A beginner’s guide to stock investing – a guest post

Most new investors jump into the market when the Sensex is near a peak, and there is a feeling of euphoria all around. That is precisely the wrong entry point. Investors tend to shy away from the stock market when bears are on the prowl and even well-known and well-established companies trade near 52 week lows.

Nishit feels that bear periods are great times to do your homework and get ready for entering the market once things improve. In this month’s guest post, he explains the steps that novice investors can take for building wealth through stock market investments.

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I often face this question from my colleagues: How do beginners begin investing in stocks? The fear factor is what prevents many people from investing. The first step is often the most difficult one to take to start as an investor.

One of the first things to do is to start small. Start with a capital which you can afford to lose. The ‘tuition fees’ are needed to be paid to the markets. Till one actually invests (and loses some money), one cannot get a feel of the markets. Now that one has earmarked a small sum to play with, the next step is to identify a decent online brokerage. Most of the novices are normally fixated with the amount of brokerage one has to pay. That should be the least of one’s concerns. Remember you are an investor, not a trader. Best is to stick to some big player like ICICI Direct or HDFC Securities.

So, we have allocated funds and have an online account in place. What next? Now comes the most interesting part. Nothing beats reading. While your account is being opened, do start reading. Read the Economic Times daily, and the Hindu BusinessLine on Sundays. There are several good books for reading, like Beating the Street and One up on Wall Street by Peter Lynch; Rich Dad, Poor Dad by Robert Kiyosaki. Once one has read up a bit, one can read the grand daddy of all investment books, The Intelligent Investor by Benjamin Graham.

When buying a stock, make sure you are clear in your mind about why you are buying the stock. Start off by buying blue chip stocks. Remember if one makes losses initially it may put off the investor from investing for a lifetime. Stock picking is a fine art and one improves with time.

Also, start of by visiting blogs and websites like www.equitymaster.com to get a feel of the markets. Make sure you review your portfolio once a week. A portfolio should contain about 5-10 stocks. Next is keep track of earnings and news related to one’s stocks by visiting www.nseindia.com

Often, the process of seeing a blue-chip winner is more interesting and satisfying than the actual profits one makes. Each of us is a specialist in the field where we earn a living. Start off by exploring stocks in your area of competence. A doctor could explore Pharma stocks, an IT engineer the software companies, and so on. Also, ask your friends and relatives about companies in their domain of expertise.

The housewife is one who has a vast circle of competence. She knows which items are popular in the grocery store and can look at investing in those companies.

Those folks who find doing all this cumbersome and boring, mutual funds are the easier way out. HDFC Top 200 is a blue chip fund with a portfolio of good companies which has returned compounded 23.58%, which means Rs 10 invested in 1996 is now Rs 196. 20 times returns in 15 years. In this case, sit back, relax and enjoy your life.

For all Mutual Fund Investors, www.valueresearchonline.com is the mother of all sites. One can research one’s fund here and invest.

To create wealth, stock market investment is a must. It is not rocket science and even the lay person with a bit of reading up can become an informed investor.

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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 stock market technical analysis chart patterns act like airport windsocks

One of the interesting aspects of writing a blog is that I get almost instant feedback from readers. It is a real joy when my posts on technical analysis of stock index chart patterns motivate some of you to get interested in the subject.

Carl Swenlin, a self-taught technical analyst, has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports.

Below his weekly technical analysis posts is the following comment:

'Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.'

(If you have never seen a windsock or don't know its purpose, here is a link that will enlighten you.)

One of the reasons that technical analysis of stock market chart patterns doesn't find favour among many well-known stock market gurus (like Warren Buffett, Peter Lynch and others) is probably because they don't need to use it.

They are like the 'jumbo jets' of the investment world that can take off and land in fair weather and foul, regardless of wind conditions. They have ready access to the upper echelons of the corporate world.

But what about us - the single-engine turboprops trying to fly with limited resources? Wind and weather conditions play an important role in our longevity. We have to use as many tools as are available to make our path to investment success a little less thorny.

Fundamental analysis alone may not help us to reach our goal of financial independence. Why? The Satyam scam has shown how managements out to commit fraud can hoodwink the best known auditors. Even if we are convinced about the management, we rarely have information about the actual operations inside any company.

The collective wisdom (or lack of it) of the market players tend to get reflected in the price charts. If we learn to identify similarities in price patterns from stock charts, it gives us an idea about which way the wind is blowing.

What these chart patterns can not reveal with a high degree of accuracy is which way the wind will be blowing three months or a year later. But, like a windsock, they can be very useful when we decide to land ('sell') or take off ('buy').

Now, learn portfolio strategies from a game of stud poker

One of the best ideas for managing your portfolio on an ongoing basis is to treat each stock (or fund) in your portfolio as a hand in a game of stud poker. Not my idea. Peter Lynch mentioned it in his book: "One Up on Wall Street".

Stud poker is a 'man's game', pitting strong-willed men with nerves of steel and expressionless faces against each other across a card table. The game has been immortalised in several Hollywood films.

Two of them - my favourites - come to mind. The old pro, Edward G. Robinson playing against the new kid on the block, Steve McQueen, in "The Cincinnati Kid". And a sophisticated Robert Shaw being taken for a ride by a bumbling Paul Newman in "The Sting".

The game - for the uninitiated - is simple enough. A card is dealt face-down, which can only be seen by the player to whom it was dealt. This is immediately followed by a second card dealt face-up to each player. All players get to see the face-up cards. A round of betting follows. Each bet is for a specific amount.

A player has the option to 'fold' (i.e. take no further part, if the cards he has been dealt are not to his liking); 'call' (i.e. stay in the game by betting an equal amount) or 'raise' (i.e. increase the bet by a pre-determined amount). Every time a player raises the bet, another round of betting follows.

The process is repeated three more times, as a card is dealt face-up to each player remaining in the game. After all five cards for each hand have been dealt (one face-down and four face-up) and the betting is concluded, the players remaining in the game show their hands to the others. The player with the best five card combination wins.

I'm not a gambling man, nor do I advocate a gambling mentality in the stock market. But the analogy - that each stock (or fund) in your portfolio is akin to a hand at stud poker - seems very apt.

The face-down card is like some knowledge or information you may have about the company that may not be known to the general public. Each face-up card is some bit of financial news or company-specific information that becomes available in the market.

As each 'card' is dealt, you need to take some action as an investor. If it is pretty bad news - like the Satyam fraud, or Punj Lloyd's overseas subsidiary delaying a project and incurring a huge penalty - you should fold (i.e. sell) that particular hand.

If it is so-so or good information - like Larsen and Toubro bagging a new order, or Tata Investment declaring a marginal profit and matching last year's dividend - you may hold your stock (or fund).

If it is better news - like 3i Infotech declaring increased profits when most IT companies were struggling in the down turn - raise the bet (i.e. buy some more).

You'll need the mental and physical discipline of tracking each bit of information about each of the stocks (or funds) in your portfolio, analysing the consequences and filing it properly at a place from where it can be retrieved easily.

It is not rocket science, but it has to be followed diligently on a regular basis - at least once a week. That means not only tracking company results and announcements, but also the forex rates and macro-economic and political news to understand the implications and likely effects on your portfolio.

Many intelligent individuals never succeed in their market investments. A probable cause can be the lack of time and/or discipline in following a regular process of updating information about their portfolio holdings.

Life becomes a lot easier if you manage to limit your holdings to 10-12 stocks or 5-6 mutual funds. Keeping track of fewer companies improves your chances of being able to move quickly as the situation demands.

Weekly tracking of a smaller number of companies (or funds) means you will tend to remember the important bits of information necessary for taking buy-sell-hold decisions.