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.

Post-Crash and Purchase

Today the Bombay Stock Exchange fell by 500 odd points and the National Stock Exchange touched its low for 2008. The biggest lesson in the stock markets is to buy like a long term investor in a falling market. This requires a huge amount of guts and belief in one's positions. This was one lesson I learned myself last year even though I was familiar with Warren Buffett's story. Last year, I built a pretty good position in Gujarat NRE Coke [pretty good position for an individual small investor] at Rs. 58 per share but couldn't be patient and then sold out at Rs. 61 per share but within 3 months of my selling out, the stock had zoomed to Rs. 120, and then it went up even further. So, if you think a stock is good, it is good, irrespective of market crashes and recessionary conditions.

Anyway, I had discussed Tata Motors and Parsvnath in my earlier blogs. Today, I purchased both stocks in small amounts. Another secret is to buy in small amounts so that one tends to get the best price and one's investment is normally protected. My purchase price for Tata Motors was Rs. 512 and I bought Parsvnath at Rs. 169 per share. I had discussed Tata Motors as looking attractive at Rs. 540! So, I got it at a 13-month low. And I got Parsvnath at a 12-month low. I think these are pretty attractive prices. I'll keep on adding small amounts but I'll not buy Tata Motors if it crosses Rs. 525 and I'll not buy Parsvnath if it crosses Rs. 180. This way, I am making out my personal SIP-Systematic Investment Plan, without going to a mutual fund.

I expect the Indian stock markets to be subdued for the next 5-6 weeks. They may perk up a bit by August in view of the results of the latest quarter which are announced in September. They may also gyrate to the tunes of Wall Street. So, this means that there are going to be sufficient buying opportunities in the next six weeks and there is no hurry to go out and buy everything at once.

It is this staggered approach that really helps a small investor in building a big portfolio. Always remember that what goes down always goes up and what goes up always comes down in the stock markets. I really think this is exciting stuff. This is a real bargain buy situation, where you get the best possible discounts on the brands that you always wanted.