Best Bets in a Falling US Market

Which stock are you going to buy in these bad times, if you happened to stay in the United States? Probably, nothing. But isn't that being foolish, being scared of the dips in the markets. Dips are good because they cleanse the system. The only problem, this time around, is that we don't know which sectors are well insulated. Automobiles are in the lurch and financial services, along with insurance and real estate, are to be avoided. That doesn't leave us much room. Pharma stocks are uncertain right now but they wouldn't be a bad bet in the long run.

Today, I would like to speak about a company that has never failed to amaze me. I am sure all of you have heard about it. We are talking about the great Warren Buffett's company, Berkshire Hathaway and about its Class A stock, which is awfully expensive to buy.

You can track the stock here at the AOL Finance website. The current market price is $120,400, so, if you had the money, you could make a purchase. The stock has taken a beating because of the broader market trends and I find it a pretty defensive stock in these market conditions.

(This post does not purport to give advice in the stock markets and constitutes the personal views of the author.)

Only Good News in Stock Market Gloom

The only good news in the present stock market gloom is the fall in oil prices. Oil is selling a bit under $100 per barrel. It has really taken a hit from its highs of $140 odd per barrel. If we had a spike in oil price, even if it were a speculative one, or if we had any other oil related crisis the world over, it would send the financial markets in a real tailspin.

There is real fear on Wall Street. And most companies believe that they might be the next after the fall of Lehmann Brothers. So, the United States government, along with its friends in the OPEC, should ensure stability, or even better a fall, in oil prices for the next week or two till the present crisis subsides. One also hopes that Wall Street does not come up with further gloomy news.

Collapse in Stock Markets

There is a major fall in the stock markets. Wall Stress has been badly bruised. Another one of the venerable financial firms has collapsed. Lehman Brothers is no more and it had been there for the last 158 years. And add to this, another bit, Merrill Lynch has decided to sell itself to Bank of America. And AIG, American International Group, which offered Tata-AIG insurance in India, is trying to keep afloat.

This wave of collapses some after an earlier wave, where we had Bear Stearns being sold off for a pittance. And Citi taking in a big write-down. We also had Fannie and Freddie in deep waters.

The Indian markets are ruling about 4.5% down at the moment. Interestingly, there is nothing which is so serious with India that it should be fall. So, this is actually sentimental. Yes, when the US sneezes, the world catches a cough.

It is undoubtedly shocking and very terrifying for anyone who is into the financial markets right now. But there isn't much room for real panic for the people in the Indian stock markets. In fact, I would suggest my NRI friends and other foreign nationals to seek avenues for investment in the Indian markets.

There is good and real qualitative money to be made from the Indian markets at this juncture. The only important thing to keep in mind is to adopt an intelligent approach.

Stock Picking Strategies: Cherry Picking

There are a number of stock picking strategies. One of them is known as cherry picking. The idea of cherry picking is to buy those stocks which are available at rock bottom prices or which are going through bad times due to various reasons. Cherry picking is a sure short strategy but something that requires a lot of patience from the investor. It is quite possible for the investor to lose faith and exit quickly, which would either result in a loss or in minimal profits.

So, how do you pick the cherries? If you were in the US, should you buy General Motors (GM)? I'm a member of Social Picks, the social networking site on stocks that Reuters runs. I am upbeat on General Motors but a number of other investors feel that it is an absolutely wrong and foolhardy choice. But wait a bit... GM is a pretty old company, which is going through really bad times. There are fears that the company could fold up. The stock price is really down. But does it mean that the company would file for bankruptcy protection? Not really.

The company is going through what are known as classic recessionary conditions. Accumulating such a stock in small and regular quantities is not a very bad idea. It has its risks and it requires a high degree of patience on part of the investor. But it also has the potential of creating decent profits. The only risk with a company like GM is if it were to file for bankruptcy or were to be bundled out for a cheap price, like Bear Stearns. Unless that happens, any worse case scenarios aren't so bad. The company could recover from high oil prices and falling sales. The United States could recover from the recession. If GM performs very badly, it could be taken over by another foreign company, which might as well have a positive effect on stock price.

So, if you think logically, cherry picking isn't such a bad idea.

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!

Crash at Wall Street

Yesterday, there was a major crash at Wall Street and it seems that the experts did not seem to know the reason behind it. As a result, there was a major sell-off in Asia and Asian indices fell heavily across the board. The Bombay Stock Exchange in India fell 415 points. Hong Kong's Hang Seng index fell and breached 20,000, which is the lowest in seventeen months. It seems as if the economists expect the United States to have lost another 70,000 jobs last month. There are still fears of recession in Europe. Interestingly, this fall in the Wall Street came yesterday even as oil prices fell. Usually, a fall in oil prices leads to a rise in stock prices. So, the movement in the markets yesterday was somewhat perplexing. It seems as if the markets are still trying to find their bottom and they don't seem to have stabilized anywhere at all, despite some rally in stocks that we saw in the eight weeks or so. Oil has certainly fallen from its peaks but the stocks would still need another booster dose to get fired up. This also means that any rise in oil prices could have a rather debilitating effect on the stock markets worldwide, especially with the depressed market sentiments.

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.

Fall in Dow Jones

The Dow Jones has fallen again. Right now, at 3.17 pm, it is down 203 points or 1.75%, which is considered a pretty steep fall. So, we need to wait for Nikkei to open next morning and see how Japan reacts and then how Hang Seng reacts in Hong Kong. If they are depressed too, then we can expect the Indian markets to witness a fall.

I know oil has risen a bit and there is news that Iran has offered to launch satellites of Muslim countries. Iran has already claimed that it has test fired a new rocket capable of carrying a satellite into orbit. The story can be read at the New York Times. I still don't know if there is some US economy data that has also contributed to the fall.

Let us wait and watch.

Running a Portfolio Management Service

If I were to think in terms of possible entrepreneurial ideas that I might like to implement in the future, portfolio management services would rank pretty high. Even though I'm a pretty qualified and an experienced translator and professional linguist in my language combinations, I wouldn't like to necessarily start a translation or a localization company.

But it does look pretty attractive to me if I could have sufficient capital to do two important things in my life. Both are equally important in my perspective. The first is to run a series of highly successful educational institutes with excellent faculty. The second is to offer portfolio management services. I am sure I could offer good returns compared to conventional investments such as bank term deposits.

When the stock markets crashed about two weeks ago, I bought Parsvnath stock at Rs. 103 [$2.45] per share and on Friday, July 25th, it was quoting at Rs. 117.75. So, I had a notional gain of Rs. 14.75 or about 14% in two weeks. On July 25th, the stock made a high of Rs. 122.

I guess that is a pretty good return. If one sells at a 14% profit within two weeks and then sits pretty till the markets present another opportunity, and buy again, one could be making a goldmine. This is why I feel I could really offer excellent portfolio management services.

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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Stock Markets: Introductory comment

To most people, this will sound like a heresy--An English Literature Professor with an active interest in the stock markets! But I guess we are made of complex elements and if we going to be what E. M. Forster calls 'round characters' in his book, Aspects of the Novel, we jolly well have a number of interests in this world.

I have had an active interest in following stocks ever since I was studying in college. So, this heads back to the late 1980s. But my first investments were made in around 1995, which is still sometime ago.

And long ago, I made Warren Buffett a guru. I have always been inspired by him. I have read his biography and have read so much about him. I have also read the annual reports of his company, Berkshire Hathaway on his website www.berkshirehathaway.com and I have given extracts from his annual reports to my students as exercises in the translation class, where they could learn how such a giant of the world industry could use folksy humor.