Sensex, Nifty charts (Nov 08, 2019): pause near lifetime highs

FIIs were net sellers of equity on Mon. Nov 4, but were net buyers during the next four days. Their total net buying was worth Rs 32.0 Billion. DIIs were net sellers of equity during all five trading days of the week. Their total net selling was worth Rs 44.3 Billion.

Net inflows into equity funds during Oct '19 fell 10.25% to Rs 60.4 Billion from Rs 67.3 Billion in Sep '19. On a YoY basis, it fell 52.1% from Rs 126.2 Billion in Oct '18.

The bull rally in the market stalled after twin shocks from Moody's and Nomura. Moody's downgraded India's credit rating outlook to 'negative' from 'stable' - reflecting lower policy effectiveness and a gradual rise in debt. Nomura cut India's GDP forecast for FY 2019-20 to 4.9% from the earlier 5.7%.

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex touched new closing (40421 on Nov 7) and intra-day (40749 on Nov 8) highs during the week on the back of strong FII buying. The index closed well above its three rising EMAs in a bull market.

However, on Fri. Nov 8, the index formed a 'reversal day' bar (higher high, lower close) that often marks an intermediate top. Twin downgrades by Moody's and Nomura triggered profit booking.

Daily technical indicators are correcting overbought conditions. MACD is above its rising signal line inside its overbought zone, but is turning down. ROC and RSI have dropped to the edges of their respective overbought zones. Slow stochastic has started sliding down inside its overbought zone. Some more index correction or consolidation is likely.

Investors are flocking to a few quality large-cap stocks. That has boosted the index to a new high. Mid-cap and small-cap stocks are still struggling. Macroeconomic indicators continue to weaken.

Despite government pronouncements, there is no reason to believe that all is well with India's economy. The decimation of rural and unorganised sectors (thanks to demo and GST) and periodic efforts at bringing foreign investors and companies to heel have ruined India's investment climate.

Under the circumstances, staying invested and starting a SIP in an index fund/ETF may be the sane thing to do. Revival in mid-cap and small-cap stocks is not likely to happen anytime soon.  

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty rose above the psychological 12000 level during the week, but fell short of its lifetime high of 12103. Though the index gained 17 odd points on a weekly closing basis, it failed to close above 12000.

Weekly technical indicators are looking bullish and overbought. MACD is rising above its signal line in bullish zone. RSI has climbed to the edge of its overbought zone. ROC and Slow stochastic are well inside their respective overbought zones, but are showing signs of correcting. Some index consolidation or correction is likely.

Nifty's TTM P/E touched a high of 27.75 on Thu. Nov 7 before slipping down to 27.51 - which is well above its long-term average inside overbought zone. The breadth indicator NSE TRIN (not shown) has dropped sharply towards the edge of its overbought zone. More near-term index consolidation is possible. 

Bottomline? Sensex and Nifty charts are trading well above their rising daily and weekly EMAs in long-term bull markets. Both indices are close to their lifetime highs. Stay invested. Try to avoid bottom-fishing in beaten-down stocks.

Does your Investment Style fit your Personality?

To be a successful investor, you must have your own investment style. That means evolving a system that works for you - by figuring out your own strengths and weaknesses and keeping a record of your successes and failures.

Every person has personality traits, cognitive biases, eccentricities, habits that affect their decision making. If you are impulsive, you may buy 5000 shares of Opto Circuits at Rs 9 and hope to double your investment in 3 months.

If you are risk averse, you may be happy with the long-term returns you get from a monthly SIP in an index fund or a balanced fund. 

An investor below the age of 30 may invest all her monthly savings into an equity fund. An investor who has already celebrated his 50th birthday may prefer the safety of bank fixed deposits or a debt fund.

According to an article published by the CFA Institute, there are four types of Investor Personalities:

1. Preservers - loss averse and deliberate in decision making, they are more keen to preserve their existing wealth than indulge in risky investments in search of rapid growth. They often end up not taking any decision at all and miss money-making opportunities.

2. Followers - not much interested or skilled in the investment process, they end up following the advice of friends or colleagues and have a portfolio full of yesterday's winners.

3. Accumulators - may have tasted success in a business enterprise or career, giving them the confidence to actively manage their own investment portfolio. They like to win big, and often make large risky bets that can lead to big losses.

4. Independents - like to think 'out of the box' and play contrarian based on their own research. They usually follow a plan and are not as over-confident as Accumulators. But relying too much on their own research can be time consuming and counter-productive.

So, which of these four Investor Personalities fit you the best? Give it some thought (if you haven't done so before) and then decide what kind of investment style you should follow. Your investment success will depend on it.

Read more from this investopedia.com article.  

Sensex touches 25000 – ready for a drum roll?

In the olden days – before the advent of telephone, telegraph, radio or TV – the only way to get one’s message across was to employ a drummer. One walked into a village or a small town and let the drummer do his thing to gather people around. Then the message could be delivered.

Beating one’s own drum is considered impolite in society. The question is: If you have a drum, who else is going to beat it if not you?

Times have changed. The Internet has shrunk the world. Satellite communications has enabled messages to be transmitted in nanoseconds. Information travels almost at the speed of light and is disseminated equally fast.

Still, some messages that need communicating remain buried under a mound of information overload. One such message – communicated more than a year back - is being resurrected today.

A year ago, the economy was in a dismal state. Poor governance and scams had tarnished India’s image. Interest rates were high. So was inflation. Fiscal and current account deficits seemed out of control. Capital expenditure by companies had slowed to a trickle. Infrastructure projects were stuck due to environmental and financial issues. Murphy’s Law was at work – anything that could go wrong was going wrong.

No wonder, small investors were a scared lot. Savings were being poured into gold and fixed income instruments. Equities were shunned. Stock brokers were lamenting the dearth of business. In such a situation, a long-term technical view was presented explaining why the Sensex should touch 25000. No one even imagined then that NaMo would become PM with a thumping majority.

Part of the reason for writing that post was to dispel the overwhelming mood of negativity among many small investors, and to point out that inflation-beating returns can be realised through timely investment in the stock market.

Sensex was at 19735 back on May 2 ‘13. By touching 25375 today, the index gained more than 28% in a little more than a year – beating inflation handsomely. This also makes the case why small investors are better off putting money in an index fund instead of trying their luck with individual stocks.

Related Post 

Why Sensex should touch 25000 – a long-term view

Become a better investor by learning how to swim

There is an old English idiom: Birds of a feather flock together. But the stock market is populated by strange birds that care two hoots about English. They prefer to follow the laws of physics – particularly the one that states: likes repel and unlikes attract.

So we have a variety of investors who are polar opposites – bulls and bears, active investors and passive investors, long-term investors and short-term traders, growth investors and value investors, those who trade on margin money and those who invest their savings, investors who try to make money and investors who try to build wealth. And all these opposites get attracted to the same market place, and think that their ideas are the best!

But the two types of investors that really matter – and needless to say that they are also polar opposites – are those who know what they are doing and those who don’t. The old pros and the babes in the woods. The ‘smart money’ and retail. It is not a level playing field. The scales are heavily weighted in favour of those who know what they are doing.

It is a chicken and egg situation for the new investor. How can you learn to swim if you are afraid to get into the water? But if you jump in before learning to swim, you might drown. Is there a way out? Fortunately, there is.

I learned to swim by myself by thrashing around near the bank of a pond. A lot of water got inside my lungs, nose and ears – and it wasn’t a pleasant experience at all. But I persisted and learned to do the ‘dog paddle’.

Eventually, I had to seek help from an expert swimmer – to learn proper swimming strokes and breathing techniques. I am not a pro, but consider myself an expert swimmer. Still, I’m very wary of diving into a fast-flowing river or a rough sea – because I don’t have sufficient experience of swimming under those adverse conditions.

Will you jump into the sea without any fear if you find yourself facing a barrage of 10 feet high waves? If yes, will you also be able to fend off a shark attack? The stock market is like a rough sea. The sharks are the old pros out to feed on young fish like you. Why become some one’s dinner?

Start learning to swim at the shallow end of the pool by investing in a bank recurring deposit and an index fund. After you have built up a corpus, take the help of an expert swimmer to understand financial planning and asset allocation, fundamental analysis and technical analysis. Only then should you venture out to sea.

Do you like short-term Trading or long-term Investing?

One of the questions I face most often from readers is: How do I become a trader? I usually answer back with a question: Why don’t you want to become an investor? The answers vary from “I don’t have time to do stock research”, to “I don’t have enough capital”, to “I can’t ever become a Warren Buffett or Rakesh Jhunjhunwala – so why bother”!

New entrants to the stock market usually show up in droves when the Sensex is near an all-time high, thinking that: ‘trading is easy work, and investing is hard work’. The result of such thinking (or is it non-thinking?) is a quick depletion of savings that scares away most would-be traders from the stock markets altogether; or, a transformation of a would-be trader into an investor-by-default, whose quest becomes to somehow recover the trading losses by ‘averaging’ and holding on to the loss-making stocks.

This cycle gets repeated again and again at every market peak that adds to the misery of many newbies and the wealth of a handful of smart investors. I have no illusions that I will be able to change such behaviour akin to financial suicide. But my efforts at repeating this theme periodically is with the hope that a few readers of this blog may see the light.

Let me counter the three most common excuses given by readers to justify their trading ambitions.

I don’t have time to do stock research

Time is at a premium for those engaged in a full-time job or business. When there is insufficient time to complete the tasks at hand, where is the time to perform sector analysis, assess management competence, determine growth prospects, go through annual reports?

There is a simple answer. Delegate the job to a professional fund manager. They are paid (quite handsomely) to manage large funds on behalf of small investors. They have research teams that do all the hard work, and in turn, they charge a fee that is deducted from the fund’s earnings.

I’m not talking about a Private Equity fund or a Portfolio Management System – but an ordinary actively-managed equity mutual fund. Better still, choose an index fund (or index ETF) that is passively managed and charges lower fees. By investing small amounts, one can effectively buy a basket of good stocks or all the stocks that comprise an index.

I don’t have enough capital

Investing in the stock market doesn’t mean that you have to start off with Rs 5 lakhs or 10 lakhs. While such amounts may be necessary to build a strong core portfolio of stocks, you can always build up your capital through regular and systematic investing.

Whatever small amount that you can spare after meeting your regular monthly expenses can be invested in an index fund or diversified equity fund through the ups and downs of the stock market. After a few years of regular and disciplined investing, you may be surprised at the nice bundle you will accumulate.

You can then think of building a core portfolio of individual stocks – provided of course, that you have the time and inclination for doing the hard work involved in individual stock selection and monitoring. Otherwise, continue with your regular investment process.

I can’t ever become a Warren Buffett or Rakesh Jhunjhunwala

This is the lamest excuse of all. Every cricketer can’t be a Bradman or Tendulkar. Does that mean one shouldn’t aspire to be a Laxman or Dravid or Dhoni?

You can be what you want to be – but not without hard work and talent. No one ever became good at anything by taking short-cuts. If you want to become a trader because it involves less work and can give fast returns, you are being naive. You will end up being poor quickly. The majority of traders make their broker’s rich.

Another, often unstated, excuse is: Investing is boring; trading is thrilling. My response to that is – for thrills, visit a race course or a casino. At least the ambience will be enjoyable while you lose money!

Sensex at 20000 – why isn’t the index moving up?

As I have mentioned before, 20000 is a nice round number and the Sensex has reached that level after 32 months. It is almost like a person completely focussed on climbing up a mountain who reaches a ledge within handshaking distance of the peak. He pauses to catch his breath and then looks around to see the view below, before attempting the final climb to the top.

Many investors who joined the bull market late in 2007, or started buying too soon in early 2008, are elated that they are getting back their ‘buy’ price and selling out. Not realising that the market is unaware of their ‘buy’ price. Others are following the ‘what goes up-must come down’ theory and booking profits to conserve cash for buying the correction that ‘has to come’.

What happens if there is no correction any time soon? It is possible that the Sensex continues to move up till it tests, or even surpasses, the all-time high of 21200. That could take a while if the FIIs decide to wait for the Q2 results in Oct ‘10.

It is also possible that the correction has begun already. The Sensex is still making higher tops and bottoms, but the upward momentum has slowed down. Or, it may be just a period of consolidation – the pause before the final assault.

Is this 20000 Sensex level different from the previous 20000 in Jan ‘08? If you look at it from investor-emotion point of view, there was more greed in Jan ‘08. If you look at it from the macroeconomic point of view, the western economies were already reeling from the effects of the subprime mortgage collapse in Jan ‘08. Their anaemic recoveries are just about starting in Sep ‘10. The recovery may take longer than expected, but the cycle is nearer to the bottom. It was closer to the top in Jan ‘08.

What about the situation in India? The interest rates were higher; so were the commodity prices in Jan ‘08. In Sep ‘10, interest rates and commodity prices have started to move up, but they haven’t yet reached levels that could cause a trend reversal. There are no Communists retarding the decision-making in Delhi. Not that it has helped policy reforms a whole lot!

On balance, the situation calls for more bullishness now than we see all around us. May be the debacle of 2008 is too fresh in investor minds. As I have mentioned often, it is better to be cautious near an all-time high.

The economic situation may not warrant a huge correction, but a ‘black swan’ event might. May be the Israelis decide to take a pot-shot at the Iranian nuclear reactor. Could be that Pakistan launches another terrorist attack on India. Who knows? These things happen out of the blue.

Stick to your asset allocation plan. Book partial profits and move cash to bank fixed deposits or balanced mutual funds or index funds. Start, or continue with, monthly SIPs. Wait for better opportunities to buy in lump sum. No need to worry about what may or may not happen to the Sensex.

Sensex at 20000 – what should small investors do now?

It finally happened. The Sensex broke above the 20000 level intra-day, quickly fell below, then played hide-and-seek the rest of the trading day before closing at 20001. A level last seen 32 months ago.

What is special about the level of 20000? Nothing, really. It is just a nice round number. In the good old days of the Indian stock market, shares had to be traded in lots of 50 or 100. Now, one can buy a single share. Or, 37. Or, 169. But most people still tend to buy 200 shares or 500 shares at a time. The human mind likes nice round numbers.

If that be the case, should small investors be bothered at all? Let us listen to some expert-speak, courtesy moneycontrol.com:

• Ramesh Damani said the Sensex may consolidate for a while before heading to new highs, and advised investors to enter the market even at current levels.
• Daryl Guppy thinks the Sensex may hit 21000 and then drop to 19000; that will give a better entry point.
• Adrian Mowat is bullish about the India growth story and considers the 20000 level a wake-up call for domestic investors who haven’t participated in the market.

Three out of three – all bullish. Should small investors dive into this market then? It depends what kind of a small investor you are. Let me try to segment the small investor population.

1. You are a ‘new’ investor who wants to join the bull party now – Don’t. The party has been going on for 18 months. All the ‘free’ food and drinks are finished. You may have to pay dearly for this late entry. Start a monthly SIP into an index fund/ETF and continue the SIP for several years through bull and bear cycles. In the meantime, read and learn as much as you can about the stock market and how to build long-term wealth slowly and surely.
2. You are an investor who got ‘burned’ badly during the 2008 bear market, and stayed away from this bull rally – Continue to stay away. Follow SIP advice given above.
3. You are an investor who lost a lot in 2008, but remained invested and bought some more and have just started to see some profit in your portfolio – Use this opportunity to churn your portfolio by getting rid of the non-performers. Hang on to the stocks that have performed well, or, book part profits and shift the cash to fixed income funds. Use a 10-15% likely correction to add.
4. You were lucky to enter the market in April/May 2009 and have good profits in the stocks that you still hold, but you haven’t been through a bear market yet – Book partial profits and shift the cash to fixed income funds. Use any correction to add.
5. You are a more seasoned investor who has been through the previous bull/bear cycle and emerged with a much stronger portfolio and a more balanced attitude towards the market – Stick to your asset allocation plan and book profits only to rebalance your asset allocation. Stay invested with trailing stop-losses.
6. You are a long-term investor with a strong portfolio and experience of several bull/bear cycles – Hope you are reading this for entertainment value, because you don’t need any advice from me!

Have I missed any one? If you are one of those who can’t fit into any of the six categories mentioned above, drop me a ‘comment’. 

Why did RBI raise the repo and reverse repo rates today?

The RBI has been quite proactive about controlling inflation. For the 5th time since Mar ‘10, interest rates have been raised – the repo rate by 25 basis points (from 5.75% to 6%) and the reverse repo rate by 50 basis points (from 4.5% to 5%).

Inflation has been the dominant concern in economic management for the RBI, and raising interest rates is one way of addressing that concern. There are signs that RBI’s policies are beginning to have some effect – although housewives will surely disagree, as food inflation still remains high.

Market players had ‘factored in’ a hike of 25 basis points in both the repo and reverse repo rates. That means, the rate hike was expected. If there was a surprise, it was the 50 basis point hike in the reverse repo rate – double the expectation.

Was today’s drop in the Sensex a reaction to the rate hike? May be. May be not. After seven days of sharp rise following the break above a year-long trading range, a bout of profit booking is only to be expected. It is healthy for the sustenance of the bull market.

Is the repo rate and reverse repo rate increases good news or bad news for investors?  A bit of both. The good news is that the banks will probably increase their fixed deposit rates. Some have already done so, under the guise of ‘Festive Season Bonanza’, or higher rates for specific periods of 790 or 990 days, or special rates for senior citizens.

The bad news is for those who are paying Equated Monthly Installments (EMIs) on home loans or auto loans or personal loans. Their monthly EMIs will increase.

What should investors do? This may be a good opportunity to book part profits in stocks that have run up a lot and move the cash into a bank fixed deposit. That may sound unexciting to young investors, who prefer to flit around from one stock to another. But that is a sure way to lose the booked profits.

If you do take your profits away from the stock market and invest in a bank fixed deposit, make sure you opt for quarterly dividends. Use a part of the quarterly dividend amount to buy Nifty BeES or Bank BeES or an index fund. That way, you reinvest in the market but do not put your booked profits to any risk.

Related Posts

The RBI has increased the Repo and Reverse Repo rates – should investors be concerned?

Does the Dogs of the Dow theory also apply to the Sensex stocks?

What on earth is the Dogs of the Dow theory? Why would any one want to apply the Dogs of the Dow theory to the Sensex stocks? What if the theory does apply, and what if it doesn't? Let me try and answer those questions one by one.

What motivated me to even discuss such a topic? Too many new investors wanting to enter the stock market without a clear idea about what to do. Many don't even realise that making money in the stock market is a full time activity.

I have advised investors to buy index funds or index ETFs, and balanced funds - but to stay away from buying individual stocks unless they have the time and knowledge to pick their own stocks. But I know that many think I'm plain old-fashioned and prefer to enjoy the thrill of losing money quickly!

Now here is a stock investing plan that is so mechanical that it can run on auto-pilot with a maximum input of two hours effort once a year. Sounds too good to be true? It almost is - but it does seem to work.

Postulated by Michael O'Higgins in his book 'Beating the Dow', the Dogs of the Dow theory goes like this:

Every year pick 10 stocks that form the Dow Jones (DJIA) index and that have the highest dividend yield (i.e. dividend per share to price per share ratio). Allocate equal amounts of money for buying each of the 10 shares. Then sit tight for a year without even looking at your portfolio.

After one year, repeat the process by adding and deleting stocks from your portfolio in such a manner that equal amounts of money are allocated to those 10 stocks that have the highest dividend yield after one year.

Go on repeating the process for a few years - otherwise the benefits of this mechanical investing strategy may not bear fruit. Back-testing the theory with older data have apparently shown the efficacy of the theory.

From 1957 to 2003, the Dogs outperformed the Dow by about 3%, averaging a return rate of 14.3% annually whereas the Dow averaged 11%. The performance between 1973 and 1996 was even more impressive, as the Dogs returned 20.3% annually, whereas the Dow averaged 15.8%.

Why or how does the theory work? The simple assumptions are:-

1. If a stock constitutes the Dow Jones index, then it must be a 'good' stock to own;

2. If a stock is trading at a high dividend yield, then it's price may have been beaten down for some reason, or it may have substantially increased dividends (may be due to some one-off reason - like a big capital gain, or a special anniversary dividend);

3. Either way, the market will eventually recognise that a 'good' stock is going abegging and the price will rise substantially.

The problem with any mechanical or automated investing strategy is that eventually every one starts following it (if it works), and the likelihood of outperforming the Dow Jones index recedes.

So, will the Dogs of the Dow theory work for Sensex stocks? There is no reason why it shouldn't. Just flash back to 2007, near the peak of the bull market. Tata Steel acquired the much bigger Corus. The stock market gave the acquisition a big thumbs down and the stock was beaten out of shape.

Did it substantially reduce dividends? Not at all. It ended up trading at a high dividend yield, and was a prime candidate for any one choosing a Dogs of the Sensex theory.

Question for readers: Do you know of other such Sensex dogs? Do you own them? Will you buy them after reading this post?

Which stock (or mutual fund) to buy?

"I have 2 lakhs to spare - which stock should I buy? Or, should I invest in a mutual fund?" These are typical questions I face from investors who enter the stock or fund investment arena for the first time.

May be it is not the first time. Investors may have burned their fingers in their initial attempts, and are now being cautious by seeking guidance. Either way, my answer is usually the same: If you have less than 5 lakhs and/or are not sure how to go about selecting stocks to buy, invest in mutual funds.

Should I be more 'helpful'? Should I just provide a list of fundamentally strong stocks and be done with it? Here are three reasons why I don't go down that path.

1. There are plenty of web sites, blogs and investment groups spewing out free stock 'buy' advice by the truckload every single day. Why add to the noise?

2.  The stocks I recommend to buy are the ones that are likely to make you rich slowly. They are stocks that have low debt, pay decent dividends and appear to be 'expensive'. Most new investors are interested in 'cheap' stocks that will make them rich quick.

3. This is a corollary to 2. If there isn't a substantial investible surplus, new investors usually buy a large quantity of a 'cheap' stock instead of a small quantity of a 'good' share. This quest for hitting it big usually leads to a big loss. (The fact that the Cals Refineries stock trades in such high volumes is an example.)  

With the Sensex hovering near its 52 week high for a few months and defying all attempts by the bears to engineer a correction, more and more new investors are flocking to the market with full pockets. Unfortunately, most of the low-hanging fruits have already been eaten.

So new entrants will either end up buying good stocks at inflated prices, or junk stocks that appear 'cheap'. Both are harmful to building your long-term wealth.

If you have money to spare and are not sure which stock to buy, look at an index fund or index ETF. You get to 'own' all the stocks in the index by just buying the fund units.

Better still, look at good balanced funds which can better protect the downside due to their debt component. Say an HDFC Prudence fund or a DSPBR Balanced fund that have proven performance records over the years.

Related Post

Should you invest in Balanced Funds?

What caused the 250 points drop in the Sensex today?

Can you envisage tomorrow's headlines in the pink papers analysing the 250 points drop in the Sensex? 'Greek tragedy causes Sensex slip'; or, 'Inflation up - Sensex down'; or something equally eye-catching and ridiculous.

Before you start scoffing at the headline writers, please remember that they have to earn their bread and butter by selling papers and not necessarily by educating investors. Fortunately, I'm not under any such compulsion. So my short answer is: Who cares?!

The fact is, Greece continues to face a sovereign debt problem which they were trying to mitigate through an issue of government bonds. Apparently that issue has fallen flat raising the spectre of a bail-out by other members of the EU or the IMF.

European indices started tanking mid-day and probably had a rub-off effect on our indices. Food inflation figures continue to rise, and that may lead to more monetary tightening by the RBI in the near future. Markets may have anticipated a rise in interest rates - which is considered negative for bulls.

But the real reason may not have anything to do with fundamentals and be purely technical. If the Sensex moves up 4 straight days in a row, one should not get surprised or worried by one down day. Such down days are good for the overall health of the market as it corrects potential overbought situations.

A quick look at some of the Sensex indicators show that the MFI, RSI and slow stochastic had entered their respective overbought zones after the Sensex crossed the 17250 level, and have since been oscillating in and out of the overbought zones for the past 10-12 trading sessions while the Sensex gradually moved up towards the 18000 level. All three indicators are showing negative divergence as they failed to make new tops when the Sensex moved above the 18000 level on an intra-day basis yesterday.

The FIIs have been buying relentlessly since the budget and of late the DIIs joined the bull party. Obviously, some amount of 'index management' is happening, and today's announcement of SAIL's divestment could be a reason for the buoyancy in the index. It almost seems that the Sensex wants to fall but isn't being allowed to do so.

What should you be doing as an investor? Focus on the 20 day EMA at 17500 and the 50 day EMA at 17150. If the Sensex falls below the 20 day EMA, treat it as a second warning of a bigger correction. (The first warning happened today, when the index fell below 17790 - its previous top made on Jan '10.) The third, and final warning will be if and when the Sensex dips below the 50 day EMA.

Of course, these warnings are not for selling out but for booking part profits, and on the assumption that you are invested in index funds/ETFs (or in stocks with high weightage in the Sensex). At all times, you should concentrate on your individual portfolios and set appropriate stop-losses.  

The Sensex fell 120 points - is it time to hit the panic button?

Regular readers of this blog will not even think about hitting the panic button just because the Sensex fell 120 points. They would have heeded my recent advice about being prepared for a possible correction as the index approached the Jan '10 top.

Probably just routine profit booking after four straight up days. May be even an effort by bulls to trap the bears. Why? Because the FIIs were net buyers even today and market breadth was positive after several days. That means, index heavyweights were sold (e.g. Infosys, HDFC) which pushed the index down and stocks outside the index were bought.

However, the fact that the Sensex tested the Jan 6 '10 top of 17790 two days in a row and briefly crossed it to hit 17793 on Mar 29 '10 before retreating by 200 points could also be a sign that an intermediate top has been made. So the index could be heading down soon.

The advance-decline line is showing a huge divergence with the Nifty index (thanks to reader Sanjeev - who sent me the link to the chart at the icharts.in site):-

Note that during Sept and Oct '09 there was a wide divergence between the falling A-D line and the rising Nifty index which culminated in a sharp correction.

From Nov '09 to Feb '10, the Nifty index and the A-D line moved together in lock-step. Post the budget, the Nifty index has soared while the A-D line has plummeted. Such a situation is unlikely to continue much longer.

Investors can play this three ways:

1. Book profits and wait for the correction to re-enter. That will be the riskiest way.
2. Book partial profits to generate some cash that can be redeployed during the correction. Less risky.
3. Stay invested with strict stop-losses - say, around 5150 for the Nifty and 17200 for the Sensex. Of course, this assumes that you are invested in index funds or index ETFs.

For individual stocks, the stop-loss levels should be placed at the previous (lower) tops. If the Sensex resumes its rally, remember to maintain trailing stop-losses.

(If you don't understand how to set stop-loss levels or what is a trailing stop-loss, you should read my FREE investment eBook.)

Related Post

Why you should forget about the Sensex and Nifty and look at the Advance-Decline (A-D) line instead

Should you invest in lump sum or gradually?

Some frequent investor questions I face go like this:

'I have some spare cash. Should I invest it gradually in SIP (Systematic Investment Plan) or in a lump sum?'

'I have recently booked some profits from my portfolio. What should I do with the cash?'

'The market has moved up so much. Should I keep my savings in a fixed deposit or in a liquid fund?'

The answer will be different for different investors. Why? Because no two investors have the same financial situation. Some have aged parents to take care of. Some have EMIs on their residential accommodation. Some are planning to get married. Others have young school-going children.

But if I had to give a single answer, it would be: 'Follow your asset allocation plan.' (If you don't know how to go about making an asset allocation plan, read Chapter 12: How to Reallocate your Assets in my FREE eBook.)

Once you have an asset allocation plan in place, it will be a lot easier to decide what to do with your spare cash. If your equity allocation is too high already, don't buy any more shares. Invest in fixed income, or a gold ETF or in a liquid fund.

If the market is tanking and your equity allocation has dropped below your benchmark level, then only venture into equities. If you are unable to decide which stock to buy, then buy some Nifty BeES or an index fund.

The thumb rule about investing a lump sum amount - which you may have received as a gift, or as a bonus, or due to the maturity of a long-term investment - is to invest all of it, but without deviating from your asset allocation plan.

The best avenues to invest systematically and gradually are additional amounts in your company provident fund (or, Public Provident Fund for the self-employed), a bank recurring deposit, or a SIP in an index fund.

May be all three together. You may be surprised by the tidy sum that will accumulate after 5 years.

Have you taken some profits home?

Two weeks back I had suggested that investors should take some profits off the table in this post. The BSE Sensex moved up to make a new high of 17790 on Jan 6 '10 - very close to the target of 17800 mentioned in a post on gap-analysis back in Sept '09.

The expected long-term resistance from the 17500-18000 zone kicked in, and the Sensex started to drift down and closed today at 17422 - almost the same level at which it had closed two weeks back. If you haven't booked some partial profits already, this may be a good opportunity to do so.

The Q3 results season is upon us, shouldn't one wait to check out the results before booking profits? Yes, if you are stock specific - and you should be. Volatility in the Sensex doesn't affect all stocks equally. One should concentrate on the stocks in one's own portfolio.

But don't forget that stock markets generally 'discount' good or bad news months in advance. If you own stocks that make up the Sensex (or Nifty) index, and if such stocks have risen a lot already and are now showing signs of hesitation - then they may fall if the results are perceived to be less than great. Only positive earnings surprises can cause them to rise more.

What if you have booked some profits already? Don't get anxious because the Sensex isn't correcting. Also, curtail your impulse to jump in if the market starts to move up. That is the challenge in the stock markets. To keep your cool, and be patient - like the South African python mentioned in Chapter 4 of my FREE eBook. (If you haven't got a copy of the FREE eBook yet, get it now by sending me an email request.)

If you would rather not time the market (it is a difficult task for most investors), park your profits in a liquid fund and make monthly withdrawals from it to invest in an index fund or Nifty BeES.

What you should definitely avoid is to sell out completely and sit on cash. That is investing suicide in the midst of a bull market.

Does the Price of a Stock reflect its Value?

"Price is what you pay. Value is what you get." - Warren Buffett

Many small investors face a problem with stocks that have a 'high price'. They don't want to buy them, because they feel they can't afford them. They prefer to buy stocks that have a 'low price', because they appear more affordable and capable of giving high returns.

Last weekend, I was discussing the state of the markets with a friend and inevitably the discussion veered towards what stocks are worth buying now. I suggested that he look at a medical devices stock trading at 200 or a hospitality stock trading at 80.

His response was typical. He wanted to buy the 'cheaper' stock. I pointed out that the cheaper stock was actually more expensive on several counts - it had a Re 1 face value (vs. Rs 10 for the other), its net profit margin was less than half, and its Return on Equity (RoE) was just about a fifth.

What he said next left me speechless: 'When I can buy 1250 shares with Rs 1 Lakh, why should I buy only 500?' 

Such an approach to investments is illogical. This fixation on price and affordability is one of the prime reasons why small investors do not become successful investors. It is like saying: 'I can't afford the price of gold, so I'll buy some brass instead.'

The 'Efficient Market' theory was postulated by French mathematician Louis Bachelier in 1900 and developed further by Eugene Fama in his PhD thesis at the University of Chicago in the 1960s. It states that stock prices reflect all available information and adjusts to any new information as and when it becomes known.

It is very unlikely that an individual investor can consistently outperform the market indices because the financial news and information he uses for his stock selections is already available to every one else. Any future information will only be available on a random basis, and will affect stock prices randomly. Therefore, investors will be better off investing their money in a good index fund.

The Efficient Market theory anticipates rational behaviour from investors. But by nature, human beings tend to be irrational. And nowhere more so than in the stock market. Otherwise, why would they enter when the market has already gone up, and refrain from buying at the depths of a bear market?

Experienced investors learn to pick up value-stocks that may appear expensive but are cheap on a valuation basis - at or near market bottoms. Inexperienced investors chase after cheaper growth-stocks that are actually more expensive value-wise.

To answer the question: a stock's price tends to reflect its underlying value in the longer term. In the shorter-term, price and value mismatches do happen, that allow smart investors to build wealth.

About Cost averaging and Value averaging strategies

Following a strategy involving either Cost averaging or Value averaging can lead to significant wealth creation for most investors - specially if followed for a reasonable period of time. These are simple strategies, but require investing discipline.

Cost averaging

Let us say, you are able to save Rs 3000 per month from your income. If you are a novice investor, or, have not yet learned how to pick fundamentally strong stocks, choose an index fund or an index ETF (like Nifty BeES). More experienced investors can choose any of their favourite stocks.

Every month, without fail, buy Rs 3000 worth of index fund/ETF units (or any stock that you have chosen). When the market moves up (bull market), the number of units/shares you get to buy every month will get reduced. If the market moves down, the number of units/shares will be more.

So, if you buy 300 units of Rs 10 in the first month, and the next month the net asset value (NAV) of the unit is Rs 12 - you will buy 250 units. In the third month, if the NAV is Rs 15, you will buy 200 units.

This strategy is identical to the Systematic Investment Plan (SIP) touted as very effective for small investors by most fund houses. Though this is a no-brainer system that any one can follow, it has a drawback. It doesn't work so well in up or down trending markets.

Value averaging

This is a variation to the cost averaging concept, that requires more monitoring. Instead of investing a fixed amount every month, you buy according to a pre-determined value of your portfolio. Let us say, it is Rs 3000 per month.

As in the above example, you buy 300 units @ Rs 10. At the beginning of the second month, if the NAV has increased to Rs 12, then the value of your portfolio has become Rs 3600. Instead of investing Rs 3000, you will invest Rs 2400 - getting 200 units in return. Your total portfolio value becomes Rs 6000.

If at the beginning of the third month, the NAV is Rs 15, then your portfolio value is Rs 7500. So you'll invest only 100 units to reach your goal of Rs 9000 after 3 months. (The actual numbers - and the math - will not be so simple. An Excel spreadsheet should take care of the calculations.)

See the difference? In the Cost averaging (SIP) method, you buy 750 units in 3 months for Rs 9000. In the Value averaging method, you invest Rs 6900 to buy only 600 units. In other words, you invest less when the market is going up. The balance savings of Rs 2100 can be used when the market turns down (bear market).

What happens when the market goes down? Which method will be the better of the two? Why? Are there any drawbacks to the Value averaging strategy?

Ponder about these questions. And get back to me with your opinions and comments.

Why small investors should avoid small cap stocks

There are several reasons why small cap stocks should not be considered for investment by any investor - new or old, small or large. Before I start to argue my case, let me define what is a small cap stock.

The market capitalisation (or market 'cap') of a stock is the product of a stock's current market price and the total number of equity shares outstanding. In other words, a stock having total outstanding equity shares of 10 Million (1 Crore) and a price of Rs 100 has a market cap of Rs 1 Billion (100 Crore).

The question is: What market cap makes a company a small cap, or a mid cap or a large cap? The short answer is: It depends on whom you ask. There are no precise definitions. The industry norm for a small cap company seems to be a market cap of upto Rs 2500 Crore!

A mid cap company has market cap ranging from Rs 1000 Crore to Rs 13000 Crore. Large caps are those forming part of the Sensex 30 and Nifty 50 stocks. As you can see, the whole thing is pretty confusing.

Small investors get attracted to small caps because of two main reasons - 'affordability' and greed. Most small companies are also small cap companies that trade typically at few tens of Rupees. This price is attractive to small investors with small capital. (Many don't realise that a Rs 30 stock may have a Re 1 face value and may be trading at a P/E of 30.)

Many of today's large caps were small caps 10 or 12 years back. The general assumption is that all small caps have the potential to become large caps and give multibagger returns. But only a small minority out of the thousands traded in the stock market actually make the transition. Most will remain small caps, or disappear into the sunset.

Why are small cap stocks so risky that they are best avoided by small investors?

• lack of transparency of management
• lack of adequate research by fund houses and brokers
• lack of financial muscle
• low liquidity
• high volatility

Management is too busy trying to survive (or siphon off money) to look after investor relations and proper communication of plans. Fund houses shun such stocks, so analysts don't cover them or visit their factories to ask tough questions.

One or two bad quarters can wipe out a small company, who may not have access to big money. Low volume of trading leads to difficulty in getting in or out, and wild price swings if small quantities are traded.

Only those investors with adequate experience and knowledge of fundamental and technical analysis should attempt investing in small cap stocks. That too, with the awareness that the entire investment can go down the drain. Preferably, the investment in small cap stocks should be limited to 10% of total portfolio value, to mitigate the risks involved.

The vast majority of investors should look for more expensive but less risky large cap stocks, or stick to index funds or index ETFs. Always remember Warren Buffet's investment rule: Don't lose money.

Related Post

The futile quest for the mythical 'multibagger'

Are you an investor or a speculator?

"Avoiding where others go wrong is an important step in achieving investment success. In fact, it almost ensures it."
- Seth Klarman, 'Margin of Safety'

If you are like me, your first foray into the stock market was probably buying 100 shares of a 'cheap' stock on a friend's tip. That's speculation. No wonder I ended up losing money!

The characteristics of a speculator and investor are almost exact opposites of each other. How can you tell if you are one or the other? Here are some indications:-

1. On a whim, you go to the railway station, buy a platform ticket and jump on to the first train that is departing, without having any idea where it is going. Isn't it exciting? You are a speculator.

You plan ahead and make your seat reservation a month in advance; go to the railway station a half hour before the scheduled departure; board the train, find your reserved seat and settle down for the journey, knowing how long it will take to reach your destination. You are an investor.

2. It is a Sunday. Some friends visit unannounced at 7 pm. You serve them tea and refreshments. At 8 pm you suggest going to the movies. All of you agree and go to the nearest multiplex, but find that all shows are 'house full'. So you go to the food court and have 'idlis' or burgers instead. You are a speculator.

You call up a few friends mid-week and ask them if they would like to catch a movie next Sunday. They agree. You go to the nearest multiplex and buy tickets in advance for Sunday's show. On Sunday, your friends arrive. You serve them tea and refreshments. Then all of you go and watch the movie. Afterwards, you grab 'idlis' or burgers at the food court. You are an investor.

3. You have recently graduated from college and are looking for a job. You buy some newspapers and go through the 'Jobs' columns. You circle the addresses of several companies, and send across your resumes. The process is repeated for several weeks without much success. You are a speculator.

You are still in college. During the summer vacation, you work as an apprentice for free in a company owned by a friend of your older brother. Next summer, you repeat the process. After graduation, you get a job offer from your brother's friend, who has not only come to know and trust you, but is impressed with your diligence and forethought. You are an investor.

4. You hear that a new highway is going to be built to bypass the town where you live. The proposed highway is supposed to pass through some inhabited villages. You visit the villages and buy up a few parcels of land, hoping to make a killing when the land acquisition for the project starts. But the villagers have political clout and block the land acquisition. After a few years, the highway is built bypassing the villages where you bought land. You sell at a loss. You are a speculator.

You wait for the land acquisition process to be completed and the highway construction to begin. Then you buy a plot of land near the highway, and build a convenience store-cum-motel. You are an investor.

5. You find out that Gruh Finance is a subsidiary of HDFC. You feel HDFC is too expensive and buy shares of Gruh Finance instead. But because of its regional bias and smaller size, the company never becomes the 'next HDFC'. After holding for some time, you sell the shares at a decent profit. You are a speculator.

You find out that HDFC is the company most respected by the FIIs because of its conservative and sound management. You wait for a price dip and buy a small quantity. You remain patient, and keep buying small quantities on every substantial dip and just keep holding. You are an investor.

I could go on, but you get the idea. Whims and tips and gut-feel may work very well in a bull market. But in a sideways trend or a bear market, the huge gains through speculation get wiped out fast by huge losses.

There are no short cuts to investment success. Diligence, discipline and the ability to analyse company fundamentals require effort and patience. It is not rocket science and can be learned. Why not start today? Why depend on others? There are no better way to ensure success in building wealth through stock market investments, than taking charge of your own investment decisions.

You neither have the time nor the inclination to do the hard work? Still want to benefit from the stock market? Buy a couple of index funds and a couple of balanced funds. Your long term returns won't be insignificant.

Related Posts

Should you invest in Balanced Funds?

Two Index Funds that track the Nifty 50

Your portfolio of stocks and mutual funds - why you shouldn't diversify

Two Index Funds that track the Nifty 50

In a post on Dec 8, '08, I had written briefly about the benefits of index funds and discussed about Nifty BeES, which is a ETF (Exchange Traded Fund). ETFs are traded like shares through brokers in a stock exchange, and just like for share trading, investors need to open a demat account.

In a subsequent post on Feb 22, '09, I had discussed about two balanced funds that may be more suitable for those investors who have less risk tolerance and don't have a demat account.

Index funds are ideal for the category of investors who are:

a) conservative but don't mind taking the risk associated with equity investments;

b) disinclined to track the performances of individual stocks;

c) not interested in opening a demat account

What are the specific benefits of index funds? They need very little management since they track the constituents of the respective indices. That means no dependence on the skills or whims of fund managers - leading to minimal management fees. Also, there is not much scope of out-performance or under-performance since an index fund tracks an index closely.

In the longer term, equities as an asset class tend to outperform all other assets. Regular investments in index funds provide long term wealth creation in a slow and steady fashion.

For more than 4 months, since the Sensex made a 52 week intra-day low on Oct 27, '08, there has been a rectangular sideways consolidation by the Sensex with no clearly discernible up or down trend. Such periods provide good opportunities for investments in index ETFs like Nifty BeES or index funds.

A couple of highly rated index funds that investors may want to consider are ICICI Pru Index Fund Retail and UTI Sunder, both of which track the Nifty 50 index. A brief summary of the funds are given below:-

1. ICICI Pru Index Fund Retail

Entry load - 1%, exit load - nil; Minimum lump sum investment: Rs 5000, subsequent investments: Rs 1000; Systematic Investment Plan (SIP) - available, minimum investments are Rs 1000 for monthly SIP and Rs 5000 for quarterly SIP; Systematic Withdrawal Plan (SWP) and Systematic Transfer Plan (STP) available; Dividend option available; top holding - Nifty Futures (65%).

2. UTI Sunder

Entry load - nil, exit load - nil; Minimum lump sum investment: Rs 10000, subsequent investments: Rs 2000; SIP, SWP, STP - NOT available; Dividend option available; top holding - Reliance Industries (11%).

Both index funds have marginally out-performed the Nifty 50 over all time periods. They have lost less during shorter time periods and gained more over longer time periods. This was possible because of some amount of tweaking of the weightage in the portfolio of the Nifty 50 stocks.

My personal preference is for an index ETF like Nifty BeES over an index fund because it is easier to buy and sell ETFs any time during the day at the prevailing price (whereas a mutual fund can be bought or sold up to 3 pm on the same day's NAV and after 3 pm on the following day's NAV).

Investment Philosophy of an Experienced Investor

Instead of my usual dose of stock market and mutual fund investment wisdom on a Sunday, I thought it will provide a different perspective to hear about the investment philosophy of other experienced investors. So I requested Nishit to answer 30 questions. Very generously, he agreed to spare some time and gave detailed answers for the benefit of this blog's readers.

Nishit Vadhavkar is a young investor who works as a Quality Manager in a MNC IT company. In his spare time, he analyzes the Financial Sector. "You work hard for your money; make your money work hard for you" is Nishit's motto in investing.

Here is the full Q&A session:

Q1.  When did you first start investing in the stock market?

Ans: I started off when I was in Engineering College. CNBC was just launched around 1998 and I saw the prices of companies going up and going down. This got me interested in knowing why they went up and why they went down.

Q2.  Who got you interested in investing in the stock market?

Ans: I come from a family of investors. I am the 4^th generation investor. My mother used to actively track the markets and from her I got the first whiff of the markets. The advent of share prices on television hastened my interest in the markets

Q3.  How did you choose your first investment?

Ans: It is said that you learn only from your mistakes. The money you lose in the markets is your tuition fee. Those were the days of the dot.com boom. My first stock was DSQ Software. I still hold it in my account since it is not traded.

Q4. Which stocks did you buy?

Ans: DSQ Software, Reliance Petroleum (the earlier ‘avatar’) and Wipro were amongst my first buys. I was not earning those days. But I had an inheritance of a few shares of Gujarat Ambuja Cements from my grand mother. I used that capital to slowly build up my portfolio

Q5.  How long did you hold them?

Ans: Wipro I sold after it trebled. Reliance Petro when the Ambanis announced a merger with RIL at an unfavorable ratio.

Q6.  Why did you sell them?

Ans: It made no sense to hold Reliance Petro after the unfavorable ratio. I had bought it at Rs 60 but the merger ratio made it at Rs 22. I got out after booking my losses. I learnt from my mistakes and sold Wipro at 3 times my cost price

Q7.  Did you make a net profit or a loss on your first investments?

Ans: Wipro got me back what I lost in Reliance Petro and DSQ Software. Wipro had consecutive upper circuits and went to Rs 8000 from my cost price of Rs 1100. I did not exit at Rs 8000, but finally did so at Rs 3000. That taught me to exit when the price becomes unrealistic.

Q8.  What did you learn from your first investments?

Ans: Thoroughly analyze the company. Promoter background is of paramount interest. You are buying a company, not a stock. You are a part owner in that business and you must understand everything about the business. A share will do well if it is a well managed company in the right sector at the right time.

Q9.  How long did you spend in the market before realizing that making money in the market wasn’t as easy as it looked?

Ans: Actually I realized it is much easier than it looks. ‘Keep it simple’ is my philosophy. A 30 minutes study is enough to take a decision whether it is worth investing or not.

Q10. What steps did you take to keep better informed?

Ans: I subscribed to Outlook Money (Intelligent Investor in those days), read the Economic Times daily. I am a voracious reader. The advent of Internet also helped my browse the sites. I joined an online investment club. I found other like-minded investors like me and we corresponded regularly. Then we started meeting once a month and finally gave presentations to each other. Today it’s been more than 10 years that I have been investing in the markets. I have actively seen 2 bear markets and 1 long bull market.

Q11. Did you learn fundamental or technical analysis first? Why?

Ans: Fundamental analysis. For the simple reason I did not know TA existed. For a long time, I did not believe in TA but since the last 2-3 years I am brushing up on that as well.

Q12. Did some one teach you, or did you read some books?

Ans: My mother was my first teacher. She had an uncanny knack of picking up winners just by browsing through the Economic Times. She kept a watch on scrips that were moving up steadily and she used to pick up winners. She still does.

Q13. What books did you read? 

Ans: Peter Lynch is one guy I completely agree with. ‘One up on Wall Street’ and ‘Beating the Street’ are classics. I also read Ken Fisher though it did not fascinate me as much. Of course, the ‘Bhagavad Gita’ of all Investors, ‘Intelligent Investor’ by Ben Graham, and Jesse Livemore’s ‘Reminiscences of a Stock Operator’. Also, I read ‘Technical Analysis’ by Magee and Edwards. Jim Rogers is another great investor. His books are worth reading.

Q14. Were these books useful for a novice investor?

Ans: Yes, though they are for US markets, the lessons are universal. Markets change but investing philosophies remain the same.

Q15. Now with experience, what books would you recommend for novice investors?

Ans: Peter Lynch is one author you should not miss on.

Q16. How do you choose a stock? Top down (sector analysis) or bottom up (stock analysis) or technicals? 

Ans: I look around me. I look at products that are selling well. In 2003-2004, I saw every one buying Bharti Airtel mobile connections. The stock was languishing around Rs 40. I went out and bought Bharti. I saw UTI Bank ATMs popping up all over Mumbai. This was my next purchase. I first look at what is selling in the market. Then I look who are the promoters, and then I look at the financials.

Q17. What fundamental indicators do you use (P/E, P/BV, RoE, Cash Flow, etc.) for stock selection?

Ans. I like to keep it simple. P/E ratio, book value is enough for me.

Q18. Do you think timing the market or timing individual stock entries are feasible?

Ans: This is where TA comes in handy. Technical Analysis tells you when to buy or sell a stock. Fundamental Analysis tells which stocks to buy. If you combine the two you have a winner on your hands.

Q19. What strategies do you follow in a bull market?

Ans: I keep taking my profits and locking them into debt instruments. This reduces my returns, but ultimately you never know when the market will correct. The idea is to build wealth slowly.

Q20. What strategies do you follow in a bear market?

Ans: In bear markets it pays to be cautious. When it is clear that the trend is downwards, it's better to sit on the sidelines. Stick to large caps because they give you safety. Do not enter the markets unless you are sure that the valuations are absolutely compelling and also whether your company will survive the bear market. Stick to quality stocks.

Q21. What is your strategy in a market that is moving sideways?

Ans: I am a long-term investor. I buy when I see value. The market can go anywhere it wants.

Q22. What is your typical holding period for a stock?

Ans: 2 years to 5 years. Over the years I have matured and become more patient. In markets you have to be like a crocodile. Wait patiently for your prey.

Q23. Why and when will you sell a stock?

Ans: I sell when I see that I have made good profits, or if the potential for rise is limited. I find another stock that would give better returns. I also sell when I need the money or when I find I have a made a blunder. I believe in cutting my losses. I never marry my stocks. Stock markets are not a place to be emotional.

Q24. How do you allocate your assets – stocks, fixed income, mutual funds, gold, real estate, cash? A fixed percentage for each?

Ans: I am a conservative person. I never put more than 50% of my assets in stocks. Fixed income and gold form the other 50%. I avoid real estate because there is no transparency and too much paperwork. There is no easy exit.

Q25. How do you react to bonus, rights, stock split, buy-back, dividend announcements?

Ans: Usually gimmicks by the promoters and sell on news.

Q26. How do you react to merger, acquisition, demerger announcements?

Ans: Another gimmick by promoters. Be very careful when you hear such announcements

Q27. Are you for or against ‘Rupee cost averaging’ (a fixed amount of money regularly invested in the market)?

Ans: Strongly in favor of investing regularly in the markets

Q28. Do you think ordinary investors are better off investing in an Index fund or an Index ETF?

Ans: If you do not understand the markets, then definitely yes. Check out the returns during the bull phase.

Q29. What are some of your biggest investment mistakes, and how do you ensure you won’t repeat them?

Ans: DSQ Software and Reliance Petro. I constantly keep updating myself on the markets and I have a long memory. A burnt child always dreads fire.

Q30. What are some of your biggest investment successes, and how will you ensure that you can repeat them?

Ans: Bharti and UTI Bank. I bought Air Deccan when everyone was flying Deccan and sold it at Rs 300 when I felt it was overvalued.

Keep your eyes open. Successful investing is all about common sense. It is no rocket science. Do your homework and book profits regularly. You must network with people who are good investors. You get different insights. Always keep your ego in check. The market is the King. You cannot beat the market. It's like in Game theory, the game always wins. The market will always win. If you try to beat it, you will lose.

-----------------------------------------------------------------------------------

Well, there you have it. Guess Nishit's investment philosophy isn't much different from my own. Experience of different bull and bear cycles teaches you how to be diligent, cautious, and patient (I just happened to use a different animal while talking about being patient in this post in Aug '08- where I had also mentioned of a buying opportunity in Oct '08).

If you have experienced a complete bull-bear cycle and would like to talk about your investment philosophy, please send me an email or leave a comment on this post.