Wednesday, June 4, 2008

Investing in Stock Markets--First Principle

The Tata Motors stock closed today at the National Stock Exchange at Rs. 541 per share. The year's lowest is Rs. 530 and the highest is Rs. 842. The stock has had a bad run due to many reasons--the first was its acquisition of Jaguar and Land Rover, the second was a slump in the automobile sector in India and the latest is certainly the fuel price hike, which the market expects will curb demand. Today, the stock opened at Rs. 599 and then went on a downward spiral. 2008 has seen few shocks in the stock markets and the markets haven't tested their 2008 lows but the Tata Motors stock is close to its year low.

If you went to the Anand Rathi website, which is an online brokerage, and the website is at, you would see that their research division had initiated a BUY on this stock on May 20, 2008, when the price was Rs. 668 and it said that investors should have a stop loss of Rs. 640 and have a medium term target of Rs. 745. So, most investors would be dumping Tata Motors stock now and conventional wisdom should dictate that people should not buy it.

But my intelligence tells me that this is the best time to buy the stock. How? I am not as savvy as an online brokerage and I don't have access to any illegal information. Then, how could I come to such a hypothesis?

Well, Warren Buffett and his guru, Benjamin Graham, both believed that when a stock is at a reasonable price, far below its intrinsic worth, it should always be bought irrespective of what the market thinks. But then Buffett and Graham, I'm sure never invested in Tata Motors!

True. However, if you look at Tata Motors and the history of the stock, it has had a very interesting run ever since Ratan Tata took over at the helm of affairs as the Chairperson of the Tata Group. When Tata Motors launched its first passenger car, Indica, years ago, the stock was badly hammered and he got bad press. People wrote that he was trying to finish off an old company. Then in 2008, the company launched the Nano, an engineering marvel and the world's cheapest car.

The first principle of investing in the stock markets is: When you find a stock of a leader in an industry-- BUY It! But it immediately, especially if the sector is in the dumps due to some economic downturn or market sentiments. Sentiments change and downturns go away and then the stock would give you amazing returns. Market leaders, when down due to recessionary fears, are the best possible stocks to buy. If you buy them blindly with money that you have in the bank [not borrowed money] and if you can wait, you can have nothing better in this world.

And at Rs. 541, it is the equivalent of a bargain sale because with a little jump in the markets, with some recessionary fears going away, with the next quarter results, one can easily find a 25-30% rise in the price. In a year's time, one could even find 50% rise. I guess that's not bad at all.

And if you have any further doubts, the company announced yesterday that it plans to announce a Rights issue for its shareholders who woud be offered shares at a 40% discount. And even if you simply plan to hold the share like a long term bank deposit, even then, the dividend that the company currently pays is about 2.5% return annually and dividends are not taxable in the hands of the public in India. So, it is a 2.5% tax-free return.

Wouldn't you agree? Wait and watch and tell me when you find it coming true.

Please note that this post is not a recommendation of any stock at any price.

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