book loss and move on to better counter.
While taking any investment decisions we should concentrate on the bussiness independent to the price performance of the stock.If the underlying bussiness is going to do well then the stock is most probably do well in the future irrespective of it's prformance in the past .
"Why Smart People Make Big Money Mistakes" - Gary Belskey & Thomas Gilovich
In a research for Ohio University theater's 1982-83 season one group of buyers paid normal ticket price $15; another group received $2 discount per ticket and another group received $7 discount per ticket. Logically there should not be any difference in attendance but the result shows that the attandance is directly proportional to the money spent.
This is another psychological trap in which we can easily fall in stock market. Many times we will hold or average stocks which we think fundamentally strungling just because we have bought them at high price even the stock continues to fall. At any time if we think the stock is not worth a buy at current price then it is better to book loss and move on to better counter.
While taking any investment decisions we should concentrate on the bussiness independent to the price performance of the stock.If the underlying bussiness is going to do well then the stock is most probably do well in the future irrespective of it's prformance in the past .
"Why Smart People Make Big Money Mistakes" - Gary Belskey & Thomas Gilovich
Saturday, 2 February 2008
Loss Aversion
" Prospect Theory: An Analysis of Decision under Risk "
This theory will explain how people feel about loss called "loss aversion"
1)Imagine that you have been given $1000 and have been asked to choose between A) guaranteed to win additional $500 B) a chance to flip a coin if it heads , you receive another $1000; tails you get nothing more..
2) Now Imagine that you have been given a $2000 and asked to choose between A) guaranteed to lose $500 B) a chance to flip a coin if it heads you lose nothing ; tails you lose $1000 .
Even though in both cases the outcome is exactly same for both options ( option A you will leave with $1500 and option B you will get either $1000 or $2000 depending on the coin) the research suggests more likely you will choose option A in 1st case while option B in 2nd case.
This explains why many investors sell their profit making shares more quickly compared to loss making shares. According to one research which studied thousands of patterns the stocks that investors sold outperformed the stocks they hold by 3.4% .
So in stock market it is better to sell the stocks which are making losses ( over a long period ) compared to selling the shares which are in profits . It will not only improve you returns in long term , but also offset that losses to other gains which reduces TAX burden .
"Why Smart People Make Big Money Mistakes" - Gary Belskey & Thomas Gilovich
This theory will explain how people feel about loss called "loss aversion"
1)Imagine that you have been given $1000 and have been asked to choose between A) guaranteed to win additional $500 B) a chance to flip a coin if it heads , you receive another $1000; tails you get nothing more..
2) Now Imagine that you have been given a $2000 and asked to choose between A) guaranteed to lose $500 B) a chance to flip a coin if it heads you lose nothing ; tails you lose $1000 .
Even though in both cases the outcome is exactly same for both options ( option A you will leave with $1500 and option B you will get either $1000 or $2000 depending on the coin) the research suggests more likely you will choose option A in 1st case while option B in 2nd case.
This explains why many investors sell their profit making shares more quickly compared to loss making shares. According to one research which studied thousands of patterns the stocks that investors sold outperformed the stocks they hold by 3.4% .
So in stock market it is better to sell the stocks which are making losses ( over a long period ) compared to selling the shares which are in profits . It will not only improve you returns in long term , but also offset that losses to other gains which reduces TAX burden .
"Why Smart People Make Big Money Mistakes" - Gary Belskey & Thomas Gilovich
Thursday, 31 January 2008
Diversified Vs Focused
Today the January F&O series expiry and this is a tough start for the year .
From tomorrow new February series starts and expecting market to settle in this month. In last 10days FED cut interest rates by 125 basis points and Reliance Power refund should start from tomorrow which should bring new liquidity into the market . So I am expecting less downside compared to potential upside in this month.
In this post i want to discuss about managing portfolio. We can keep our portfolio either diversified or focused ( or concentrated) .
Diversification mainly helps in mitigating risk by external factors which we can not control . Many people will hold 30 to 40 different shares and think they are diversified but if all the companies fundamentals depends on same events then the diversification is of no use. For example if we hold 10 different banks,10 different auto companies and 10 different real estate shares and if the interest rate climbs up then most probably all the shares will loose their capital . And main drawback in this is we cannot track and act accordingly on all the companies at the same time. So what we get is potentially diluted returns and most of the time index will outperform us .
What warren buffet advices to the investor was to focus your portfolio in as less companies as possible . It is very tough to select 5 to 6 companies in 3000+ companies so you have to do a lot of home work before investing.
So my suggestion is Identify 4 to 5 sectors which are fundamentally different and invest in one company from each sector which can outperform the peers and pay reasonable price to it and hold it for longterm . If you cant identify which share can outperform its peers better to buy mutual funds than buying 4 to 5 companies stocks in all sectors .
In this process we may feel uncomfortable when our shares not performing and some junk shares or going up 20%-30% a day but believe in your conviction and hold the shares without churning portfolio at the end of the day you will be rewarded handsomely. And we also need to look at the returns on our portfolio as a whole and should not look at individual returns means some times some shares might not perform because of the macro factors of that sectors etc .
I suggest diversification in assets compared to diversification in stocks like build 3 - 4 businesses which can earn money irrespective of the economy .
RK
From tomorrow new February series starts and expecting market to settle in this month. In last 10days FED cut interest rates by 125 basis points and Reliance Power refund should start from tomorrow which should bring new liquidity into the market . So I am expecting less downside compared to potential upside in this month.
In this post i want to discuss about managing portfolio. We can keep our portfolio either diversified or focused ( or concentrated) .
Diversification mainly helps in mitigating risk by external factors which we can not control . Many people will hold 30 to 40 different shares and think they are diversified but if all the companies fundamentals depends on same events then the diversification is of no use. For example if we hold 10 different banks,10 different auto companies and 10 different real estate shares and if the interest rate climbs up then most probably all the shares will loose their capital . And main drawback in this is we cannot track and act accordingly on all the companies at the same time. So what we get is potentially diluted returns and most of the time index will outperform us .
What warren buffet advices to the investor was to focus your portfolio in as less companies as possible . It is very tough to select 5 to 6 companies in 3000+ companies so you have to do a lot of home work before investing.
So my suggestion is Identify 4 to 5 sectors which are fundamentally different and invest in one company from each sector which can outperform the peers and pay reasonable price to it and hold it for longterm . If you cant identify which share can outperform its peers better to buy mutual funds than buying 4 to 5 companies stocks in all sectors .
In this process we may feel uncomfortable when our shares not performing and some junk shares or going up 20%-30% a day but believe in your conviction and hold the shares without churning portfolio at the end of the day you will be rewarded handsomely. And we also need to look at the returns on our portfolio as a whole and should not look at individual returns means some times some shares might not perform because of the macro factors of that sectors etc .
I suggest diversification in assets compared to diversification in stocks like build 3 - 4 businesses which can earn money irrespective of the economy .
RK
Sunday, 27 January 2008
Mental Accounting
I want to share some concepts of behavioral economics from "Why Smart People Make Big Money Mistakes - Gary Belskey & Thomas Gilovich" which i am reading now.
Not all dollars are created equal :
A newly wed groom finds $5 and he goes to roulette table bets his money on number 17 and the ball stops on 17 and he wins $175 he continues playing and winning until the casino runs out of money,He rushes to some other better financed casino and continues betting on 17. He wins $262 millon only to loose it when the ball stops on 18 . When the bride asks about how he did in casino , he tells " not bad ,I lost $5"
He explains this as the human being will have separate mental accounts for earned money and gift money.We some how feel the earned money is more sacred than the casino money eventhough both can buy same amount of things.
What i feel the same applies to stock market also . We feel more pain when we loose our capital compared to the profit . For example if we invest 1 milloin and lost half million the pain will be more compared to loosing one million in 2millions profit.Upto some extent it will be fine but we should not be overwhelmed with the profits we earned in stock market and start taking riskier bets .
Even the spending boom in India can be partly attributed to this .. A young man working in IT or BPO industry earning more than what his father had earned after working for 20-30 years . Some how most these people are not believeing what they are getting as earned money and treating it as a gift money. They are compensating this either by spending more or taking riskier bets in share market.Some of them compensating this by working long hours than neccesary in office which is more dangerous .
RK
Not all dollars are created equal :
A newly wed groom finds $5 and he goes to roulette table bets his money on number 17 and the ball stops on 17 and he wins $175 he continues playing and winning until the casino runs out of money,He rushes to some other better financed casino and continues betting on 17. He wins $262 millon only to loose it when the ball stops on 18 . When the bride asks about how he did in casino , he tells " not bad ,I lost $5"
He explains this as the human being will have separate mental accounts for earned money and gift money.We some how feel the earned money is more sacred than the casino money eventhough both can buy same amount of things.
What i feel the same applies to stock market also . We feel more pain when we loose our capital compared to the profit . For example if we invest 1 milloin and lost half million the pain will be more compared to loosing one million in 2millions profit.Upto some extent it will be fine but we should not be overwhelmed with the profits we earned in stock market and start taking riskier bets .
Even the spending boom in India can be partly attributed to this .. A young man working in IT or BPO industry earning more than what his father had earned after working for 20-30 years . Some how most these people are not believeing what they are getting as earned money and treating it as a gift money. They are compensating this either by spending more or taking riskier bets in share market.Some of them compensating this by working long hours than neccesary in office which is more dangerous .
RK
Saturday, 26 January 2008
Trading in Options
Options are financial instruments that convey the right, but not the obligation, to engage in a future transaction on some underlying security. For example, buying a "call option" provides the right to buy a specified quantity of a security at a set strike price at some time on or before expiration, while buying a "put option" provides the right to sell. Upon the option holder's choice to exercise the option, the party who sold, or wrote, the option must fulfill the terms of the contract.
Options can be effectly used to hedge the potential losses for the shares that we are holding . In F&O segment all the shares are traded in specific amount of quantities(or lots) so any transation can be done in that amounts only. There are two types of options call option which gives right to buy and put option which gives right to sell. I will explain put option as a hedging tool.
if you are are holding 700 RCOM shares and you want to insure the profits of that you can buy a put option for that for the specified month.
The important things in options are strike price which indicates price of the share( for selling ) and premium which we need to pay for that contract and expiry date which indicates the date of the expiry .
If the pirce of RCOM in cash market say 650 on 1st Jan . We can buy a put option for the series (which expire on last thursday of the month) of strike price 650 for a primium say 20 rs , by paying 14000(20*700) . We can execute the option anytime before the end of the month. By the time of expiry if the price goes up you will loose the premium amount ( but the same amount we will gain in cash market) . If the market crash in the middle of the month we can execute our right to sell at 650 and we can make money, If the price of the share say 640 we will loose 10rs of our premium money and we will get the remaining money back.
This is a general senarios , what we can do is , if we can identify some share which can outperform the index , for example buy a nifty share in cash market and buy a put options for nifty then the possibility of losing money will be minimal..
Note: Buying a put option without holding the share is too risky and not advisable ( especially in a bull market like india).
Call option will work in same way but gives right to buy the share..
RK
Options can be effectly used to hedge the potential losses for the shares that we are holding . In F&O segment all the shares are traded in specific amount of quantities(or lots) so any transation can be done in that amounts only. There are two types of options call option which gives right to buy and put option which gives right to sell. I will explain put option as a hedging tool.
if you are are holding 700 RCOM shares and you want to insure the profits of that you can buy a put option for that for the specified month.
The important things in options are strike price which indicates price of the share( for selling ) and premium which we need to pay for that contract and expiry date which indicates the date of the expiry .
If the pirce of RCOM in cash market say 650 on 1st Jan . We can buy a put option for the series (which expire on last thursday of the month) of strike price 650 for a primium say 20 rs , by paying 14000(20*700) . We can execute the option anytime before the end of the month. By the time of expiry if the price goes up you will loose the premium amount ( but the same amount we will gain in cash market) . If the market crash in the middle of the month we can execute our right to sell at 650 and we can make money, If the price of the share say 640 we will loose 10rs of our premium money and we will get the remaining money back.
This is a general senarios , what we can do is , if we can identify some share which can outperform the index , for example buy a nifty share in cash market and buy a put options for nifty then the possibility of losing money will be minimal..
Note: Buying a put option without holding the share is too risky and not advisable ( especially in a bull market like india).
Call option will work in same way but gives right to buy the share..
RK
Friday, 25 January 2008
The Biggest of them all
Today Sensex posted 1140 points gain which is the biggest ever absolute point gain.The participation is quite low as anyone can expect after the carnage we have seen in the starting of the week . Next week will be critical for me as all of my companies will be announcing Q3 results as well as RBI,FED and ECB meetings are lined up..
This week we have seen the biggest ever fall and raise (absolute) for the Sensex which is close to 1400(8%)and 1100(6%).
While taking the large positions in equity markets we should be prepared for the worst . But is this the worst that can happen?
History says not .. The Dow Jones lost 22.6% in a single session on October 19,1987 and S&P 500 lost 20.4% on the same day.
I am not telling this to threaten anyone , i am an outright bull in Indian equity market but it doesn't mean we can be careless and expect to get away from the market.
This is the article written on Black Monday in 1987 . The reasons seems pretty much similar to what we have seen this week.
http://hnn.us/articles/895.html
So be cautious and Happy Investing.
RK
This week we have seen the biggest ever fall and raise (absolute) for the Sensex which is close to 1400(8%)and 1100(6%).
While taking the large positions in equity markets we should be prepared for the worst . But is this the worst that can happen?
History says not .. The Dow Jones lost 22.6% in a single session on October 19,1987 and S&P 500 lost 20.4% on the same day.
I am not telling this to threaten anyone , i am an outright bull in Indian equity market but it doesn't mean we can be careless and expect to get away from the market.
This is the article written on Black Monday in 1987 . The reasons seems pretty much similar to what we have seen this week.
http://hnn.us/articles/895.html
So be cautious and Happy Investing.
RK
Thursday, 24 January 2008
Technical Vs Fundamental analysis
This is my first post in this blog . In this post I want to give my brief ideas about technical and fundamental analysis .
Today Sensex lost 372 points in a exteamly volatile session which witnessed more than 1100 points swing, But the improving global situations should bring stability to indian markets from tomorrow.
Fundamental analysis mainly deals with companies assets , liabilities , profits, growth etc etc. While technical analysis will deal with the demand and supply of the particular share.
The most confusing thing in stock market is both of these are contradictary to each other .
Fundamental analysis will tell shares will become attractive when the prices fall as they became cheap while the technical analysis will tell the shares will become attractive when the prices raise as there is more demand to the share.
Investing based on technical analysis is more risky as compared to fundamental analysis as they will change drastically and un-predictably ..
Technical analysis is more useful ( or meaningful) in trading rather than investing . While trading we should be more cautious and limit our potential losses by applying stop loss etc.
We should take any investment decision rationally , un-emotionally by considering only the fundamentals of the company rather than the price movements or technicals of the shares..
RK
Note: I have copied my previous posts from the old blog below, for the sake of continuity
Today Sensex lost 372 points in a exteamly volatile session which witnessed more than 1100 points swing, But the improving global situations should bring stability to indian markets from tomorrow.
Fundamental analysis mainly deals with companies assets , liabilities , profits, growth etc etc. While technical analysis will deal with the demand and supply of the particular share.
The most confusing thing in stock market is both of these are contradictary to each other .
Fundamental analysis will tell shares will become attractive when the prices fall as they became cheap while the technical analysis will tell the shares will become attractive when the prices raise as there is more demand to the share.
Investing based on technical analysis is more risky as compared to fundamental analysis as they will change drastically and un-predictably ..
Technical analysis is more useful ( or meaningful) in trading rather than investing . While trading we should be more cautious and limit our potential losses by applying stop loss etc.
We should take any investment decision rationally , un-emotionally by considering only the fundamentals of the company rather than the price movements or technicals of the shares..
RK
Note: I have copied my previous posts from the old blog below, for the sake of continuity
Mindless speculators
Wednesday, 23 January 2008
Mindless speculators
In this Savage correction which continued for 7 days many retail investors ( rather we should call them mindless speculators) had lost almost all their capital buy investing on margins and hot tips . How can we explain a counter like RPL which is still making losses having more market capitalizaion than the counter like infosys which is a 5 billion dollar company..
As told by sameer arora in CNBC yesterday people who have lost more than 50% this week should not come back to market or atleast go to mutual funds..
Some of the speculators who are damning the Govt. for the fall should understand that capital market is a free market which run through basic principal of demand and supply , And their losses are the nothing but the indication of their own greed and lousiness .
RK
Posted by Ravikanth at 11:40 0 comments
Mindless speculators
In this Savage correction which continued for 7 days many retail investors ( rather we should call them mindless speculators) had lost almost all their capital buy investing on margins and hot tips . How can we explain a counter like RPL which is still making losses having more market capitalizaion than the counter like infosys which is a 5 billion dollar company..
As told by sameer arora in CNBC yesterday people who have lost more than 50% this week should not come back to market or atleast go to mutual funds..
Some of the speculators who are damning the Govt. for the fall should understand that capital market is a free market which run through basic principal of demand and supply , And their losses are the nothing but the indication of their own greed and lousiness .
RK
Posted by Ravikanth at 11:40 0 comments
Is the worst over?
Is the worst over?
After 7 days of relentless fall in indian equity markets today the sensex recorded biggest ever intraday gain and ended up 864 (5.6%) points .
Does this means the worst is over and we can start buying at these prices.
The stocks which have fallen most were rallied most today and the stocks which fallen less posted marginal gain which indicates this is a technical rally (short covering rally) .
The volumes are very less and open intrest has came down with the price raise in the counters like RNRL ,RPL.Ispat etc so i think it is not advisable to buy any of these counter and also should reduce their exposure to this counters by booking losses ..
So I believe we are going to get good buying opertunities in next couple of weeks probably below 16K levels..
I am worried abt my holding to the Gujarat NRE as considering the US economic situation the commodity prices may fall which can hit its profitability , So looking to reduce the exposure to it and shift to fundamentally better counter..
RK
Posted by Ravikanth at 10:20 0 comments
After 7 days of relentless fall in indian equity markets today the sensex recorded biggest ever intraday gain and ended up 864 (5.6%) points .
Does this means the worst is over and we can start buying at these prices.
The stocks which have fallen most were rallied most today and the stocks which fallen less posted marginal gain which indicates this is a technical rally (short covering rally) .
The volumes are very less and open intrest has came down with the price raise in the counters like RNRL ,RPL.Ispat etc so i think it is not advisable to buy any of these counter and also should reduce their exposure to this counters by booking losses ..
So I believe we are going to get good buying opertunities in next couple of weeks probably below 16K levels..
I am worried abt my holding to the Gujarat NRE as considering the US economic situation the commodity prices may fall which can hit its profitability , So looking to reduce the exposure to it and shift to fundamentally better counter..
RK
Posted by Ravikanth at 10:20 0 comments
The bull climbs up the stairs of the building
Monday, 21 January 2008
.........while the bear jumps out of the window.
Today most of the equity investor might be feeling like this..
Today the Sensex lost 1408 points which is biggest ever absolute fall for the index at some point it had lost more than 2200 , Nifty , midcap and small cap indices lost 8-12%..
In NSE there were 9 advances while declines were more than 1200 ..
We may not see a day when most of the A group scrips falling 25-30% ..
I feel instead of struggling in finding fundamental following market etc etc, if you go out for a shopping in a day like this you cann't be wrong.
Most of the investors had lost the money they have made in last 6 months in this 6 days it self.. take the case of parsvnath developer , it has taken 6 months to go from 300 levels to 600 and in 6 sessions it has came down to below 300 again..It has fallen almost 30% in one day..
After seeing a day like this , can any body stay invested for longterm . This day might come when you need the money most..
If you think the same situation in another context , say you have bought a put option by paying some premium your loss considerably come down and even you can make money more quickly .
So my advice to any one wants to be in market they should know how to make money in both direction either up or down..
RK
Posted by Ravikanth at 11:10 0 comments
.........while the bear jumps out of the window.
Today most of the equity investor might be feeling like this..
Today the Sensex lost 1408 points which is biggest ever absolute fall for the index at some point it had lost more than 2200 , Nifty , midcap and small cap indices lost 8-12%..
In NSE there were 9 advances while declines were more than 1200 ..
We may not see a day when most of the A group scrips falling 25-30% ..
I feel instead of struggling in finding fundamental following market etc etc, if you go out for a shopping in a day like this you cann't be wrong.
Most of the investors had lost the money they have made in last 6 months in this 6 days it self.. take the case of parsvnath developer , it has taken 6 months to go from 300 levels to 600 and in 6 sessions it has came down to below 300 again..It has fallen almost 30% in one day..
After seeing a day like this , can any body stay invested for longterm . This day might come when you need the money most..
If you think the same situation in another context , say you have bought a put option by paying some premium your loss considerably come down and even you can make money more quickly .
So my advice to any one wants to be in market they should know how to make money in both direction either up or down..
RK
Posted by Ravikanth at 11:10 0 comments
Make a killing
Wednesday, 16 January 2008
Make a killing
This is the popular term used in stock market which means doing something that makes you a lot of money.
By following these simple principles in a disciplined manner we can also make a killing in stock market.
First thing we should look for in any scrip is the sector or the business of the scrip, If the underlying business is struggling even the best management can do little for the stock price, like in 2007 all the indices have given more than 40% returns while the IT, Pharma and Autos have given -ve returns because of the macro factors of those industries. So select 3 to 4 sectors in which growth is visible for next 2 to 3 years .
I feel in next couple of years power equipment manufacturing business (ABB, BHEL and Siemens) is going to give superior returns compared to any other sectors because of the investments taking place in power generation sector ( Reliance power alone is going to invest 75000 cr in next 5 years).
After deciding the sector we should look for the management which can exploit the opportunity available in that sector, Pay reasonable price (compared to peers) for that scrip add whenever correction( or opportunity ) comes .Do the homework and focus your investment in only one company.
Things you should look for before investing..
1) PE/Growth should be less than 1 .
PE = Share price / Earnings per share (which you can obtain from companies financial statements).
Only matured businesses and companies can be valued through PE value ( sectors or companies with future earning potential like insurance and private infrastructure companies can not be valued using this)
2) PE should be reasonable compared to peers.
3) Look for hidden value and possibility of value unlock .
4) For commodity stocks ( steel,coal,sugar etc) we should look for the commodity price cycle and various factors that can effect those commodity prices.
RK
Posted by Ravikanth at 07:53 0 comments
Make a killing
This is the popular term used in stock market which means doing something that makes you a lot of money.
By following these simple principles in a disciplined manner we can also make a killing in stock market.
First thing we should look for in any scrip is the sector or the business of the scrip, If the underlying business is struggling even the best management can do little for the stock price, like in 2007 all the indices have given more than 40% returns while the IT, Pharma and Autos have given -ve returns because of the macro factors of those industries. So select 3 to 4 sectors in which growth is visible for next 2 to 3 years .
I feel in next couple of years power equipment manufacturing business (ABB, BHEL and Siemens) is going to give superior returns compared to any other sectors because of the investments taking place in power generation sector ( Reliance power alone is going to invest 75000 cr in next 5 years).
After deciding the sector we should look for the management which can exploit the opportunity available in that sector, Pay reasonable price (compared to peers) for that scrip add whenever correction( or opportunity ) comes .Do the homework and focus your investment in only one company.
Things you should look for before investing..
1) PE/Growth should be less than 1 .
PE = Share price / Earnings per share (which you can obtain from companies financial statements).
Only matured businesses and companies can be valued through PE value ( sectors or companies with future earning potential like insurance and private infrastructure companies can not be valued using this)
2) PE should be reasonable compared to peers.
3) Look for hidden value and possibility of value unlock .
4) For commodity stocks ( steel,coal,sugar etc) we should look for the commodity price cycle and various factors that can effect those commodity prices.
RK
Posted by Ravikanth at 07:53 0 comments
Creative thinking
Sunday, 13 January 2008
Creative thinking
" The process of getting new ideas is a five step process ..
1) Gathering raw material .
2) Working over those material in mind
3)The incubating stage ( Let the un-conscious mind do the work of synthesis)
4) The actual birth of the idea stage .
5) Final shaping and development of the idea for practical use. "
Most of us follow the first 3 stages un-consciously and suddenly we will get the idea when we least expected . If we follow the above process we may get that magical ideas even quicker .
Some people wont follow the 3 stages and expect some inspiration or idea will suddenly strike-out out of vacuum which may not strike at all because of the in-conclusive work done in first 3 stages ..
" A technique for producing Ideas - James Webb Young"
Posted by Ravikanth at 02:01 0 comments
Creative thinking
" The process of getting new ideas is a five step process ..
1) Gathering raw material .
2) Working over those material in mind
3)The incubating stage ( Let the un-conscious mind do the work of synthesis)
4) The actual birth of the idea stage .
5) Final shaping and development of the idea for practical use. "
Most of us follow the first 3 stages un-consciously and suddenly we will get the idea when we least expected . If we follow the above process we may get that magical ideas even quicker .
Some people wont follow the 3 stages and expect some inspiration or idea will suddenly strike-out out of vacuum which may not strike at all because of the in-conclusive work done in first 3 stages ..
" A technique for producing Ideas - James Webb Young"
Posted by Ravikanth at 02:01 0 comments
First step
Tuesday, 1 January 2008
First step
Hi ,
Wishing u all happy and prosperous new year..
In this blog I am going to discuss abt my experiences in capital markets etc etc..
At last 2007 has came to an end with healthy returns to the investors of all caps .
This is 5th year in a row with +ve returns for the sensex..
In 2007 Sensex (47%) Nifty(53%) Mid Cap Index(74%) Small-Cap(87%) all the indexes have given healthy returns.
2008 seems to be extereamly challenging to the equity markets throughtout the world because of various global problems like sub-prime mortagage and US recession.. For indian equity markets eventhough there were no problems fundamentally,there might be problems with liquidity conditions and general elections etc.
RK
Posted by Ravikanth at 03:55 0 comments
First step
Hi ,
Wishing u all happy and prosperous new year..
In this blog I am going to discuss abt my experiences in capital markets etc etc..
At last 2007 has came to an end with healthy returns to the investors of all caps .
This is 5th year in a row with +ve returns for the sensex..
In 2007 Sensex (47%) Nifty(53%) Mid Cap Index(74%) Small-Cap(87%) all the indexes have given healthy returns.
2008 seems to be extereamly challenging to the equity markets throughtout the world because of various global problems like sub-prime mortagage and US recession.. For indian equity markets eventhough there were no problems fundamentally,there might be problems with liquidity conditions and general elections etc.
RK
Posted by Ravikanth at 03:55 0 comments
Welcome to 2008
In 2007 overall my inverstments have given good returns..
In my investments Gujarat NRE coke (150%) ,Punj lloyd (80%) and Reliance communication(60%) has given good returns while Mindtree(-20%) and Tech Mahindra (-30%) has given -ve returns..
In 2008 I am bullish on ..
Gujarat NRE coke as the coal prices on the raise in world market and china has again increased export taxes last week so the prices will increase more..
Reliance communication for its GSM foray and value unlock through tower bussiness.
ICICI Bank for its value unlock and interest rate scenario in india
Punj lloyd for its stellar performance.
GE Shipping for attractive valuations
Siemens for its valuations compared to peers like BHEL and ABB and bonus share
In 2008 I believe all these stocks will outperform their peers as well as all the indices
RK
Posted by Ravikanth at 03:18 0 comments
In my investments Gujarat NRE coke (150%) ,Punj lloyd (80%) and Reliance communication(60%) has given good returns while Mindtree(-20%) and Tech Mahindra (-30%) has given -ve returns..
In 2008 I am bullish on ..
Gujarat NRE coke as the coal prices on the raise in world market and china has again increased export taxes last week so the prices will increase more..
Reliance communication for its GSM foray and value unlock through tower bussiness.
ICICI Bank for its value unlock and interest rate scenario in india
Punj lloyd for its stellar performance.
GE Shipping for attractive valuations
Siemens for its valuations compared to peers like BHEL and ABB and bonus share
In 2008 I believe all these stocks will outperform their peers as well as all the indices
RK
Posted by Ravikanth at 03:18 0 comments
Subscribe to:
Posts (Atom)
