How to Select a Company for Investment - a guest post

The long correction since Mar '15 in the Indian stock market may have finally come to an end. The time for a pre-budget rally has arrived. If you were waiting to enter the market, don't wait any more.

But which stocks should you buy from the hundreds that trade every day? Buying a stock is not buying a piece of paper (or an entry in a demat account). You are buying a 'share' of a business.

In this month's guest post, Nishit explains how you should go about selecting different companies for investment. Promoter integrity is at the top of his selection criteria.

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The Indian economy is showing signs of green shoots and we are in the take off state right now.  People who I meet often ask me how to select a company for investment. There are many things which go into the selection of a company but the most important parameters for me are Corporate Governance, Ethics and Transparency.

I usually look at where the broad economy is going and from that I identify which sectors will do well. Once the sectors are identified, next is identifying companies within the sectors. Investing in a company with a crooked promoter in a good sector will still lose you money. An honest promoter is the most important yardstick while selecting a company.

Promoters can make mistakes which are acceptable; skimming off money from the shareholders is not. Satyam is a prime example of a blue chip company in a very exciting sector of IT going bad. Satyam not only jeopardized the jobs of its employees, eroded shareholder value, it also shook the confidence within the IT industry.

If I was a foreigner waiting to invest in India, I would constantly think which other Satyam was lurking in the wings in the Indian IT industry. Now if we were to compare this with a TCS or Infosys or even a Wipro, the promoter ethics are above board. Wipro might be slow to change but at least we know that the promoter is not skimming off money.

This is the very reason the Tata group of companies is my favorite while investing. With their long history and illustrious background, there is very little chance of fraud happening with the Tata companies. They may be slow to change, there could be some mishaps in decision making but that is acceptable.

If I am assured of promoter honesty then 50% of my worries are taken care of. Stock picking is an art. I normally make up my mind in 30 minutes whether or not to buy or not to buy a stock. If I cannot decide in 30 minutes it means there is something wrong somewhere.

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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. You can reach him at nish.stockid@gmail.com)

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IT Sector stocks – an update

Despite the global economic slowdown, or perhaps because of it, IT sector companies have been relative outperformers in the Indian stock market. Devaluation of the Rupee against the US Dollar has been an added boon.

Large-cap IT stocks have done particularly well. Mid-cap IT stocks haven’t been far behind. But small-cap stocks in general have faced a rough time. In the IT sector, retaining talent is a challenge. That is where smaller companies are at a disadvantage.

IT services remain the major revenue earner. Consulting business is yet to catch on in a big way. With increasing visa impediments – particularly in the USA - the larger companies have focussed on offshore and India businesses. Software product development activity is mostly limited to MNCs.

HCL Tech

The stock has gained more than 200% since the bull run began back in Aug ‘12. Daily technical indicators have corrected from overbought conditions but showing negative divergences by failing to touch new highs with the stock price. There are rumours of a stake sale. May be a good idea to take some profits home.

Infosys

Lack of leadership and so-so performance kept the stock in a sideways range till Narayanamurthy took back the reins. Lot of top-level executive departures have put a question mark on succession issues. The market is obviously encouraged by an improvement in performance.

KPIT Cummins

After an 8 months bear phase (from Sep ‘12 to Apr ‘13), the stock is back in a bull market. Q3 result disappointed the market, causing a sharp fall. Can be added on dips.

Mindtree

The stock is in a terrific bull run, gaining 300% in the past 2 years. Founder and CEO Ashok Soota’s departure has been long forgotten. The stock is looking overbought and ripe for a correction. Dips can be used to add.

MPhasis

This stock has gone nowhere in the past 2 years. Likely drop in business from parent HP and possibility of sale of HP’s entire stake has kept the stock price in a sideways range. Avoid.

Oracle Financials

The stock price is undergoing a correction after touching 3400 in Jan ‘14 – its previous top was also 3400 touched in Jan ‘13. If the stock price falls below the support/resistance level of 2990, the possibility of a bearish double-top pattern may open up.

Tata Elxsi

After a prolonged sideways consolidation that tested the patience of most investors, the stock has broken out sharply and tripled in 5 months. Daily technical indicators are looking overbought. Part profits can be booked.

TCS

The ‘big daddy’ of IT companies has been in a steady bull market with frequent corrections that have kept the chart ‘healthy’. This is a stock that every investor should have in their portfolio. All dips are adding opportunities.

Tech Mahindra

It is a great credit of the M&M management that Satyam Computers has been so well integrated with the company, turning Tech Mahindra’s stock into an outperformer with gains of more than 200% in 2 years. Add on dips.

Wipro

Even after sorting out management issues, Wipro’s performance has been tepid. The stock has returned to a bull market, but gains have been moderate. Switch.

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IT Sector stocks – time to change the game plan?

IT Sector stocks – time to change the game plan?

Recently, Sabeer Bhatia (of Hotmail fame) was in Calcutta/Kolkata for a little R&R-cum-business. (December and January are the two most pleasant months in the city, and attracts NRIs by the hordes.) Along with spending quality time with his in-laws and playing golf, Sri Bhatia indulged in promoting his latest venture (JaxtrSMS - free SMS through the Internet), hobnobbing with the Chief Minister and giving press interviews and speeches at IT industry gatherings.

One of the important points he raised was that Indian IT companies are over-dependent on selling services through hiring out consultants to overseas clients. Successful Indian software products are conspicuous by their absence. Apparently, JaxtrSMS has been totally designed and created by Indian software engineers sitting in India. It is time that other companies follow his lead.

Certainly the 10 chart patterns of Indian IT companies attached below indicate that Sabeer Bhatia may be right – it is time to change the game plan from services to products if the Indian IT sector wishes to retain its position in the global pecking order. Already, Philippines and East European countries are taking away IT-enabled service contracts from India.

HCL Tech

HCL Tech formed a double-top reversal pattern during Apr ‘11 to Jul ‘11 and dropped sharply into a bear market. The chart is looking weak and the price can dip to test the Aug ‘11 low. Switch to Wipro.

Infosys

The recent changes in management seem to have robbed Infosys of whatever little aggression it had. The recent attempts at getting back into a bull market have fizzled out. The stock is looking oversold, and can bounce up towards the blue up-trend line. That will be a selling opportunity.

KPIT Cummins

After touching a peak in Jul ‘11, KPIT Cummins is making a bearish pattern of lower tops and lower bottoms, and is in a bear market. The chart is looking weak, and the stock can test and break the Dec ‘11 low. Sell.

Mindtree

Ashok Soota’s departure from the helm of affairs hurt the market sentiment badly. The Mindtree stock is trying to extricate itself from a strong bear grip – with some degree of success. The stock is making a bullish rounding bottom pattern, and can be added on dips (but with strict stop-loss).

MPhasis

Not sure what MPhasis is doing currently, but the chart pattern shows that it is not doing it well. The stock is deep inside a bear market and likely to fall further. Avoid.

Oracle Financials

The stock of Oracle Financials peaked out in Jul ‘11 by making a small double-top reversal pattern, and is in a bear market. The stock is expected to resume its fall soon as both the RSI and the slow stochastic are showing overbought conditions. Sell.

Tata Elxsi

Tata Elxsi seems to have lost its way, and is sliding in a bear market. The current rally has been on falling volumes and both the RSI and the slow stochastic are looking overbought. Avoid.

TCS

Despite its gap-down fall below the blue up-trend line – probably in sympathy with the Infosys stock – TCS is technically in a bull market. Both the RSI and the slow stochastic are looking oversold, and a pullback towards the blue trend line is on the cards. Use the opportunity to book partial profits. Q3 results may not be as bad as some are expecting.

Tech Mahindra

Tech Mahindra is another stock that peaked out in Jul ‘11 and quickly slipped into a bear market. The next leg of the down move may start soon. Get out.

Wipro

Wipro has recovered very smartly after a short spell in a bear market. The ‘golden cross’ of the 50 day EMA above the 200 day EMA will confirm a bull market. Change of CEO has brought in new direction and aggressiveness that was lacking earlier. Use dips to buy.

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In which IT Sector stocks should you invest?

The Sensex Fool’s Four stocks

This is a sequel to last Thursday’s post: Fool’s Four stock investment strategy. Before proceeding further, let me thank readers Googol, Purnendu and Rishi for providing me with their lists.

There are a few stocks common in their lists with mine, but there are differences due to changes in current market prices, adjustments for split/bonus and calculation of dividends. I have checked the list to the extent possible, without turning it into a research project. But there may be errors in my list as well.

The point to note is that the stocks that make the list – with one notable exception – have under-performed the Sensex by various degrees. That is the whole idea behind the Fool’s Four strategy. Without further ado, here are the Sensex Fool’s Four stocks:

1. NTPC
2. Jaiprakash Associates
3. ITC
4. ONGC
5. Wipro
6. Tata Steel

Why 6 stocks? Well, if you read the previous post, you will know that the stock ranked 1 – viz. NTPC - is supposed to be dropped from the list. That leaves 5 stocks. Regular readers may be aware that I am biased against PSU stocks because the government treats them as ‘free ATMs’ and run them to the ground. That eliminates ONGC from my list.

Given below are the one year closing charts of the remaining four – compared with the Sensex (in green):-

Jaiprakash Associates

Jaiprakash Associates has been a significant underperformer for the past one year, and it isn’t a surprise that it is at the top of the list. The company’s ambitions have far exceeded its execution capabilities. The huge debt burden is a millstone around its neck. Since it has fallen so much, the chances are better for a higher percentage gain when the market eventually turns around.

ITC

ITC is the odd-one-out of this list. It was a market performer till Feb ‘11, but has significantly outperformed the Sensex from Mar ‘11 onwards. The special centenary dividend boosted the dividend yield. The dividend is unlikely to be repeated next year. But this is a great stock to own – even if it wasn’t on the list.

Wipro

Wipro had outperformed the Sensex till mid-Jul ‘11. It is the last two months that haven’t gone well. There are management issues that haven’t yet been sorted out to the market’s satisfaction. Of late, it has fallen behind aggressive competitors like Cognizant and HCL Tech. But it is a good company and may fight back.

Tata Steel

Like Wipro, Tata Steel has underperformed the Sensex in the last two months. It is the lowest cost integrated steel maker in India and extremely well-managed. The Corus integration is still a work-in-progress, and the real benefits of the acquisition may be a couple of years away. But I have no doubts that the current problems in Europe will be overcome, and the company’s bottom line will significantly improve.

The Fool’s Four strategy suggests that you invest equal amounts of money in all four stocks, and make any adjustments only after one year. Will the strategy work? There is only one way to find out – by investing. Or, you can opt out by only investing ‘on paper’ and check back after one year.

In which IT Sector stocks should you invest?

The IT Sector had been one of the star performers in 2010. With the US and Eurozone economies showing signs of recovery, it is expected that the sector will perform well in 2011 also. A performing sector doesn’t mean all the companies in the sector are worth investing in. Some stocks are leaders; some are laggards. Some are just not getting anywhere.

Here are the chart patterns of 10 IT sector stocks – including the four big guys and a few mid-caps. With demand for experienced manpower on the rise, the problem of attrition is causing concern. The big guys with their geographically spread out operations in different verticals is better able to manage attrition than the smaller players.

TCS

TCS is the jewel in the crown of the IT sector, and has been in a raging bull market, touching new highs on a regular basis. After a decent correction during Mar-May ‘10, when the stock almost fell to the 200 day EMA, the stock touched a lower bottom, but the RSI made a bullish higher bottom. For the past month, it has been in a consolidation mode with an upward bias. The stock is at an all-time high, so caution is advised. The RSI and slow stochastic are showing negative divergences. Hold. Add on a slightly deeper correction.

Infosys

The Infosys stock is also in a strong bull market, touching higher tops and bottoms for the past 12 months. The correction during Apr-May ‘10 touched a higher bottom. Both the RSI and slow stochastic have fallen sharply from their overbought zones. The correction may continue for a while longer. Hold, and add the dips.

Wipro

Wipro is also in a bull market, but the Oct ‘10 high has not been breached yet. The stock is showing some weakness near its previous high, and a bearish double-top pattern may be forming. Wipro has never quite been in the same league as TCS and Infosys. It is reflected in the stock’s performance. Book partial profits.

HCL Tech

HCL was an established company when Infosys first appeared on the scene. Somehow, their head-start in the small computer manufacturing and marketing field could not be leveraged into leadership in the software services field. That doesn’t mean that their stock is doing badly. It is in a bull market, and has given decent returns in the past 12 months. Can be added on dips.

Oracle Financials

The Oracle name hasn’t changed the fortunes of the original iFlex. Though the stock is technically in a bull market (trading above a rising 200 day EMA), it has traded in a sideways range for the past year and has given negative returns to shareholders. Switch.

MPhasis

Mphasis hit a peak in Feb ‘10, fell well below the 200 day EMA, and has since been oscillating around its long-term moving average. The stock has given negative returns to its shareholders in the past year. Switch.

Tech Mahindra

Tech Mahindra is trading below its falling 200 day EMA, making lower tops and bottoms and is technically in a bear market. The British Telecom connection has broken and the Satyam amalgamation will be a heavy cross for investors to bear. Avoid.

Mindtree

The Mindtree stock is not going anywhere. It is making an effort to move above its 200 day EMA, but is trading within a bearish pattern of lower tops and bottoms. Not quite as bearish as Tech Mahindra, but an ‘avoid’.

KPIT Cummins

The KPIT Cummins stock dropped like a stone below its 200 day EMA back in May ‘10. It recovered sharply to double in value in Aug ‘10. It has been in a down trend ever since, and is about to drop into a bear market. Sell.

Tata Elxsi

Tata Elxsi touched a high-volume peak in Mar ‘10, and has been oscillating around its 100 day EMA since then. Shareholders have got no returns. The stock is technically in a bull market, but the chart pattern does not inspire any confidence. Hold.

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Why did the Sensex fall so much today?

One of the favourite pastimes (or is it bread-and-butter?) of market analysts is to assign reasons for gyrations in the Sensex after it has gone through a big up or down move.

Some times the reasons are genuine and accurate. Mostly it is an exercise in trying to explain the unexplainable. The Finance Minister said that inflation in food prices will slow down, so the Sensex moved up. Several Indians are on a ship hijacked by Somali pirates, so the Sensex moved down. You get the drift.

I have no intention of doing a post-mortem. I'd rather quote from this recent article:

'... 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.'

Larsen and Toubro's Q3 Profit After Tax (PAT) grew 15% on a Year-on year (YoY) basis; the stock fell more than 6.6%. BHEL's Q3 PAT rose more than 35% on a YoY basis; the stock dropped 4.25%. Wipro's Q3 PAT increased more than 21% on a YoY basis; the stock dipped by 2.2%. ONGC's Q3 PAT was higher by 23%; the stock shaved off 2%.

Is the market behaving irrationally? Not at all. The results were below the market 'expectations'. It was the expectations that were irrational.

Will the Sensex fall some more? The probability is high, because the expectations of growth of the Indian economy has been on the irrational side as well. The actual growth is likely to be lower.

For the April to December '09 period, indirect tax collections have suffered. A 13% dip in excise duty, a 6% drop in service tax and a hefty 28% cut in customs duty has led to an overall 18% lower collection over the previous year's same period. These figures will not enthuse market players.

World indices are facing headwinds, with the Dow dropping like a stone at the time of writing this post. FIIs have been selling for some time, and buying by DIIs may not stem the rot.

What should small investors do? If you have been reading my blog posts regularly, you already know my answer. Wait and watch, but stay nimble. Curb the urge to dive in. This could be a quick, sharp cut before the Sensex recovers. The India growth story is far from over.

Will the H1/L1 US visa restrictions 'news' affect the IT sector?

A couple of months back, I had written a post about how to use financial news. Four categories of 'news' were discussed - good, great, bad and worse. Some suggestions about how to deal with such news were given.

What if there is a fifth category? Some item that appears in the pink papers or business channels as 'news' and causes some turmoil in the stock markets - but later turns out to be a misinterpretation? It wasn't really 'news'?

It is difficult to take any action till you receive further clarifications. Or, you may have an 'insider' in the industry or sector who can separate the wheat form the chaff and go to the core issue to advise you.

The recent 'news' about the H1/L1 visa restrictions for temporary non-immigrant workers in the USA is a case in point. The business channels went to town about it, asking leading members of the IT industry how these restrictions will affect their top lines and bottom lines.

Some retail investors dumped Infosys, TCS and other IT stocks. Some even stated that the leading IT sector stocks had become 'fundamentally weak'. The 'smart money' lapped up the stocks.

Any one who has spent a few years in the IT industry and has worked in the USA would take such 'news' in their stride. Because (s)he would know that similar 'news' keeps popping up every so often only to dissolve without a trace.

Why? Because the visa restriction 'news' was only a proposal by a couple of senators - pandering to the popular misconception that most of USA's unemployment problems have been caused by jobs being outsourced to India.

It takes a very long while - some times, forever - for such restrictive proposals to become a law. The proposal needs to be tabled and passed in the US Congress and the Senate. There will be a strong Indian-American lobby that will be working against it.

Even if the proposal gets through both houses, it is likely that there will be several amendments made to the original draft proposal. Each amendment will take its own sweet time to go through.

The US President has to sign the revised proposal to turn it into a 'law'. He has the authority to turn it down, or - you guessed it - seek more amendments. Many such proposals never get to become a law. Even if it does, most of the severe restrictions are likely to get diluted.

At the end of it all, should the visa restrictions become a law, it will not take effect retrospectively. Meaning, existing H1/L1 visa holders will not be affected. Only new visa applications made after the law comes into effect will face the restrictions.

Who might get affected the most in the IT sector? It will be the small body-shoppers whose business model is to hire out programmers to different US companies.

Also affected will be large US IT companies like Microsoft, Oracle, Cisco who employ significant numbers of H1/L1 software personnel from India. They will face difficulty in finding new employees from the US job market. So they will probably be lobbying the US government to veto such a restrictive proposal.

Infosys, TCS, Wipro have globally dispersed businesses, with a large portion of the work done 'offshore' in India. They will be inconvenienced, but the effect on their top line and bottom line will be very little.

Stock Market News, Financial News - Mar 13, 2009

GLOBAL MARKETS - World stocks charge higher on better banking hope

By Jeremy Gaunt, European Investment Correspondent

LONDON (Reuters) - World stocks were on track on Friday for one of their largest weekly gains in 20 years, propelled by growing confidence in the recovery of the U.S. banking system.

Wall Street looked set to open with hefty gains and government bonds sold off.

The Swiss franc steadied, a day after the Swiss National Bank knocked it sharply lower by intervening to weaken the currency to make it more competitive, a move that triggered some concerns about countries embarking on a currency war. (More ...)

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ANALYSIS - Banks toughen as flimsy boom-time loan deals hurt

By Tom Freke

LONDON (Reuters) - Flimsy loan agreements drawn up in haste during the credit boom are coming back to haunt lenders as private-equity owned companies blow up without advance warning, forcing banks to rein in lending and tighten standards.

Italy's Ferretti shocked lenders when its value plummeted to little more than 100 million euros ($126.9 million) last month -- roughly the same value as just two of the luxury shipbuilder's most expensive yachts.

There had been little warning the group was in difficulty before its private equity owners walked away. (More ...)

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Homes slump, but finance upbeat

Hindustan Times

Amid a general slowdown in construction and real estate industry and poor credit offtake, the housing finance industry remains bullish about growth hoping to disburse over 10 per cent more loans in 2008-09 as compared with the previous year.

"There won't be contraction in numbers for the year and the industry will end the year with growth," said Keki M Mistry, vice chairman and managing director, HDFC. (More ..)

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TATA-owned Land Rover offered 27 million pounds to produce 'Green Car'

By ANI

London, Mar.12 (ANI): The British Government has offered a grant of up to 27 million pounds to TATA-owned Jaguar Land Rover for the production of a new 'green' car.

According to a Sky News report, the company will make a decision later this year on whether to go ahead with the 400 million pound project at its factory at Halewood on Merseyside.

The car will be based on Land Rover's LRX Concept vehicle. (More ...)

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FE Editorial : Reading data; CPI at 10.45%

By The Financial Express

Inflation at 2.43% and industrial growth at -0.5% strengthens the much-discussed narrative of depressed economic activity. But a closer look yields some interesting sub-stories. January's negative index of industrial production (IIP) figure is the second dip in two months. But note that for December, for which the original IIP was -2.6%, the revised figure, while still negative, has been revised upwards to -0.6%. This, and the fact that consumer goods and consumer durables posted positive growth in January (in December's IIP, durables had posted double-digit negative growth) leads to the question whether we are seeing early signs of an uptick in the near future. (More ...)

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Wipro Infotech wins Rs 1,182 Crore e-governance project from ESIC

By Financial Express Bureau

Wipro Infotech, the India and Middle East IT business wing of Wipro Ltd, won an e-governance project, titled Panchdeep Project and worth Rs 1,182 crore, from the Employees' State Insurance Corporation (ESIC).

ESIC is a statutory corporation under the ministry of labour and employment, Government of India. It is the implementing agency of a pioneering social security scheme in the country. (More ...)

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.

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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.