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How to Become a Better Investor

By

Subhankar Ghose

http://investmentsfordummieslikeme.blogspot.com

December 31, 2009


(I own the copyright of this eBook. Please do not copy or distribute without my
permission.)
http://investmentsfordummieslikeme.blogspot.com

Table of Contents
Page

1. Introduction 3

2. Chapter 1 : How to lose money and become a better investor 4

3. Chapter 2 : How to lose less with a Stop-loss 6

4. Chapter 3 : What are your Future Options? 8

5. Chapter 4 : Don’t be a Bull or a Bear in the Stock Market 9

6. Chapter 5 : When the going gets tough, do nothing 10

7. Chapter 6 : Learn stock portfolio selection from a tall ex-cricketer 11

8. Chapter 7 : Why you shouldn’t Diversify 13

9. Chapter 8 : Market Cycles and Sectors 14

10. Chapter 9 : Which Sectors should you invest in? 15

11. Chapter 10: Learn from my investment mistakes 17

12. Chapter 11: “Time in” vs. “Timing” the Market 19

13. Chapter 12: How to Reallocate your Assets 21

14. Chapter 13: Learn about Contrarian investing from a great tennis player 23

15. Chapter 14: If you must SIP, sip good Darjeeling tea 24

16. Chapter 15: Start your own risk-free FMP 26

17. Chapter 16: BeES in your bonnet? 27

18. Chapter 17: Stay ahead by being interested in interest 29

19. Chapter 18: What the CRR-SLR-Repo rates mean for investors 30

20. Chapter 19: Why Michael Ballack is a role model for the better investor 32

 Subhankar Ghose, 2009 2


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Introduction

There were three reasons why I started to write an investment blog in June 2008.

First, the stock market was in the throes of a severe bear market after 5 years of
euphoria. I remembered the boom and bust during the Harshad Mehta scam in
1992 and how traumatic it was for me. I felt that sharing some of my experiences
in the stock market could help young investors to learn and avoid the mistakes I
had made.

Second, while there are a plethora of web sites and blogs that offer stock tips, I
failed to find a single web site or blog that educated investors by explaining the
concepts behind fundamental or technical analysis in simple language, with
examples from the Indian stock market.

Third, the blogging platform offers instant reach to an audience, and allows quick
two-way communication with readers - thanks to the proliferation of the Internet.
That helps in regularly guiding, resolving doubts of, and learning from, investors.

I had to struggle during my early investment days in the 1980s. There was no
Internet and no SEBI regulations and no business TV channels and no quarterly
reporting by companies. The only way to find out about companies was from
brokers or friends. The only way to know what price a stock was trading at was to
call your broker and accept whatever he said. Charting had to be done manually
on a graph paper after prices were published in the next day’s newspapers.

Things have changed quite a bit since then – mostly for the better. If there is a
problem now, it is an overload of information and stock ideas! Investors are
better informed and better educated. Still, investment psychology – particularly
the extremes of greed and fear during bull and bear phases – remains pretty
much the same. At every market peak, a new lot of investors keep jumping into
the market without adequate homework, only to lose their hard-earned money.

So, my effort at investor education through my blog continues. Many of my


readers have been urging me to prepare an eBook using my blog posts, so that
they can easily refer to some of the posts without wading through my entire blog.
They have motivated me to produce this eBook, and I hope they would not mind
if I don’t thank them individually.

The effort took longer than I had expected, and for reasons of brevity, I have
chosen a few posts from the period June 2008 to January 2009. Hope readers of
this eBook will learn to become better investors by reading it.

 Subhankar Ghose, 2009 3


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Chapter 1: How to lose money and become a better investor

There are only two rules of investments (as per legendary investor Warren
Buffet):

Rule number 1: Do not lose money


Rule number 2: Read rule number 1

Such great advice is totally inappropriate for those who are investing in the stock
market or mutual funds for the first time. It is almost like saying "Do not fall down"
when learning to ride a bicycle. Just like you will fall down a few times before you
learn to ride a bicycle, you will lose some money before you learn how to invest
in stocks and mutual funds.

In fact, losing money is an essential part of learning to become a better investor,


though this goes against the grain of logic.

When you begin making your initial foray into investments, chances are you will
not have too much cash in hand. So going to an investment advisor wouldn't
make much sense. You will end up going to a relative or a friend - whom you
consider to be an expert - and ask for tips or ideas.

Despite the best intentions of all concerned, the first couple of investments will
probably go sour. Even if the investments actually generate a profit on paper, you
may not be able to take that profit home because you will not know when to sell!

You may be among the unfortunate many who got caught up in the buzz of the
Sensex hitting 20000, and jumped in to the market in January 2008 - when all the
excitement and euphoria was at its peak. That means you are probably still
sitting on substantial losses.

Shortly afterwards, the market began to drop and you were left holding your
investments at higher prices - not knowing what to do. When the market dropped
some more, you got into a panic and called your friend or relative for advice.

Chances are, the advice was: "Hold on a little longer; the market will rise again -
sell then." The market did rise but not to the level at which you entered. You may
have held on, hoping to get back your ‘buy price’ and break even.

That was just the time for you to turn your ‘paper’ losses into ‘cash’ losses. Which
means actually selling the shares in which you were losing money instead of
holding on to them. Why would you do such a 'foolish' thing? Because you never
know how low the market can go, and when it will rise again.

 Subhankar Ghose, 2009 4


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If you buy a share at Rs 100, and it falls to Rs 50, you lose 50%. But if you hold
on expecting to sell when the stock reaches 100 again, you are expecting a
100% rise in the stock price. Not impossible but highly unlikely.

If the stock falls further to Rs 33, your loss is 67% but to get back your original Rs
100, the stock has to rise 200%! (Do not use such 'opportunity' to buy more. Your
average price may go down, but your losses will keep increasing.)

So you decide to 'book' your losses. Now what should you do with the money?
Do not reinvest it back in the market right away. Put it in a short term fixed
deposit or a Liquid Mutual Fund, and watch the Sensex move back up before re-
entering.

A better investor will quickly learn the concept of a 'stop loss' - a price below
which (s)he will 'book' losses and get out. Setting a stop loss is an art, and will
depend on your risk taking ability and your conviction in the quality of the stock.

A timid investor will run away from the market after such a money-losing
experience and put the money in a bank - where inflation will eat away a major
chunk. A smarter investor will decide to buy some books and interact with
experienced investors to learn more about the subject. And he will already be on
the road to become a better investor.

Like what you’ve read so far? Why not sign up for my soon-to-be-launched
paid monthly newsletter? Send an email to mobugobu@yahoo.com for details.
Your email will be kept confidential.

 Subhankar Ghose, 2009 5


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Chapter 2: How to lose less with a Stop-loss

"More money has probably been lost by investors holding a stock they really did not want until
they could 'at least come out even' than from any other single reason" - Philip A. Fisher.

You should re-read the quote above. If you have been investing in the stock
market for any length of time, you have surely succumbed to the 'coming out
even' fallacy at least once.

Truth is, ‘Mr. Market’ does not know at what price you bought a stock or fund.
Nor does he care. But you do, and that is the root of the problem.

I'm presuming that you performed due diligence in selecting a particular stock or
a fund - carefully studying past performance, dividend records, peer
comparisons. And yet, in spite of your best efforts, you pick a loser. It happens.
All a part of the game.

This is when your investing mettle will be tested. Will you swallow your pride and
get out? Will you soldier on, 'knowing' that you've picked a winner that will surely
make you rich soon? Or will you become a 'long term investor' simply because
your short-term plans have got nixed?

A neat little device, called a 'Stop-Loss' level, may save you the blushes. How
does it work? Before you buy a stock or a fund, you should decide how much
loss you will be able to tolerate. For an expensive stock, your loss tolerance may
be less. For a cheaper fund it may be more.

As a conservative, long-term investor, I like to set a stop-loss level of


between 15% and 30% of the buy price.

Let us say I'm planning to buy a stock for Rs. 100, and set the stop-loss at 20%.
If the stock falls to Rs. 80 or below, I'll not wait and sell immediately - thus
‘stopping my loss’ at Rs. 20 per share.

What if the stock price rises to Rs. 120? Do I have a huge grin on my face and
brag about my stock-picking skills to all and sundry? I'll be lying if I said, 'No'. But
what I also do is set a 'trailing stop-loss'.

What's that? It means increasing the original stop-loss level by the same
percentage as the rise in the stock's or fund's price. In our example, we will raise
the stop-loss level to Rs. (120 - 24 =) 96.

If the stock moves up to Rs.200 (this happens usually in bull markets - but also
some times in sharp bear market rallies), the stop-loss level will now be Rs.160.
Stop-loss levels not only help you to limit your losses, but a trailing stop-loss will
protect your profits as well. Should the stock price suddenly fall to Rs.150, your

 Subhankar Ghose, 2009 6


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stop-loss level will be 'triggered' and you will sell off, still making a profit of Rs. 50
per share (that you bought originally at Rs. 100).

The foregoing discussion has been written from the point-of-view of a


conservative long-term investor. I have nothing against those who trade stocks
on a daily basis, but I do not recommend trading to new or inexperienced
investors. But if trading is what gets you excited, you may want to set 'tighter'
stop-losses.

In the recent bear market, the Sensex fell more than 60% from its January 2008
top of 21200. But many small investors were facing much bigger losses because
of their penchant for buying smaller and ‘cheaper’ stocks and funds.

The two lessons from such a traumatic experience are:


(1) most stocks or funds that seem a bargain are not; better stick to proven
performers and market leaders;
(2) even if you've chosen the wrong stock or fund, applying a disciplined stop-
loss mechanism will limit the losses.

Like what you’ve read so far? Why not sign up for my soon-to-be-launched
paid monthly newsletter? Send an email to mobugobu@yahoo.com for details.
Your email will be kept confidential.

 Subhankar Ghose, 2009 7


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Chapter 3: What are your Future Options?

A British schoolboy cricketer had once approached Sir Geoff Boycott to learn
how to play the hook shot. Boycott told him that the best way to play the hook
shot was not to play it!

"But how do I score runs?", the boy had asked. Boycott's response was typical:
"Don't get out! The runs will come."

Futures and Options (F&O) trading by small investors are akin to a young
cricketer playing the hook shot. The chances of losing money overshadow the
probability of scoring big. It is far better and safer to buy quality stocks and wait
for your wealth to grow.

Nowadays the lot sizes for F&O trading have been reduced, but the risks have
not. Such trading is better left to professional and institutional investors who play
for much bigger stakes and usually buy or sell in the cash market and hedge in
the F&O market.

There is no harm in being aware of what F&O trading is all about, and some
smart investors can get clues about the market levels from the open interest
volumes and the difference between spot and future prices. But I get confused
when I hear talk about 'covered calls', 'strangles' and 'naked futures' and have
stayed far away from F&O trading.

Seems like I'm not in a minority of one. The legendary Peter Lynch has made the
following comments in his book ‘One Up on Wall Street’:

"I've never bought a future nor an option in my entire investing career.... Reports
out of Chicago and New York, the twin capitals of futures and options, suggest
that between 80 and 95% of the amateur players lose. Those odds are worse
than the worst odds at the casino or at the race-track, and yet the fiction persists
that these are 'sensible investment alternatives'.... I know that the large potential
return is attractive to small investors who are dissatisfied with getting rich slow.
Instead they opt for getting poor quick.... Warren Buffet thinks that stock futures
and options ought to be outlawed, and I agree with him."

 Subhankar Ghose, 2009 8


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Chapter 4: Don’t be a bull or bear in the Stock Market

The triangular headed South African python is a truly awe-inspiring reptile -


massive in length and weight, immensely strong with an intricately patterned
shining skin. The other day, on the National Geographic channel, the camera
followed such a beauty as it slowly slithered through the bushes and weeds and
glided into a watering hole.

There it hid with only its snout above the water - and waited patiently. Day
followed night and night followed day - and still it waited. Animals big and small,
frisky and sloth, came to the watering hole for a drink. The python didn't move.

Six days and nights passed - and no one except the camera-person knew that
the python was lying in wait. On the seventh evening a herd of deer came for a
drink. A younger member ventured a little further from the water's edge -
unaware of the peril.

Suddenly, the water hole exploded into action. With its immense muscle power,
the python lunged out like greased lightning and in the blink of an eye had
wrapped itself around its prey. The poor animal probably didn't even know what
hit him.

The South African python is used to spending weeks and even months without
feeding. Some times it eats the odd rodent or bird. But when it really wants to
eat, it plans its every move and with infinite patience grabs a large meal so that it
won't have to eat for a long time.

Like the python, a successful long-term investor does not need to 'feed' (i.e.
trade) every day or every month. Once in a long while, the stock market provides
an ideal opportunity to grab a few frontline stocks at mouth-watering prices. Back
during the 2002-2003 bear market period, stocks like Tata Steel was available at
100, M&M at 90, ITC at 60 (actually 600 for a Rs 10 share). All three
subsequently offered bonus shares at 1:2, 1:1 and 1:2 ratios respectively.

There were many other shares going for a song and which made a ton of money
for savvy long-term investors. Since then, we had a one-way bull-market with V-
shaped corrections in 2004 and 2006. But after 5 long years we had a full-
fledged bear market, which ended in March 2009.

For long-term investors, the period from January 2008 – March 2009 was the
right time to behave like the python. Not to jump in, but to conserve their muscle
power (i.e. cash), decide on a few target companies and wait patiently for the
market to start rising.

 Subhankar Ghose, 2009 9


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Chapter 5: When the going gets tough, do nothing

Edward Kennedy 'Duke' Ellington was a well-known jazz pianist who later
became a famous composer and bandleader. Considered by many to be one of
the foremost influences in jazz music, his complex compositions and
arrangements brought jazz to the mainstream of American music.

Several of his compositions have become jazz 'standards' - recorded and


performed by a whole host of singers and musicians through the years. Some,
like 'Caravan', became so popular that even pop instrumentalists performed and
recorded the song.

One of Duke's compositions - 'Do nothing till you hear from me' - has relevance
to the current state of the Indian stock market, if you replace 'me' with 'Mr
Market'!

With the market hitting new highs every day, many small investors are utterly
perplexed about what to do. Some feel this is a great time to buy. Others had
seen their portfolios erode away in the bear market and are waiting for the next
big correction to enter again. The more adventurous ones are writing puts and
calls and probably making their brokers rich! Risk-averse investors are looking at
bank fixed deposits and company deposits. But the really smart ones are riding
out the market turmoil by doing nothing.

An avid mountain climber once commented about his frequent attempts at


climbing the Everest: “I try to climb the Everest because it is there!” Well, the
stock market is very much there - and will be there for quite some time longer!
Does that mean that you should always be buying and selling?

Remember, 'do nothing' does not mean 'remain completely inactive'. This is a
great time to do fundamental analysis of companies. Find out which ones are
offering greater value in terms of dividend yields, price to book value ratios,
operating cash flows, profit margins.

Make a short list of such companies and track them on a daily basis. Then wait to
hear from ‘Mr Market’. He will start giving you diverse and interesting clues - such
as, changes in interest rates, a decrease in the advance-to-decline ratio, an
aversion to discussion about the stock market among your market-savvy friends.

The cumulative effect of such clues will indicate that the correction may be
around the corner. Till you hear from me (I mean, ‘Mr Market’), take your spouse
out for a candlelit dinner, take that dream holiday to Mauritius or Machu Picchu
but do nothing about buying or selling in the stock market. If you absolutely must
buy or sell, at least wait for the quarterly results before doing so.

 Subhankar Ghose, 2009 10


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Chapter 6: Learn stock portfolio selection from a tall ex-cricketer

During his playing days, former England & Sussex skipper Tony Greig literally
towered over his opposition. His medium pace and offspin bowling and
aggressive batting earned him the 'best England all-rounder' title till Ian Botham
took over his mantle.

But he is best known for his controversial comments - used to intimidate and
provoke the opposition. Some may remember his "I'll make them grovel"
statement about the West Indies team that really stirred up a hornet's nest.

The comment I remember best is about which players to choose if he was the
captain of a World XI. In typical controversial Greig-like fashion he said that he
would prefer to have a Geoff Boycott in his team instead of a Gary Sobers.

Now anyone who knows anything about cricket knows that Gary Sobers is the
greatest all-rounder in the history of the game. Boycott is best known for his long,
strokeless stints at the crease that frustrated opposition bowlers.

Greig's logic was simple - Sobers could, and often did, win a match single-
handed with his flashy stroke play. But he was equally likely to score a zero.
Boycott however could be relied upon to grind out scores of 30s and 40s in game
after game.

That brings us to the biggest lesson in stock selection. Stock market success is
all about staying power over the long haul. So you need stocks in your portfolio
that have performed well - but may not be spectacularly - year after year after
year, through bull and bear markets. In terms of capital appreciation (often
through attractive rights and bonus offers) and also by providing regular income
through steady or increasing dividends.

The Boycotts of the stock market are Hindustan UniLever, ITC, Colgate,
Reliance, Tata Steel, Tata Motors, Mahindra and Mahindra, BHEL (you get the
gist - this list is not meant to be exhaustive). The Rico Autos, Prajay Engineers,
Suzlons, Gujarat NRE Cokes shine for a year or two and then fade away.

Does it mean that your portfolio should only contain 'boring' stalwarts? Not really.
But the high-fliers of the day should form only a small part. A formula that works
for me is 8 to 10 stalwarts that form 90% of my 'core' stock portfolio. (And the
best time to build such a 'core' portfolio is when the stock market is in a bear
grip.)

The balance 10% of my portfolio is made up of 6 to 8 mid-caps and small-caps


with a potential to hit the big time. I'm mentally prepared to lose all the money
allocated to this 10% 'speculative' part of my portfolio. You have to choose the
percentage allocation that suits your risk profile. But a word of advice - don't let

 Subhankar Ghose, 2009 11


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the 'speculative' part exceed 25% of your portfolio. If it does - and that is likely to
happen near a market top - reallocate by booking partial profits.

If you prefer to invest in mutual funds - and most investors should, unless they
have the time and interest to pursue the solid amount of research required to
maintain a good stock portfolio - then the Boycott's are HDFC Equity, DSPBR
Equity, Magnum Contra, HDFC Prudence, Magnum Tax Gain (once again this
list is not meant to be exhaustive). The 'speculative' portfolio can contain the
ICICI Pru Infrastructures, Reliance Visions, DSPBR TIGERs.

Like what you’ve read so far? Why not sign up for my soon-to-be-launched
paid monthly newsletter? Send an email to mobugobu@yahoo.com for details.
Your email will be kept confidential.

 Subhankar Ghose, 2009 12


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Chapter 7: Why you shouldn’t diversify

Investment analysts and the pink papers cry themselves hoarse about why
investors must diversify their portfolios to mitigate risk and enhance returns.
This is another one of those investment myths that need debunking. Peter Lynch
coined the term di'worse'ify about companies who enter unrelated areas of
activities. The term applies equally well for investors.

50 stocks or 20 funds in the portfolio is a classic case of di'worse'ification.


Individual investors should try not to have more than 10 stocks or 5 funds in their
portfolio. Otherwise it takes too much time and energy to keep track of the
performance of individual shares and funds.

The richest individuals in the world tend to have extremely concentrated


portfolios. Think about Microsoft's Bill Gates, Oracle's Larry Ellison, Walmart's
Sam Walton, Infosys' Narayanmurthy.

While the average investor like you or me can't be compared with the legends
mentioned, we can reduce risk and enhance wealth by placing a few
concentrated bets on outstanding stocks. The key word here is 'outstanding'.

If you prefer particular sectors, avoid sugar or cement or real estate that give you
windfall profits one day and huge losses on another. Concentrate on defensive
sectors like FMCG and Pharmaceuticals. You'll get steady and regular returns
through price appreciation and dividends. And the downside will be limited.

So here is a formula for investment success. Buy a few outstanding stocks from
the FMCG and Pharma packs - like Colgate, HUL, ITC, Nestle, Glaxo, Lupin, Sun
Pharma. These will provide steady returns and limit your losses during bear
markets.

Balance such a sector tilt with stalwarts like Reliance, L&T, Tata Steel, M&M. For
a little extra, albeit risky, returns add the odd Yes Bank and Opto Circuits.

Mutual Fund investors can buy a couple of diversified equity funds (like DSPBR
Top 100, Sundaram Select Focus), a couple of Balanced Funds (like HDFC
Prudence, DSPBR Balanced) and an ELSS fund (like Magnum Tax Gain or
Sundaram Tax Saver).

If you feel that such a portfolio is boring or uninteresting, then that is a good
indication that you will make very good returns! For excitement and adrenaline
flow, you can always visit Las Vegas or the Mahalaxmi race course!

 Subhankar Ghose, 2009 13


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Chapter 8: Market Cycles and Sectors

The stock market rises and falls in a cyclical fashion that often 'leads' the
economic cycle by several months. The signs of an economic down turn were
quite visible in December 2008, but the stock market had started to 'discount' that
fact much earlier in January 2008.

The steep drop in the Sensex from 21200 in January 2008 to 7700 in October
2008 must have been traumatic for many investors for whom this was the first
experience of a bear market. The sideways consolidation for the next four
months must have been quite frustrating for those who were struggling to
understand what they should be looking for next. The sudden about turn in March
2009 followed by a one-way bull rally for the next 10 months must have been
equally perplexing.

When all the fundamental and technical analysis still leaves common investors
bewildered, a look at how different industry sectors have performed during
previous bull and bear market cycles may be enlightening.

The first signs of a stock market revival become visible when stocks from the
financial sector like banks and NBFCs (Non-banking financial companies), retail
and transportation sectors start to rise and consumer durables like home
appliances, cars and trucks start showing improved sales. The economic story is
nothing but bad news.

As the bull market begins to mature, and the economic cycle starts to improve,
the sectors to watch will be technology, capital goods (like construction
machinery) and construction materials (like cement and steel).

These will usually be followed by chemicals, paper, non-ferrous metals,


petroleum - when the economy starts to gather momentum. Near the peak of the
bull market, the real estate and energy sectors tend to dominate.

The FMCG and Healthcare sectors come to the forefront as the stock market
begins its bear phase. The economic cycle tends to be at or near its peak
around this stage.

As the bear market matures, utilities and services sectors try to hold the fort. The
economy is now well and truly in its downward cycle.

As the poet T. S. Eliot wrote in "Little Gidding":

What we call the beginning is often the end


And to make an end is to make a beginning.
The end is where we start from.

 Subhankar Ghose, 2009 14


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Chapter 9: Which sectors should you invest in?

In the previous chapter, the sectors that receive prominence during different
stages of the economic and stock market cycles were discussed. Does that
mean that you, as a small investor, should look at investing in all those sectors?
Probably not.

Fund managers, who are under pressure to perform in the short term, have no
alternative but to move in and out of sectors depending on the particular stage of
the stock market cycle. They also have access to company managements and
better research resources and larger funds than small investors.

With considerably less funds and little or no research capabilities, small investors
like you and me are better off choosing only a handful of sectors to invest in.
Some industries are in an environment that helps to create substantial
competitive advantage. It is easier for the companies in such industries to make
money.

Four sectors that I like - based on their competitive advantage and cash
generation capabilities - are: -

1. FMCG: Strong brands built up over the years create huge competitive
advantage. Companies tend to be solidly profitable, debt free and generate a ton
of cash (which is distributed to investors through generous dividends). The
market leaders have been around for many years, so they are slow but steady
performers.

This sector is practically recession proof and should form a significant part of a
small investor's core portfolio. The FMCG sector is often called a ‘defensive
sector’ because FMCG stocks tend to fall less during bear markets. Companies
to look at are HUL, ITC, Colgate, Nestle, Dabur, Marico.

2. Pharmaceuticals: Like FMCG, Pharma companies are recession proof,


have strong brands, are hugely profitable and good dividend payers, and long
term growth is assured because of the large population. Multinational Pharma
companies have access to better product pipelines from their overseas parents.
Domestic Pharma companies profit from generics and contract research and
manufacturing.

This is also a ‘defensive sector’, and should receive pride of place in your
portfolio. Companies to look at are Glaxo Pharma, Aventis, Sun Pharma, Lupin,
Cadila.

3. Financial Services: Banks pay less interest to depositors and lend the
money at higher interests to borrowers. For current account holders, banks pay
nothing at all. Many banks generate additional income by selling other financial

 Subhankar Ghose, 2009 15


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products to their customer base - such as insurance, demat accounts, credit


cards, mutual funds, home loans. Home loan companies tend to be highly
profitable with long-term growth assured.

Companies to look at are State Bank of India, HDFC Bank, Axis Bank, HDFC,
LIC Housing Finance, Sundaram Finance.

4. Media: Many companies have competitive advantage through regional


language and regional market domination. This sector also tends to be recession
proof, because people will read newspapers and watch TV whether there is an
economic downturn or not.

Companies one can consider are Jagran Prakashan, HT Media, UTV.

Why am I suggesting sectors that are recession-proof and ‘defensive’? Go back


to Chapter 1 and re-read the two ‘Rules of Investments’. Always remember those
two rules. Most investors buy stocks or funds without doing adequate homework,
and end up buying losers.

Buying into defensive sectors will not give you spectacular gains. Neither will it
give you wealth-destroying losses. In the year ending March 2009, a year of
economic downturn, most FMCG companies maintained or increased their
dividend payouts.

Are these the only sectors that an investor should look at? Obviously not. But this
should be a good starting point for building a long-term portfolio.

Like what you’ve read so far? Why not sign up for my soon-to-be-launched
paid monthly newsletter? Send an email to mobugobu@yahoo.com for details.
Your email will be kept confidential.

 Subhankar Ghose, 2009 16


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Chapter 10: Learn from my investment mistakes

When I look back on my track record of stock market investments over the past
25 years, I am amazed by the sheer number of downright idiotic mistakes that I
have made.

Without trying to sound immodest, I consider myself of above-average


intelligence. Most of my friends, and I dare say a few enemies, will probably
corroborate that.

So how did I end up making so many mistakes in stock investing? And was I in a
minority of one? Turns out that most amateur investors, and several professional
ones including acknowledged experts, have made their share of similar mistakes.

Why do apparently intelligent and experienced people make ridiculous and stupid
investing mistakes? The answer may lie in an area of study called 'behavioral
finance', which studies the effect of human psychology on financial decision
making.

Have you ever bought a share only to see its price going downwards? Or,
decided not to buy a share (or bought only a small quantity) at a particular price,
only to see the stock zoom up? This happens because the market has no idea -
nor is it bothered - about your ‘buy price’. The market moves as per its own logic.
But we tend to 'anchor' at a particular price.

If we buy at a higher price and the stock falls, our 'loss aversion' prevents us from
selling it. Keeping a loss making stock in the portfolio does not seem like a real
loss, whereas selling it would incur an actual cash loss. The way out is to have
the discipline to stick to a 'stop-loss' figure (it could be 5 or 10 or 25% below the
‘buy price’ - depending on the stock's volatility and your risk tolerance), and sell
as soon as the stop-loss figure is hit.

What if the stock you buy starts zooming up, up and away (which usually
happens in a bull market, but can also happen during sharp bear market rallies)?
The smart investor's way is to keep moving the 'stop-loss' figure upwards by the
same percentage as the stock's price and ride the rally. During the next market
dip, sell when the now much higher stop-loss figure is touched.

One of the biggest mistakes of all is to 'water the weeds and cut off the flowers'.
This means selling off the good performing stocks too soon, and hanging on to
the loss making stocks for long periods in the hope of a recovery.

This mistake is often compounded by another big mistake. That is, over-
confidence in your stock picking skills. During bull markets, any stock that you
buy seems to fly upwards and you start feeling that you are a genius at stock

 Subhankar Ghose, 2009 17


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picking. When the market tanks, some of the high fliers - specially small and mid
caps - lose as much as 80-90% of their peak value.

It is no wonder that Benjamin Graham in his book 'The Intelligent Investor' has
written: ‘The investor's chief problem - and even his worst enemy - is likely to be
himself.’ (Haven't read Graham's book yet? Buy it tomorrow and then carefully
read it, and then re-read it again and again.)

Like what you’ve read so far? Why not sign up for my soon-to-be-launched
paid monthly newsletter? Send an email to mobugobu@yahoo.com for details.
Your email will be kept confidential.

 Subhankar Ghose, 2009 18


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Chapter 11: “Time in” vs. “Timing” the market

This is one of those investment debates that have been waged through the
years, with no sign of a resolution in sight. With strong opinions on either side, it
is quite likely that the controversy will endure for a long time.

The dilemma arises because of the way most experts and analysts define
'timing'. They mean selling out your equity portfolio completely at market tops,
and buying the same portfolio back at market bottoms.

Common sense - which is not so common among the majority of investors -


dictates that such a plan is doomed to failure. Why? Because consistently
deciding when a market has reached a top or bottom over several economic and
stock market cycles is pretty nigh impossible.

The stock market moves on its own logic, reflecting the collective sentiments of
various market participants who have differing agenda. The hedge funds are in it
for the short term (i.e. less than one year). Some of the Foreign Institutional
Investors (FIIs) may invest for a longer term of 3-5 years. Pension funds tend to
be real long-term investors who stay in for 10 years or more.

As an individual investor it will be quite futile to try and outguess what these big
boys are up to at any point of time. Chances are that they are better informed
and have more research and financial resources than you. Therefore they can
enter and leave the market in droves - driving up or smashing down prices before
you can say 'Jack Robinson'.

Research has proven that those who stay invested for the long term perform
much better than those who try to exit and enter the stock market frequently. No
wonder most fund managers say that 'time in the market' is preferable to 'timing
the market'.

While I cannot disagree with such strong logic backed by academic research, my
investment experience has been otherwise. It arises from a different
interpretation of the definition of market timing.

For long-term investment success it is imperative that you try and time the entry
into, and exit from, individual stocks. But do not try to exit from your entire
portfolio or try to buy the whole portfolio back.

In Chapter 8: Market Cycles and Sectors, I had explained that different sectors -
and therefore, stocks from those sectors, get prominence depending on the state
of the economic and stock market cycles.

When the Sensex was trying to find a bottom, FMCG stocks were hitting their 52
week highs whereas metal stocks were hitting their 52 week lows. So that was a

 Subhankar Ghose, 2009 19


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good time to exit from FMCG stocks and enter metal stocks. (You don't have to
sell your entire holding in a sector. Partial ‘profit booking’ works pretty well.)

Now, experts and fund managers will tell you that FMCG is a good defensive
sector to enter in a bear market and metals will face a lot of pain over the next
couple of years. They will be quite correct from the short-term view of the market.
But a small investor with a long-term outlook has to play ‘contrarian’. That is the
only way to 'beat' the market.

While the 'time in' vs. 'timing' debate rages, my solution to the controversy is to
replace the 'vs.' with 'and'; i.e. stay invested for the long term but time the entry
into and exit from individual stocks.

Like what you’ve read so far? Why not sign up for my soon-to-be-launched
paid monthly newsletter? Send an email to mobugobu@yahoo.com for details.
Your email will be kept confidential.

 Subhankar Ghose, 2009 20


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Chapter 12: How to reallocate your Assets

An investor friend had asked me a million dollar question during the previous
bear market: The stock market has collapsed and blue chips are available at
attractive valuations, but where is the cash to buy them?

Many investors had been taken completely by surprise by the severity of the
market decline. Let alone think about buying, many were scrambling to save
whatever little was left of their portfolio. The attractive bank fixed deposit (FD)
rates had prompted some to sell even at a loss and move to fixed income.

Before we can start a discussion about asset reallocation, we need to be aware


about asset allocation.

Let us say that you are 35 years old and an investor in the stock market. The
thumb rule for percentage allocation to equity suggested by market experts is
(100 - your age). In this case, it will be (100 - 35 =) 65%.

Now you may not feel comfortable with the associated risk of such an allocation
to equity. No one is pointing a gun at your head. Choose whatever percentage
makes sense to you. 40-50% if you are a conservative investor. 75% if you are
aggressive about making high returns with high risk.

The younger you are the more should be your equity allocation. Why? Because
equities tend to earn the best returns over the long term, and when you start
young, you have fewer responsibilities and hence can afford to take more risk.

The older and closer to retirement you are, the more should be your allocation to
fixed income. Why? Because the stock market can be in doldrums just when you
are about to retire - when your regular income source will dry up. The (100 - age)
formula comes in handy after all.

For argument's sake, if you agree with the 65% equity allocation (this could mean
shares, or equity Mutual Funds, or a combination), the balance 35% should be in
fixed income, gold ETF (Exchange Traded Fund) and cash. A rough breakup can
be 25% in bank Fixed Deposit (FD), or Post Office Monthly Income Scheme
(MIS), or Public Provident Fund (PPF), or a combination of the three schemes,
5% in gold ETF and 5% in cash.

The gold ETF is a hedge against inflation, but low returns may not permit a
higher allocation. The cash is necessary for unforeseen opportunities - like a
rights issue, or additional purchase due to a bonus issue or divestment.

If you have Rs 20 lakhs as an investible surplus, this asset allocation formula


means Rs 13 lakhs in equity/Mutual Funds, Rs 5 lakhs in fixed income, and Rs 1
lakh each in gold ETF and cash.

 Subhankar Ghose, 2009 21


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Investment guru Benjamin Graham had advocated that on no account should you
let your equity allocation go beyond 75% or go below 25%. If you follow this
advice to the letter and spirit, it will enable you to reallocate your assets almost
without thinking.

How? Say the stock market enters a bull phase and the value of your equity
portfolio becomes Rs 18 lakhs. Your total investment value now becomes Rs 25
lakhs (=18+5+1+1), and your equity percentage becomes 72% (=18/25).

This is still below Graham's limit of 75% but is 7% above your original plan of
65%. Prudence requires that you start booking profits partially. If you are
aggressive, you can ride the bull market till your equity value goes up to Rs 21
lakhs, while the other asset allocations remain as before. Now your equity
allocation hits the 75% level (=21/28). No further waiting - start selling and invest
the proceeds into fixed income and cash, to return to your original percentage
allocation plan.

What happens in the process is that you increase your wealth in real terms - not
only on paper, because now your fixed income/cash amounts have increased.
The actual re-allocation of the Rs 28 lakhs (=21+5+1+1) becomes Rs18 lakhs in
equity, Rs 7 lakhs in fixed income and Rs 1.5 lakhs each in gold ETF and cash.

Thanks to a bear phase, let us assume your equity value drops to Rs 10 lakhs
from Rs 18 lakhs. Your total investment value is now back to the original Rs 20
lakhs (=10+7+1.5+1.5) but your equity allocation is now down to 50% (=10/20).

Guess what? You now have some extra cash to deploy back into the market.
And if you opt for Post Office MIS and/or quarterly interest from your bank FD in
your fixed income allocation - then you will have even more cash and may not
need to ‘break’ your FDs or gold ETFs to reallocate to equity.

No wonder Warren Buffett has said that knowledge of simple arithmetic is


enough to be a smart investor! (In real life, the arithmetic may become a little
more complicated - but an Excel spreadsheet should take care of that.)

 Subhankar Ghose, 2009 22


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Chapter 13: Learn about contrarian investing from a great tennis player

While watching the epic Wimbledon final between Nadal and Federer on TV in
June 2008, I was disenchanted by the number of viewer polls popping up on the
screen about “The King of Wimbledon” and “The Greatest tennis player”. None of
these polls mentioned the name of arguably the best player ever – Rod Laver.

Sampras, McEnroe, Federer haven’t won at Roland Garros. Borg never won the
US Open. Lendl and Rosewall never won Wimbledon. A handful of players have
won all four majors in their career. Only two have won grand slams – all four
majors in the same year – Budge and Laver. Only Laver has won the Grand
Slam twice – once in 1962 in the amateur era and once in 1969 in the Open era.
The defence rests.

So what does Laver have to do with investments? In his book, “The Education of
a Tennis Player” Laver writes about his attitude at Wimbledon – a tournament
frequently interrupted by rain and blustery winds. He used to put on his whitest
and starched pair of shorts and shirt, was well groomed and used to jump up and
down with enthusiasm – as if the cold and rain was just the kind of weather he
enjoyed. Far from it. It was specifically meant to demoralize the opponent, who
was already feeling miserable in the inclement weather!

Contrarian investing is not about selling at the market top and buying at the
bottom, nor is it about buying realty stocks when every one is dumping them. It is
about developing a mindset that prevents you from getting swayed by what is
happening in the market on a daily basis. It is about ignoring all the buy calls
given by so-called experts for ‘momentum’ stocks. It is about understanding
which sectors and stocks have had their day in the sun, and avoiding them.

Most important of all, contrarian investing is about making an investment plan


based on your knowledge and risk tolerance, and having the self-discipline to
stay with the plan through the ups and downs of the market. But all this is
common sense, isn’t it? You will be amazed how uncommon it is amongst the
majority of investors!

 Subhankar Ghose, 2009 23


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Chapter 14: If you must SIP, sip good Darjeeling tea

Edward Luce, the Financial Times correspondent who was stationed in Delhi for
some time and is now based at Washington DC, has written an eminently
readable book on the challenges affecting the growth story of modern India.
Called "In Spite of the Gods", the book postulates that the reason for the success
of a vibrant democracy is India's diversity.

This diversity can be exemplified by how tea is prepared in different parts of


India. In the west, tea leaves, water, sugar and milk are brought to a boil in a
pan. In the north, spices like cardamom or ginger or both are mixed with the tea
to make 'masala chai'. In the south, coffee is the preferred drink, though a large
quantity of tea is grown in the Nilgiris.

In the east, there is Assam tea - a strong rich brew prepared with milk and sugar.
And then there is the queen of teas - Darjeeling - whose beautiful bouquet and
light taste emerges only if it is brewed in a pre-warmed porcelain tea pot and
sipped without adding milk.

That brings us to another SIP, or a Systematic Investment Plan (another of those


investment myths!). A disciplined and conscientious investor should have no
problems with saving a fixed amount of money every month or every quarter. But
is it necessary to invest that sum every month or every quarter on a particular
date?

The fund managers of most Mutual Funds will respond with a resounding "Yes".
They even provide examples on offer documents or on business channels to
prove their point that investing a fixed amount on a particular day every month or
every quarter is the way to untold riches.

Like a dummy, I listened to their collective advice and started a 12 months SIP in
a well known diversified equity fund in the middle of 2004. By the time my 12
monthly installments were complete, I found to my horror that my average price
per unit had continuously climbed up - along with the stock market. For my last
monthly installment, units cost as much as 40% more than the units bought with
the first monthly installment!

One lives and learns. The only one who get rich from your SIP is the fund
manager. SIPs provide steady monthly (or quarterly) revenue to the fund without
the fund manager spending any time or effort in selling the fund.
In a trending market - whether it is moving up or down - a SIP will always make
your average cost per unit much higher than the cost you will incur at the
beginning of an up trend or the end of a down trend.

Is a SIP completely worthless? No, it works if a market is moving sideways -


some times up and some times down within a range - without a clearly

 Subhankar Ghose, 2009 24


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discernible up trend or down trend. How often do such sideways movements


happen?

Not very often, and even when they do, they last for a short period of 3 weeks to
3 months - not long enough to benefit from the price averaging that a SIP will
provide.

So heed a word of advice. Buy some good Darjeeling tea and learn how to
prepare a proper brew. Savour the taste and flavour by taking small sips. And
avoid SIPs.

(Note: No, I haven't joined a tea company. But I have alluded to an investment
myth: ‘Timing the market’ vs. ‘Time in’ the market. That myth was debunked in
Chapter 11.)

Like what you’ve read so far? Why not sign up for my soon-to-be-launched
paid monthly newsletter? Send an email to mobugobu@yahoo.com for details.
Your email will be kept confidential.

 Subhankar Ghose, 2009 25


http://investmentsfordummieslikeme.blogspot.com

Chapter 15: Start your own risk-free FMP

The stock market spent 14 months (from Jan ’08 to Mar ’09) in a bear market.
For investors who had entered the markets in the last 5 years, this was the first
experience of how a bear market can destroy wealth.

What we saw in 2004 and 2006 were just bear phases in a bull market, which
provided opportunities to buy. Many small investors jumped in to buy in March
and July ‘08 - only to see that there was no real recovery in the markets.

Investors who had been in denial for the first few months of the bear market,
started thinking and talking about how to protect capital and reduce losses.

The mutual fund industry had been promoting Fixed Maturity Plans (FMPs) of 12
months+ duration and tried to explain the benefits of lower tax against a bank
fixed deposit. Some fund houses even started offering 1 month FMPs - and were
not mentioning anything about tax benefits!

A small investor trying to protect his capital should start his own FMP and make it
completely risk free. How? It is so simple, that it is almost a no-brainer.

Let us say you have some investible cash of Rs 2 lakhs. What are your options?

a) You can buy shares at low prices and watch them go lower;
b) You can buy MF units and watch their NAV drop
c) You can park it in a bank FD for 2 years and earn 10% interest
d) Start your own FMP. Start by opening a FD account, but take monthly or
quarterly simple interest. Depending on your risk tolerance set up a recurring
deposit (RD) account with 20% or 50% of your monthly/quarterly interest. The
balance interest should stay parked in your savings account for periodic
purchases of shares and/or MF units.

After 2 years, when your FD matures your entire capital will be intact, the RD
account would be intact as well, and the shares or MF units that you purchase
should start showing some real gains, as the bear market should change its trend
by then.

Simple, isn't it? But exciting? No. But who said building wealth is exciting? It is a
slow and steady and disciplined process to be carried through for many years.

(I try to preach what I practice. In Oct '07, I had sold a percentage of my holdings
in shares and Mutual Fund units when the market looked overbought. With the
proceeds, I opened a 3 years Fixed Deposit with a leading private bank. 20% of
the quarterly interest earned was reinvested in a Recurring Deposit. The balance
interest accumulated in a savings account. I gradually reinvested in shares and
Mutual Fund units.)

 Subhankar Ghose, 2009 26


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Chapter 16: BeES in your bonnet?

After a steep fall and a short and sharp rally, the Sensex moved in a sideways
consolidation phase for more than four months (end-Oct ’08 to early Mar ’09). At
such times, it becomes difficult for fundamental or technical analysis to provide
clear indications of what is to follow next.

Reduction in the ‘repo’ and ‘reverse repo’ rates (read more about them in
Chapter 18) had been 'discounted' by the market already. The overhang of
tensions following the Mumbai terror attack in November ‘08 had put a spanner in
the works of any quick recovery in the economy. Sideways consolidation phases
are notorious for doing exactly the opposite of what every one expects them to
do.

During such consolidation phases, small investors have four choices.

For the adventurous who rely on their stock picking skills, such phases may be
as good a time as any to start buying into frontline stocks at beaten down prices
and build a good long term portfolio.

The less adventurous can select highly rated large cap diversified equity funds
with good performance records over bull and bear cycles.

For conservative investors the above two choices may still seem risky because of
the possibility of further downsides. Also, when the market does turn upwards (as
it eventually does), there is no guarantee that the shares or funds selected will
perform well.

Risk-averse investors should limit their choices to bank fixed deposits (FD) or
index funds. FDs protect capital but are not tax efficient. At current interest rate of
around 8%, the post-tax return at the highest tax bracket of 30% will provide a
net return of 5.5% (which is lower than the real inflation rate).

Index mutual funds allow the investor to buy into a particular index - it could be
the Sensex or Nifty (or a Sector index). The underlying assets are the 30 Sensex
or 50 Nifty stocks. There is no dependance on a particular fund manager's skills
or whims in stock selection. The returns will be almost the same as the Sensex
or Nifty performance.

A good spin on an index fund is Benchmark Mutual Fund's Nifty BeES ETF
(Exchange Traded Fund). An ETF is listed on a stock exchange and can be
bought and sold at any time during the trading day through a broker by paying
the Security Transactions Tax (STT). So for all intents and purposes, it is treated

 Subhankar Ghose, 2009 27


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like a share. There are no separate entry or exit loads. But brokerage costs
apply.

While the underlying asset of a share is a single company, Nifty BeES' underlying
asset is the entire Nifty 50 stock group. Which means that by buying a unit of
Nifty BeES, whose NAV is about 1/10th of the current Nifty level, you are
effectively buying all 50 stocks that comprise the Nifty.

Why not just buy an index mutual fund? The major advantage of an ETF like Nifty
BeES is being able to buy or sell at any time during the day at the prevailing rate
- whereas a mutual fund can only be bought or sold at the day's closing NAV (Net
asset value). During volatile trading days, this can be a real advantage.

The other unseen advantage, apart from there being no entry or exit loads, is that
the fees charged by the fund is much less because an expert fund manager's
stock picking skills are not required. So the disposable profits are higher.

If you are a risk-averse investor with some spare cash, periodic investments in
Nifty BeES can provide reasonable, if not spectacular, returns over the long term.

Like what you’ve read so far? Why not sign up for my soon-to-be-launched
paid monthly newsletter? Send an email to mobugobu@yahoo.com for details.
Your email will be kept confidential.

 Subhankar Ghose, 2009 28


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Chapter 17: Stay ahead by being interested in interest

Interest rates are a 'leading' indicator. That means interest rates usually change
direction before the stock market does. Some times this can happen several
months ahead of time and some times it happens shortly before.

Back in 2002-03 (if you can remember that far back!) when the stock market was
in the doldrums, the returns from debt mutual funds were so good - upwards of
15% - that a certain foreign bank's mutual funds division didn't even bother to
include an equity fund in their portfolio!

Then interest rates started falling and the stock market had started picking up. By
the time they woke up to the fact and came out with some equity funds, they
were way behind in performance. Eventually, the bank's mutual funds division
had to be sold off.

The situation had drastically changed by 2007 when interest rates started moving
up again. Conservative Indian investors started moving money back into bank
fixed deposits. Inflation hadn't reared its ugly head. However, that was the first
warning sign that the stock markets were going to be in trouble.

Why? Because most 'punters' (the gamblers who play with options and
derivatives) bet with borrowed money - many a times loaned by their brokers. As
interest rates move up, their cost of doing business goes up and makes the
margin of profit minimal.

The higher interest rates also have a cascading effect on the economy -
particularly in rate-sensitive sectors like banks, automobiles, real estate. The cost
of doing business goes up for all of them. Less people take out loans at higher
interest rates, so they hold back on their vehicle and apartment purchases.

To top it all, the huge run up in oil prices pushed inflation up - causing the
Reserve Bank to raise interest rates even further to curb inflation! Then the FIIs
started to depart. Talk about a 'perfect storm'!

How does the nightmare end? A necessary - but not necessarily sufficient -
condition is when interest rates start moving down again. That is the first sign
that the market can turn back up.

Inflation is not always bad for stocks. Some sectors may have pricing power,
either due to temporary supply-demand mismatches or due to the price elasticity
of the product (medicines, liquor and cigarettes come to mind). Rising cost of
inputs is offset by raising prices of the end product.

More cash flows into the coffers leading to higher profits and EPS. That in turn
means higher stock prices.

 Subhankar Ghose, 2009 29


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Chapter 18: What the CRR-SLR-Repo rates mean for investors

It is important for investors to try and understand the basics of economics and
monetary matters. A lot of investors may be wondering how all these different
rates can affect them. So here is a 'dummies guide' to how the RBI controls the
supply of money in the economy to stimulate growth or reduce inflationary
pressures.

The Repo rate is the rate of interest charged by the Reserve Bank of India (RBI)
to commercial banks who may need to borrow some short-term funds against
securities. (The Reverse Repo rate is the rate of interest paid by the RBI to the
banks who may park short-term funds with it. Usually the RBI pays a lower rate
of interest than it charges the banks for short-term funds.)

The Cash Reserve Ratio (CRR) is a percentage of the total deposits with
commercial banks that they need to keep with the RBI.

The Statutory Liquidity Ratio (SLR) is a percentage of deposits that commercial


banks need to invest in government securities.

What purpose is served by such means? It is for the safety and security of the
funds available in the banking system (which in turn helps investors like you and
me). It is also for controlling the supply of money (or liquidity) in the country's
financial system.

The Foreign Institutional Investors (FIIs) were lured by the growth prospects of
the Indian economy and brought in huge funds (by Indian standards) to purchase
shares of Indian companies. Indians working overseas also channeled money
back to the country for investments because of the comparatively higher interest
rates.

As demand for products and services kept rising, capacities got stretched, and
prices were hiked. Industries went in for capacity expansion availing cheaper
overseas funds. With higher production the GDP kept rising, attracting more
foreign funds.

The increased liquidity - mainly from overseas - and higher prices caused
inflation to rise. Initially the government kept ignoring the rising inflation rate till it
hit double digits. To curtail inflation, the RBI squeezed the supply of money by
gradually increasing the CRR, SLR and Repo rates.

Unfortunately, the sub-prime crisis in the USA hit the world's financial system like
a whirlwind. Many of the FIIs who had lost heavily in the sub-prime derivatives
markets, started to sell aggressively in the Indian share market.

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The outflow of foreign money caused two problems. First, it caused a reduction in
liquidity - which had already been tightened by RBI's policies. Second, it caused
a fall in the value of the Rupee - which the RBI tried to stem by buying foreign
currency, further reducing liquidity.

The banks started feeling the pinch and started offering higher interest rates for
deposits and, therefore, charging higher interest rates to borrowers. Industry
found the easy-money taps getting closed - both in India and overseas, and
started slowing down their growth plans.

Speculators who borrow money to invest felt the cost of doing business was too
high and started selling off. This compounded the selling pressure already
exerted by the FIIs. The downward spiral in the stock market got exacerbated
when small investors also started selling off.

The several rate cuts that followed was the RBI's and governments rather
belated effort to inject liquidity into the market so that banks could resume
lending. That led to rejuvenating the growth plans of industries and eventually
caused interest rates to go down.

That was the first indication that the stock market was ready to start their next
upward journey. But the spectacular rise from Mar ’09 onwards took a lot of
experienced investors and fund managers by surprise.

Like what you’ve read so far? Why not sign up for my soon-to-be-launched
paid monthly newsletter? Send an email to mobugobu@yahoo.com for details.
Your email will be kept confidential.

 Subhankar Ghose, 2009 31


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Chapter 19: Why Michael Ballack is a role model for the better investor

There are two kinds of people in this world - those who are crazy about soccer
and those who aren't. For the latter, Michael Ballack is an outstanding German
midfielder (who now plays for Chelsea in the English Premier league) with a
rocket-like right foot shot.

So what does Ballack have to do with investments? It's his left foot (not to be
confused with Daniel Day Lewis' Oscar winning performance), with which he can
kick the soccer ball just as hard and with immense power.

Which brings us to the unresolved debate about fundamentalists (pun intended)


and technical analysts. Fundamentalists don't understand technicals; technical
analysts believe that all fundamentals are reflected in the price!

Just as an international soccer star needs to use both his feet to pass and score,
the better investor needs to learn about how to fundamentally analyse companies
as well as technically analyse their price charts. Why?

Fundamental analysis looks at ‘what to buy’; whether an industry is a sunrise or a


sunset one, then identify companies within that industry, study their financial
stability, growth rates, future plans, profitability, management quality, competitive
advantages.

After doing all that hard work for a particular industry, let us say for infrastructure,
you make a short list of three companies: NTPC, L&T and BHEL. All are
supposedly great companies. If you had bought them in December 2007, you are
probably still losing money on your investment. Knowing ‘what to buy’ is not
enough.

Technical analysis tries to figure out ‘when to buy’, by identifying previously


observed patterns in the price charts of stocks or the Sensex (or Nifty). The chart
pattern of the Sensex in December 2007 would have indicated a severely
overbought situation indicating an imminent fall. That was precisely the time
when you should not buy.

Neither fundamental analysis nor technical analysis can ensure profits in the
stock market. By combining the two, an investor improves his chances. Use
fundamental analysis to identify good stocks to buy. Then use technical analysis
to find out the most appropriate time to buy. If the fundamentals are good but the
technicals are weak, or vice versa, avoid buying.

 Subhankar Ghose, 2009 32