IndiaStar.biz - Indian Stock Market Guide

1. Trade in equities first and only when confident broaden your portfolio to include Derivative (Future and Options) and Commodities.

2. Love your money not the stocks you own. It is important to sell stocks to realize your profit. There is nothing called “notional gain” . It has no significance.

3. Remember one simple thing  - Higher the P/E of a stock, lesser the chance for you to make further money in it. Exceptions are there - but why to work with exceptions. There are thousands of other stocks available at lesser P/E and which might be profitable- why not keep them.

4. Equity as an asset class is historically proven to be the best asset class in terms of returns. So be  an investor, even if you are a small investor. You can have a small portfolio.

5. Believe in gravity - Anything which goes up will come down and vice versa. A Stock which has risen too fast too soon will come back.

6. Avoid bringing fresh cash to save your ailing stock. Averaging might not be the best option all time. Discipline wise its nice to have a pre-determined level of money you will bring on the table for investment in the Stock Market. Stick to it - unless there are exceptional situations.

7. Risk and Reward are directly proportional - higher the risk , greater will be the reward. It is easy to get lured by riskier asset class (derivative), resists the temptation unless you are sure of what you are doing.

8. Know your entry and exit points - When you are buying a stock, have a decision right away as to at what percentage upside you will sell it. And a 5% number here is not less. It is important to make money rather than expecting it to rise 50% and in process be sitting on losses.

9. Safety First - For whatever you do. Keep your Plan-B ready. What if, if the counter does not move the way you expected.  What you will do if you suddenly need liquidity to support your other expenses. How much of your networth is exposed in the market. Do you know the exit routes (read hedging routes) in case your trade direction is going wrong (remember, Abhimanyu - he did not knew exit path from the war field).

10. It is fine if you missed run up of the market from x to 2x. What did you lose actually - nothing. It is important to be safeguarded against potential fall - once you are invested. Because here you will lose.

11. Have small - small milestone. Like you brought 10k today. You want to see it 11k by end of week. Do not look beyond, I will make it 20K by end of this week. It is not going to happen.

12. Listen to everyone but do what you want - it is your money after all. Before buying - ask why you are buying, what highs you expect, when you will sell, what if, if it falls 5% just after you buy, if the P/E > 20,  is the P/E greater than its peers (does it deserves to be there), is there a corporate action coming up for the stock, who all are the promoters, what has been the track record of the promoters, look at the chart of last 2 years on www.nseindia.com (see how the stock moved over the years), is the stock close to its 52 Week H/L etc.

13. So called experts speaking on various portals and media have vested interest interests in particular stocks. There comments may be biased. There are just too many of the experts who hold no - accountability if their calls goes wrong. Additionally, for the same stock at any given time you will always have a +/- opinions from two different stocks which will confuse you further. Use their talks, interviews and data to help your own research rather than follow them blindly.

14. Just because your friend made 10k yesterday did not mean that you will make 10k today. Just because a Stock X rose 10% yeterday does not mean it will repeat it today.  Just because your friend told you to buy this - you are not going to buy it. Just because your friend looks smart in dealing with his portfolio - it doesn’t mean you are as smart or as bigger a fool. Bottom line in all this - how on heavens are you ever going to know if your friend is telling gospel truth in the first place.

15. Begin with a small sum of money (say 5% of your networth) and see how much and how fast you are able to grow it. Worse case scenario is your 5% shrink 50% to 2.5%.  Market is not going at Sensex zero anytime in history. Its not the end of the road. You would have taken huge learning out of this loss. Turn your 5% as many times as you can. Buy- Sell - Buy - Sell (keep churning). If something is not going up - sell and move over to another.

16.  Just to make sure we are just not talking concepts but bit of researched number as well - will put forward a guidance from Benjam Graham (writer of the Intelligent Investor). His  suggestion is that you multiply the P/E ratio by the P/B (price-to-book) ratio and see whether the resulting number is below 22.5. If it is then it is generally a safe investment more often than not.

17. Good luck and Happy Investing.

Previous Week

The Indian equity market, after three weeks of consecutive rise fell during the previous week due to weak global cues, mainly from China.

However, the week started on a positive note, after witnessing a highly choppy and range bound trading for the next couple of days, the market fell significantly during the last couple of days, losing an average of 2.5% each day.

On a week-on-week basis,

• BSE Sensex plunged 510 points or 3.25% to close at 15160.24
• Nifty ended at 4481.4, down by 155 points or 3.3%.

Better-than-expected results for most major companies across the globe so far have been supporting the market to remain strong.

During this week, however, indications that China may restrict lending, deteriorating monsoon in major parts of India, some weaker-than-expected global economic data and a very high valuation for the market attracted profit booking. This further accelerated, as both important indices breached some important levels.

Auto, Realty and Metals remained among the top losers in the previous week.

Week Ahead

After rallying significantly for the last five months with only one correction in between, the market is likely to pause for some time. We saw this during the previous week.

It would be interesting to note whether the previous week’s fall was only a breather or it has the potential to drag the market further. This would be clear only in the coming week.

The recent rally was mainly driven by better prospects of economic recovery in emerging markets, mainly China and India.

Some indication of restrictions in lending and over-valuation of some sectors, coupled with skepticism on the latest consumption of certain raw materials raised concerns over the potential of the rally. This attracted profit booking.

Though some occasional buying may emerge at lower levels, the market is likely to maintain its weaker undertone in the coming week also.

Question 1(a): Given the business projection of Infosys that the coming year will be difficult for both sales and net profits, what is your suggestion for IT sector stocks?

Infosys traditionally has been a conservative management. It guides with lot of safety buffers. However, there is no doubt that high margin pricing of Infosys projects will be under maximum pressure during this downturn and there would be bigger negative impact to its bottom line at least over the next 3 quarters. For Infosys stock, Rs 1500 might be an upper limit for this stock to break – at least next 2 quarters. So Rs 1100 to Rs 1500 becomes a trading range for Infosys stock. Over a long time and those deciding to park bit of their retirement funds – Infosys remains a safe rainy day stock. But no fast bucks anymore with this counter.

TCS stock looks better, because TCS has strength in large deal conversion and can thus take a bigger pie of the large outsourcing deals. Plus the 1:1 bonus is not bad in this business environment and apart from forex losses predominantly on account of hedging mismatch TCS suffered in the troubled last quarter. Going forward because of its pricing, size and global presence TCS looks better positioned to offer same service to customer at less cost and is the likely vendor to thwart new entrants like Tech Mahindra despite the successful Satyam acquisition.

WIPRO will have to remain content with the 3rd spot, because its going to b very difficult to beat either Infosys or TCS. Moreover a closed management style does not give enough confidence to player and as recession goes deeper. Wipro has posted a Q4 performance that looks okay, but Azim Premji himself acknowledged the need for better deal conversion in the analyst conference yesterday. Unless Wipro rapidly comes with strong business growth strategy, chances are high that it will be squeezed on various fronts by different players.

IT Taxation also plays a key role for investors. Renewal or not renewal of tax holidays comes up as a major incident at the dawn of 2010, and the Indian IT sector will see de-rating in case the tax holiday ceases. However, seems IT companies by showing its internal pain will bully the government to at least give a temporary respite on tax front. However, there is no doubt the erstwhile bellwether sector ceases to be one now.

1(b) Is there a place for well performing mid-cap stocks like Polaris?

Patni and HCL (esp. after Axon) will remain hot picks. Polaris is also doing well in its BFSI space. These Tier-2 companies might outperform Infosys, TCS and Wipro. The management of HCL is aggressive and that will help in these trying times.

1(c) Which are some of the better options than IT stocks in the current market?

Patni, HCL, TechM, might be better options. Mphasis can be avoided.  Rolta will remain traders top pick along with Educomp.

Captioned story means a lot to one and all. At a time when global market seems to be on a bear hug – trillions have gone in the drain.

As we step into recession, blue chips are available at prices which were unthinkable about 6-8 months back. Yes, we have indeed stepped into a market where a year is an eternity. A moment of shock and awe is re-writing the support and resistance levels.

India has fallen behind its peers on account of poor IIP numbers, global slowdown, meltdown of commodity space and now Satyam’s corporate governance scandal.

The valuation of the entire Nifty fifty pack, with no exception has been re-written. PE index of Sensex and Nifty has been well and truly revised. What’s next? All experts’ say- that there is some pain still left in the market – but on the face of it, they seem to be following a herd.

Existing macroeconomic fundamentals thus suggest that the experts may be right, but gravity too takes a stone only to ground and not beneath. Speaking on an Indian context Reliance, L&T and the nifty-fifty pack is today available at throw-away prices. IT has been hammered beyond recognition – but fundamentally nothing much has changed.

Indian banking system remains resilient and domestic demand is still robust. GDP numbers have taken slight hit – but that’s understandable. Today, India still gives a window of opportunity to investors which is different from the dynamics of an US market or that of the highly export centric Asia-Pacific rim. Fundamentally, India still remains a growth story with minor aberration in form of current turmoil it is confronted with!!

While it may not be the right time to park the entire investment portfolio now – but we believe that for sure, it is the beginning time. Retail investors, who missed the ferry ride to 21K Sensex, can start booking the passes now.

Stocks like Reliance Industries (RIL), L&T, BHEL, ONGC, Tata Steel, and TCS are looking very attractive on valuation – leave alone the technical charts and other such pointers.

While, it is understandable to note that many retail investors have lost aplenty in the current bear hug (or atleast are exposed to heavy notional losses), but it is time to get the portfolio right.

There are stocks in portfolio like Hindalco for instance which has no value left in it – as it struggles to make payments towards its Novelis acquisition, there are further downside expected. Its time to take a call on such counters and get the locked cash in hand.

Inventory is a bad word, but Inventory turnover is a good word. It is all about the resource one has and how one uses it. A resource tied to a stock which has no near time upside is locked in inventory. If the same resource is turned 4-5 times a year in various portfolios it is serious money. So take out the locked funds and move into a running stock – say an RPL for instance. Turn the fund twice over the next six months and there would be sizable return in the taking. Yes, this is a “trading approach”.

A portion of the fund can also be apportioned in momentum stocks like JP Associates, Nagarjuna Fertilizers, Power Grid, TTML, Idea and RNRL to make the inventory roll-over fast.

Lots of news is expected in the current and next quarter. Obama’s gift check, an Indian election summer, a populist budget, a hawkish audit regime and a tired bear. These are the news a momentum stock would love and dance according to the tune.

As an investment advisory portal our aim is to give value to our readers and clients in making positive gains. We used to advise investors on specific stocks and its holding periods- 6 months, a year or sometime even more. While this advisory service is not available at the moment, we want to use this blog post to suggest the inventory turnover approach, where an investor begins by say a Rs 50k ticket and in the first 3 months targets a 10% returns and then compounds the proceeds to another 10% in the next 3 months to get a 21.10%, six monthly return. It will require plenty of smart work – but we sincerely believe that it’s achievable and therefore we are approaching the time to bring cash in hand to counters.

The golden rule remains- invest when the market appears dead, make money like a trader on a dead cat bounce and exit just before the euphoria becomes too good to be true.

What’s an economic stimulus plan, really? Is it a cure for the corporate illnesses and rotting losses? No, it isn’t. It’s just an analgesic to kill pain for sometime. Then what is the cure – go to a doctor-seek advise (consulting), change your lifestyle (corporate planning), and let your immune system kick in.

Pumping in billions of dollars by various federal governments is nothing but aggravating the problem. It will only encourage corporate showing dismal numbers and making a beeline to have a pie of the cake. If today a Lehmann Brothers or a Citigroup or a GE is in trouble then there are reasons for that- in a level playing field. If WAMU and Barclays are in similar domains of work then it is imperative to discuss why WAMU failed and Barclays remained afloat. ICICI while reporting a huge M-to-M loss has to look into its portfolio to investigate why it find itself in a soup.

Risk reward ratio is a complex game, the riskier it get higher the rewards. The investment banker plays with the riskiest of assets class sometimes riskier than even the bad named hedge funds. They made merry when the going was good, why cry when the screws got tightened. People who kept money in fixed deposits were considered morons while the investors who parked money with headline making ‘sizzling’ fund-managers laughed all the way to the bank during the hay days in which the Indian Sensex kissed 21000. Of course, the story has reversed by 180 degrees now.

Sub-prime mortgage is more of excuse then a valid reason for the plight of the present economic downtrend. Any bank which gives away loans to individuals needs thorough reading of the credentials of the individual. Home loans are a long term engagement, payment of which runs into decades. ICICI in India offers you the disbursement cheque in a matter of 72 hours. A similar size nationalised bank in India might take months – there lies the strength of due diligence. The down trend should give the opportunity to banks and financial institution re-visits the way they handle their business. Its not the time to cry and blame external forces.

Depleting the government coffers can only mitigate the problem in short term – in the long run, it will result in a very disturbing set of fiscal numbers. A wide current account misery can have drastic repercussion and US for instance is sitting on that bubble.

A 13 trillion dollar economy cannot afford to have a 10% CAD where it stands now and more rescue measure will leave nothing to play with when economy goes deep. India can learn a lesson or two of its own mis-adventure in early 90’s with a bad set of GDP and fiscal numbers and a horrible BoP situation.

Equity and derivative markets will remain a risky business and thus the return are bound to be lofty. Funds from government treasuries composing of federal revenue collection is no way to save those who indulged in riskier business unless there exists a provision by which they paid a higher differential tax during their hay days.

All these macroeconomic factors boil down to two questions:

(1) Can the government stay idle? And (2) On broader side, have we seen the worst of Capitalism? Answers, to these questions can’t be a firm “YES” or a “No”. It’s a shade between the two.

India, has often been blamed for two much protection and we are still long way from convertibility and easing of FDI investment norms. During these down trends- exactly this is what is reflecting as robustness of Indian economy. The downtrend has come and stayed but the flight of capital is still under control and not many companies have unfolded. A CRR here, a SLR there have ensured that portion of the funds remains un-utlized but safe. These are small bargains a country needs to do be safe then sorry. Non-existent convertibility on capital account have ensured that the global companies India wing continues to do decent business while their parents in advanced west economies are gasping. This is apparent from the retrenchment number of a company like Yahoo when, one compares the numbers of Americas and India.

Let’s also examine what is happening by virtue of these bailout packages. Well it is reverse privatization or globalization as one may call in simplistic term. When US treasury bailed out Citigroup it came with the rider that Citigroup gets this cheque and pledges this much of right to federal authorities.  This is bringing the US banks organized like those of Indian banks, which has a big RBI to live by.

Probably, this is the right middle path where the risk reward is safe. Bail out to a GM Inc. would mean a similar structure like a Maruti Suzuki. Our school of thought believes that this is probably the way to go as long as federal intervention is related to corporate governance and proper usage of funds rather than intervening in core operations.

Is the rescue package necessary – Yes!! Now that many have handled operations in the risky way and are down to the surgery table, they albeit deserve a second chance. It was easier for these corporate to grow in an environment with close to double digits GDP growth and ample liquidity and believe that it will be same always – but reality bites and gravity exists for sure.

Banks have to now believe that there is nothing called a sub-prime lending in the near term. Lending has to happen at PLR and round about and those who cannot get a loan because of a bad credit history needs to wait. As growth plateaued even a low earning individual working in an un-organised sector with no decent job security went for a loan – and a bank gave him, without accessing the risks in an elaborate way. Now this is a recipe for disaster in simple common sense terms.

Obama has announced a lofty bailout package and many other governments are following suit. Being a welfare state this is need of the hour, but at the same time the respective government needs to quickly put in place a watch dog which monitors the use of these funds. Obama has already told that monitoring will be tough – but so be it. If time has given Obama the opportunity to do a recovery of magnitude post the “The great depression of 1930’s, then he has the opportunity to be a Hero for the generations. Victory for Obama can be a renaissance for the globe in terms of economy pull back – while on the softer side, it will ensure that dark side of globe does not get any darker.

Some may argue that by giving big rescue packages probably the respective governments are not saving for the rainy day…but come on “its already raining heavily out there”!!