Recent Stock Market Experiences

Now, believe me, I'm not bragging at all. I had bought shares of Apollo Tyres last month for Rs. 30 a share and today, after the fall in the markets, Apollo Tyres is still selling at Rs. 37 a share. So, we are essentially talking about a profit of Rs. 7 or 23% profit within a month. I don't think that's bad. I could have easily sold my stock. But I am trying to change my investing strategy these days. For a long time in life, I have tried my hand at various trading strategies, inluding day trading, BTST (Buy today-sell tomorrow), very short term trading (with a week's margin), short term and medium term investing (selling stocks at a profit within a time frame of two to six months).

But now, I would like to try my hand at a very different investing strategy in life. There was a time in life, about ten years ago, when I used to follow this strategy. But those days, this strategy wasn't very well worked out in my mind. Now, it seems that it has been well worked out mentally. These days, I have begun investing in stocks the same way as one invests money in long term bank deposits. I am now following the classic long term investment strategy and I have this strong feeling that it is going to pay me pretty well.

Stock Market Moves

Isn't it nice when you find that your own evaluations of the stock markets are backed by well-known brokerages? On August 11, 2008, Anand Rathi, a well-known Indian brokerage recommended Development Credit Bank [DCB] at the current market price of Rs. 58 with a stop loss of Rs. 50 and a medium term target of Rs. 78. Earlier this year, I had bought the stock at Rs. 110 and sold it at Rs. 145 within a short span of three weeks. So, when it started falling and it reached a low of Rs. 45, I thought that was the right time to buy it. But when I was signalling a buy in my personal charts, there was no brokerage recommending it. But now when it began rising a bit, we have Anand Rathi recommending a buy.

I find this really interesting. And fascinating. I am only hampered by big time finance, which is why I am still a small time player. With more finance or with investment finance from some of my friends, I could do a pretty good deal. I would not be able to beat the legendary Warren Buffett because he has been a genius and I have often found him pretty inspiring. But I would have done pretty well if I had started off with an investment partnership.

And I would do pretty well even if I opened one right away!

Investment Perceptions

I have such anecdotes to narrate about the perceptions of most people about the stock markets and about investing that it would probably make you die laughing. People have such outlandish and strange ideas when it comes to investing that one could find it really difficult to believe.

I had a good friend. I still know him. We used to stay nearby and meet everyday. So, one day, about ten years ago, he met me and said, "I have made some money working for a company and I have some extra cash to spare. I would like to discuss investment options with you." I told him, "That's great. But before you begin investing, the first thing we should discuss would be the returns that you would expect on your investments."

Those days, the banks gave a maximum of 10% per annum on term deposits. He had made some money as a freelancer and he wasn't eligible for the Employees Provident Fund, which would have given him a return of 12% tax free. Anyway, he wasn't in the tax bracket but if he were, the maximum tax bracket was 30%, so, the maximum taxable return, he could have got would have been around 17% in a year.

So, when I asked him, what he expected from the stock markets to do for him, pat came his reply. He said, "I would like to double my money in a fortnight but I could wait for a month." I was furious and as he was a good friend, he didn't mind my outburst. I told him, "You jolly well get into a casino!"

Most people have such strange notions about investing money in the stock markets. If the best return that he could have got in the country from safer avenues was 17%, he should have been content with around 25% from the markets. If he set his objectives at 25%, he wouldn't ever lose his money and would invest scientifically and his investments would be strong fundamentally.

Financial Sector News

June 11, 2008, 8.00 pm

This is just off the wires at this moment. The RBI [Reserve Bank of India] has raised the repo rate by 25 bps [bps= basis points / 1 basis point is 100th of a percent; so, 25 basis points is 0.25 %]. This is the first such hike since March 2007. The news was off the wires at Marketwatch.com barely one hour ago. And you can read this news on the NDTV Profit website as well, where it was published at 7.10 pm. So, I am not far off!

What is a repo rate? The repo rate is the rate at which the RBI lends money to other banks in the country. This is a move to fight inflation in the economy. If the RBI makes it costly for the banks to borrow money, they would be able to lend money to customers at a higher rate, which would help in curbing spending in the economy and thus, help in curbing inflation.

What is RBI? The RBI is the Indian Central Bank, the same way as the Federal Reserve is the US central bank.

It remains to be seen what impact the RBI move will have on the economy. The hike in petrol prices is going to increase inflation anyway...Let us wait and watch.

But one thing is certain--the stock markets are going to open gap down tomorrow morning and they are likely to be volatile as well.

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.

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 www.anandrathi.com, 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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The Price of Petrol in India and Other Places Around the World

All of us in India have felt the pinch of rising prices of petrol. Global oil prices are around $130 a barrel. The Indian government subsidizes the cost of petrol and it is costlier than what it costs in the US. But the price of petrol is neither the costliest nor the cheapest the world over in India. The costliest price of petrol is in Turkey with about $2.68 per liter. The world's cheapest oil is in Venezuela where it is $0.05 per liter and where the government subsidizes the price. But in Saudi Arabia, it is pretty cheap as well, where it costs $0.12 per liter.

If you want to read the complete story, please go to the Rediff.com website and read this interesting story.

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Investing in the Indian Stock Markets--Introductory Comments

For those who have never invested in the stock markets, it might seem like a muddle and there are some who would say that the stock markets are a gamble. There are some colleagues of mine who are academics and they feel that it is quite unbecoming of an English Professor like me to invest in the stock markets or to possess an active interest in investing. But my interest in investing goes back a long time. It was active in my family and the first person in my family to invest in the stock markets was my grand uncle. He invested in the Bombay Stock Exchange [BSE] most probably before the Second World War. So, I bring a genetic experience to investing in the markets that is at least six decades old.

I never attended a workshop or a training session on investing nor did I ever complete a degree or a diploma or an MBA in Capital Markets or an MBA in Finance. But I picked up my skills slowly, observing at home, reading widely and investing myself.

If you study any great investor, such as the great Warren Buffett, who I consider a guru, there's always something very precious that you will learn. Buffett is never in a hurry to buy. You can always say that well, he's old, so, he could afford to wait. But this is actually a very sound strategy and it has reaped rewards for many people in the past.

The first lesson that you learn from these stalwarts is that what goes up always comes down and what comes down always goes up in the stock markets. So, when there is a great euphoria in the stock markets, that is probably the best time to sell and make a profit. And even if you buy in the euphoria, you should buy in limited quantities and you should buy only front line, blue chip stocks.

To take a small example. In February 2008, I bought some shares of Parsvnath Developers [NSE Code: PARSVNATH] for Rs. 190 per share, then by May 2008, it had gone up to Rs. 235-240, which is a gain of Rs. 45 or 25% within a span of three months. And today, on June 3, 2008, it is back at Rs. 189 per share. As of today, the year low is Rs. 169 and the year high is Rs. 598. We know that there are fears of a depression in the markets and that most people are scared of the recessionary fears in the US. But Rs. 190 is not a bad price because when I tracked the stock price last year, there were at least five occasions when I had bought the stock at Rs. 270 a share and sold it at Rs. 350 a share. And today, at Rs. 190, the stock seems to have few takers. The fears are justified because the markets feel that Parsvnath is a real estate company and that the subprime crisis will affect its fortunes. One doesn't discount the market fears and one does not doubt what the markets think but unless the company were to be completely wiped out like Bear Stearns, there isn't much of a crisis. And even in the case of Bear Stearns, after the controversial J P Morgan deal was sealed, its stock price went up!

I hope you liked this small introduction to the Indian stock markets and I will follow up with more posts on this subject in a regular manner. Please do feel to comment and to share your views.