Is it worth investing in tax-saving bonds?

To reap the benefits of high interest rates prevailing in the market, many investors have been booking profits in the stock market and parking the proceeds in bank fixed deposits (FD). But the interest received from bank FDs is taxable. It is that time of year when advance taxes need to be paid. Shouldn’t investors be looking at saving taxes by investing in infrastructure bonds and tax-saving bonds?

In this month’s guest post, Nishit explains the basic difference between infrastructure bonds and tax-saving bonds, and recommends that investment in tax-savings bonds is definitely worth considering seriously.

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Tax-saving bonds are the flavour of the month. Let us try and ascertain if they are worth buying. Earlier in the year, Infrastructure Bonds were introduced. Some of those bond issues are still open. How are the current tax-saving bonds different from the Infrastructure Bonds?

For starters, to avail tax breaks in the infra bonds, the limit up to which one could invest was Rs 20,000. This Rs 20,000 would be deducted from your taxable income for the year. This would save about Rs 6,180 in the highest tax bracket. The interests from these bonds are not tax free and would be added to one’s taxable income in subsequent years. The interest rates offered were in the rage of 8-8.25% per annum.

The tax-savings bonds being offered now are of a different type. In these bonds, a retail investor can invest Rs 1 lakh for a period of 10-15 years. These bonds are offered by various government undertakings like REC, NHAI, PFC and are hence safe investments. The bonds offer tax free returns as the interest is not taxable. The interest rates are about 7.93% to 8.32%. This means if Rs 1 lakh is invested, then upto Rs 8,130 interest which one gets annually is not taxed. Over a period of 10 years, this amounts Rs 81,300 which is not taxed. To get equivalent returns from a taxable bank FD, the interest rate one should get is about 11.5%. There is no bank FD which falls under the ‘safe category’ offering such returns.

The REC issue is due to get closed on the 12^th of March, 2012 and one can definitely look at further similar issues hitting the markets. The benefit of such issues over the infrastructure bonds is that one can save a much larger amount of tax.

Details of REC issue as below:

There is another tax free bond in the market! REC or Rural Electrification Corp. Ltd. is going to raise Rs 3,000 Crore by selling tax free secured redeemable non-convertible bonds . The subscription will open on March 6 and close on March 12 , 2012. While it is being sold that the interest on the bond will be tax free, it is important that subscribers should know other aspect of this tax free bond issue.

Credit Rating : “CRISIL AAA/Stable” by CRISIL, “CARE AAA” by CARE, “ICRA AAA” by ICRA & “Fitch AAA (Ind)” by FITCH.

The Company has confirmed the following interest rates:

Tenure of the bonds	Other than Category III investors (i.e. QIBs & Corporates and Individuals/HUFs investing > 1,00,000)	Category III investors (Individuals and/or HUF investing upto Rs. 1,00,000/- in the issue)
10 years	7.93%	8.13%
15 years	8.12%	8.32%

Individual/HUF limit reduced due to a notification dated February 14 issued by Central Board of Direct Taxes (CBDT) clearing the issue has said that “any individual investing over Rs 1 lakh will be classified as high net worth individual (HNIs)”.

• Bucket size: The issue size would be Rs. 3000 Crores (shelf limit)
• Minimum Application: Rs 5000/-(5 Bonds of Rs 1000/-) and in multiple of Rs 1000/-
• Issuance Mode - Demat only
• Listing at BSE only
• Interest Payment – Annually
• Allotment on first come first served basis.
• Interest on the refund money will be at rate of 5% p.a.

Category of investors	Bucket size
Category I (includes QIBs and Corporate)	50%( 1500 Cr)
Category II (Individuals/HUFs investing > 1,00,000)	25% (750 Cr)
Category III (Individuals/HUFs investing < 1,00,000)	25% (750 Cr)

Tax Benefits:

1. The income by way of interest on these Bonds shall not form part of total income as per provisions under section 10(15)(iv)(h) of I.T. Act, 1961;
2. There shall be no deduction of tax at source from the interest, which accrues to the bondholders;
3. As per provisions under section 2 (29A) of the I.T. Act, read with section 2 (42A) of the I.T. Act, a listed Bond is treated as a long term capital asset if the same is held for more than 12 months immediately preceding the date of its transfer. Under section 112 of the I.T. Act, capital gains arising on the transfer of long term capital assets being listed securities are subject to tax at the rate of 20% of capital gains calculated after reducing indexed cost of acquisition or 10% of capital gains without indexation of the cost of acquisition;
4. Wealth Tax is not levied on investment in Bond under section 2(ea) of the Wealth-tax Act, 1957.

Note: The investment limit for Category III investors has been increased from Rs 1 Lakh to Rs 5 Lakhs.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

Behavioural traits of a successful investor

To be a successful investor in the stock market, one needs to develop several skills:

• Learn how the stock market functions – the roles played by short-term traders, long-term investors, operators, company promoters, brokers, FIIs, DIIs, NSDL/CSDL, stock exchanges, SEBI
• Know about the various types of securities that are traded – stocks, convertible and non-convertible debentures/bonds, warrants, ETFs, mutual funds, bonus/rights shares, bonus/rights debentures
• Be aware of related information – dividends, interest on debentures/bonds, tax implications of buying and selling of various securities
• Have working knowledge of economic concepts – supply and demand, money supply, inflation/deflation/stagflation/recession, surplus/deficit, interest rates, impact of global economies on domestic economy, effect of economic changes on different business sectors
• Reasonable proficiency in accounting concepts – debit/credit, assets/liabilities, capital/reserves, equity/preference shares, payables/receivables, raw materials/inventory, profit/loss, cash flows, and ability to calculate and compare EPS, P/E, P/BV, RoNW, RoCE, Debt-Equity ratio, etc.

But the most important skill of all is to learn about oneself – the behavioural traits that determine who will be a successful investor and who will be an ‘also ran’.

In a recent article posted at investopedia.com, the following behavioural model developed by Bailard, Biehl and Kaiser was presented:

Investors are classified according to their decisions and actions (‘impetuous’ at one end and ‘careful’ at the opposite end) as well as their levels of confidence (‘confident’ at one end and ‘anxious’ at the other end). Based on these behavioural traits, investors are divided into five groups:

• Celebrity – anxious and impetuous, a follower of the latest investment trends
• Adventurer – confident and impetuous, a strong-willed risk taker
• Individualist – confident and careful, with an analytical and self-reliant approach
• Guardian – anxious and careful, willing to sacrifice riskier growth for more stable returns
• Straight Arrow – equally shares the above four behavioural traits

Apparently, greatest investment success is achieved by those with the ‘Individualist’ behavioural trait. What if one has one of the four other behavioural traits? Should they exit from the stock market?

With discipline and perseverance, behavioural patterns can be changed – provided one is aware which behavioural category one belongs to.

Moral of the story? To be a successful investor – know thyself.

Related Posts

Become a successful investor by avoiding 'herd mentality'

Are you an irrational investor?

Some practical examples of Behavioural Finance

A strategy to beat that ‘missed out’ feeling

A sudden gush of FII money has propelled the Nifty to a 1000 points gain from its Dec ‘11 low, and caught experts and small investors unawares. What had looked like a typical bear market rally is beginning to look more like the first stage of the next bull market.

Many who failed to buy at the low prices of 2011, and those who booked profits and moved to cash in the hope of buying at much lower prices, are feeling that they ‘missed out’ on the rally. How do investors ensure that they don’t miss out on opportunities to buy (or sell)?

In this month’s guest post, Nishit discusses the FoC (Free of Cost) strategy to beat that ‘missed out’ feeling.

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The stock market has rallied more than 20% from the Dec ’11 bottom. Many of us are feeling left out from this rally. What must one do to avoid such a situation? The stock market is one place where one can create a lot of wealth over the long-term. So, how does one go about doing this?

Step 1: Identify about 10 businesses which you feel will do well over the long term (as in next 5-10 years). Remember you are investing in businesses - not only stock prices.

Step 2: Once these businesses are identified, keep a watch on their stock prices. The strategy one will adopt is to keep investing into these stocks at regular intervals.

Step 3: With knowledge about the stock market and Nifty, buy these stocks at attractive valuations. There are 3 things which can happen to the stock prices. They can go up, go down or remain flat.

1. If the prices go down, be ready to average the stocks and buy them at a cheaper rate. For doing this, awareness of the broader trend of the market helps a lot.
2. If prices go up, be ready to book profits. One very effective way of doing this is by making the shares ‘Free of Cost’. Let me give you the example of SAIL. Say 100 shares were bought at Rs 90. Now the price has rallied to Rs 110. I feel I had enough of the ride and expect a correction in the markets. I book out 84 shares and remove my cost price. Now, the remaining 16 shares are free for me (i.e. my holding cost becomes zero). I know that SAIL will continue making steel for the next 10 years (and may be much longer than that). These 16 shares I will not touch unless there is a blow out rally where the Nifty trades in 22 + P/E which would be around 6300+.
3. If prices remain flat, I just wait and watch.

With this strategy, I will not be sad if prices go up and I have not bought anything fresh. If prices go down, I will be having cash to add to my holdings.

The risks to this strategy are the identification of the companies. If one goes for fly-by-night operators and the company goes bust, then one is in trouble. The ‘Free of Cost’ shares become worthless. Hence one has to keep a watch on the fundamentals of the companies and take a call to move on to other stocks.

This approach combines both fundamental and technical aspects. In the last year itself there were 4 bear market rallies. Even if one had booked with about 15-20 % profits one would have had a sizeable quantity of ‘Free of Cost’ shares right now.

This is one way to create long term wealth in the stock market.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

A common investing mistake - and its remedy

A common investing mistake made by many small investors is to wait far too long, and let buying or selling opportunities slip away. When the stock market is rising, and portfolio values go up in leaps and bounds, the tendency is to hang on to the stocks or funds in the portfolio to try and squeeze out the maximum amount of profit. The wait to sell keeps getting longer and longer and one fine day, the market cracks for no apparent reason. The investor rues the fact that a selling opportunity near the top was missed.

When the stock market is falling, the same psychology plays out in reverse. Investors try to buy a selected stock or fund at the lowest possible price, and keep waiting and waiting to buy at even lower prices. Out of the blue, the market turns and starts to rise - as if throwing caution and common sense to the winds. A buying opportunity near the bottom is missed.

Seasoned professional investors find it tough to correctly time stock market tops and bottoms. Imagine how much more difficult it is for amateur investors to catch market tops and bottoms. It is not worth trying unless one has become adept at identifying technical signals - and that takes years of practice.

There is a simple way to remedy the mistake of waiting too long and losing opportunities. Inculcate the habit of being fully invested. Regardless of whether the stock market is moving up or down. But it requires a bit of planning and a large dose of discipline. First of all, investors require a financial plan based on their income, savings and existing and future financial commitments. Help can be sought from a professional financial planner (for a fee) or a CA friend (for free). But it isn't rocket science. Knowledge of Class 5 arithmetic is good enough to do it yourself.

Then one needs an asset allocation plan, based on risk tolerance. This post explains the concept of an asset allocation plan. Once the plan is in place, investors should have the discipline to stick to the plan at least for two or three years. Change the plan only if things don't work out. Investing without a plan is like travelling without a destination.

If the asset allocation plan indicates it is a good time to buy (because the equity portion of the allocation has fallen below a pre-set threshold level), start buying systematically. By using cost averaging or value averaging concepts. Read about these concepts in this post. Identify a couple of good stocks or funds. Then decide how much of each you want to buy value-wise. Spread out the buying over a few months, till your asset allocation plan is rebalanced.

If the asset allocation plan indicates it is time to sell (because the equity portion of the allocation has exceeded a threshold level), don't wait any longer. Start booking profits partially. To find out more about partial profit booking, read this post. Remember to keep the flowers and cut the weeds in the portfolio first.

Why did Reliance announce a share buyback?

Regular readers of this blog know that I am biased against any company that has ‘Reliance’ in its name. So it should not come as a surprise that all actions by the Ambani brothers are viewed through a lens of strong suspicion by me.

If you are a dyed-in-the-wool Reliance investor, please don’t take umbrage at my tirade. Just ignore it. If you are considering an entry into this erstwhile darling of the Indian stock market, please read through and then decide.

The performance of Reliance companies have been less than stellar during the past couple of years. The stock market has punished all the group company stocks, including those of the big daddy of them all, RIL. The Ambani brothers have become wealthy beyond belief and have acquired notoriety by using various dubious means to circumvent the rules and accumulate the shares of their own companies. The hammering of Reliance group stock prices has dented their considerable personal wealth.

What better way to make a little extra cash than to announce a buyback before announcing Q3 results? RIL’s Q3 results – to be announced on Jan 20 ‘12 – is not expected to be great. That may lead to further selling of a stock that has already lost more than a third from its 2009 peak. The buyback announcement caused a price spurt – providing a nice opportunity to make a few extra bucks.

What will happen to small investors holding the stock? Not much – unless they use the current price spurt to book profits. Buybacks are a method used by companies ostensibly to ‘reward’ shareholders. How? Usually, the bought back shares are extinguished – which means they cease to exist. So, the equity capital of the company gets reduced and correspondingly, the EPS increases. The P/E ratio becomes lower, making the stock look more attractive valuation-wise.

But it all depends on how much of the equity capital gets bought back and extinguished. A similar buyback was announced six years back, but only a small percentage of the total equity capital was bought back. If it is a tiny percentage this time as well, it will have little or no effect on the EPS or P/E. RIL is likely to buy the shares from the open market – which means small investors will get no particular benefit.

A share buyback can be an indication that the management thinks that the shares are undervalued. It can also mean that the company is bereft of ideas about what to do with their money to enhance growth. More likely the latter, based on the totally unrelated ‘di’worse’ifications that the elder Ambani has undertaken of late – into sectors like retail, telecom, media.

Make no mistakes. The refinery business has been – and continues to be - a cash cow. But refinery margins are coming down and the gas business has been mired in controversies. None of the unrelated businesses have performed well so far. Technically, the chart looks weak and the stock price can fall to its 2009 low.

Related Posts

Why rely on Reliance?

1:1 Bonus announcement by Reliance Industries - is it good news for investors?

Should you invest in large-cap or mid-cap stocks?

The stock market has been in a down trend for more than a year – losing 25% from its Nov ‘10 peak. Experts suggest that such falls provide excellent opportunities to accumulate strong large-cap stocks. Large-cap stocks are less risky and offer steady rather than spectacular returns.

Most small investors have a penchant for seeking out small and mid-cap stocks in the hope of making multi-bagger returns. But high returns are usually accompanied by high risks. What should small investors do? How to contain risk without missing out on returns?

In this month’s guest post, Nishit looks at the pros and cons, and comes up with an alternative approach.

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The argument will always continue whether to invest in large-cap or mid-cap stocks. One of my friends was asking me this morning whether it would be a good idea to invest in mid-cap IT stocks. It was the trigger for this post.

Mid-caps have several advantages. They are the real multi-baggers. Microsoft and Infosys were mid-caps once upon a time. Mid-caps can be a 10-bagger or even a 100-bagger. Mid-cap stocks carry a greater amount of risk as compared to large-cap stocks. In a bear market, a large-cap may lose 50% of its value whereas a mid-cap can lose as much as 90-95% of its value.

So, how does one address this conundrum? Every portfolio needs to be garnished by a sprinkling of mid-cap stocks, just like our food needs a sprinkling of salt to add to the taste. Just as too salty food is not good for health or taste, too many mid-caps is not good for the health of your portfolio, which leans towards risk.

How does one identify good mid-cap stocks? There are several criteria one must keep in mind.

1. They should have sound business models.
2. They should be generating real profits.
3. They should have good management. This is a very tricky question. How does one see a management to be good? A small investor cannot go and meet the management of a company he likes. One must look through the annual reports and notifications of the stock exchanges. The promoters should not have a shady reputation, or indulge in activities that harm shareholders – such as pledging of shares or dazzling announcements aimed at TV and newspapers.
4. The companies should be generating positive cash flows and providing steady dividends. Steady dividends can be ignored if the business is growing and the promoters are not investing the money in unrelated activities.

Now that we have looked at what criteria to use in selecting a good mid-cap company, the next question is when to invest. In bear markets, mid-caps are battered beyond recognition. Hence, one can follow this strategy. Keep accumulating large-cap stocks on every dip.

For mid-caps, buy only if the Nifty sustains above its 200 day Moving Average for a week or more. 200 day Moving Average is considered the dividing line between bear and bull markets.

Also, depending on one’s risk profile, the allocation has to be done between large-cap and mid-cap ideas. A conservative portfolio can have a 80:20 ratio between large and mid-caps. A more aggressive portfolio can have 60:40 ratio between large and mid-caps.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

Why did the stock market fall despite a good IIP number?

India’s Nov 2011 IIP (Index of Industrial Production) came in at 5.9% – higher than the consensus estimate – raising hopes of a quick return to the growth path. Considering the Oct 2011 IIP of –5.1%, there was a huge 11% swing month-on-month.

The stock market should have celebrated by spiking higher – specially since both the Sensex and Nifty are in the midst of rallies from their recent bottoms. Instead of doing the obvious by rising, both indices lost ground. Not much, but enough to cause consternation among small investors.

What is going on? Is this just the way Mr Market behaves to separate investors from their hard-earned money?

There can be a few logical explanations, which are mentioned below:

1. Both the Sensex and Nifty are in the midst of prolonged bear markets. Good news tend to get ‘discounted’ quickly and bad news causes renewed selling during bear markets.

2. Infosys – which is generally considered to be one of the bellwethers of the Indian stock market – announced better than expected Q3 results, but disappointing Q4 guidance and got hammered. Its high weightage in both indices caused the fall.

3. Oct 2011 IIP number was unusually low – but one must remember that it was a festival month (Navratri and Diwali), which meant lower production days due to the holidays. Nov 2011 IIP was comparatively much better, but some of the new orders may be due to inventory replenishment. Lower growth usually leads to inventory draw-downs (companies tend to let their existing inventory get depleted almost completely before placing new orders).

4. Technically, both indices retreated after facing twin resistances from their 50 day EMAs and DTLs (refer last Sunday’s post on Sensex and Nifty chart patterns).

5. All of the above.

Stock markets don’t necessarily move according to logic. In the short-term, sentiments can, and often do, overrule the fundamentals. So can a rush of buying or selling by the FIIs. What should small investors do?

Remember an old saying: “Buy the rumour; sell on news.” There is no better example of that maxim than today’s price action in the TTK Prestige counter. The company announced impressive Q3 results, but the stock lost more than 7% after the ‘good news’!

The stock market is in a state of flux. After 14 months of down trend, small investors are becoming impatient to buy in the hope of a trend reversal soon. Please be aware that interest rate is still high. So is inflation – though food inflation has turned negative. Stock markets don’t reverse trend till the first few interest rate cuts happen.

There is a clamour for a CRR rate cut from all corners. If the Nov 2011 IIP figure is the reality, i.e. economic growth is back on track instead of what has been mentioned in point 3 above, then there is no reason for the RBI to cut the CRR – let alone cut the interest rate. A rate cut may stoke the inflation fire.

In other words, there is no need to turn bullish yet. Await Q3 results of the big guns and RBI’s policy announcement on Jan 24. You may miss the absolute bottom by being conservative, but in a bear market it is better to be safe than sorry.

5 strategies to follow in a bear market

Most small investors enter the stock market when a bull market is nearing its peak. They don’t have clear goals and strategies, and get caught on the wrong foot by the bear market that inevitably follows. The trauma of losing money in a hurry can be soul-destroying.

Without the necessary skills and experience of surviving in a bear market, investors resort to all kinds of ill-advised strategies in an effort to quickly recover the losses. That only makes a bad situation worse.

The current bear phases in the Sensex and Nifty indices are 14 months old, and so far there has been very little indication of a reversal in the down trends. Experts are saying that the bear phase can last till the first half of Financial Year 2012-13. If they are right, the bear market may sustain till Sep 2012 – another 9 months!

Whether you are one of the unfortunates who are ‘stuck’ at higher levels, or a more seasoned investor who is sitting on cash to deploy at lower levels, here are 5 strategies that you may want to follow in the current bear market:-

1. Remember that bear market rallies are sharp and swift. Don’t jump in by thinking that you will miss a buying opportunity at a low entry price. Such rallies are some times ‘created’ by bears so that they can sell at a higher price.

2. Just because a stock has fallen to a 52 week low doesn’t mean it can’t fall any lower. As long as the trend is down, it can fall lower. If it is worth buying, being patient can help you to enter at a much lower price.

3. A sharp vertical drop in price – often accompanied by strong volumes - usually attracts a lot of buyers who believe that they are being smart by entering at a low price. It is the sign of a ‘panic bottom’, which seldom holds. Prices bounce up on the buying, but then fall lower than the ‘panic bottom’.

4. At the risk of sounding like a broken record (or, a damaged CD) – do not, repeat do not, average down in price. No one knows how much further a stock’s price will fall, or worse still, if it will ever recover (e.g. Cranes Software). It is far better to average up once the price forms a bottom and starts its up move.

5. Major down trends are not reversed in a day or a week. Bottom reversal patterns take a few weeks to a few months to form. Ability to ‘read’ chart patterns can help investors to accumulate a stock while a reversal pattern is ongoing (refer Chapter 7: Reversal Patterns of my free eBook: Technical Analysis – an Introduction).

If you can’t ‘read’ a reversal pattern, don’t worry. Eventually, prices will turn up and a new bull market will begin. You may enter at a higher price, but the chances of a loss can be minimised by using a trailing stop-loss.

Related Posts

Five things you should avoid in a bear market

Five more things to avoid in a Bear Market

eBook: Technical Analysis – an Introduction

As regular readers already know, I have been writing a blog for more than 3 years to educate new investors about investing in the stock market. The experience so far has been quite enriching for me, and hopefully, beneficial for some of the readers.

The stock market can be a fascinating place or a fearsome place – sort of like bathing in the sea. The first few attempts are usually quite humbling – specially if the sea has large waves that keep constantly crashing on to the shore.

The uneducated can get thrown and dashed around by the waves – hurting pride and self-confidence. In extreme cases, the sea waves can drag out the hapless to a watery grave.

To the experienced sea bather, there can be nothing more exhilarating, invigorating and even relaxing. Jumping up to let the smaller waves flow through, diving under the really big breakers, then swimming out and letting the waves gently carry you back to shore is great fun and builds up a healthy appetite.

Likewise for the stock market. The inexperienced buy to find their stock going down, sell to find the stock going up, spend sleepless nights thinking how to salvage their losses – and in extreme cases, commit suicide.

Of those who have been through the experience, some leave the market permanently blaming brokers, operators, market manipulators, friends who gave wrong tips – in fact any one except themselves. Those who stick around to fight another day, try to learn the ropes by reading, or following the advice of experienced market players.

My earlier eBook: How to become a better investor, was published exactly two years ago on New Year Eve. It contained general advice about sector and portfolio selection, and strategies about how and when to invest without losing a lot of money. Several hundred eBooks were emailed – and may have helped a few readers to become better investors. That eBook is now being ‘retired’ – it will no longer be emailed, but will be available for reading on a different blog.

Many of the posts on this blog are about technical analysis of chart patterns. Several readers had requested me to write an eBook on technical analysis, so that the important information can be available easily in one place. After remaining on the anvil for nearly a year, it is finally ready.

Like the previous eBook, this one is also being provided to my blog readers for free - but on two conditions:

First, you need to specifically ask for the free eBook by sending me an email at mobugobu@yahoo.com with your full name. Hiding behind a pseudonym won't help! I would like to avoid spammers to the extent possible.

Second, you can ask your friends, relatives, colleagues to send me an email for the eBook (or send them a link to this blog post) - but please do not forward the eBook to others without my permission. I don't want the eBook to be freely circulated over the Internet.

The eBook has been compiled from selected blog posts and some new material. It is meant to be an introduction to the subject of technical analysis, with a handful of important concepts that are more than enough to arouse the curiosity of those who want to learn more.

2011 has been a disappointing bearish year for most small investors. Please consider this eBook as a small gift towards making 2012 a happier and more prosperous year. Needless to say, your comments and feedback will be most welcome.

10 Reasons why small investors should love a bear market

Most small investors detest a bear market. The helpless feeling of watching stocks bought with hard-earned money falling into oblivion can be quite traumatic, and cause sleepless nights.

In a desperate and misguided effort to salvage a losing position, investors start ‘averaging’ – buying more shares at progressively lower prices. The stock doesn’t know that some one is ‘averaging’ it – and keeps going down further! The ‘average’ price of the stock decreases, but the losses increase.

Is there any remedy for this fairly common ailment? Turn a disastrous situation into a learning experience. Find out the reasons why small investors should love a bear market. Here are 10 of them.

1. Every one loves bargains. The best bargains in stocks are found during a bear market. Good stocks are available at 40%-50%-60% discounts to their recent peak values.

2. Experts and analysts appearing on TV or writing in business papers stop recommending third rate stocks. They may actually discuss about some decent companies. No longer will you hear that Suzlon is a great buy or Bartronics is the next Infosys.

3. Email or cell phone inboxes will not get overloaded with SMS stock tips about unknown companies from unknown brokerage houses. Most of those brokerages go belly-up during a bear market.

4. No one wants to discuss about stocks at weddings or college reunions. One can actually have intellectually stimulating conversations with relatives and friends – instead of saying “I’ve bought this” or asking “Why did you sell that?”

5. Working hours will not be wasted by staring at stock tickers scrolling on computer terminals. Up to the minute stock updates on cell phones will get disabled. Productivity at work places will improve.

6. One can get a haircut or a shoeshine in peace without getting stock tips from the barber or the shoeshine boy.

7. A bear market separates the short-term, one-hit rock-star companies from the true long-term wealth creating companies. The stocks that don’t fall much in a bear market are the ones that provide dividend income and stability to your portfolio.

8. If one is unfortunate enough to come face to face with a bear in a forest, the best thing to do is not to run or try to fight but to play dead. In the stock market, one can play dead by investing in fixed income avenues. Interest rates are usually higher at such times.

9. The importance of proper asset allocation becomes clear. Spreading investments among equity, fixed income, gold and cash not only saves a portfolio from annihilation but the asset allocation gives clear signals about when to buy and when to sell.

10. A bear market tests an investor’s mettle. Those who turn tail and run are just not meant to be successful investors. Those who can stick it out and learn from their mistakes are the ones who may be able to build wealth over the long term. 

Investment options in a bear market – a guest post

Both Sensex and Nifty indices have been sliding down in bear markets for the past 13 months. There doesn’t seem to be any signs of a recovery. In fact, the economic situation – both in India and abroad – seem to be heading from bad to worse. This is not the best time for investing in the stock market, because the market can fall much further.

What should investors do? Where can they park their savings and hope to get reasonable returns without undue risk? In this month’s guest post, Nishit discusses a few investment options that can provide decent returns without taking on too much risk.

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With the markets falling continuously, the question uppermost in people’s minds is where to invest their hard earned money? Let us explore a few options.

PPF investment limits have been increased from Rs 70,000 to Rs 1 lakh, and the interest rate has been increased to 8.6%. This is one of the safest options for investors and should be used first before looking at anything else. Next it is tax saving time and IDFC has come with Infrastructure bonds which provide tax saving on an additional Rs 20,000 over and above the 1 lakh cap under Section 80C. These bonds have an interest yield of 9%. If you are in the highest tax bracket you will save additional tax of Rs 6,000. Thus, in the month of December itself, additional avenues to invest Rs 50,000 are possible.

Gilt funds are a good place to be in. In the past 1 month, bond yields have fallen from 8.97% to 8.4%. Bond funds have given a return of 4.5%. Now, this performance will not be repeated every month but one may get an annualized return of about 15% in the next 2 years in gilt funds.

A slightly more sophisticated way of generating money in a falling market is writing call options of the Nifty against your portfolio. For example, Jan 5200 Nifty call is trading at Rs 32. The margin for writing 1 lot is around Rs 20,000. So, for 5 lots one would get an inflow of Rs 7,500 and the margin of 1 lakh would be blocked till Jan 25^th 2012. This is another safe way of generating steady returns in a bear market.

HDFC Top 200 is a very good equity fund where one can continue to do a SIP every month. This fund has yielded a return of 22% over the last 15 years. During this time, several bear and bull markets have come and gone.

The above mentioned are just a few avenues for putting in one’s money as per his or her risk appetite. Also, there is the safe bank fixed deposit giving very good returns for risk-averse investors. My advice for those not needing that cash in a hurry is to lock in the money for next 5 years for returns between 9-10%, depending on the bank.

Also, there is the L&T NCD trading on the NSE which has an expiry of about 7.5 years still and yield is about 10%. The benefit is one gets the interest credited twice to the bank account.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

Do investors have the ‘if-its-free-I’ll-take-two’ syndrome?

Before I can answer the question, I need to tell the story about the syndrome.

A young boy was being taught by his father about prudence in handling money. Here are the three important guidelines provided by the father:

• Live within your means and try to save money from whatever little you may have
• Always ask the price of anything you wish to buy, and then decide if you can afford to buy it
• Don’t blindly accept a quoted price; try to bargain and buy at a lower price

Well-versed in the guidelines, the young boy went to the local ‘paanwala’ to buy some candy. On being told that the candy cost a Rupee, he promptly started to bargain. Despite repeated pleas by the ‘paanwala’ that there was no discount on a candy costing a Rupee, the boy would not relent. A small crowd had gathered on hearing the commotion, and potential customers were walking away. In desperation, the ‘paanwala’ handed over a candy to the boy, saying: “Take this. It’s free. Now please leave.” The boy was delighted, but refused to budge. “It’s free? Then I’ll take two!”

That boy must have grown up to be a stock investor. He also must have told all his friends – who also became stock investors. How do I know this? Because of the proliferation of web sites offering “sure-shot free stock tips” and “99.9% success guaranteed Nifty tips”.

There was a time when I used to go out of my way to provide free advice to young investors about what stocks to pick and how to build a portfolio. But I no longer give free advice – except in my blog posts. Why? Because I found out that most investors were not following my advice at all. In fact, they were doing just the opposite. They would not buy the stocks I’d recommend, and would go right ahead and buy the stocks I suggested that they avoid!

Then a wise reader related the story of a doctor in a small town who decided to treat patients for free after his retirement. Hardly any one showed up at his chamber. Then he decided to charge a reasonable fee. Soon, he had several patients visiting his chamber every day. The moral of the story is: No one respects free advice.

The other day, I received an email: “Can you please suggest one multibagger stock?” Usually, I ignore such emails, or answer back: “I don’t provide free stock advice.” But I was in a genial mood that day, and wrote back: “Buy Tata Steel.” The response floored me completely. Let alone thank me, this smart fellow came back with: “Any penny-stock multibagger?” This is what I meant by ‘if-it-is-free-I’ll-take-two’ syndrome!

A more dangerous affliction is the ‘if-it-is-free-I’ll-take-as many-as-possible’ syndrome. I got this email from such an investor: “I would like to buy some fundamentally strong stocks in this bear market. Please send me a list of such stocks.” I answered: “I don’t give individual stock advice for free. But you can take a look at some of the beaten down stocks in the Sensex and Nifty indices.”  Back came a response: “OK, I promise to send your fee, but send me the list of stocks now.” I didn’t bother to reply, only to receive this reminder: “I still haven’t received the list of stocks.” Later, I found out that this freeloader was regularly providing free stock tips in one of the investor forums!

The answer to the original question is: Many investors do. I think it is part of the human psyche that we get swayed by products that are offered ‘free’. That is why retailers periodically offer “Buy-1-get-1-free” deals to get rid of unsold or unfashionable or oversized/undersized stock. Shops tend to be overcrowded during such offers.

When it comes to stock advice, ‘free’ usually means ‘not good’. Investors need to appreciate that. If some one really knew which stocks will become multibaggers in future, he would not tell a soul and buy as many of those stocks he could afford before the stock market got wind of it. 

Investing strategies in inflationary times – a guest post

The business channels and pink papers have been obsessive about high inflation in the Indian economy and the consequent rise in interest rates – and well they should be. The government doesn’t seem too perturbed about the deleterious effect that high inflation causes – not just to GDP growth, but also to the wallets of common citizens.

During such times, savings and investments may be farthest from people’s minds as they struggle to make both ends meet. However, there are some comparatively less risky investment opportunities that smart investors can avail of – and Nishit discusses them in this month’s guest post.

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Inflation is rising, cost of loan repayments (EMIs) is going up and jobs are getting lost. How does a common man deal with such a situation?

Government bond yields have almost reached 9%. This means interest rates may rise further in the times to come. EMIs may go up if the RBI hikes the Repo rate, which is currently at 8.5%. In the case of loans, it is best to pre-pay some amount rather than letting the tenure increase. Many people will not get a tenure extension if their tenure has reached the maximum limit of about 25 years.

This is a good time to lock in your savings in high yield fixed investments. Non Convertible Debentures of L&T Finance gives an yield of about 10%. Other fixed income investments like Bank FDs should be utilized to avail of high interest rates. A SIP can be started in a Gilt fund. The interest rate cycle is about to peak soon and Gilt funds are likely to give good returns.

The recently increased limit in PPF investments from Rs 70,000 to Rs 1 lakh, and the higher rate of PPF return of 8.6% is a wonderful opportunity and should be made use of by small investors.

The markets are headed downwards. This scenario is likely to remain till interest rates start moving down. At every decline to key support levels, one can add blue chip shares to the portfolio keeping a 5 years horizon in mind. Supports for the Nifty are at 4700, 4300 and 3700.

Gold as an investment can be looked at only when the previous high of US $1900 per oz is taken out, or near the support level of US $1600 per oz.

For astute investors, cash is king. In a slow GDP growth environment, if one is willing to put down cash then real estate as well as automobiles may be available at good discounts. Plummeting car sales indicate that good cars may soon get sold at discounts just to clear off the inventory and keep the assembly lines working.

This is a great time for an investor to build an entire new portfolio. The portfolio should comprise of fixed income instruments, stocks, commodities and real estate. A proper balance of allocation to these assets will generate wealth going forward.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

Why do small investors get ‘cheated’?

The cynical answer to the question is: Because they deserve it. The cynicism can be explained by a recent incident during my last visit to the local market.

I was buying half a kilo of Kashmiri apples – the small, roundish kind with alternate patches of bright red and light green colours. They have a crisp, lightly sweet and fresh taste that takes me back on waves of nostalgia to my only trip to Kashmir more than 50 years ago. A place of such pristine and gorgeous beauty I have rarely ever seen again. But I digress.

As is my habit, I asked the rate per kilo, and was told by the young fruit vendor that it was Rs 80. As the young fellow was weighing the fruits, a middle-aged gentleman came by. He wanted to buy half a kilo of the Kashmiri apples as well, and proffered a Rs 50 note with this comment: “It is Rs 100 a kilo, isn’t it?”

The fruit seller glanced at me quickly, and observing my blank expression, simply nodded his head and promptly took the Rs 50 note. Now, being overcharged Rs 10 for half a kilo of apples may not seem like a big deal. The point is, the buyer unnecessarily tried to show-off that he was a knowledgeable buyer, and allowed himself to be ‘cheated’.

Should I have pointed out the correct price to the buyer and saved him Rs 10? That would have broken the mutual trust that has developed between the young fruit vendor and me over the past several years. I pay him whatever rate he asks, and he always gives me the best fruits from his pile.

What does all this have to do with investments? Change the ‘half a kilo’ to ‘500 shares’; ‘Kashmiri apples’ to ‘Dabur India’ (say); and ‘young fruit vendor’ to ‘Rakesh Jhunjhunwala’ (or, Ramesh Damani). A small investor could have bought Dabur shares for Rs 80 a few months back, but may choose to buy them at Rs 100 now. Due to the bear phase, the stock goes nowhere. After a couple of months, the stock’s price may drop to Rs 90, and the investor will probably exit in a hurry with a Rs 10 loss. Except that the loss is not Rs 10, but Rs 5000 – since the original quantity bought was 500 shares.

The investor feels ‘cheated’ because he bought a well-known FMCG stock, and still lost a decent amount of money. The fact that he made a couple of serious mistakes - buying at a higher price, and then selling at a loss because of a short-term mentality – may not dawn on him. A few more similar experiences may keep the investor permanently away from the stock market – with the feeling that the market is ‘manipulated by operators’ to ‘cheat’ innocent investors.

The moral of the story? Don’t allow yourself to be cheated. Do some prior preparation and planning. Talk to veterans of the market. Read a few books. Understand how the game is played. Opening a demat account and a trading account is a necessary formality but not adequate preparation for buying stocks.

Notes from the USA (Oct 2011) - a guest post

The Eurozone debt problems have been hanging like the proverbial sword of Damocles over global stock markets. Any deal eventually worked out by Eurozone leaders is likely to be a temporary relief for a deep-rooted malady.

In this month’s guest post, KKP chalks out a plan on how investors can benefit from the turmoil in global stock markets.

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Déjàvu All Over Again?

There are so many variables in the market including earnings, recessions, financing, trade imbalances, debt to GDP ratio and many others. A lot of these variables are focus elements in the media and weigh on our minds and portfolios, but US took the lime-light in 2008-09 and now Europe is about to take that seat!

So, what are these ‘economic bombs’:

1. Greece, and the in the bigger picture, PIIGS (latest group of countries in trouble
2. Recapitalization of Debt in Europe (and the valuation of each country’s bonds/rating)
3. Flexibility and affordability of EFSF (needs are far beyond EFSF capabilities)
4. ‘United we stand’ mentality amongst the EU nations (Germany, France, UK and others are not of the same opinion)

In the reality that ECRI (Laxman Achutan’s indicator) is painting, the USA is heading for a recession of sizable proportions. The time frame has not been specified, although many speculate six months. This means that USA will not be in any position to help Europe with trade balances or with any QE packages if they need more than what they can afford.

My personal view is that the US market is behaving as the “least ugly” and hence pushing upward. Think about the “least ugly vs. ugly vs. most ugly” concept and things will come to perspective. This push is really a total suckers rally with very low volumes on the Nasdaq and S&P500. None the less, it is still a rally and one where US investors should be cashing out of the equity positions, slowly but methodically, and yet more importantly without fail.

Stocks are dramatically over-valued based on the underlying business trade going on (in the US). Any gains are in complete defiance of the many identified headwinds that will show its mighty strength soon. Sales to and within US corporations are weak at best, but the comparisons made to last year make it look better.

Hence, it is going to get very unpleasant and possibly catastrophic at the first sign that EU cannot afford the outcome of one or more of PIIGS defaulting on their debts. If the sovereign debt crisis results in anything less than a deep and prolonged global recession, there are chances (albeit a low probability) that this rally will continue for a short time. We will see a lot of investors get sucked into the rally and feel very lonely at the top, when the correction resumes at 3 times the speed (typical bear move vs. bull moves of US markets) of the slow move up that we are seeing.

BRICS will feel the pinch for a while (corrective), but the only positive view of all this is that we will be able to see a US$ rally, and therefore a gold/silver correction. As with the current softness in gold/silver that I had predicted on ISG and IIF investor forums a few weeks ago, I think we will get a slightly lower price from the current levels (to the next support levels), and that will definitely be the last hurrah based on the current state of US$ and Euro. Resumption in the gold and silver rally (new money as a lot of people call it), will happen as Euro falters, and the focus returns on US issues.

Bottom line, keep your powder dry to buy at lower levels, and, from those purchases in 2012-13, we will get our eventual high of 2015-16 (8 year cycle) once all of this settles down. Buying at these deep corrective levels, building a solidly balanced portfolio will be the right thing to do for serious investors (not traders), and we will also have a good amount of gold and silver to show in our portfolios between now and the eventual high of 2015-16 (as predicted by Vivek Patil of ICICI).

(Note: At the time of posting this, Eurozone leaders seem to have worked out an emergency deal to resolve the region’s debt crisis. That may provide a boost to global stock markets.)

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KKP (Kiran Patel) is a long time investor in the US, investing in US, Indian and Chinese markets for the last 25 years. Investing is a passion, and most recently he has ventured into real estate in the US and also a bit in India. Running user groups, teaching kids at local high school, moderating a group in the US and running Investment Clubs are his current hobbies. He also works full time for a Fortune 100 corporation.

Should you invest in Infrastructure Bonds? – a guest post

Have you started investing regularly to avail of the various income tax benefits, or are you like most investors who leave their tax saving investments till the third week of March every year?

In this month’s guest post, Nishit suggests a tax saving investment that is not that well-known or well-publicised, but can provide quite decent returns.

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Diwali is just a week away. Many of us will be getting Diwali bonuses. What do we do with the money instead of blowing it up? Tax season is still 6 months away but it pays to plan early. There is an interesting Infrastructure Bonds issue of which not much is known about. Organisations like IFCI, LIC, REC, IDFC, IIFCL, SBI, ICICI, L&T have been allowed to issue these bonds.

This is the second year when the Government has permitted investment in Infrastructure Bonds of specified companies with tax benefits, subject to a tax exemption ceiling of Rs 20,000. This comes under Section 80 CCF, over and above the Rs 100,000 that can be tax exempt under section 80C. The bonds have a face value of Rs 5000, and can be bought by resident Indians and HUFs.

Power Finance Corporation has come out with a bonds issue with tenures of 10 years and 15 years. These bonds have a lock-in period of 5 years after which you can sell them on the Bombay Stock Exchange, where they will be listed in demat form. There is an option to hold the bonds in physical form too.

The 10 year bonds have a coupon rate of 8.5%, with two options of interest payments - either Annual or Cumulative. The 15 year bonds come with a coupon rate of 8.75% and with same two options as the 10 year bonds. The interest income on the bonds is taxable (under ‘Income from Other Sources’) but no TDS will be deducted.

Now, should one invest in them?

Assuming one holds them for 5 years, and gets a one-time tax benefit of Rs 6,180 in the highest tax bracket, a simple back of the envelope calculation shows one effectively saves Rs 1,236 per year. That works out to a ‘yield’ of 6.18% in addition to the coupon rate of 8.75% for a 15 years bond, which is equivalent to a pre-tax return of nearly 15%.

The above calculation assumes that one exits after 5 years and gets a similar tax break. The yield could be higher or lower depending on your tax bracket. Of course, one could continue holding till maturity of 10 or 15 years.

The bonds are secured against the immovable property of the company and PFC is a government Navratna - thus making it a very a safe investment. Whichever way one looks at it, PFC’s Infrastructure Bonds are a good investment because of the AAA rating, tax benefits, and the decent rate of interest. The bonds are open for subscription till Nov 4, 2011.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

Why long-term investors should look at the big picture

With the Sensex and Nifty indices stuck within trading ranges for more than a month, small investors are in a quandary. What to do next? Two days of sharp bounce from a bottom, and the urge to jump in and buy is almost uncontrollable. Three days of correction from a resistance level, and every one is worried about a 2008-like crash.

Getting worried and disturbed about short-term index gyrations only increases your blood pressure and clouds your decision making. Times like these are true tests of your investment mettle. In life, unplanned action is some times better than planned inaction. But, for building wealth through successful investing in the stock market, you should practice the discipline of planned inaction.

The inaction refers only to buying and selling of stocks. Reading annual reports, books and preparing buy/sell lists are part of the daily ritual of  long-term investors. What then is the big picture referred to in the headline? I’m not an economist, but here is my take on what is happening around us.

Thanks to the Internet and FIIs, our stock market is fully integrated with global markets. All the nonsense about decoupling because of our strong domestic market is just that – nonsense. So, keep an eye on what is happening in global markets. To keep readers updated, I regularly post about stock indices in the US, Europe and Asia. If you are not reading those posts, ask yourself: Why not?

Europe is in quite a mess due to a unified currency that is not helping profligate nations - like Greece, Italy, Spain, Portugal - that are deep in debt and have very little capabilities (or even intentions) of repaying that debt. They neither can print their own currencies, nor can they devalue their currencies. The only options are that a financially stronger economy like Germany, and perhaps the IMF, will bail them out to stop them from defaulting. But that is postponing the problem – not solving it.

Many Indian companies – particularly IT services companies – switched their export focus from the USA to Europe post the dot.com crash in 2001. Some have built up significant businesses in Europe, including acquisition of European companies. The economic mess in the Eurozone is going to affect their bottom lines for the next few years.

China is a wild card. For years, they have been far ahead of India in building world-class infrastructure and an export-led high-growth economy. But with global economies slowing down, China is desperately trying to re-focus on their domestic market. There is strong suspicion about their reported growth figures, and that is reflected in their sliding stock market. If they start cutting back on their commodity purchases, which has been sustaining the global commodities market and shipping businesses, a big crash in global stock markets may follow.

The USA is not on the verge of collapse – like they were three years back. The situation is grim, but not hopeless. There will be a lot of pain before their economy eventually turns around. But thanks to two rounds of quantitative easing, and significant belt-tightening, US corporations are sitting on a lot of cash. They haven’t curtailed spending on existing IT services, and there are signs that they may be spending more on new services. The strengthening dollar will add to the bottom lines of IT services and export companies.

Our over-dependence on oil imports will further add to our balance of payments problem. The government had introduced several populist measures to help the rural poor. Subsidies on diesel, kerosene, fertilisers have added to the fiscal deficit. Rampant corruption and scams, as well as high inflation are keeping FIIs away. Their inflows partly help in reducing the deficit.

However, our GDP continues to grow. Not at 8-9% but more like 6-7%, which is much better than almost every one else except China. That pretty much rules out a 2008-like crash in the Indian stock market. But it could take a while before we see new highs on the Sensex and Nifty.

The sensible approach will be to cut out the daily noise emanating from the business TV channels, and concentrate on companies that have capable and trustworthy managements, and have records of several years of good performances through bull and bear cycles. If they produce goods or services that find buyers regardless of the state of the economy, so much the better. Companies that sell toothpaste, cigarettes, soaps and detergents, biscuits, life-saving drugs, drugs for chronic diseases, tractors, power tillers, tea and coffee will continue to do well.

Just remember that the stocks that don’t fall much during a down trend, don’t rise much during the subsequent up trend. The ones that fall more, tend to rise more. Of course, this ‘rule’ works only for well-managed companies.

Should investors keep a beady eye on the BDI (Baltic Dry Index)?

What makes successful investing in the stock market (or mutual funds) such a challenge (or, intellectually stimulating – depending on your mental makeup) is the wide variety of factors and indicators that you need to keep track of. The Baltic Dry Index (BDI) is one such indicator that many investors may not have a clue about.

What is the BDI, and why should investors keep a watchful eye on it? This is how wikipedia.com describes it:

The Baltic Dry Index (BDI) is a number issued daily by the London-based Baltic Exchange. … the index tracks worldwide international shipping prices of various dry bulk cargoes.

The index provides "an assessment of the price of moving the major raw materials by sea. Taking in 26 shipping routes measured on a timecharter and voyage basis, the index covers Handymax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore, and grain."

In plain English, the BDI gives an indication of international rates for transporting raw materials by sea in cargo ships of different sizes – based on supply and demand of commodities.

Why should stock or funds investors be interested in the current state of the BDI? Most economic indicators, like consumer spending, unemployment figures, housing starts are lagging indicators. That means, we get to assess the implications after the events have already occurred.

However, the BDI is a leading economic indicator because increasing demand for raw materials (which leads to higher shipping rates) is a signal of greater economic activity. That in turn, leads to growth and higher stock prices. Likewise, a fall in the BDI indicates declining demand for raw materials, leading to reducing economic growth and a likely slide in stock prices.

Unlike stock and commodity exchanges, where speculation is an important part of the overall activity and may camouflage the actual supply-demand equation, the BDI is free of any speculation since the index is based on shipping rates on various representative routes submitted by international shipbrokers who have actual cargo to transport.

Supply and demand of raw materials is not the only reason for changes in the BDI. Availability of cargo carriers, heavy traffic on certain routes, bad weather, price of oil can all contribute to higher shipping rates. Like all indicators, the BDI can’t be used in isolation.

Over the past year, the BDI has fluctuated between a high of about 2750 in Oct ‘10 and a low of about 1050 in Feb ‘11. It rose sharply from 1270 in Aug ‘11 to its current level of 1890. Is it indicating that the global economy may not be in the doldrums that many economists are suggesting?

Why small investors should emulate a convicted murderer in Texas

The Texas Department of Criminal Justice executes more condemned men than any other state in the USA. Traditionally, condemned men were granted a last request. Most death-row inmates chose to have an elaborate last meal before going to the ‘gallows’.

This practice has recently been stopped, thanks to convicted murderer Lawrence Russell Brewer – a member of a white supremacist gang who brutally murdered a black man by dragging him behind his truck for several kilometres before dumping his decapitated body near a cemetery.

Brewer ordered the following last meal before his execution:-

• Two fried chicken steaks with gravy and sliced onions
• A triple-patty bacon cheeseburger
• A cheese omelette with ground beef, tomatoes, onions, bell peppers and jalapeno peppers
• A bowl of fried okra with ketchup
• One pound of barbecued meat, accompanied by half a loaf of white bread
• Three fajitas
• A meat lover’s pizza
• A pint of Blue Bell ice cream
• A slab of peanut butter fudge with crushed peanuts
• Three root beers

No human being can possibly consume all that food in one sitting. In fact, when the meal arrived, Brewer refused to eat by saying he wasn’t hungry. He was deliberately manipulating the system. He ordered whatever he felt like, because he could – and then declined to eat it.

What does this bizarre tale have to do with small investors? The stock market displays a smorgasboard of alluring stocks from junk companies with questionable promoters that trap unwary small investors. After losing their shirts, small investors complain about ‘operators’ manipulating the system to deprive them of their savings.

Be a smart investor instead. Substitute each of the junk food items in Brewer’s last meal with companies like Cranes Software, Karuturi Global, Bartronics, Punj Lloyd, Suzlon, IVRCL, Delta Magnets, Reliance Communications, Kingfisher Airlines, Temptation Foods (!). Then ‘manipulate’ the system in your favour by refusing to buy any of their stocks. Only buy stocks of well-respected companies with proven managements at reasonable valuations, and you will never go wrong.

To make money in the stock market, avoid these three buying mistakes

Stock markets have trading days or holidays. Using stock market jargon, trading days can be either ‘bullish’ or ‘bearish’. But if you follow the so-called experts on business channels or the pink papers, stock markets have ‘good’ days or ‘bad’ days. On ‘good’ days, the Sensex gains. On ‘bad’ days, the Nifty falls.

What happens when both the Nifty and the Sensex drop by 4% – like they did today? It is a ‘terrible’ day! For whom? Obviously for the brokers and the business channels, because their business thrives on ‘good’ days. When the market moves up, more viewers tune in, and more investors place ‘buy’ orders. For investors, who were lucky or prudent to sell at higher levels, ‘panic’ days offer a great opportunity to cover back the stocks sold earlier.

So, are ‘panic’ days great opportunities to buy? The short answer is: No. In an earlier post, ‘How to tackle a ‘panic bottom’, I had explained that panic bottoms seldom hold. Technically, today’s heavy FII selling didn’t create a bottom in the Sensex or the Nifty. But it is a sign that the lower level of the last six weeks’ trading range may get tested, and possibly broken.

If you ever watch a tennis match between a top 10 player and a player ranked much lower, you will notice that there may not be much difference in their respective skill levels. The big difference lies in their ‘unforced errors’ stats. The better player makes fewer ‘unforced errors’.

In stock market investments, there are three such ‘unforced errors’ that you must learn to eliminate to enjoy greater success. These are common buying mistakes that many investors make:-

1. Buying near a top
2. Buying during a down trend
3. Buying before a bottom is formed

The buying mistakes in 1 and 3 are caused mainly due to inexperience with technical analysis. In the majority of bull and bear markets, a top or a bottom just do not happen out of the blue. There is a process, usually accompanied by a clearly identifiable reversal pattern, through which a top or a bottom gets formed. Such reversal patterns may take a few weeks, or a few months to form.

In both the Sensex and the Nifty, the Nov ‘10 peaks were part of ‘diamond’ reversal patterns, which transformed into large ‘descending triangle’ reversal patterns. So, we actually had two reversal patterns to indicate a change of trend from bull to bear.

The 2008 bear market ended with a 5 months long rectangular reversal pattern. It is expected that the current bear market will also form an identifiable pattern before the next bull phase can start. No such pattern is visible yet.

It is easier to identify reversal patterns after the pattern is fully formed. But there are prior signals given by various technical indicators that help to ascertain whether a reversal pattern is in progress. It is better to err on the side of caution when stock markets are rising or falling fast.

Buying during a down trend is acceptable only if you are covering up an earlier sale at a higher price. Not otherwise. Unlike tops and bottoms, which are tougher to identify, a simple trend line or the 200 day EMA can show whether a stock or an index is in a down trend. The biggest mistake you can make is to think that ‘it can’t fall any lower’. Learn to be patient and stay away during down trends. Buy only after an up trend is re-established.