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.  

Nifty chart: a midweek technical update (Sep 07 '16)

FIIs returned with renewed buying vigour after Monday's holiday. On Tue. Sep 6, their net buying in equities touched Rs 1440 Crores, while DIIs were net sellers of equity worth only Rs 270 Crores, as per provisional figures.

Nifty opened with a 24 points 'gap' and gained more than 130 points. But this 'gap' may be a concern for bulls (reasons explained below). Today, FIIs were net buyers of equity worth Rs 850 Crores while DIIs were net sellers of equity worth Rs 770 Crores.

The Nikkei India Services PMI, which tracks monthly changes in activity in services sector companies, rose to 54.7 in Aug '16 - up from 51.9 in Jul '16 - its 14th straight month of expansion and highest level in 42 months. New business was the main driver of activity growth.

Since touching its Feb 29 low that marked the end of a year-long bear phase, the daily bar chart pattern of Nifty has formed several 'gaps', starting with the
'breakaway gap' (marked by blue circle as Gap1 on the lower left of chart).

Gap2 that formed on May 25 '16 has been marked 'Runaway gap1'. Gaps 3&4 formed on Jun 30 and Jul 11 respectively have been marked 'Runaway gaps 2&3'. 

'Runaway gap4' occurred on Aug 30 but has not been marked on the chart for two reasons: (a) to avoid cluttering up the chart; (b) because it is technically less significant because it has formed within a consolidation zone.

A few other 'gaps' (upward and downward) had also formed on the chart - but have been ignored because they have been filled either partly or completely, and hence are technically less significant.

A 'runaway gap' has measuring implications, and hence is also called a 'measuring gap'. It usually occurs at the mid-point of a price move (up or down).

Here, we have a situation - not unique, but unusual - of three such 'runaway gaps'. Unfortunately, there are no measuring 'rules' for such unusual occurrences. 

So, we need to use our common sense and chart position of the 'gaps' to arrive at a suitable mid-point of the bull rally. Using approximations instead of exact calculations (because a price chart doesn't move according to arithmetic or logic), we arrive at the following figures:

i) the 'breakaway gap' occurred at about 7250;
ii) 'runaway gaps 2&3' occurred at about 8225 and 8375; close enough, so we can combine them and consider the average level of 8300;
iii) 'runaway gap1' occurred at about 7800;
iv) the mid-point is then the average of 'runaway gap1' and 'runaway gaps 2&3', i.e. at (7800+8300)/2 = 8050;
v) the distance from the 'breakaway gap' to the calculated mid-point of the rally is (8050 - 7250 =) 800 points;
vi) the upward target of the rally is, therefore, (8050 + 800 =) 8850.

This target has already been exceeded. In one of those strange coincidences that keep happening on price charts and make technical analysis fun, 8850 also happens to be a long-term 'support-resistance' level (refer last week's post).

Now we come to the most crucial 24 points 'gap' formed on Tue. Sep 6. The reasons for considering it as an 'exhaustion gap' that signals the end of a price move are two fold: (a) it has formed just below our price target of 8850 before moving higher by 100 points; and (b) it has been followed by a 'reversal day' bar (higher high, lower close) that often signals the end of an intermediate up move.

So, should you sell all your stocks first thing tomorrow and move to cash? That will be akin to timing the market, and is not recommended.

Whether yesterday's 'gap' is an 'exhaustion gap' or not will be technically confirmed when it gets filled. That should happen within the next three or four trading sessions. Even after that, there is no reason to believe that the bull market is over even before it has started properly. 

What is likely to happen is either a decent (5-10%) correction - which will provide the adding opportunity for all those who missed the rally of the past 6 months - or a period of consolidation, following which the next leg of the up move should resume.

Daily technical indicators are looking overbought. Breadth indicator NSE TRIN (not shown) is falling deeper inside its overbought zone. Nifty TTM P/E is well above its long-term average at 24.45. All these are technical signals suggesting a correction.

No need to panic. Part-profit booking - particularly in mid-caps and small-caps that are trading at very high valuations - can release some cash for investing at lower levels. Alternatively, stay invested with a trailing stop-loss.

Gold and Silver charts: recovering after month-long bear attacks

Gold chart pattern

The following warning note was sounded in the previous post on the daily bar chart pattern of Gold: "A drop towards the 50 day EMA is a possibility before gold's price can move higher."

Gold's price corrected below its 50 day EMA but bounced up after finding good support at the 1310 level, which had provided resistance in May & Jun '16.

The upward breach of the 1310 level on Jun 26 was accompanied by a sharp increase in volumes. A resistance level when breached with high volumes often turns into a support level for future down moves.

Note that the 1310 level was breached on the downside during the past three trading sessions. But those were intra-day breaches which are considered technically insignificant.

Daily technical indicators are in bearish zones, but showing signs of recovery. MACD is below its signal line in negative zone, but has stopped falling. RSI has started moving up towards its 50% level. Slow stochastic has just emerged from its oversold zone.

The up move should resume - may be after a bit of consolidation.

On longer term weekly chart (not shown), gold’s price bounced up after receiving support from its rising 20 week EMA, and closed above its three weekly EMAs in long-term bull territory for the 13th week in a row. The 'golden cross' of the 50 week EMA above the 200 week EMA, which will signal a return to a long-term bull market, is still awaited. Weekly technical indicators have corrected overbought conditions but remain in bullish zones.

Silver chart pattern

The following remark was made in the previous post on the daily bar chart pattern of Silver: "A test of support from the 50 day EMA is a possibility before silver's price can move higher."

Silver's price received just a day's support from its 50 day EMA on Aug 21 before dropping below it. For the next two weeks, silver's price was well supported by the 18.50 level.

Note that 18.50 level had provided resistance to silver's price on Jun 26, but was subsequently breached with strong volumes on Jul 1. That turned it from a resistance to a support level.

Daily technical indicators are beginning to turn bullish. MACD is about to cross above its falling signal line in negative zone. RSI has just crossed above its 50% level. Slow stochastic has emerged from its oversold zone.

Silver's price has closed above its three EMAs in bull territory, and should resume its up move soon. 

On longer term weekly chart (not shown), silver’s price received good support from its 20 week EMA and bounced up to close above its 200 week EMA after a week's close below it. Weekly technical indicators have corrected overbought conditions but remain in bullish zones.

S&P 500 and FTSE 100 charts (Sep 02 '16): bulls trying to regain control

S&P 500 index chart pattern

The following remarks were made in last week's post on the daily bar chart pattern of S&P 500: "Some more correction is possible. Support can be expected from the rising 50 day EMA. Bulls have been buying on every little dip, so a deep correction appears unlikely."

Following a positive close above its three EMAs on Mon. Aug 29, the index gradually drifted down to its rising 50 day EMA on Thu. Sep 1, before bouncing up to close above its three EMAs with a small gain of 11 points for the week.

Note that volumes on the two up-days (Mon. & Fri.) were lower than the three down-days in between. That is an indication that bears are still quite active.

Daily technical indicators are looking mildly bullish. MACD is below its signal line in positive zone, but has stopped falling. RSI has bounced up a bit after receiving support from its 50% level. Slow stochastic has made a 'V' shaped recovery from the edge of its oversold zone, but remains below its 50% level.

For the past 8 weeks, the index has been consolidating sideways within a 'rectangle' pattern. The pattern is unreliable, as it can act as a 'continuation' or a 'reversal' pattern.

Since the index is in a bull market, expect an upward breakout after some more sideways consolidation within the 'rectangle'. It will be a prudent move to wait for the eventual breakout before initiating any buy/sell action.

On longer term weekly chart (not shown), the index closed well above its three rising weekly EMAs in a long-term bull market for the 26th week in a row. Weekly technical indicators are looking overbought.

FTSE 100 index chart pattern

In a holiday-shortened trading week, the daily bar chart pattern of FTSE 100 corrected down close to the 6720 level and the rising 50 day EMA, before bouncing up sharply on Fri. Sep 2 to close with a 0.8% (56 points) gain for the week. (At the time of writing this post, the index is trading 10 points lower.)

Daily technical indicators are looking bullish. MACD is below its signal line in positive zone, but is showing signs of moving up. RSI has moved above its 50% level. Slow stochastic bounced up sharply from its oversold zone and has just crossed above its 50% level.

The index is trading above its three EMAs in bull territory, and should rise above its previous top of 6955 (touched on Aug 15) soon. 

On longer term weekly chart (not shown), the index closed above its three weekly EMAs in a long-term bull market for the 10th week in a row. Weekly technical indicators are looking overbought.

Sunday musings: Lord Ganesha's lesson on preservation of wealth

There are several mythical tales about Lord Ganesha - most of them about how he got his elephant head, why one of his tusks is broken, why a serpent is wrapped around his waist.

The one that has relevance to modern life is how he taught Kubera a lesson. The story goes like this:

The god of wealth, Kubera, was extremely vain and proud about all the wealth he had accumulated in his fabulous city of Alakapuri. He wanted to show off to the gods by throwing a lavish party.

He personally invited all the gods to come to his city. But when he visited Mount Kailasha, Lord Shiva turned down his invitation. Seeing the look of disappointment on Kubera's face, Lord Shiva relented and said:

"Sorry I can't come, but you are most welcome to invite my young son, Ganesha. Just remember that Ganesha has an insatiable appetite."

Kubera immediately agreed to the proposal - thinking 'I have so much wealth, how much can young Ganesha eat?' 

The god of wealth took the young son of Lord Shiva to his grand city. Like the other guests, Ganesha underwent a ritualistic bath after which he was dressed in expensive clothing and jewellery provided by Kubera.

A serious problem arose when everyone sat down for the banquet. Whatever food was put in front of Ganesh was gulped down in the blink of an eye. Kuber's servants were running back and forth with plates of food to keep up with Ganesha's voracious appetite.

Within a short time, Ganesha finished all the food that had been prepared for the banquet. Still he wanted more. When no more food was made available, an omnivorous Ganesha started eating tableware, furniture, decorations, chandeliers and whatever else he could lay his hands on.

Kuber was horrified. He prostrated himself before young Ganesha and begged that his spectacular palace be spared from Ganesha's ravenous appetite.

Ganesha not only refused, but said that he was still hungry and if not provided with anything else to eat, he would devour Kubera himself. 

A frightened Kubera rushed off to Mount Kailasha and fell at the feet of Lord Shiva - asking for forgiveness and seeking a remedy to Ganesha's insatiable hunger.

With an indulgent smile, Lord Shiva gave a handful of roasted grains to Kubera and asked him to offer it to Ganesha with love and humility.

By the time Kubera returned to Alakapuri, Ganesha had devoured most of the city. Kubera humbly and respectfully offered the roasted grains to Ganesha. Ganesha's hunger was finally satiated and all was well.

There are different morals that can be drawn from this tale. At one level, it suggests that a simple meal, if offered with respect and consumed with love, can offer more nourishment than a sumptuous banquet.

At a metaphysical level, the roasted grains symbolise the 'burning' or extinguishing of our desires that can lead to progress along a less materialistic and a more spiritual path.

At a more mundane level of wealth creation from the stock market, there is a lesson to be learned about preservation of wealth. 

Showing off to your friends and neighbours by buying a curved-screen TV and an imported car can only give you temporary pleasure - till your friend buys a bigger TV and your neighbour buys a more expensive car.

BSE Sensex and NSE Nifty charts (Sep 02, 2016): bulls regain control

Bulls regained control during the week's trading as FIIs and DIIs combined forces. Their total net buying in equities was worth Rs 3250 Crores, as per provisional figures. 

DII's bought shares worth nearly Rs 1800 Crores; FIIs bought shares worth a little more than Rs 1450 Crores. Both Sensex and Nifty gained around 2.7% on a weekly closing basis, but are near long-term resistance levels. 

In a bit of relief for the NDA government after lower than expected Q1 (Jun '16) GDP number, the Nikkei India Manufacturing PMI rose to a 13 months high of 52.6 in Aug '16 - against 51.8 In Jul '16. A figure above 50 indicates growth.

Passenger vehicle and two-wheeler sales grew in strong double digits during Aug '16, thanks to a good monsoon and dealer stocking in expectation of good festive season sales. 

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex bounced up sharply on Tue. Aug 30 after receiving strong support from the 27600 level and the rising 50 day EMA. For the rest of the week, the index gradually moved up to touch a new 52 week high of 28582 on Fri. Sep 2.

Despite buying support from FIIs and DIIs, the index traded within the 'support-resistance zone' between 27600 and 28600 for the 8th week. 

As and when the index moves above the 28600 level - which it surely will if FIIs and DIIs continue to buy - some resistance can be expected from the 29100 level.

The 'rounding top' pattern mentioned in last week's post did not get technical confirmation as Sensex didn't fall below 27600, and has been negated by the index moving up to touch a new high.

However, bears are not completely out of the game yet. Note that all four daily technical indicators are showing negative divergences by touching lower tops (marked by blue arrows) as the index climbed higher.

All three EMAs are rising, and the index is trading above them in a bull market. The strategy should be to buy on dips.

The lack of euphoria among investors - even as Sensex is a hop-skip-jump away from its lifetime high - is an indication that the index will move even higher. 

But it may be more of a gradual rather than a sharp up move - as selling often ensues near a previous top. 

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty rose to touch a 16 months high of 8824 with good volume support - negating the bearish 'rounding top' pattern mentioned in last week's post.

A convincing cross above the resistance level of 8850 should take the index to a new lifetime high.

Weekly technical indicators are inside their overbought zones, with ROC showing upward momentum and the other three moving sideways.

Remember that an index can remain overbought for long periods during a bull market. However, some profit booking can be expected as the index approaches its previous top of 9119 (touched in Mar '15). 

Nifty's TTM P/E is quite high at 24.15. The breadth indicator NSE TRIN (not shown) is inside its overbought zone. A correction can occur at any time.

Bottomline? Bulls have regained control of Sensex and Nifty charts. Index valuations on a TTM basis remain expensive - giving bears some hope. Stay invested, but refrain from placing large bets.

How to find under-valued stocks (even when a stock market is trading near its lifetime high)

The Indian stock market has rallied almost 30% from its Feb '16 low and is within hand-shaking distance of its lifetime high touched back in Mar '15.

Many stocks are touching 52 week highs on a daily basis. Some have touched their lifetime highs. 

Small investors are in a quandary. Should they jump on to the bandwagon and ride the bull market, or should they wait for a correction to enter?

The answer is: Neither. Instead, they should do their homework. Try to find undervalued stocks. 

Are there any undervalued stocks left in the market? Haven't all of them been bought already?

Those are valid questions - specially when a market is near its lifetime high. The truth is, there are undervalued stocks available under all market conditions. They are more difficult to find near market tops.

So, what is the 'secret formula' for finding undervalued stocks? There isn't any. 
Finding undervalued stocks requires methodical, 'grunt work'.

The following five metrics will get you started on your quest:

1. P/E (Price to Earnings) ratio
2. P/BV (Price to Book Value) ratio
3. Debt/Equity ratio
4. Free Cash Flow
5. PEG (P/E to Earnings growth) ratio

The first three ratios are readily available from any finance website. The last two may need to be calculated from Annual Reports.

Read more about the five metrics from this article.

Not interested in doing grunt work to find undervalued stocks? Leave the job to experienced fund managers. Invest in equity or balanced funds.

Related Post
How to pick Stocks for Investment - Part III