SMART
PEOPLE
INVESTS
SMARTLY
KNOWLEDGABLE
PEOPLE
INVESTS
FOOLISHLY
To my visionary leader Mr. R Chenraj Jain to whom I shall
remain
indebted for setting the foundation on which this book is based.
He is the
person who is simple, down to earth, and have grown not for
himself but
for the youth and students in general. He is the person who wants
to
contribute something to the GDP of India not by himself but
through the
youth power counseled by him. He is the person who made me realize
the
concept of “We” rather than “I”. He inspires and informs people,
helping
them to realize their true potential. He has taken his dynamic
personal
messages to every corner of India. His common sense approach and
deeply held beliefs have motivated countless thousands to
re-evaluate
their attitudes.
Saket Jalan
CONTENTS
PREFACE
ACKNOWLEDGEMENTS
1.
THE MARKET CYCLE AND ITS CHORUSES
2.
PREPARING TO INVEST
3.
RULES OF INVESTMENT SUCCESS
4.
THE MYTHS AND MISCONCEPTIONS
5.
OBSERVATION AND READINGS
6.
TO SELL OR NOT TO SELL
7.
14 GOLDEN RULES TO EVALUATE ANY COMPANY.
J.P.Morgan was once asked what the market was going to do.
He
replied, “It will fluctuate”. This is the most important
possible
truth. We need to get deeply into our bones the sense that
any
market and the stock market, moves in cycle so that we
will
infallibly get wonderful bargains every few years and have
a
chance to sell again at ridiculously high prices a few
year later.
Lets go through a complete cycle….
THE
MARKET CYCLE AND ITS CHORUSES
The
Washout: “All Is Lost”
At a
major bottom current business news is usually terrible and many authorities
feel that
things
are likely get even worse. The brokerage business is likely to be in dumps with
many
bankruptcies,
Eventually a point is reached where everybody who can be scared into selling
has
sold. Usually, the final battle occurs in a few days of extremely high volume-
a selling
climax.
At this point the ordinary investor, who has gone over the waterfall is groggy,
bruised
and sick, is ear ringing. He does not want to hear about the stocks, never
again.
The
Early Surge: “ Its too Early to Buy…”
We
are at the beginning of the dynamic phase of the bull market. The optimum
buying “
window”
will last for only a few months, but it is prudent to hold off most of your
buying until
the
market has clearly turned and is full and by on the new course. You can usually
recognize
when
the upward trend has been solidly established. The professional investors does
not mind
paying
20% more for a stock that has been cut by two thirds to be quite certain that
it is not
going
to go down a lot more.
The
government shocked by the decline as always beset by the clamor to do
something,
pumps
liquidity into the economy which of course does not take effect instantly.
Stock market
pundits
declared that this time the stimulus is not working.
The
months go by and the price rises. The misery of the recent past is quickly
forgotten, like a
throne
extract from your foot. A few mutual funds will have been started during the
bottom
area
and article in the financial press being point out that ‘X fund’ has grown by
75% in six
months.
One starts hearing story of the people who made a lot of money.
The
Surge Continues: “Prices Seem High…. It’s too late too Buy.”
More
months pass and the market can now be seen to have established a rising channel
for
itself.
The ‘Index’ oscillates from top of the channel to the bottom, but continues to
in the
same
broad upward path. There will be few significant reactions during this phase of
the
new
bull market.
The
rising prices of the principal stock attract more buying from the professional
and from
institutions
that have been waiting on the sidelines; this additional buying puts prices
still
higher.
The higher prices in turn give confidence to more buyers, who enter the market
putting
prices higher still. The whole system continues to feed upon itself, to rise
and build
like
prairie twister.
The
general public during this phase moves from feeling that it’s too early to buy
to feeling
that
it’s to late to buy.
The
Second Stage of the Rocket: “Prices Are High, But Maybe It’s Okay to Buy…”
Times
passes. Then public, which has been apathetically watching from the sidelines
starts to
become
interested. There are a number of downward legs or tests, against the bottom of
the
market
rising channel each time the test is reversed at a higher level than before.
The longer
the
channel remains intact, the more it is consider invulnerable but the more it is
considered
invulnerable
the closer it is to a bust. Most times there is eventually pronounced and
unmistakable
rise in the volume fervor and the tempo of the dance continue to mount. The
music
play louder and louder more and more spectators join in.
Not
a Cloud in the Sky: “Buy!”
More
months go by and the public hooked. Business news is excellent. The standard
forecast
of
the economic is optimistic. Some particular industry surfaces as the center of
attention and
the
focus self-confirming myth as the brokers and professional bid up these “
talisman”
stocks
to irrational heights.
The
Blow off: “ Stocks can only go Up”
Hot
manager become famous. Hot manager become famous. Young, Glib, impatient of the
conventional
wisdom, they collect huge sums from trustful and greedy investor hoping for
miracles.
The volume of hot manager trading may become a significant part of the whole
market.
They chase a new theme as a pack. A broker can sell any stock by letting it be
known
that
he is in touch with a few big operators who are getting behind it.
Most
new issues, even companies without a history or even established management
rise to
an
immediate premium. At cocktail parties, people talk excitedly about the latest
prodigy.
News
of your neighbour buying a new car with profit of stock is heard. Now people
jump into
the
market with both feet, buying all the second and third graded companies, which
are
called
“the star in the making”. This is what called a buying panic- the reverse of
selling
panic.
Coasting:
“The markets High, But this time is different….”
As
the months wear on stocks hesitate; their upward pace slows with only a few
leader
making
new highs. The market analyst detects this situation as loss of “breath”. For
instant,
the
ratio of advance declines usually starts falling, even though the leaders are
still rising. A
few
enthusiastic still claims that this time thing is different. They rationalize
that there is an
absolute
shortage of stock because of an insatiable institutional or foreign appetite
for them,
which
will support prices at permanently higher level.
The
Top: “Hold”
At
last the government, concerned about economic “overheating” and stock market
speculation
starts leaning against the wind. The central bank raises the reserves
requirement;
the discount rate goes upto notch; margin requirements may be tightened. Here
again
the government gets what it wants, and in time this process always wrestles
down a
runway
bull market.
The
operators suspicious of stock price levels step up the sale of their holding in
the market.
A
series of vicious reactions or chops begins probably for the first time since
the cycle
started.
Sometime later there is a second vicious chop, which usually bottoms at a
higher
level,
than the previous one. The recovery again carries to a high, those who sold out
at the
bottom
of either reaction feels foolish. Those who jumped at that level are jubilant.
Then the
southward
journey starts and each reaction making a lower bottom.
The
secondary stock those not in the index has been sluggish for months. This is
the
beginning
of the end.
Over
the Humps: “Its too Soon to S ell”
The
public remains heavily in the market but the professional investors edging out.
It is like
an
ogre’s dinner party at which the last guest to leave or eaten themselves. When
the chairs
begin
to be pushed back and napkin placed on the table, the wise diner prepares to
dash for
the
exit as soon as there is any excuse to do it. This crush at the door is why the
market goes
down
much faster than it goes up. The lower quality stocks starts declining
significantly.
The
Slide: “Prices are Cheap, But it’s Too Late to Sell……”
A
few months passes and a number of scripts, although not yet the leader have
fallen
appreciably
from their height perhaps 30 percent. The market has been going down for some
time.
Business news is now felt to be not too good we hear doubts about economic
outlook;
perhaps
there will be a recession next year?
The
market like a tired horse that no longer feels the whip, drops on a bad news
but fails to
respond
to the good news.
“Its
Okay to Sell”
After
a while we may see a severe decline with perhaps25 percent mark off the prices.
There
is
often deceptive recovery, which one might call the “ trap rally” the usual
sequence is that
the
lowest quality stocks collapse first, while the top quality issues struggle
forward; then the
general
market start giving ground. Finally the institutional growth stocks let go and
everything
starts slipping faster and faster. The primary issues are quoted well below
their
offers.
The
Cascade: “Sell”
Now
the river sweeps over the brink, carrying everything with it. Business news is
a bad. The
hot
fund managers have to meet redemptions and as such they have to sell.
The
Selling Climax: “The Market’s Going Way Down…”
The
torrent crashes down the falls. In the frightful plunge some stocks give up in
a day their
gains
of a year and drop 30 to 40 percent in a week or two. It is a so sudden and so
awful
that
for a while many investors finally thrown in the sponge and sell out.
But
if you have kept some reserves intact and have the knowledge of recognize value
when
it’s
being dumped by panicky and have the guts to act then at these moment you can
make the
buys
of a lifetime.
Preparing
to Invest
Before
you think about buying stocks you ought to have made some basic decision about the
market,
about how much you trust corporate India, about whether you need to invest in
the
stocks
and what you expect to get out of them, about whether you are a short or a long
term
investor,
and about how you will react to sudden, unexpected, and severe drop in the
price.
Its
best to define our objectives and clarify your attitudes beforehand, because if
you are
undecided
and lack conviction, then you are in potential market victim, who abandons all
hope
and reason at the worst moment and sells out at a loss. It is personal
preparation as
much
as knowledge and research that distinguish the successful stock picker from the
chronic
loser.
Ultimately it is not ten stock market nor even the companies themselves that
determine
an
investors fate. It is the investor.
Do I
have the persona l qualities it takes to succeed?
This
is the most important question of all. It seems to me the list of qualities –ought
to include
patience,
common sense, a tolerance for pain, open-mindedness, detachment willingness to
admit
to mistakes and the ability to ignore a general panic. It is also important
never clear on
dalal
street or when they are, then it’s too late to profit from them. Then
scientific mind that
needs
to know all the data will be thwarted here.
The
unwary investor continually passes in and out of three emotional states:
concern,
complacency
and capitulation. He ‘s concerned after the market has dropped or the economy
has
seemed to falter, which keeps him from buying good companies at bargain prices.
Then
after
he buys at higher prices, he gets complacent because his stocks are going up.
This is
precisely
the time he ought to be concerned enough to check the fundamentals, but he isn’t.
Then
finally when his stocks fall on hard times and prices fall to below what he
paid, he
capitulates
and sells in a snit.
What
is the most important attribute of investing?
Patience.
In the stock markets you are fighting against greed and fear, two of the most
important
human emotions. Unless you have a discipline and patience, you are likely to
buy
wrong
companies or buy the right ones at the wrong time.
Rules
of Investment Success
#
Invest – don’t trade or speculate.
The
stock market is not a casino, but if you move in or out of stocks every time
they move a
point
or two, the market will be your casino. And you may loose eventually or
frequently.
#
Buy value, not market trends or economic outlook.
Ultimately,
it is the individual stocks that determine the market, not vice versa.
Individual
stocks
can rise in a bear market and fall in a bull market. So buy individual stocks
not the
market
trend or economic outlook.
#
Buy low. So simple in concept. So difficult in execution.
When
prices are high, a lot of investors are buying a lot of stocks. Prices are low
when
demand
is low. Investors have pulled back, people are discouraged and pessimisistic.
But if
you
buy the same securities everyone else is buying, you will have the same results
as
everyone
else.
#
There’s no free lunch. Never invest on the sentiment. Never solely on tip.
You
would be surprised how many investors do exactly this. Unfortunately there is
something
compelling
about a tip. Its very nature suggests inside information, a way to turn a fast
profit.
#
Learn from mistakes.
The
only way to avoid mistakes is not to invest which is the biggest of all. So
forgive yourself
for
your errors and certainly don’t try to recoup your losses by taking bigger
risks. Instead
turn
into a learning experience.
#
Aggressively monitor your investment. Remember, no investment is forever.
Expect
and react to change. And there are no stocks that you can buy and forget. Being
relaxed
does not mean being complacent.
#
Never follow the crowd.
If
you buy the same securities as other people you will have the same results as
other people.
It
is impossible to produce superior performance unless you do something different
from the
majority.
To buy when others are despondently seeking and to sell when others are
greedily
buying
requires the greatest fortitude and pays the greatest reward.
#
Buy during the times of pessimism.
Bull
markets are born on pessimism; grow on skepticism, mature on optimism and die
on
euphoria.
The time of maximum pessimism is the best time to buy. And the time of maximum
optimism
is the beset time to sell. In almost every activity of normal life people try
to go
where
the outlook is best. You look for a job in an industry with a good future, or
build a
factory
where the prospects are best. But if you are selecting public traded
investments you
have
to do the opposite. You are trying to buy a share at the lowest possible price
in relation
to
what the corporation is really worth. And there is only one reason a share goes
to bargain
price:
because other people are selling. There is no other reason. To get a bargain
price, you
have
to look where the public is most frightened and pessimistic. The time to buy is
when
everyone
is scared and you are a bit scared yourself.
“Gaps
between perception and realty are where
investment
opportunities are born.”
The
myths and misconceptions
If
it’s gone down this much already. It can go much lower.
Frequently
people say that a particular stock has gone down a third and so it should not
go
lower.
Shareholders of TV 18 would have a good experience of this. The share got
listed at
Rs.
1450 in the boom of 2000 and with the bear market it went on making new lows
and each
time
the stock continued its southward journey until it reached the price of Rs. 36
so much for
that
it can’t go lower theory.
You
can always tell when a stock’s hit bottom.
Bottom
fishing is a popular investor pastime, but it’s usually the fisherman who gets
hooked.
Trying
to catch the bottom on a falling stock is like trying to catch a falling knife.
Its
normally
a good idea to wait until the knife hits the ground and sticks, then vibrates
for a
while
and settles down before you try to grab it. Grabbing a rapidly falling stock
results in
painful
surprises, because inevitably you grab it in the wrong place if you are
interested in
buying
a stock, it ought to be for a more sensible reason than the stock’s gone down
so far it
looks
like up to you. Zee television is the finest example to speak about from 1500
level it was
supposed
to be the best stock to invest in but with every fall in its price it was the
best until it
reached
Rs. 68 in the year 2001.
If
it’s gone this high already. How can it possibly go higher?
Generally
people do not invest in some good companies just because it has already
appreciated
200 percent. For example take the case of “Infosys”. It got listed at Rs. 180
and
then
within a few months the price was quoting at Rs. 380. So the people said “
Infosys was
too
costly. But the stock did not stop the upward climb and crossed Rs. 1000 to
attract more
such
remarks. But it has never looked back and is quoting at a price of more than
Rs. 5000. If
we
include all the bonuses and split for the share the figure for Infosys is just
mind-boggling.
The
point is there’s no arbitrary limit to how high a stock can go and if the story
is still good,
the
earnings continue to improve and the fundamentals haven’t changed. “Can’t go
much
higher”
is a terrible reason to snub a stock.
Its
only Rs. 10 a share; what can I loose?
This
can be heard a number of times. People say the Rs 10 stock of Eonour
Technology.’ is
safer
than the Rs. 2000 of Wipro Ltd. But the price of zero will result in losing 100
percent in
both
the stocks and the chances of this happening is more in favour of SRG than
Wipro.
When
it rebound to Rs. X, I will sell.
No
downtrodden stock ever returns to the level at which you have decided to sell.
In fact the
minute
you say, “if it gets back to Rs. X, I will sell”, you have probably doomed the
stock to
several
years of teetering around just below Rs. X whenever you are tempted to fall for
this
one,
you ask yourself whether you are ready to buy some more share at the lower
prices, if
the
answer is no, sell it immediately.
Look
at that money I have lost: I didn’t buy it!
This
may sound ridiculous thing to mention, but its common to hear people saying
that they
have
lost so much by not investing in the biggest gainers of the bull market. This
is happening
now
with the people who haven’t invested in software stocks, which have jumped
multifold.
I
miss that one I will catch the next one.
This
is one of the greatest mistakes of common investors. When they have missed a
good
growth
stock, they readily try to associate some other stock as “next”. This has
happened in
software
industry and media sectors. People who have missed Zee or Infosys have tried to
associate
TV 18, Kale Consultant or KPIT systems Ltd. As the next Zee or Infosys”. The
result,
the stock went up from Rs. 600 to Rs. 1500 within one month.
The
Stock gone up, so I must be Right, or…
The
Stocks gone down, so I must be Wrong.
One
of the greatest fallacy of investing is believing that when a stock price goes
up, then you
have
made a good investment. People often take comfort when there recent purchase of
something
at Rs.50/- a share goes upto Rs. 60/- as if that proves the wisdom of purchase.
Nothing
could be further from the truth of course, if you sell quickly at higher price
than you
have
made a profit, but most people don’t sell in these favorable circumstances.
Instead they
convince
themselves that the higher price proves that the investment is worthwhile, and
they
hold
on to the stock until the lower price convinces them that the investment is no
good. If it
is a
choice they hold on to the stock that risen from Rs.100/- to Rs.120/- and they
get rid of
one
that’s dropped from Rs.100 to Rs.80 while telling themselves that they have “kept
the
winner
and dump the loser”.
Contrarian
Investing.
Some
have fancied themselves contrarians, believing that they can profit by zigging
when the
rest
of the world is zagging but it didn’t occur to them to become contrarian until
that idea
had
already gotten so popular that contrarianism becomes the accepted view. The
true
contrarian
is not the investor who takes the opposite side of the popular hot issue (i.e.
shorting
a stock that everyone else is buying). The true contrarian waits for things to
cool
down
and buys stocks when nobody cares about.
“This
safe time to invest is when there is blood in the street” as the adage goes,
and the
dangerous
one is when everything looks wonderful. That has to be so in the market
situation.
If
all the children sit on the south end of the seesaw because that is the end
that is going up it
can’t
go up. If the outlook is so bright that everybody is fully invested where will
the new
buying
come from to put the market still higher? Quite the contrary the market will
probably
decline,
even if the good news is true.
The
principal of contrarianism applies not only to the market as a whole but also
to major
sectors,
such as growth stocks. It is the best to buy the growth stocks when the market
is
skeptical
of them, and does give them as high a price-earning premium.
“Stocks
are most likely to be accepted as prudent at
the
moment they’re not.
Observation
and Readings
……There
are optimists all around you and there is undoubtedly a very insistent one
inside
your
head. Watch out for them all. They can be fuddling your good judgment to an
alarming
degree.
……When
you are feeling optimistic try to judge whether that good feeling is really
justified
by
the facts. At least half the time, it won’t be.
……In
centuries past, people hearing the rooster crow as the sun came up decided that
the
crowing
caused the sunrise. It sound silly now, but everyday the experts confuse cause
and
effect
on dalal street in offering some new explanation for why the market goes up.
Hemlines
are
up, Japanese are unhappy, a trend line have been broken, stocks are oversold
etc.
To
Sell or Not to Sell
“……Even
more costly reason why an investor should never sell out of an outstanding
situation
because of the possibility that an ordinary bear market may be about to occur.
If the
company
is really a right one, the bull market should see the stock making a new peak
well
above
those so far attained. How is investor to know when to buy back? Theoretically
it
supposes
that that the investor will know when the decline will end. I have seen many
investor
dispose
of the holding that was to show stupendous gain in the years ahead because of a
coming
bear market. Frequently the bear market never came and the stock went right up.
When
a bear market has come, I have not seen one time in ten when the investor
actually got
back
into the same shares before they had gone up above his selling price. Usually
he either
waited
for them to go far lower than they actually drooped or when were down. Fear of
something
else happening still prevented their rein statement.”
……When
a really good irrational panic sets in (or indeed the opposite a bull market
blow
off)
very few people indeed can resist the trend. If they try to they feel acutely
uneasy. The
heard
instinct seems to the strongest human emotions, one that the race is constantly
breeding
for as the mavericks are liquidated. Happiness is running with the crowd.
……In
the very nature of markets at the bottom of a drop almost everybody u encounter
will
be
in despair, particularly the stock brokers whose lively hood is caving in. also
other
investors
who once felt rich and now feel poor. (In a decline people measure down from
the
top)
……A
peculiarity of investment news is that it often follows rather that anticipates
price
changes.
This in a bull market the analyst keep revising their earning estimate to
justify the
higher
prices then prevailing pretty soon they are discounting the hereafter. And the
information
will be taken in different ways depending on the market stage. It is like a
love
affair.
In the full tide of a romantic enthusiasm all doubts are swept aside and at the
end
anything
may precipitate a quarrel. In the same way a potential weakness in a company
won’t
hold back its stock in bull market euphoria, but will be used to justify the
selling when
the
tide turns.
……The
psychological cycles are easy enough to understand. The ebb and flow or mass
emotion
is quite regular: panic is followed by the relief and relief by optimism, then
comes
enthusiasm,
then euphoria and rapture, then the bubble bursts and public feeling sides of
again
into concern, desperation and finally in new panic.
……Warren
Buffet believes that investors must be financially and psychologically prepared
to
deal with markets volatility. Investors should accept their common stocks to fluctuate.
Buffet
believes that unless you can watch your holdings decline by 50 percent with out
becoming
panic- stricken you should not be in stock market.
“Valuation
of asset based companies will collapse and
intangibles
will drive future stock prices.”
14
golden rules to evaluate any company
1)
Behind every stock there is a company and you should always find out what it is
doing.
If you can describe about the company in just 500 words your have done your
job.
2)
You should place confidence in what you own and why you own rather than making
hue
& cry that it should have gone up.
3)
Having gone through few income statement and balance sheet you should find that
they
only speaks something available in the market but you should always try to find
flaws
in those reports. You should never invest without understanding the finance of
the
company.
4)
You should invest in the things you understand
5)
Investing without a research is just like playing a blind game; you should
avoid
playing
blind games.
6)
You should study facts, annual reports, financial conditions, value the company
future
outlook
and then make a decision.
7)
You should apply relatively simple methods and trust the company on the basis
of
value
and never on the popularity.
8)
You should keep away for the bells to ring i.e. to signal you about the end of
recession
or
the beginning of the bull run market because bells never go off. Therefore you
should
avoid forecasting recession, interest rates, inflation etc.
9)
You should study for opportunities that have not yet been discovered by the
market or
companies
that are “Off the Radar Scope”.
10)
If fundamentals are not strong for the companies you should avoid altogether
and
should
wait for the better opportunities
11)You
should always feel that bad management will never give good return in good
times
but good management will fell the gaps when better times arrives.
12)
You should always think differently for different company.
13)
You should always believe that success comes by hard work, patience,
persistence,
flexibility,
willingness to do research and equal willingness to admit to mistakes and
ability
to ignore general panic.
14)
You should consider that these eight steps of success would grow your
livelihood.
v To
have a great attitude.
v To be
in time because it’s your money and time makes money.
v To
be prepared organization is the key of any business.
v To
work your area correctly i.e. the more you learn, see, talk the more money
you
will make.
v You
should never loose your attitude i.e. every bad company will bring you
closer
to successful companies.
v You
should know why and what you are doing and to learn the business from
the
business itself.
v You
should work ten hours or as many as it takes to reach your goal
v You
should take control of your clients, situations and your future goals.
Saket Jalan
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