September 2012

The twelve most silliest things people say about stock prices – Part I

The twelve most silliest things people say about stock prices , investing mistakes, Peter Lynch, One up on wall street book review, stock investing.

The twelve most silliest things people say about stock prices

As I have mentioned earlier in my blog post, I have been reading ‘One up on Wall Street’. The book is a must read for people interested in value investing.

Peter Lynch brings to us his experience and packs with a punch of humor, wisdom, timeless principles and wonderful examples of all kinds of businesses. Towards the end, there is a chapter on 12 silliest things that people say about stock prices with examples of US Stocks.

I could relate so many similar examples from the Indian Stock markets and so this post and my thoughts are on the 12 silliest things (& most dangerous) things, which people say about stock markets.

I will bring this in 3 parts… Part I is here. Have fun. It is eye opening

1. If it’s gone down this much, it can’t go further down

I’d bet the shareholders of Satyam (now Mahindra Satyam), Suzlon, Reliance Communication (RCOM), Reliance Power (Rpower), DLF etc were repeating this phrase just after the stocks kept dropping. The phrases which people use are “I am a long term investor”, “You have to be patient in stock markets”, “These are blue chip companies”. During the unraveling of the Satyam scam the shares fell to 11.50 rupees on 10 January 2009, their lowest level since March 1998, compared to a high of 544 rupees in 2008. Investors purchased at various levels on the stocks way down.

There is simply no rule hat tells you how low a stock can go in principle

2.  You can always tell when a stock hit bottom

Peter Lynch says ~ Bottom fishing is a popular investor pastime, but it’s usually the fisherman who gets hooked. LOL

RCOM (and many other erstwhile super stocks with weak fundamentals) bottom was never successfully found by investors. Over the past 4 years these stock has successfully managed to do create only new bottoms.

If it is a turnaround story, then there has to be a solid reason to pick a stock. For eg: the balance sheet shows Rs 50 as Cash per share and the stock trades at Rs 53. Even then, the author mentions that the stock might take years to pick up steam.

3. If it’s gone this already, how can it possibly go higher?

This is one of the favorites of the analysts who frequent the News Channels. However consider the stocks like Asian Paints, Titan Industries, Page Industries, Hawkins Cooker , Trent Industries or Pidilite Industries etc.  These stocks have strong fundamentals and strong earnings & profit growth. They continue to beat the markets quarter on quarter. The fundamentals catch up with the price and so the market values them slightly higher than the rest.

Many investors do make the mistake of parting away with the stock just when a strong uptrend in underway. In reality successful stock investing is & should be a boring activity. However investors go in for action in the hopes of getting the stock at a lower price. Unfortunately, in case of fundamental stocks, that never happens. Recently, Hindustan Unilever has moved from 350 to almost 500+. Many investors whom I know have already parted with the stock at 400 levels and they are ruing the fact.

4. It’s only Rs 3 a share: What can I possibly lose?

How many times have you heard people say this? People assume that buying a Rs 8 share is less riskier than buying a Rs 50 stock.

Case in point .. Kingfisher airlines, Indowing Energy, Sujana Towers, Moser Baer etc. All these high flying stock of 2007 Boom phase are trading in single digits for last 2 years now 

The fact of the matter is that whether the stock costs Rs 50 or Rs 5, if it goes to zero you still lose everything. If it drops to 50 paise, the results are only slightly differen

The investor who buys at Rs 50 loses 99% wheras the investor who buys at Rs 3 loses 83% ~ hardly a consolation. Lousy cheap stock is just as risky as lousy expensive stock if it goes down. So investing in a Rs 50 stock or Rs 3 stock does not matter. The reason for buying the stock should be based on the fundamentals of the company.

.. Read Part II & Part III

August 2012

Top 15 stock holdings by mutual fund schemes (by market Value) in India

Top 15 stock holdings by mutual fund schemes (by market Value) in India as on May 31, 2012

Company Name

No of Shares

Market Value (Cr.)

ICICI Bank Ltd.

20931593

1641.41

HDFC Bank Ltd.

28350785

1434.49

Infosys Ltd.

5354002

1305.43

Reliance Industries Ltd.

18333476

1294.27

Bharti Airtel Ltd.

35477786

1071.85

State Bank Of India

3846177

790.66

Oil & Natural Gas Corpn. Ltd.

28993438

735.5

Tata Consultancy Services Ltd.

5685768

708.31

Housing Development Finance Corporation Ltd.

11851185

682.96

Bharat Petroleum Corpn. Ltd.

9678946

674.15

Larsen & Toubro Ltd.

5600142

656.52

Power Grid Corpn. Of India Ltd.

58827429

625.58

Dr Reddys Laboratories Ltd.

3560060

601.73

Hindustan Unilever Ltd.

13562592

579.03

ITC Ltd.

22323154

513.54

The above data is as of May 31 2012. The stocks are held across various mutual fund schemes. Small retail investors always look out for Blue Chips… The above stocks are certainly the favorites among the fund managers. If the compilation were for 20 stocks, then the following stocks make the list as well : Coal India, Mahindra and Mahindra, Axis Bank, Tata Motors & Bajaj Auto.

May 2012

Warren Buffett Tips for Investors.. Worth a read..

Warren Buffet, Buffett, Tips, Investment, Stock Market, Success,Trading, Bull Market, Value Investing

Here are 5 valuable tips for investing from Warren Buffett –
The Master of Value Investing.
 
1. “Look at stocks as parts of business. Ask yourself, ‘How would I feel if the Stock Exchange was closing tomorrow for the next three years?’ If I am happy owning the stock under that circumstance, I am happy with the business. That frame of mind is important to investing.”
 
2. “The market is there to serve you and not to instruct you. It is not telling you whether you are right or wrong. The business results will determine that.”
 
3. “You can’t precisely know what a stock is worth, so leave yourself a margin of safety. Only go into things where you could be wrong to some extent and come out OK.”
 
4. “Borrowed money is the most common way that smart guys go broke.”
 
5. “The stock doesn’t know you own it. You have feelings about it, but it has no feelings about you. The stock doesn’t know what you paid. People shouldn’t get emotionally involved with their stocks.”
 
Happy Investing…
 

April 2012

Understanding COEFFICIENT OF VARIATION

COEFFICIENT OF VARIATION , Financial Terms, Understand, Risk, Return, Investing, Stocks, Standard Deviation

What is COEFFICIENT OF VARIATION?

It Measures risk per unit of return.

It helps us choose between two investments where one has both a higher expected return and higher standard deviation than the other.

A simple example to understand the concept :

Investment 1 has an expected return of .40 and a standard deviation of .22.

Investment 2 has an expected return of .23 and a standard deviation of .14.

Which should we choose assuming we are a risk averse investor?

Coefficient of variation is calculated by dividing the standard deviation by the expected return.

Investment 1 : .22/.40 = .55

Investment 2 : .14/.23 = .61

A risk averse investor would choose investment 1 because the risk per unit of return is less.

The vast majority of investors are risk averse, i.e., when choosing between two investments they will choose the less risky of the two.

March 2012

February 2012

September 2010

Reliance – 2nd among world’s largest value creators

There is a report in Business Standard which mentions many Indian Companies amongst the world’s largest value creators in this decade. The report is here :

Mukesh Ambani-led Reliance Industries has been ranked second in the list of world’s 10 biggest ‘sustainable value creators’, companies that have been successful in creating the most shareholder value over the last decade, prepared by Boston Consulting Group.

Reliance Industries again comes second in the ‘Large Cap firms’ for 2005-2009 of 112 global companies with a market valuation of more than 35 billion dollars.

In the chemicals industry, Reliance Industries has been named the second biggest value creator of 53 global firms during the period behind South Korea’s OCI.

However, the stock has virtually not given any returns over the past 2 years….. Many investors are losing patience now and
letting go of the stock in favor of Banks, Pharma and FMCG Companies…. which have outperformed…
If you compare the returns of Reliance with the BSE Index, the result is quite glaring….Sensex is up almost 40 % in last one
year……Whereas Reliance has not given any return at all ……
So , What is next …….. Well a relief rally should be on cards till 1200 at least if the stock holds above 960 levels. …. And this will definitely bring smiles to the investors… and the markets as well.

August 2010

Stock Watch – Aban Offshore – Jul2010


Aban Offshore price movement is explosive in both the directions and thus it is considered a traders delight. Observe the price movement in Mid May 2010 all the way down from 1170 levels to 650 odd levels. The action was swift , and violent. Reason, One of the premier rigs had sunk in the Caribbean Sea.

Minor upmove started from around 740 levels……

Now 3 months later, reverse upward move is unfolding again with good volume action. And Stock is above 850 levels…. Reason, News is out again that the re insurer is covering almost all the claims of the company.  This was always to happen !!! A company of size of Aban Offshore is supposed to have it’s bases covered before venturing out in deep sea’s…. isn’t it?

Results announced a day later reflected the one time write off for the sunken Rig.

Anyways… what will be interesting is to observe the price movement in next few days with the possibility of reaching the Gap Zone level of around 1000 odd levels quickly and maybe some more over the next few months.

Investors of Aban invested at 3000-4000 odd levels of 2007/2008 are still waiting for what seems to be eternity now…..

If you follow short term, trend-lines, probability and price-volume action ,then this is one stock to be on watch for now.

Selling Options : Sometimes it can be made to good use.

Selling Options , Calls, Puts, Tutorials, Options Strategies, Butterfly, Straddle, Strangle,  What Investors should know.

Options, by definition, are a wasting asset. The time decay, declining volatility etc. eat away into the premiums of the options.

Many option buyers learn this fact the hard way by watching their option contracts expire worthless many times. The majority of options expire worthless (estimates are somewhere > 80%). Given that the majority of option buy positions are worthless at the time of expiration, some investors decide that they will sell options and collect the premium. Prima Facie, this sounds like an easy way to make money.

However, there is no free lunch in the investment field as well. There are stories of how some of the brightest people in the world have blown up their accounts while selling ‘Naked’ options. Selling options, when there are no underlying holdings to support in case of adverse move is known as ‘Naked’ Selling.

Nevertheless, Options selling, when used intelligently, can be used to complement/protect your portfolio holdings to a certain extent and also make income in return.

Investors earn a premium for every put and call option which they sell. This premium is paid by Option Buyers.

Selling Short

When you sell shares of a company which you do not own, then it is called short selling. Selling a stock short is taking a view that the shares will keep going down. One way of doing this is by selling Futures. And another way of doing this is by selling Call Options.

In a short sale you have to buy back the shares at some point. And thus, short selling exposes you to unlimited risk, if the price of the stock starts to increase.

There are numerous strategies in Options. I will present just one example of how the selling of call options can be used by investors :

 

Covered Call Strategy

A covered call strategy is strategy for bullish investors to make some money and benefit from a stock that will move little over the short term.

This is often employed when an investor has a short-term neutral view on a stock or when the Stock has made a decent up move in a relative short period of time, and is expected to be range bound in the near term.

Let us take the example of Larsen and Toubro (LNT) recent price action again.

Assume, Investors bought the stock @ 1400 or Traders bought it at the breakout above 1660 in early June. Next, the stock made a decent up move in a month’s time frame and touched almost 1900. Investors could have written an options contract selling one call option of LNT Jul 2010 strike price 1900 at Rs 40. (However, Remember that one call option gives an investor the right to buy 125 shares).

You would earn income because the buyer of the call option has to pay you a premium for the option. If the stock’s price drops stays below the strike price (In this case , LNT did close well below Rs 1900 by Jul end) , the call buyer will never exercise the contract and the entire premium is yours to keep (Remember one lot of LNT is 125 and that makes the premium monies Rs 125 * 40 = Rs 5000).

If the stock’s price increases above the strike price, the call buyer may choose to exercise the contract. You would then either have to buy shares on the open market or deliver your shares to the buyer.

This is one of the common ways in which large institutional players generate income on the basis of their large holdings which they can always use to hedge in case of any adverse move against their options position.

Again, the intention of this article is to arouse interest and make aware of Options Selling. It does not advocate that you start selling options. Please understand, when selling options, remember that although your profit potential is limited to the amount of the premium that you receive, your losses can be rather large.

Also, My personal view is that selling PUT Options carries higher risk than Selling CALL options. This is because , in general, stocks generally use the stairs when going up (Sellers of Call Options can manage risk here ….) , But Jump out of the window when coming down. (Sellers of Put options can run out of exit options or get trapped …)

LNT has indeed made a good move from 1660 to 1900 and which I have been tracking since Early June …

You might be interested to know about Buying Options here…

July 2010

Buying Options : What Investors should know

“The greatest ignorance is to reject something you know nothing about”

If you are invested in Equity Markets or Mutual Funds, it is wise to be AWARE of the derivative product called ‘Options’.

Buying Options , Calls, Puts, Tutorials, Options Strategies, Butterfly, Straddle, Strangle,  What Investors should know

Options have seen increase in popularity over the past few years. Television shows like CNBC, NDTV Profit, ET Now etc devote a significant amount of time discussing option strategies for investors. Investors and traders are attracted to options due to the low cost involved. There is a possibility of high return potential in case of options trading as well. However there is an equal or more probability of downside of trading in options which needs to be understood as well.

Let us take a look at a few of the more popular strategies for buying options.

Types of Options

Call Options

Call options give an investor the right to buy shares at an agreed upon price. Investors that buy calls are not obligated to ever exercise the option. Call options can be owned for as short as a few days or long as a year. Investors that purchase call options are bullish on a particular stock.

Put Options

Put options are just like call options except they give investors the right to sell shares of a stock. Bearish investors buy put options so that they can benefit from a stock that they expect to decline. Watching the activity in put options is a great way of judging when investor sentiment is turning bearish.

Buying call options are cheaper than buying shares of stock.

Call options allow investors to buy shares of a company for a much cheaper price than buying the actual shares themselves. For example, say you wanted to buy 125 shares of LNT (Larsen and Toubro) at 1700. Your total cost would be Rs 2,12,500. I have taken the figure of 125 shares because lot size of LNT is 125. (Pls note that futures and options are bought in lots)

A cheaper option would be to buy call options. You could buy one CALL option of Jul 2010 series , strike price 1700 (lot size 125) for Rs 50. Your total cost would be Rs 6,250 (125 shares x Rs50). You would only pay Rs 6,250. If shares of LNT are higher than 1750 (Strike price + cost of purchase Rs 50) by series end, you could exercise the option and make a profit. If not then you can just let the option expire. Your total risk is only Rs 6,250. For this investment you could control 125 shares of LNT.

Buying put options can limit your downside risk.

Buying a put option is a great way for investors to limit their downside risk. It is like taking insurance against your assets.

Let’s say you already owned 125 shares of LNT and the stock is currently at Rs 1700. Let us assume that you are sitting in good profits, you are afraid that the stock is going to decline, and at the same time you do not want to sell your shares.

You could protect your profits by buying a put option.

You could buy one PUT option of Jul 2010 series, strike price 1650 (lot size 125) for Rs 50. . If shares of LNT are lower than 1650 (Strike price – cost of purchase Rs 50) by series end, you would exercise the option and make a profit. By doing this, you have unlimited profit potential on downside and at the same time have limited your losses (which is depreciation of holdings of LNT against profits made by the PUT option.)

This strategy is known as a protective put strategy. If the stock drops substantially, you can always exercise your put option. If shares rise you can do nothing and just let the option expire.

Put investors can also employ a married put strategy. A married put strategy is when an investor buys shares of a stock and buys a put option on the same shares at the exact same times. The stock and option are considered married since they were both purchased at the same time.

If used properly, options can cost less, limit risk, and have the potential for higher returns.

Many investors are completely unaware about options. The intention behind this article is to make aware of the basics of options. Nevertheless, One should definitely understand the implications and understand the risks involved before buying or trading in options.

ps: I have used the example of LNT (Larsen and Toubro), because it has been on my radar since it broke out of 1700 range earlier this month. More here …..

I will cover selling options and implications later sometime.

The Simple rules to Successful Investing – Part 1

The Simple rules to Successful Investing , Understanding Investing, Stocks, Mutual Funds, Tax, Insurance, Estate, Wills.

“No amount of talking or reading can teach you swimming. You will have to get in the water.”

There are these little general rules which are applicable and useful for decision making and taking actions. And these simple rules are applicable in so many aspects of life, they are just some small reminders, some common-sense stuff which are really useful.

And yes most of them are applicable in investment planning as well.

a. Perfect Plan – Forget it.There is no such thing as a perfect investment plan and no such thing as a perfect time. The right time is now. Tomorrow is and always will be uncertain. Perfectionism is the enemy of action. Do not let perfect investment plan or a perfect time to invest stop you from starting.

b. Analysis Paralysis – Too much thinking will often result in getting stuck.Some thinking is good — it’s good to have a clear picture of where you’re going or why you’re doing this — but don’t get stuck thinking. Just do.

c. Get the Broad Picture and Start. You need to get the broad picture in your mind. You need to understand your future requirements or what do you want to achieve (goals). You need to know the time you have to meet those requirements. And, then you should have the broad plan to meet the goals. Once you have the broad picture. Get going.
All the planning will take you nowhere unless you take that first step, no matter how small it is.

d. Keep things Simple and take Small Steps. Small steps always work. Little tiny blows can break down that mountain. And then each step counts. Keep the big picture in mind, but start by taking small steps.

Understand the advantage of Investing Early here.

The Little Rules to successful action To be contd … Part 2.

ICICIdirect’s trading site crashes; customers trapped and helpless

The online trading system as well as the phone-order service of ICICIdirect broke down today leaving numerous customers feeling completely helpless. However, the company is keeping mum so far

icici-direct-trading

ICICIdirect.com, ICICI Securities Ltd’s retail trading and investment services portal crashed today due to technical glitches. This has put all of its customers in deep trouble. Till writing the story, the trading or customer login page on icicidirect.com was showing an error message saying:”Dear Customer, Our website ICICIdirect.com is not available today due to technical issues. We truly regret the inconvenience caused to you.”

ICICIdirect.com was down since morning with a message that the services will be resumed at 8.55am, the time when trading commences on bourses. However, throughout the day, customers were not able to log in or do any online trading. Even its CallNtrade facility used for placing orders through a phone was not working.

More here at moneylife ………

It is surprising that there was no backup planned for such an event and no trading could be conducted by ICICIdirect customers. Wonder whatever happened to people who speculate in Derivatives and wanted to square positions.  Markets gapped up and stayed positive throughout ……

Welcome to the secure world of technology , security and finance…….

Larsen and Toubro showing good signs after a long time.

lnt-jul20102

LNT Stock is a favourite of Investor community and is also one of the top holdings in most of the Mutual fund Portfolios.

It has recently broken above 1700 levels after almost 9 months with decent amount of volume backup.

If you are one of those who wants to own this in your portfolio , then, now – it can be accumulated on dips for investment purposes.

The 50,100,200 Exponential Moving averages levels mentioned above in the chart can be used to accumulate.