Thursday, June 5, 2008

Stock Markets--First Principle--Further Gloss

We had discussed yesterday that the Tata Motors stock made good sense to buy at the given price of Rs.541. Today, it made a low of Rs. 525 and closed at Rs. 531, which is only 2% less than yesterday. In the process, the stock also made a new 52-week low. It is possible that the stock may slide a bit or may perform sideways and if the market sentiment is weak due to the petrol hike, then the stock might under perform the market a bit. But by how much should a market leader fall? That's a very important question.

And there's no way that a small investor is going to time the markets. Even big ones find that tough.

In the stock markets, public memory is short. I had bought Tata Steel shares after the Corus acquisition for as low as Rs. 410 a share in January-February 2007. Today, after the market crash and the low sentiments, the stock closed at Rs. 841. So, there's a potential gain of Rs. 431 or 105% in a period of eighteen months. I suspect what is happening to the Tata Motors stock these days is something quite similar.

From the current market price of Rs. 533, even if there's a downside, I wouldn't expect the stock to touch Rs. 450 in any situation. Most probably, it might display a downward movement till Rs. 475 or Rs. 480. But even if we take Rs. 541 [the price at which I thought I would like to buy yesterday] as the buying price in June 2008, I should expect at least 60-70% return within the next fifteen months. Most probably, my targets should be reached much earlier. Keeping this long target in mind, I have factored in every thing, including one year of the running of Tata Nano, the fuel price hike and the possibility of high fuel prices, low automobile demand and the pending elections in the country next year. So, unless, there were something really drastic on the financial front, I am certain that my targets should be achieved.

There's always another way to work in the markets for those who cannot take a pretty long view. This is called the intermediate position, where you can always get a 20-25% movement in the Tata Motors stock in the next three months, take your profit and sell. Then wait for a low price, keep the money safe, again buy and sell at 20% profit in another three months. This is also possible with the Tata Motors stock and this can easily be done at least 3 times in the next 12 months.

Hope you enjoyed the first principle of investing and further notes on it. Certainly, the position that I adopted with Tata Motors could be adopted with some other stocks as well.

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