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Tuesday, April 27, 2010

Did you read my FREE eBook 'How to Become a Better Investor'? Really?

After emailing several hundred copies of my FREE eBook 'How to become a Better Investor', I was taken aback by a large number of reader responses that went like this:

'I've been too busy at work and haven't found the time to read the eBook yet'; or, 'The eBook got buried in my inbox, can you please forward another copy'; or, 'I've been travelling overseas and will read the eBook once I return to India.'

I had deliberately kept the chapters short and the total number of pages to around 30 so that readers will find it easy to read it through. So what happened? Are readers really too busy to read an eBook of 30 pages? Or, in this age of Internet, smart phones and TV, have investors forgotten their reading habits?

Whatever be the reasons, to become a successful investor, inculcating a regular reading habit is of utmost importance. It doesn't matter whether your portfolio is up by 10% or 200%. Looking at the ticker and counting your profits will not prevent investment mistakes.

By reading and re-reading the better known investment books, good investing tricks and strategies will gradually become ingrained in your brain. But before you can contemplate reading Graham's 600 page tome, 'The Intelligent Investor' (if you haven't read it yet, you really should!), you have to first practice by reading my 30 page eBook!

Even after investing for more than 25 years in the stock market I try to find interesting investment books to read - for new ideas and strategies. Why? Because no plan or strategy seems to work for a prolonged period. Just when you think that you've learned it all, the market surprises you with an unexpected jolt.

Recently, while reading William O'neil's 'How to make money in stocks', I came across a simple idea that I felt like sharing. This idea works better for short-term investing, but can be used for long-term investment with suitable modifications.

It is the 3-to-1 rule for setting stop-losses - some thing that every investor should learn, particularly in the current state of the stock market, which is moving sideways in a broad range. Here is the simple rule:

If you expect the stock to rise by 5%, set the stop-loss at 1.5%. If you are buying for a minimum 25% up move, set the stop-loss at 8%. On no account should the stop-loss be greater than 8%.

If you are buying a Rs 20 stock (which will be a pretty risky thing to do now) and expecting to sell at Rs 22 for a 10% profit, the stop-loss should be at Rs 19.40. If you are expecting to sell at Rs 25, set the stop-loss at Rs 18.40.

The stock should be sold as soon as the stop-loss is hit. What if the stock moves higher than expected? Increase the stop-loss by the same percentage (a trailing stop-loss).

Investors lose more money by sitting on their losses and rationalising the loss by saying that they are long-term investors. A loss is a loss - whether it is booked, or remains in your demat account. By limiting your loss to a maximum of 8%, you will not get swamped by a 2008-like tsunami of selling.

Chapter 2 of the FREE eBook describes how to set trailing stop-losses. Even if you don't read any other chapter, read that one and internalise the idea.

6 comments:

Ganpat said...

Dear Subhankarji,

Thanks for sharing this new strategy.
Just for those who have not read your
e-book yet: please do not delay.Read it first.
Very useful and informative

Regards,

Ravi said...

I read it. Thanks for the very informative book.

Please feel free to remove the following extract from your book.
<<<
The following is what I liked the most in this book.


When all the fundamental and technical analysis still leaves common investors
bewildered, a look at how different industry sectors have performed during
previous bull and bear market cycles may be enlightening.

The first signs of a stock market revival become visible when stocks from the
financial sector like banks and NBFCs (Non-banking financial companies), retail
and transportation sectors start to rise and consumer durables like home
appliances, cars and trucks start showing improved sales. The economic story is
nothing but bad news.

As the bull market begins to mature, and the economic cycle starts to improve,
the sectors to watch will be technology, capital goods (like construction
machinery) and construction materials (like cement and steel).

These will usually be followed by chemicals, paper, non-ferrous metals,
petroleum - when the economy starts to gather momentum. Near the peak of the
bull market, the real estate and energy sectors tend to dominate.

The FMCG and Healthcare sectors come to the forefront as the stock market
begins its bear phase. The economic cycle tends to be at or near its peak
around this stage.

As the bear market matures, utilities and services sectors try to hold the fort. The
economy is now well and truly in its downward cycle.

>>>
Thanks again.

scorpio said...

The issue is most of the times you will hit your stop and will have to close the position to move the way you wanted it too. Yes its a good thing to buy on pull backs, though sometimes you never get a pull back for a long time. Again the risk can be less when you buy on pull backs or close to the 20 day or 50 day EMA. I liked your book because it was small. graham book is taking time to complete - I have only done 3 chapters :(

Subhankar said...

@Ganpat: Appreciate your comments and thanks for recommending my eBook to others.

@Ravi: You are welcome. The extract has been left as is - for the benefit of those who haven't read it.

@scorpio: It is better to close a small losing position, than let it turn into a huge loss. Any tool - including stop-loss setting - should be used judiciously, and not blindly. But O'neil's '8% max' rule seems quite appealing.

Glad to note that you enjoyed the brevity of the eBook. But do continue with Graham's book. And definitely buy and read Pat Dorsey's book.

Tirthankar said...

Hi Subhankar,

I just read your book. All my investing ideas got messed up ! Benjamin Graham's book is surely a re-read, but before that anyone needs to re-read your simple book that changes the perception of investing.

I would like to clarify some points

1)Why would one like to see what happened to his SIP after just one year of investment ? Isn't SIP a long term investment tool. We can see the last 10yrs CAGR of top diversified MF is around 20%.

2)I spend around 7k for 2 ELSS and 3 diversified MF, and keep rest 8k for stock market investment as well as a part of it for my debt portion of the portfolio, and waiting like an 'South African Python'. So, I was expecting some topics on P/E ratio of Nifty for investment.

3)Can you come up with some articles covering the fundamental analysis of stocks for infant investors like me :) .

4)How do you get the historical stock quotes of companies, I tried the quotes from yahoo finance which provides a lot of garbage data.

I was crunching some data and realized the concept of investing in FMCG and your ebook cleared that concept, I just loved it. A lot of topics in your book needs re-read. I just loved you book and the way of writing was great with comparison to the different sportsman.


Thanks and Regards
Tirthankar Mukherjee

Subhankar said...

Appreciate your feedback, Tirthankar, and thanks for the kind words.

There are lots of articles on fundamental analysis in my blog. You'll need to dig through the archives, or use the blog search (on the top left corner) to find them. If you are serious about learning fundamental analysis, buy and read Dorsey's book.

Since bull phases tend to last longer than bear phases, a SIP will go on increasing your average holding price. Value averaging is a better bet - it requires additional commitments during bear phases. (There is an article about it on my blog.)

For historical prices, visit the BSE and NSE web sites (links to both are available on the right panel of my blog).

Feel free to ask more questions or leave comments. Happy investing!