Tuesday, April 11, 2006

Stock markets are booming and so is the art of stock picking/investing ?

I hear a lot of pple talking about investing in stocks these days. People who never bothered or are least informed about companies are talking like pro's. A few examples -

Just the other day an office colleague of mine was talking confidently about the hottest IPO in town - Reliance Petroleum. While the company is offering its shares at Rs.62 per share, my friend here claims that it will touch Rs.300 per share on the day of its listing. Well what exactly does a price of Rs.300 per share mean for this company.....read on.

Reliance Petroleum is raising funds to "set up" a world scale petroleum refinery in the state of Gujarat. At Rs.62 per share, it is valued at around Rs.28,000 crore, that for a company which is still to lay the foundation for its refinery, let alone earning any revenues. And if at Rs.62 per share it is valued at Rs.28,000 crore, Rs.300 per share would fetch it a value of a mindnumbing Rs.135,000 crore. This is higher than its parent co. Reliance Industries. Well, so much for a booming stock market and its effect on investor psyche. Beware, speed breakers ahead !!

In another incident a colleague was happy to share his investment made this week in a new mutual fund scheme. This after he stayed away from the markets for all this while thinking it was risky to invest his savings (read hard earned money) into stock markets. While it is nice to know that here was a retail investor who is taking a safer route of investing into stock markets through a mutual fund (and a reputed one at that)....but what one needs to wonder is whether - is this the right time to make fresh investments ? May be or maybe not.

Students of behavioral finance would say that such incidents mark the beginning of an end !

Btw, listed below are a few investing rulez that my friend (Tariq) and I follow. We've learnt these over the last 2-21/2 years of stocks investing experience. Hope you find'em useful in these markets -

1. MORE JEWS (or MARWARI's in India's case) LOST THEIR SHIRTS on the WALL STREET AVERAGING in a falling market than those affected by the Great Depression.

NEVER AVERAGE.

2. Always buy stocks that offer a good MARGIN OF SAFETY.

Margin of safety is the difference between the intrinsic value of a stock (i.e. value based on stock valuation and what the company is actually worth) and the price that the market sets on a stock (i.e. stock price is a matter of market participants' opinions and is different from the intrinsic value). Buying stocks with healthy MoS provides a higher probability of earning returns.

3. It is inseparable from Human Nature; To Hope and To Fear. The successful trader/investor/speculator has to fight these two deep-seated instincts. Instead of hoping he must fear; instead of fearing he must hope. He must hope that his loss may develop into a much bigger loss; and hope that his profit may become a big profit.

IT IS ABSLOUTELY WRONG TO GAMBLE IN STOCKS THE WAY THE AVERAGE MAN DOES !

4. What does a man do when he sets out to make the stock market pay for a sudden need ?

He not only just hopes. He gambles. To begin with, he is after an immediate profit. He cannot afford to wait. Which means, he foolishly begins to believe that - THE MARKET MUST BE NICE TO HIM AT ONCE, IF AT ALL.

NEVER GO TO STOCK MARKETS 'HOPING' YOU WILL MAKE MONEY, YOU ARE BETTER OFF BETTING ON HORSES THAT WAY.

The last two quotes are from the book - Reminiscences of a Stock Operator by Edwin Lefevre. It is a biography on the greatest stock trader of our lifetime - Jesse Livermore. It is a must read for anyone looking to invest in stocks.


2 comments:

Anonymous said...

Dear Ravi,
Never Average is sound advice.

I was out of the market @ 10400 levels.Then out of sheer lack of activity on my side I invested in midcaps with fair amount of Margin of safety, in past 15 days.
Now with the markets going down what is the line of action for these stocks.Am long term investor,with sudden urges to book profits that makes me sell my entire portfolio(? ? fear psycosis ).SUNIL U.PATIL.
P.S.Had lost my shirt due to KetanP.

Ravi Purohit said...

Sunil: Bull markets have a history of painful corrections. May be we are witnessing one. But I dont think it can last for too long. Domestic mutual funds have raised a cumulative sum of Rs.25,000 crore in February and March. They will step in sometime this month. So maybe we may see markets stabilising in a few days. So stay put with ur stocks, if you believe they are good companies with sound fundamentals.

--
Ravi.