I am starting a series of articles that will deal with “How to invest in stocks efficiently”. This post is Part 1.
There are two important questions which you have to answer when you want to buy shares? They are “What to buy” and “When to buy”?
Fundamental analysis
You may be familiar with Fundamental Analysis, Fundamental Analysis answers the question “What to buy” ? . It a study of companies Financial statements, cash books, markets study to find out the future prospects of a company. It answers the question “Will this company is a good buy for long term”? , “Will it be more valuable than what it is now ” etc, etc ”
But !!, Even though you have picked up some excellent companies for your long term investments, That’s not the end of the story. Now the biggest challenge and question you have is “When to buy it”?
You should not just go the next day and buy the share, that’s not the right approach. There can be a price area where buying is best in terms of risk/reward .
Technical analysis
Technical Analysis is the study of charts, price and volume patterns and other indicators derived from price and volume. Technical Analysis gives us hint on what can happen in the future, understand that it only gives you chances, not a guarantee.
So everything should be taken with crossed fingers, Decisions are taken on the basis of TA only increases your risk/reward scenario.
I will give you an example :
Reliance is a very good long term Investment (do your own analysis to find out why, but it is :).
On Feb 1, 2009, Ajay and Robert want to invest Rs 1 lac in Reliance for the long term. Both of them understand that Reliance is a truly long term buy. Ajay invests in Reliance on Feb 1, because share is going up and he feels its a good time to enter others. He buys the stock at Rs 1360.
After some days Stock starts falling and reaches around Rs 1,150. Roberts buys the stock at that time.
Here you can see that Robert has got the stock at a 15% lower price, which means his profits will always be more than Ajay’s by that much. What did Robert do? Robert used simple Technical Analysis concepts and entered in the stock with better prices, It does not mean it will always happen, but there are good chances for getting a better price.
In the above case of Reliance, there is no significant price difference, but there can be cases, where there can be drastic differences, and it would be really worth using basic Technical Analysis.
Don’t be scared, I will tell you some very basic things of technical Analysis in some of the next post.
I will talk about
Part 2: Support, Resistance Part 3: Trend Lines Part 4: Simple Oscillators to use for short term investments.
Watch out for the second part soon.
Please share any real-life example which happened with you, May be we all can try to find out what could have been done to make a better entry or exit from the stock.
Have you invested in the peak of bull run (Nov Dec 2007 or Jan 2008) or in middle of this downturn (Mid of 2008) and now sitting on heavy losses.
In this article we will discuss how and why should we avoid it. This article mainly covers investors who invest there money in some share for relatively short term like 6 months to 2 years, even though its applicable for all kind of investors.
Robert bought 100 shares of Jaiprakash Associates around May 2008, at Rs.300. His reason was simple, The stock has fallen “a lot”, “how low can it go? “, ” What if I don’t buy it and it goes up again, I will miss the profits”.
Does it sound similar?
Then stocks moves upto 350, and he is so furious that why he didn’t out more money. within some days stock comes down to 250. Now he feels that he probably made a mistake and made investments at right decision. He was sad that he is now in loss , he says to himself, that he will get out at cost once it moves up to 300.
Now it comes down to 200, He is not thinking why didn’t he get out at small loss? He is not ready to get out at 250, and he is determined to get out. But it never happens and stock tumbles down to 160, Now he tries to play a trick with market, and wants to prove his point that he is also smart.
He triples his shares by buying additional 200 shares by buying the share at 160 and averages his price to Rs.207, He can now get out once shares move to Rs.200 or 210 and he can get out at cost price or may be he can make some profits also.
But stocks still goes low and reaches low of 45-50. At the time of writing this article, the price for the share is around Rs.90. Probably it will take at least 1-2 yrs for this share to reach Rs.200 levels and that will happen once overall markets stabilizes.
Does all this sound similar to you?
What are the wrong decisions Robert made?
1. Trying to Time the Market :
The one reason was that he was trying to find out if share has made a low. He believes that share has lost a lot of value and will not go further.
Learning : There is an old saying, “Dont catch Falling Knives”, When a share has started its down move, the chances that it will move more down is more than its going up. The overall mood is bad. There is no MRP of shares, there is only market value. Prices are governed by emotions and sentiments, Don’t try to get in middle buying them. Rather short sell it or wait more.
2. Patience :
The other problem was no patience, Just imagine if this person had more patience, What if he waited for stock to go as low as possible and then start its journey upwards and then buy it. I am not saying, its a right time to buy, but current scenario provide much better risk/reward ratio.
Learning : Don’t go against the trend, if markets are falling like hell. don’t mess with it by buying in between. Have patience, No profits are better than losses I guess. Always try to be with the trend, A stock has more chances of going in the same direction of the trend rather than counter trend.
On the day Satyam bad news came in, I don’t know why people bought shares in between it was falling, It fell from 170 to 40-50, But people bought it in between around Rs 120 levels, thinking, “How low it can go”. Eventually some people bought it at 20-25 levels and many have doubled there money in weeks.
Patience helps.
3. No Stop loss or Targets set :
Often people emotions come in between there trading or investing. “If only it comes back to Rs XYZ I will get out”, Once it goes up by Rs PQR more, I will get out”.
People invest without knowing there risk capability, They don’t invest with some target, once your shares rises by 20% in 1 month, you may often think, what if it goes up to 50%, then I will miss out those profits.
They also don’t want to take losses, they only want profits, once prices go against them, they are not ready to get out at small loss. They want there money back. Then prices move a little more down and then this vicious circle of “If only it comes back to this point, I will get out” continues
Learning : Do you invest to be right or to make money. What is your goal? I guess its to make money. So don’t feel bad if you are wrong some times, it happens with everyone. The most important thing is to not let it become so big, that it becomes pain.
Have a stop loss, When you buy something at 300, say to your self that if it comes down to 250, I will take Rs.50 loss and accept I was wrong and move on to find out a new opportunity. And also tell yourself that if it moves to Rs 500, I will get out, take my “excellent profit” and then find out some thing else. Don’t be too greedy.
It hurts in long term. “just a little more” is a not a good idea.
Watch this video to know why no Retail Investors make money in the Stock Markets:
Conclusion :
The main idea of investing is to make money, don’t try to prove market that you were correct and no one can make you wrong, keep your emotions at home, If you are wrong, you are wrong, Just accept it, take small loss and try to find out new opportunity. Don’t waste time with the losing trade and give all your time and effort in that.
Know some rules and stick to it. Mainly this is applicable to traders whose time horizon is very less like day or a week, but this also applies to investors. Even if you are investing for long term like 10-20 yrs. Buying a share at low cost can have dramatic affect on your corpus. Just imagine this :
Ajay invests 1 lac in Unitech at Rs.150 just after it fell from 900 levels in Jan 2008. His investment after 30 yrs was 66 lacs.
But Robert waited patiently to let this share go as much down it can be and after markets shows some strength and signs of recovery bought it at Rs.30, His corpus would be Rs.3 crores.
Just imagine the difference of having some patience and respecting some ground rules of investing. It pays .. believe me.
Keep coming to the blog as in coming days I will post an article about how a common person can use basic technical analysis to make his investments more powerful and less risky.
Question for readers : What do you think Robert could have done better? Or How what are the other mistakes which I have not mentioned?
Read my previous post how to invest in this market
Evening Star shows you the shift of power from bulls to bears . Markets were near expiry and all the punters who were holding the stock from the time of strong rise which started , had to clear there positions and hence a sharp selling was expected . No Surprise that it happened today , As markets were rising , every short term long holder wanted to clear his positions , this resulted in panic selling and stock went down so much .
Now it has come to its normal levels and with this strong rally , it has good chance to move up in coming weeks . Dont over invest incase you want to invest .
You can put 10% of your capital in this and liquidate half position after you are in 20-30% profit . It can give some quick gains later . Dont be greedy , sell in profit once you are in 50%+ profit . otherwise one fine day again it will drop heavily and you will be left crying .
Why am I now suggesting to invest in this , last time I said stay away ?
Investing or trading should be done on high probability trades . This stock went up heavily and then corrected a lot to come back to normal levels now . This is a ideal time to take calculated risks , The risk/reward of this trade would be worth taking .
It does not mean , you cant loose from here , why not !! , but its worth taking that risk , because profit potential is very good . Have a logical stop loss and once its hit , get out with loss .. first loss is the best loss . Did any one make profits or loss on Akruti ? Share it with other readers , so that everyone comes to know about it .
Read my previous post how to invest in this market
When you make a loss, do you feel it has nothing to provide or not at all beneficial. The answer is NO! Losses are bad, but our tax laws gives us a way to utilize them in such a way that we can reduce our income tax liabilities.
Let’s see how 🙂 , don’t worry, we will start from scratch and will explain in detail so that everyone can understand .
Let us talk about capital gains in detail today and let us understand how should we utilize it to minimize our tax liability. Things we will discuss would be stocks, mutual funds, Gold , Debt funds, Real Estate etc.
Understanding Terms and Rules
Capital Gains and Loss : Any profit or loss arises from the sale of capital assets is capital gain or loss. Capital Assets Include Shares, Mutual funds, Real Estate, GOLD etc.
Short Term Capital Loss and Profit : STCL for Equity (shares and mutual funds) is when you sell them at loss before 1 yr, for Real estate, GOLD its 3 yrs.
Long Term Capital Loss and Profit : LTCG for Equity is when you sell it after 1 year, for Real estate, GOLD its 3 years.
Following is the chart showing the tax treatment and time frame for short term for each asset class. Click on the chart to enlarge it.
General and Carry forward Rules :
Short-term capital loss can be set off against any capital gain (Long-term or Short-term)
Long-term capital loss can be set off only against long-term capital gain.
A long-term capital loss will have no value in a case where the long-term capital gain is exempt from tax. For example, In case of shares or mutual funds after 1 year, LTCG is exempt from tax, so If you hold a share for more than 1 year and then take a loss, That LTCL will have no benefit. This loss cannot be set off against any other income.
A capital loss can be carried forward for next 8 years.
How can you utilize the losses ?
As we know that capital losses can be offset with capital gains, we can utilize this advantage to reduce the tax liability.
The main idea is to create losses to offset any profits. There may be the cases where there is an investment on which you are losing, but still you have not booked the loss, but you can book it and use this loss to offset a profit on which you may have to pay the tax.
Let us see some examples
Example 1 :
Ajay had invested Rs.5 lac in GOLD in 2005 and currently in 2009 he sold it for Rs 10 Lacs, Now he made a profit of 5 lacs and it will be considered as a LTCG, as its after 3 yrs. and it will be taxed at 20% indexed (If you don’t know what is indexed, just forget it, don’t worry ). The tax would be around Rs 1 lacs.
Now Ajay also had invested Rs.10 Lacs in Unitech Shares in Apr 2008. His investment has come down to Rs.4 lacs now. But he thinks that it will go up and he wants to keep it and not sell.
Good !! I appreciate his belief that it will go up again. But what is stopping him from selling it today and then again buying it next day.
Watch this video to know 7 ways to save your tax:
What will happen if he does that ?
If he sells his shares and takes a loss of Rs.6 lacs, He now has made a STCL of Rs.6 lacs and law says that he is allowed to offset it with any STCG or STCL. So now he can offset his 5 lacs profit with this 6 lacs loss and hence, he can save his tax of that 1 lac which he had to pay, also he can carry forward a loss of remaining 1 lac which was not offset.
He can again buy his favorite Unitech share the next day. The only loss he will make is the brokerage charges and any fluctuations which may occur in prices, which will not be much, may be it has gone down and he can buy them later at better prices.
So the point is to generate the loss by selling a losing investment and again buying it back in some days. This will help you cook up the loses which then you can offset with existing profits and hence reduce your tax liabilities.
Example 2
Robert had invested 5 lacs in mutual funds in early 2008 or end of 2007 and currently has a good loss of 2.5 lacs (1 yr is still not complete). This is currently every one state, most of the people have burnt their fingers and made huge losses.
Now he is sad that he made losses, He also had bought some shares before some months and made a profit of 50k. Let us also assume that next year his mutual fund will rise to 4 lacs from current 2.5 lacs, which he sells next year.
Now he has 2 choices to make, let us see 2 cases.
Case 1 : He does not book the loss and holds it .
In this case, he will have to pay profit of 15% STCG on his profit of 50k, and next year he will have his current investment at 4 lacs. When he sells it, it will be a loss of lac which will be LTGL (because he had held it for more than 1 yr).
Case 2 : He books the loss of 2.5 lacs and then again buys it back the same day or next day .
In this case, he has made a STCL of 2.5 lacs (bought at 5 and sold at 2.5), Now he can offset his 50k profit with this loss. Then he would not have to pay the tax and he can then carry his loss of 2 lacs carry forward.
Next year, he sells his mutual funds for 4 lacs and makes a STCG of 1.5 lacs (because he has re-bought this mutual fund and 1 yr is still not complete) .. But he can offset this profit of 1.5 lacs with the carried forward loss of 2 lacs, and still carry another 50k worth of loss forward.
So what’s the advantage of case 2 ?
The advantage is that you can save tax on the existing profit and also generate STCL which you can take forward and save tax on future profits.
There are many people who make losses and don’t bother to show it in their returns, if they don’t show it in returns then they will not be able to use it for offsetting purpose in future. Note, The way I have shown the examples have their own benefit and problems, Its you who have to decide what you want and how to utilize the tax rules to your advantage.
Its smart use of knowledge, not cheating 🙂
I wish you have got some knowledge out of this article, please put your comments/corrections/suggestions so that we can do more discussion.
Also, don’t forget to put your vote on the poll at the top of this page.
Bill Craft discusses a very important aspect of trading in stock markets . It says that trading success comes from taking small profits often . There should be small losses , small profits and big winners . These small profits will take care of small losses and give you over all profits only , and the big winners will give you more than average profits .
Its totally unrealistic to expect big winners each time you buy some stock , Have a reasonable target and take the profits . Once in a while a situation will come when you will get exceptional returns on some trades .
Post Updated , Read it again if you read it before .
This is a follow up post on Akruti City saga .
While I write this post on Friday Evening 20th Mar 09 , Prices of Akruti City has crashed by 28% with better than average volumes on NSE , and may even fall more . This is happened because SEBI banned it from F&O from next month . In my previous post I mentioned that retail investors must stay away from these kind of companies .
The scrip has gained more than 250% from Jan 09 , and has doubled in just 5 sessions . this kind of behaviour is unjustified and hence it had become a dangerous scrip to trade in .
There was a Evening Star Pattern seen today , which is a bearish Signal . This tell that its something to be cautious of .Though its a signal to sell , but dont just go and sell , wait for the first sign of confirmation again . Overall markets upmove can again take it high again .
So wait for next downmove to consider selling incase you have made your mind to do so . The better thing would be to stay away .
In my earlier post I had mentioned about this , Read it here
Though the reasons are not directly related to company inside news or anything . the point is simple , Whenever it comes down , it will be a heavy move and it has happened . Any one who had invested 1 lac a day before has now worth of Rs 75k. It may go further down or again go up . that’s is not the point .
The Point is Was it a Good investment ? Think 🙂
Read detailed new about Akruti City’s Drop in Prices here
If you are watching Markets , you must have seen the movements of Akruti City . This company is a Mumbai based Company . The shares of this company is on the roll from last 10 days . In just 1 week it has zoomed from 994 on march 9th to 2145 on Mar 18th , that’s roughly a week .
Note : Please vote on the question asked on the upper – left hand side of this blog .
Also see the update on Jaiprakash Associates after todays markets action on my analysys blog , click here
So, Now the company market capitalization (13421 Cr) is second highest in Real estate sector , just next to DLF (29229 Cr) . Its suddenly 3 times more valuable than Unitech !!
see list of real estate companies with market capitalization
My God !! , whats going on !!
90% of the equity is with promotors , and a very small fraction is with retail public , you can understand that everything going on is just the “kartut” (hindi word) of minority public .
Agreed that anyone who has entered the stocks some days back or 2 days back or 1 day back has made exceptional profits , But is it a right decision to invest in this as of now for short term gain or to ride the trend . A big NO!!
For sure some insider trading is going on with company , that’s the reason why stocks has gone mad . Retail Investors must not get very excited with these kind of things , These kind of sharp moves are not sustainable , to move in a healthy way , the stock must form a base (spend some time in a range ) and then start its up move slowly and with some corrections in between .
These kind of mad up moves without any pauses and slowdown are nothing but a bomb ready to explode .
If like someone who just entered the trade 1 week back and made 100% gains , other person can also loose 60-75% in just 1 week from now onwards . If you put money in this , Its not investing now , its Gambling !!
Suggestion : please stay away , Dont forget the mantra of “Not loosing money” rather than “Trying to get fast money” in stock markets . If you are bothered about lost opportunity , I can bet there more opportunities in market every day than all the combined opportunity in the world in all other aspects of life . Wait for just 1 day and you will get thousands of opportunities again .
see detailed news on :
Note : Please vote on the question asked on the upper – left hand side of this blog .
Came across a good article. Just reproducing the work here. This post talks about the Value and Price difference of some investment .
Margin Of Safety Principle
In his book, The Intelligent Investor, Benjamin Graham describes the concept of margin of safety as being an essential part of any true investment. He goes on to say that margin of safety is an element of investing that can be demonstrated quantitatively with sound rationale and from a historical perspective.
Graham’s definition of margin of safety is essentially the gap between price and value. All else being equal, the wider the gap between the two, the greater the safety level. Graham also explains that the margin of safety is important because it can absorb mistakes in assessing the business or the fair value of the enterprise.
As Graham says – “The buyer of bargain issues places particular emphasis on the ability of the investment to withstand adverse developments.
For in most such cases he has no real enthusiasm about the company’s prospects…If these are bought on a bargain basis, even a moderate decline in the earning power need not prevent the investment from showing satisfactory results. The margin of safety will then have served its proper purpose.”
From its origin, the calculation of margin of safety was never related to the volatility of the stock price of a company. The focus of most value investors has always been based on the intrinsic worth of the company in question–a bottom-up process that should be done without regard to current market valuation (which very few analysts are willing to do).
Even with a margin of safety, an investment can still go bad. This is not a failure of the concept of margin of safety principle, as the concept only provides assurance that the odds are in the investors’ favor that they will not lose money. However, it is not a guarantee that the investors will not lose money.
There are and have been many adjustments to Benjamin Graham’s margin of safety concept in the modern era. The way that Benjamin Graham calculated margin of safety years back was very asset-based, and probably quite different from how analysts today would make the calculation.
It is the inclusion of the concept that is important in one’s assessment of an opportunity, rather than the actual mechanics and particulars of the safety calculation.
Some value investors use a variety of measures in determining a firm’s safety levels. They are as keen on asset values as on earnings and cash flow, and may even consider intangible asset values like brands, reputations and intellectual property.
They also use a variety of measures just in case one of them does not hold up–the objective is never to be caught off guard. Based on these criterion, these value investors look for several different measures, such as break-up value, favorable dividend yield, price to cash flow, and discount to future earnings as supporting casts to Graham’s margin of safety principle.
Buying companies with a margin of safety prevents owning companies with a high burden of proof to justify their stock valuations. When a stock trades at a high valuation level, the expectations are so great and often so specific that a slight disappointment or an adverse change in expectations could be catastrophic. Buying shares with ample safety means buying stocks with the lowest possible burden.
Value investors also believe that margin of safety should incorporate an investor’s appetite for risk. The disparity of safety levels among investors is based on the amount of volatility they are willing to tolerate, the mistakes they are willing to accept, and perhaps the financial pain they are willing to endure.
The margin of safety principle essentially asks the question: What is supporting the stock price at its current level? or, Why shouldn’t the stock fall significantly from today’s current price? The Graham margin of safety is heavily conscious of what can go wrong, and not what the discount is to its fair value–the safety is thus purely based on the liquidation value of the current assets.
WallStraits uses the concept of margin of safety, with a debt of gratitude to Professor Graham–but we shift the primary focus from asset valuations to discounted future earnings. Our method is less tangible today, but more valuable as a predictor of tomorrow.
Because our DCF method entails making several important predictions 10-years into the future, we require a large margin of safety–perhaps 50% or more. Luckily, in a bear market environment, such as Singapore is currently experiencing, there are several fine businesses discounted by over 50%.
Upon satisfying the 50% discount to future earnings, WallStraits moves on to evaluate dividend yields (after tax), payout ratios, cash and debt levels, brand values, sustainable competitive advantages, management capability and other fundamental aspects of each business being considered for our portfolio.
We place rather equal emphasis on quantitative and qualitative issues. This differs from Graham’s search for pure quantitative net-nets (a price equal to the firm’s current assets less all liabilities–placing current value squarely on the value of property, plant and equipment).
Graham’s most notable student, Warren Buffett, demonstrated how vital it was to consider both the quantitative asset valuations and the qualitative business assessments to find true value stocks.
Buffett favored the discounted cash flow valuation because it included both the ability of a business to generate cash flow from tangible assets, as well as the ability to create value from intangible assets–like brand strength, intelligent management, and consumer monopolies. Buffett made famous the expression–I’d rather pay a fair price for a good business than a bargain price for a fair business.
WallStraits agrees that the ultimate investment is one undervalued versus its ongoing ability to produce profits and reward shareholders.
You can use your own logic and creativity to make personal assessments of the qualitative and quantitative forms for any business you consider for your portfolio–but regardless of your methodology–don’t forget to always think from the perspective of seeking large margins of safety.
This is one of the questions which everybody wants answer to . You can do it , but it will require some effort, learning and dedication. Also you will have to develop some kind of discipline and change your attitude a bit.
We shall first see who all are into Direct Equity Investing. They are Mutual funds , FII’s , Big experienced Investors with high experience and qualification . These people are 24/7 doing this job of researching the companies for long term investing . And even these people do mistakes and even they can predict markets directions always .
So now you can be one of the two kind of people.
1. Someone who has no interest in the markets and have no desire to learn things on his/her own.
They want to earn better returns than debt, but at the same time without bothering much. Then you better invest in mutual funds (SIP would be a good idea).
That way you can get returns over long term and don’t have to put much effort (apart from choosing good mutual funds in the start and monitoring them once in a while in a year, which is not a big deal).
2. Someone who is ready to take more risk and can also devote some time to do his own study of stocks (not a big one, but basic atleast).
He has better than average interest in these things and also enjoys the stuff. If you are one of those than you can put some money directly in shares of companies after your own research and understanding, it can be any way you are comfortable with. You should learn some basics of Fundamental Analysis and then apply it.
For example:Â I can say, that After RPL – Reliance Merger, Reliance will be among the biggest refineries of the world (it was anyways, but now in better position), It has lots of exploration projects going on and company’s is in safe and great management (as per the current information).
On the top of it Company has great valuations, and is available at many years low price and now overall markets are near its bottom. Just by looking at these facts, you can understand that it would make sense to BUY Reliance for long term, better accumulate it over the next 6 months, to catch the volatility too.
Can we go wrong and it may not give us good returns?
Definitely yes, Markets are the place where you should expect the unexpected. But at this moment that’s the best we can do and should do.
Can you do better than Fund managers of mutual funds?
Some people may answer yes , and may be they are true, But personally I would say at this moment I can’t do better than them. Reasons are as follows:
They are doing it from last 10 yrs, I might be doing it from last 6 months or 1 yrs (personally i dont do any ).
They are highly expert and qualified people. I learned accounts till my 12th only and it really sucks for me.
They have access to internal information and resources to do better research. I don’t have it.
So, I may be able to pick a company once in a while which gives 100% in 6 months against there 20%. but over long term, chances of there sustaining in the business is very high. So think long term. Don’t over estimate yourself.
You should understand that i am not trying to tell you cant do it. I am just trying to make sure that you understand your position in this game and your abilities to do things.
I personally like to do things on which i am good at and transfer the responsibility of other things to experts in that field. If I want the joy of it anyways, I will take a small portion of my portfolio and will play with direct equity. That is allowed 🙂
Watch the video given below to learn everything about Direct Equity:
Why Mutual funds Makes sense for Retail public?
Mutual funds are the products which are formed on the philosophy that many inexperienced and uninterested people who have money but no knowledge will pool all the money together and hire a person who has experience, understand the markets well, and can take better decision.
This person also has all the time dedicated to investing, so that thousands of investors don’t have to monitor the investments and the returns which will be generated will be distributed to investors after paying this fund manager for services.
So it makes sense you any one like you , who may be a Software engineer, Doctor, businessman or another person, who has no time for all this investing thing. Its you who have to decide who you are?
Don’t fell in the trap of high returns, With high returns comes the disaster too.
“Good return with some risk is much better than Exceptional returns with catastrophic losses”.
I hope this article will prove helpful to your. Leave your views about this article in the comment section. You can also ask me if you have any query.
