The Most Crucial Financial Ratios For Penny Stocks

Given adequate financial disclosure, we can apply some of the same analytical methods we use for larger companies to determine if a given penny stock is worth our investment dollars. 

Strong numbers and a positive trend on the balance sheet, income statement, and cash flow statement, are important because so much of the penny stock’s value is based on future expectations of performance.

Read more at:
https://www.investopedia.com/articles/investing/061915/most-crucial-financial-ratios-penny-stocks.asp

10 Tips for Successful Long-term Investing

'Butch Cassidy and the Sundance Kid' is a 1969 Western (directed by George Roy Hill) about two bank/train robbers who flee to Bolivia when the US Marshals get too close to catching them.

There is a scene where Harvey - a member of Butch and Sundance's gang - decides to take control of the gang by ousting Butch. They get involved in a knife fight. Before the fight can start, Butch wants to straighten out the rules.

Harvey says: "Rules? In a knife fight? No rules!" At which point, Butch just walks up to him and kicks him in the groin.

There are no (money-making) rules in the stock market. If you have a  'get in - get out - make a killing' mentality, and are not careful about learning the basic guiding principles of long-term investing, you are likely to get kicked where it hurts most (i.e. in your wallet).

What about the Jhunjhunwalas and the Damanis? Aren't they making a killing every day by short-term trading? Sure they are. But they are seasoned pros. You don't want to get into a fight with them!

A simple and sensible way to build wealth from the stock market is to take a long-term view by investing small sums of money on a regular basis, and letting the amazing power of compounding do its magic over the years. 

Without any further digression, here are the ten guiding principles (do's and don'ts) of successful long-term investing:

1.  Sell the Losers and let the Winners ride (easier said than done)
2.  Don't chase 'sure shot tips' 
3.  Don't worry about intra-day and short-term price movements
4.  Don't give undue importance to the P/E ratio 
5.  Resist the impulse to buy penny stocks
6.  Invest according to a clearly-defined strategy and stick with it
7.  Focus on the future potential of a company, not just its past data
8.  Always think long-term (not just 1 or 2 years)
9.  Be open-minded about market-cap
10. Be concerned, but don't worry, about taxes (Hint: Long-term investing is more tax efficient)

So there, you have it. By following these simple guidelines, any one can make money from the stock market.

Read more in this article by the staff of investopedia.com.  

Risk vs. Return - a T20 Cricket analogy

There was a time, when cricket matches were played over 6 days - 3 days of cricket followed by a rest day, and then 2 more days. They were called test matches. 

Players behaved like gentlemen. The umpire's decision was final. There were no TV reviews or 'snicko-meters'. If a fielder didn't take a catch cleanly, or stepped over the boundary rope doing so, he signalled it promptly to the umpire.

There was fierce competition, but no sledging. Batsmen appreciated a good ball by an opposing bowler. Fielder's appreciated a good stroke by an opposing batsman. A maiden over was applauded by spectators.

Test matches are still played - over 5 days. But they often finish in 3 or 4 days. Why? Because batsmen and bowlers adopt tactics they have learned by playing the shorter versions of the game - like slower balls, scoop shots and reverse sweeps.

Initially, there were 60 over games. India, under the captaincy of Kapil Dev, won the World Cup in 1983 by scoring 183 runs. They were all out in the 55th over. West Indies managed 140 in 52 overs. Those scores are now considered inadequate in T20 cricket! 

In the inaugural World Cup in 1975, a gentleman by the name of Sunil Manohar Gavaskar remained not out for 36 runs after carrying his bat for the entire 60 overs against England. That was probably his way of protest against the shorter version of the game.

Many (including yours truly) don't like T20 cricket. The art and finesse of out-thinking a bowler or batsman by working on their weaknesses for 10 or 15 overs has almost been forgotten. Now the emphasis is on heavy bats with which it is easier to hit sixes.

Batsmen have forgotten the meaning of 'footwork'. Bowlers can no longer scare a batsman into submission with bouncers because batsmen have additional protection from helmets, arm guards, chest pads, thigh pads. In any case, bowlers are restricted to 1 or 2 bouncers per over.

(People talk about Sachin Tendulkar as an all-time great because of all the hundreds he scored. But has anyone kept a score of how many times Sachin was hit on his helmet? Gavaskar never wore a helmet and hit hundreds against fearsome West Indian fast bowlers like Holding, Roberts, Marshall.)

Virat Kohli is one of the few modern batsmen who has shown that footwork and proper cricketing shots have a place in T20 cricket as well. He has cut down on risk by hitting more shots along the ground - only resorting to hitting a 6 when the situation demanded it, like in the recent T20 World Cup group match against Australia.

By contrast, Bangladesh threw away their group match against India by taking on undue risk by trying to hit over-boundaries when they could have easily won the match by taking a couple of singles.

And there lies a lesson for young investors, who feel that high risk is associated with high returns. Investing is not a T20 game of 3 hours. It is more akin to 6 day test matches of olden days.

To build wealth from the stock market, you have to plan a strategy well in advance and execute it over a long period of time. Buying a penny stock and hoping for multibagger returns is like dancing down the track to hit a 6 in a T20 game. More often than not, you will either get stumped, or get caught in the deep.

As Geoffrey Boycott once said to a schoolboy cricketer: "Don't get out. The runs will come." 

Why small investors should relentlessly pursue Saraswati and wait patiently for the blessings of Lakshmi - instead of the other way around

In Hindu mythology, the Holy Trinity of Lord Brahma, Lord Vishnu and Lord Maheshwara represent the cycle of life - Creation, Preservation and Destruction.

They are also symbols of the three ‘gunas’ (or attributes) of the soul – sattva, rajas, tamas – that have to be understood and then transcended for the soul’s liberation and eventual union (yoga) with the Universal Consciousness.

The Divine Consorts of the three Lords are Saraswati, Lakshmi and Parvati. Saraswati is the Goddess of learning, speech and music. Lakshmi is the Goddess of wealth, prosperity and generosity. Parvati is the Goddess of fertility, love and devotion.

Here, we will concern ourselves with Saraswati and Lakshmi – who appear to be mutually exclusive. Where one is present, the other is absent.

There is a Bengali proverb that says: “Those who concentrate on their education eventually get to ride in nice cars.” In other words, pursue Saraswati, and Lakshmi will eventually give you her blessings.

Times have changed. Saraswati has taken a back seat. Lakshmi has become the Goddess to be pursued – by hook or by crook. The concept of ‘capitation fees’ paid by wealthy parents to private medical and engineering colleges to admit their academically inferior sons and daughters is a glaring example.

Those with knowledge and learning have very little money. Those who have lots of money are often crude and semi-literate. Many of our rowdy Parliamentarians have amassed vast amounts of money through dubious means.

Many small investors perhaps get influenced by what is going on around us. The video of a farmer who has not paid the last three instalments of a Rs 1 Lakh loan getting beaten up by uniformed cops no longer shock us.

The King of Good Times, a willful defaulter of over Rs 9000 Crores of loans from several banks, thumbs his nose at authorities and flies off to a foreign land and there is a murmur of protest in social media, which will soon die down.

As someone put it succinctly: “If you owe 1 Crore to a bank, it is your problem. But if you owe Rs 1000 Crores, it becomes the bank’s problem."

So, why am I suggesting that small investors should pursue Saraswati and wait patiently for Lakshmi? First, I belong to the old school of the Bengali proverb mentioned above.

Second, most small investors may not have the resources of our wily politicians to launder their wealth into real estate projects or foreign bank accounts through ‘hawala’.

Making money from the stock market is the easier part. Retaining that money and growing it into long-term wealth requires skill and learning.

If you are suddenly blessed by Lakshmi and make a 10-bagger return on a penny stock, will you know how to turn that 10-bagger return into 100-bagger wealth? Or, in your urgency to chase Lakshmi, will you reinvest in another penny stock and lose it all?

Not only do you need to learn about the economy, money market, bond yields, put/call ratios, fundamental and technical analysis to survive in the stock market, you need to follow proper financial and asset allocation plans.

Without the blessings of Saraswati – which requires life-long commitment to learning – the blessings of Lakshmi may be short-lived. Unless – according to a Marathi proverb – she breaks her leg and has to stay put at your home for some time. 

Aggressive Investment Strategy

Of late, I have received several requests from investors seeking help with their investment portfolios. Earlier, such requests used to come when the stock market was nearing a bull market top.

This time it has been different. The market is at the tail-end of a 10 months long bear phase. The timing is much more appropriate for building or modifying an existing portfolio.

It clearly shows that small investors are becoming more savvy about when to buy. One of the reasons for starting this blog was to highlight the fact that 'when to buy' is just as important as 'what to buy'.

Without analysing the fundamentals of a company, buying its stock is like shooting in the dark. Chances of missing are far greater. But choosing the right stock is not enough if you buy it just before, or just after, it enters a correction. That is where technical analysis can help.

Even before you start fundamental analysis of a company, or technical analysis of its stock price, there are important decisions to be made. Like, what do you wish to achieve by investing in stocks? Make some quick money to buy the latest iPhone or put a deposit on a new car? 

Or, would you prefer to build wealth for the long-term - using stocks as an asset class that can generate risky but inflation-beating returns?

In other words, you need to make a plan. First, a financial plan to fund your long-term goals and commitments. Then an Asset Allocation plan based on your risk tolerance to achieve those goals.

If you are in your 20s or 30s and earning good money with decent savings, you can afford to be aggressive about your investment strategy. 

Being aggressive doesn't mean buying 10000 shares of a penny stock and selling it for a Rs 2 gain after a month. That is being foolish - because the penny stock can just as well go down by Rs 2.

To learn more about aggressive investment strategies, read this article.

The Risks & Rewards of Penny Stocks

Message boards in many investment groups and web sites are full of 'buy' recommendations for unknown small-cap stocks. Why do small investors get attracted - like moths to a flame - by such recommendations?

Two reasons: desire for instant gratification and greed. No one is willing to put in the time and effort in studying the fundamentals of a company. Much easier to follow some one's tips - and more fun if it is a penny stock, because more is the possibility of a multi-bagger.

End result? Getting stuck with unsaleable stocks, losing money, and losing faith in the stock market. Moral of the story? Small investors should read and learn about the stock market before spending a single Rupee. When they are ready, they should get their feet wet by investing through mutual funds.

Should small stocks be avoided entirely? Yes, if you are a novice. No, if you have paid your dues and appreciate and understand the risks involved.

In a recent article at investopedia.com, the risks and rewards of buying penny stocks have been explained. You can read the article here.

Related posts

The futile quest for the mythical 'multibagger'

'Fatal Attraction', or why small investors prefer small-cap stocks

Technical updates – Punj Lloyd and Suzlon

The two budget proposals during the week were met with widespread selling in the stock market. Huge expectations from the Modi-led NDA government had caused a sharp rise in stock prices – particularly of stocks from the infrastructure sector.

It turned out to be a case of ‘buy the rumour and sell the news’. The budget proposals had few populist measures and no big-bang reform proposals. Perhaps it was too much to expect from a government that has spent less than 2 months in power.

Interestingly, many stocks hit their peaks in June ‘14, well before the two budgets. The two stocks discussed below were darlings of small investors during the 2003-2007 bull market. Their tough times continue despite significant gains from recent lows.

Punj Lloyd

The stock of Punj Lloyd had closed at 63 back in Jan ‘13. But that was a bear market rally top. The stock soon dropped below all three EMAs. Another rally carried the stock to a lower top of 56 in May ‘13 – but the long-term support/resistance level of 57 stalled the rally.

The stock plummeted like a stone to drop to a low of 21 in end-Aug ‘13, where it formed a small double-bottom reversal pattern and started to recover. After climbing above its 20 day and 50 day EMAs, the stock entered a sideways consolidation with a slight upward bias that lasted 7 months.

All three EMAs converged in May ‘14 – and as often happens, a sharp price spurt on strong volumes followed. The stock again faced resistance from the 57 level, and has corrected down to its 50 day EMA. Technical indicators are looking bearish and oversold, which may lead to a bounce up.

The stock is technically in a bull market – but invest at your own peril. Fundamentals are atrocious.

Suzlon

The Suzlon stock has a love-hate relationship with me. I love to hate it. If you don’t know why, please read this post.

The stock spent a long period in bear territory and dropped to penny-stock status in Jun ‘13. It dropped to a low below 6 in Aug ‘13 before recovering to test its 200 day EMA in Oct ‘13.  The next 6 months were spent in a sideways consolidation in and out of penny-stock status.

A sharp rally in Apr ‘14 propelled the stock to a 2 years high of 36 in Jun ‘14 – a whopping 6-bagger gain in less than a year! All four technical indicators became overbought. The subsequent correction has dropped the stock to its 50 day EMA.

Technical indicators are looking oversold, and the stock price may bounce up from here. The company has huge losses and massive debt. Stay as far away as possible.

Do investors have the ‘if-its-free-I’ll-take-two’ syndrome?

Before I can answer the question, I need to tell the story about the syndrome.

A young boy was being taught by his father about prudence in handling money. Here are the three important guidelines provided by the father:

• Live within your means and try to save money from whatever little you may have
• Always ask the price of anything you wish to buy, and then decide if you can afford to buy it
• Don’t blindly accept a quoted price; try to bargain and buy at a lower price

Well-versed in the guidelines, the young boy went to the local ‘paanwala’ to buy some candy. On being told that the candy cost a Rupee, he promptly started to bargain. Despite repeated pleas by the ‘paanwala’ that there was no discount on a candy costing a Rupee, the boy would not relent. A small crowd had gathered on hearing the commotion, and potential customers were walking away. In desperation, the ‘paanwala’ handed over a candy to the boy, saying: “Take this. It’s free. Now please leave.” The boy was delighted, but refused to budge. “It’s free? Then I’ll take two!”

That boy must have grown up to be a stock investor. He also must have told all his friends – who also became stock investors. How do I know this? Because of the proliferation of web sites offering “sure-shot free stock tips” and “99.9% success guaranteed Nifty tips”.

There was a time when I used to go out of my way to provide free advice to young investors about what stocks to pick and how to build a portfolio. But I no longer give free advice – except in my blog posts. Why? Because I found out that most investors were not following my advice at all. In fact, they were doing just the opposite. They would not buy the stocks I’d recommend, and would go right ahead and buy the stocks I suggested that they avoid!

Then a wise reader related the story of a doctor in a small town who decided to treat patients for free after his retirement. Hardly any one showed up at his chamber. Then he decided to charge a reasonable fee. Soon, he had several patients visiting his chamber every day. The moral of the story is: No one respects free advice.

The other day, I received an email: “Can you please suggest one multibagger stock?” Usually, I ignore such emails, or answer back: “I don’t provide free stock advice.” But I was in a genial mood that day, and wrote back: “Buy Tata Steel.” The response floored me completely. Let alone thank me, this smart fellow came back with: “Any penny-stock multibagger?” This is what I meant by ‘if-it-is-free-I’ll-take-two’ syndrome!

A more dangerous affliction is the ‘if-it-is-free-I’ll-take-as many-as-possible’ syndrome. I got this email from such an investor: “I would like to buy some fundamentally strong stocks in this bear market. Please send me a list of such stocks.” I answered: “I don’t give individual stock advice for free. But you can take a look at some of the beaten down stocks in the Sensex and Nifty indices.”  Back came a response: “OK, I promise to send your fee, but send me the list of stocks now.” I didn’t bother to reply, only to receive this reminder: “I still haven’t received the list of stocks.” Later, I found out that this freeloader was regularly providing free stock tips in one of the investor forums!

The answer to the original question is: Many investors do. I think it is part of the human psyche that we get swayed by products that are offered ‘free’. That is why retailers periodically offer “Buy-1-get-1-free” deals to get rid of unsold or unfashionable or oversized/undersized stock. Shops tend to be overcrowded during such offers.

When it comes to stock advice, ‘free’ usually means ‘not good’. Investors need to appreciate that. If some one really knew which stocks will become multibaggers in future, he would not tell a soul and buy as many of those stocks he could afford before the stock market got wind of it.