For all the "wannabe" jesse livermore's, here's some nice advice

Brett Steenbarger has an interesting article on trading. Read on....

Suppose I offer you a sure $500 or the choice of flipping a coin. If the coin lands on heads, you'll get $1000. If the coin lands on tails, you'll receive nothing. Would you take the guaranteed $500, or would you flip the coin?Most people, given the opportunity for a sure thing, will take it.Now, however, suppose I confront you with a certain *loss* of $500. The alternative is that you can flip a coin. If it lands on heads, you lose nothing. If it lands on tails, however, you lose $1000. Would you take the guaranteed loss of $500, or would you flip the coin?Interestingly, in that scenario, a significant number of people will flip the coin. We tend to be more risk-seeking when we deal with losses than when we are faced with gains.

Suppose we are into a trade and can take a sure point out the S&P eminis in a short-term trade. Do we "take what the market gives us"? Suppose the market moves four ticks against us. Do we hold the loss in hopes of coming back to breakeven?There is a meaningful difference between trading to win and trading to not lose. The average person feels more psychological pain over a loss than they feel pleasure over a gain--particularly once they have already "booked" that gain mentally. If I'm expecting a bonus from my employer, I'll be happy when I receive the paycheck--but I'll be much more upset if I find out the bonus has been rescinded. When we enter a trade, we expect to be paid out. Mentally, we book a potential profit. When a loss materializes, it is the unexpected event--and we respond more strongly to the unexpected than to the familiar.

What is the solution to this dilemma? The answer, surprisingly, is to book losses before they occur.

It's human nature to not want to think about such unpleasant things as losses. But by knowing our maximum possible loss in advance and by mentally rehearsing what we'll do on those occasions when the loss occurs, we normalize the losing process. That divests it of its emotional grip. We can never eliminate loss from life or trading; nor can we repeal the basic uncertainties of markets. What we *can* do is develop an edge in the marketplace and, over the course of many trades, let that edge accumulate in our favor. And, if you're trading well, maybe that losing trade will offer you a fresh perspective about how the market is trading: an insight that can make you money the next time around. Then it's not a loss. It's information that you've paid for.

The article can also be accessed here. Brett Steenbarger's blog is a must read for any trader.

Testing market efficiency?

Companies that are likely to report robust financial performance perform well (outperform the overall market) on the bourses before the announcements are actually available? If this is true, then one is surely looking at some kind of insider trading? I plan to do an event study on this, but maybe a little later in the year. Still learning the tools of doing research in economics and finance. Nevertheless, I decided to undertake a small test.

Three companies, in which I am currently invested - Ankur Drugs, WS Industries, and Jyoti Ltd, are expected to report robust financial performance for the quarter ended Sept'06. They will most likely report their numbers sometime after mid-October.

I will be monitoring share price of these companies over a months period, from 20-Sep to 2o-Oct. If these scrips end up posting significantly excess returns over the benchmark index, NSE Nifty, during this period, then there is a case of insiders releasing the information to interested market participants or buying shares themselves.

Cont...

Investment update: WS Industries up by over 30% in two sessions?

I had written about WS Industries in August this year. I had then made a token investment @ Rs.45 per share. The scrip has since moved quite a bit, well mostly in the last two trading sessions. Yesterday, it was up 20% and today it closed with a gain of 9% to end the day at Rs.62 per share. Thats a good 37% return in a little less than two months. What interests me more is the spurt in volumes. They amounted to over nine lakh shares, both yesterday and today. This is more than 7-8 times the average daily volumes seen in the last few months. Something cooking up there?

FIIs account for a lot more than what meets the eye!

Foreign institutional investors have played a significant role in the bull run of the past 3 years. Since January 2002 they have pumped in over Rs.1.3 lakh crore in Indian markets. During this period, the benchmark indices -Sensex and the Nifty - yielded returns of over 200%. It can be argued that FIIs do not matter a great deal given that they have a small share (between 18-20%) in the daily trading volumes of the cash market. In the F&O market, their share is even smaller (less than 10%, ie.). Check the monthly derivatives update available here. But, do these numbers really indicate that FIIs do not matter a great deal? I think NOT. Here's why:

FIIs own close to 20% of all the Nifty companies. The shareholding pattern of companies available at the end of every quarter indicates that this is indeed the case. However, if adjusted for the free-float, their stake increases to around 40%, which is quite substantial! And, which is why I think they matter a lot more than what is believed. While this was only a small analysis of the Nifty 50 companies, which account for something like 50-60 per cent of the total mcap of Corporate India, one can do a more broad-based analysis by studying the S&P CNX 500 numbers.

A few examples (numbers as of 31-Aug-06 from here):

ONGC:
>> Mcap: Rs.1.4 lac crores,
>> Free-float factor - 0.2,
>> Free-float mcap - Rs.28,000 crore
>> FIIs stake (over total mcap and not FF mcap) - 9.4%
>> FIIs share as a % of free-float mcap - (0.0943 * 1.4 lac crore) / (28,000 crore) = 19.2%

Reliance Industries
>> Mcap: Rs.1.39 lac crores,
>> Free-float factor - 0.55,
>> Free-float mcap - Rs.76,000 crore
>> FIIs stake (over total mcap and not FF mcap) - 19.8%
>> FIIs share as a % of free-float mcap - (0.198 * 1.39 lac crore) / (76,000 crore) = 36%

FIIs share goes up substantially in case of companies such as ICICI Bank, Infosys Technologies, HDFC, HDFC Bank, Bharti Airtel, etc. where a). FIIs have significantly higher stakes and b). the free-float in these companies is also pretty high.

All in all, the numbers indicate that FIIs own and can therefore influence more than what meets the naked eye.

Investment update: Subros (value pick)

I have talked about Subros in one of my previous posts. The price then was somewhere around Rs.170. It has since then moved beyond Rs.200 and is currently quoting at around Rs.224.

Why I was and remain bullish over the company's prospects:

1. Subros is one of the largest manufacturer and supplier of air conditioning systems to big car manufacturers in India (Maruti and Telco),
2. it has over 50% share in the domestic market,
3. trades at a P/E of less than 10 times,
   
4. pays a decent dividend (Rs.3.5 per share for fiscal 2006),
5. both Suzuki and Denso have strategic stakes of 13 per cent each in the company, and
   
6. going forward it seems poised for healthy growth, given the company expansion plans (1 and2).

I own the shares of this company and am planning to hold them with a personal price target of Rs.300 per share.

PS: Sharekhan and Kotak Securities have recently (in April-May 2006) put a buy on Subros with a price target of Rs.370 per share & Rs.280 per share. It was up some six odd per cent to Rs.224 per share. A value pick.