Nifty chart: a midweek technical update (Jan 15, 2020)

FIIs were net buyers of equity on Mon. and Wed. (Jan 13 and 15), but were net sellers on Tue. (Jan 14). Their total net buying was worth Rs 1.9 Billion. DIIs were net sellers of equity on all three trading days this week. Their total net selling was worth Rs 24.2 Billion, as per provisional figures.

India's CPI-based retail inflation jumped to 7.35% in Dec '19 from 5.54% in Nov '19 due to soaring food prices. With most banks offering less than 7% interest on fixed deposits, real rate of return has turned negative.

WPI-based wholesale inflation has increased to 2.59% in Dec '19 from 0.58% in Nov '19. Prices of food and non-food items rose higher.

The daily bar chart pattern of Nifty touched a new high of 12374 on Jan 14th, but corrected a little bit after facing resistance from the second up trend line (marked TL 2). The index is trading above its three rising EMAs in a bull market.

Though the index appears to be climbing a wall of worries because of rising inflation and rapidly decelerating GDP growth, some bearish technical signals are visible on Nifty's chart.

Note that the first up trend line (marked TL 1) - drawn through the index lows touched on Sep 19th, Oct 9th and 25th - was breached on Nov 13th. The index continued to move higher till Nov 28th, before succumbing to profit booking and falling below its 20 day EMA.

The index bounced up after forming a 'reversal day' bar (lower low, higher close) on Dec 11th. A second trend line (TL 2) has been drawn through the Sep 19th and Dec 11th lows. Nifty touched a new high (12294) on Dec 20th. Following a few days of sideways consolidation, TL 2 was breached with a downward 'gap' on Jan 6th.

Nifty dropped below its 50 day EMA after three months, but subsequently bounced up with an upward 'gap' to rise to a new high (on Jan 14), but has been facing resistance from TL 2. 

As per 'Corrective Fan Principle', breach of two up trend lines is bearish. Breach of a third up trend line (not yet drawn) usually indicates a change of trend. This hasn't happened yet - and may not happen at all - but any bearish signal at an index top should be treated with caution and respect.

Daily technical indicators are in bullish zones. MACD has crossed above its signal line. RSI is moving sideways above its 50% level. Both MACD and RSI are showing negative divergences by forming bearish patterns (lower tops, lower bottoms) while Nifty has climbed higher. Slow stochastic is well inside its overbought zone and can trigger a correction or consolidation. 

After touching a high of 28.67 on Mon. Jan 13, Nifty's TTM P/E has moved down a bit to 28.63, which remains well inside its overbought zone. The breadth indicator NSE TRIN (not shown) is hovering near the edge of its oversold zone, hinting at some near-term index consolidation.

Q3 (Dec '19) results declared so far have not generated much hope of any improvement over disappointing Q2 (Sep '19) results. Small investors should remain circumspect and concentrate on preserving capital.

Nifty chart: a midweek technical update (Jun 12, 2019)

FIIs were net buyers of equity on Mon. and Tue. (Jun 10 and 11), but were net sellers today. Their total net selling was worth Rs 7.4 Billion. DIIs were net sellers of equity on Tue., but were net buyers on Mon. and today. Their total net buying was worth Rs 2.9 Billion, as per provisional figures.

Reigniting the debate on the accuracy of India's GDP growth numbers, the former Chief Economic Advisor, Arvind Subramanian mentioned in a research paper that analyses data on 17 different economic indicators that India's real GDP growth was only 3.5-5.5% during FY 2012-2017.

The Prime Minister's Economic Advisory Council has refuted the claims made by the former CEA in his research paper. However, the jobless economic growth on the ground may be confirming - rather than refuting - Mr Subramanian's findings.

The daily bar chart pattern of Nifty had touched a new high of 12103 on Jun 3. The index corrected sharply and tested support from its rising 20 day EMA on Jun 7. It has been consolidating since then, and touched a lower top of 12000 on Jun 11.

All three EMAs are rising, and the index is trading above them in a bull market. The index should rise to a new high soon. However, the 165 points upward 'gap' formed on May 20 remains a concern.

Charts don't 'like' unfilled gaps. Most gaps get filled sooner than later - though some gaps may never get filled. A part or complete filling of the May 20 'gap' will make the chart technically 'healthy', enabling the index to rise higher.

Daily technical indicators are in bullish zones, but not showing any upward momentum. MACD is seeking support from its signal line in overbought zone. RSI is moving sideways above its 50% level. Slow stochastic is moving sideways above its 50% level after falling from its overbought zone. 

All three indicators showed negative divergences by failing to touch new highs when the index touched its lifetime high on Jun 3. Some more consolidation or correction may follow.

After touching a high of 29.90 on Jun 3, Nifty's TTM P/E has moved down to 29.45, which is in overbought zone and much higher than its long-term average. The breadth indicator NSE TRIN (not shown) is falling inside its oversold zone, hinting at some near-term consolidation.

The debt crisis in the NBFC/HFC segment seems to be getting worse, and is having a negative spill-over effect on the banking sector. With the financial system in turmoil, how will economic growth get funded?

The consumption sector that is dependent on loans from banks/NBFCs - like automobiles, real estate - is in doldrums. It will be too much to expect the new Finance Minister to perform a miracle in her first budget and restore the economy back on the growth track.

Stay invested, but stay nimble. Book profits where available, and invest it in bank FDs to protect capital before interest rates fall further. 

Nifty chart: a midweek technical update (Feb 13, 2019)

FIIs were net sellers of equity on all three trading days this week. Their total net selling was worth Rs 12.7 Billion. DIIs, who were also net sellers of equity on Mon. and Tue. (Feb 11 and 12), were net buyers today. Their total net buying was worth Rs 3.6 Billion, as per provisional figures.

India's CPI-based retail inflation eased to a 19 months low of 2.05% in Jan '19 from a revised 2.11% in Dec '18, and was much lower than 5.07% in Jan '18. Negative food inflation was the main reason for the low inflation number.

IIP (factory output) showed a 2.4% growth in Dec '18 from 0.3% in Nov '18. IIP was 8.4% in Oct '18. For the Apr-Dec '18 period, IIP growth was 4.6% over Apr-Dec '17.

The following remark was made in last week's technical update on the daily bar chart pattern of Nifty: "A convincing close above 11090 - which is the Fibonacci 61.8% retracement level of the 1756 points correction from the Aug '18 top of 11760 to the Oct '18 low of 10004 - will put bulls firmly in control of Nifty's chart." 

On Wed. Feb 6, the index had closed at 11062.50 - just above the upper Bollinger Band. The next day, it touched an intra-day high of 11118, but formed a 'doji' candlestick by closing at 11069.

Failure to close above 11090 despite two successive attempts, combined with piercing of the upper Bollinger Band followed by a 'doji' formation gave a clear indication that the intermediate rally from the Jan 29 low of 10583.65 was coming to an end.

FIIs, who had led the intermediate rally, turned bears. So did DIIs. Their combined selling has dropped the index below its 20 day SMA (middle band - marked by blue dotted line) and 50 day EMA. Looks like Nifty may be headed below its 200 day EMA towards the lower Bollinger Band.

Daily technical indicators are looking bearish and showing downward momentum. MACD has crossed below its signal line in bullish zone. RSI and Slow stochastic have slipped below their respective 50% levels in neutral zone. Some more downside is likely.

Nifty's TTM P/E has moved down to 26.6, after touching 27.41 on Feb 7 (its highest level in 2019) - but remains much higher than its long-term average in overbought zone. The breadth indicator NSE TRIN (not shown) is oscillating inside oversold zone - hinting at some more near-term downside.

Shares of companies declaring Q3 results below expectations are getting hammered by bears even if they are making profits. A handful of companies whose results have surprised positively have seen their stock prices going through the roof.

The environment is not conducive for small investors to make much money. Mid-cap and small-cap stocks continue to bear the brunt of bear attacks. Even large-caps are tumbling down. Market volatility is unlikely to abate before elections.

With bank fixed deposit rates likely to fall after the RBI rate cut, locking some money into medium term FDs may be a good idea.

Why you should Invest in Stocks of Companies that pay regular Dividends

Most people who prefer investing in debt instruments or real estate do so because such investments are 'safer' compared to stocks. Stock prices tend to fluctuate wildly and are considered to be more 'risky'.

That logic reminds me of a departed uncle who refused to stir out of his home. He thought his home was 'safer' because it had less pollution and germs. Plus city roads were too 'risky' because of unruly traffic.

Debt instruments like bonds and bank fixed deposits may appear 'safer' but they carry risks too - from fluctuating inflation and interest rates. Real estate prices fluctuate also, putting your investment at risk.

One of the best reasons given by financial experts for investing in stocks is that they provide capital appreciation that can beat inflation. Younger people often flock towards growth stocks in the hope of quick 'multibagger' returns.

More experienced investors - who are in the game for the long haul - include stocks of dividend paying companies in their portfolios. But aren't such companies stodgy, slow-growth ones?

They often are. But not only do they pay regular dividends, such dividends tend to grow over time. Why? Because with lower growth opportunities, there is less need for capital expenditure.

So, the cash these companies keep generating through well-known branded products or services are distributed to shareholders. 

Those investors who are working regularly or earning from their business or profession may not really need the dividend income. But they can very well reinvest the dividend amounts in buying more stocks.

Over the years, 'dividend compounding' can lead to a substantial addition to your stock portfolio - leading to even more dividends that will become useful when you retire and are no longer earning a regular income.

A simple Strategy to achieve your Financial goals

(When Paul McCartney wrote the words "I don't care too much for money, 'cause money can't buy me love" he probably didn't have enough of it!)

There are three ways of making money:

1. Work hard
2. Own assets that earn money
3. Work hard and own assets that earn money

Unless you are born with a silver spoon in your mouth, you can't start adult life with option 2. So, you have no option but to work hard - whether at a job, or a business.

What you do with the money you earn by working hard will determine whether you will achieve your financial goals and will be able to retire later in life to benefit from option 2.

The simple strategy to achieve your financial goals? Save and invest. And the sooner you start, the better.

But you knew that already - right? 

Do you also know how much money you will need to save today, and what mix of assets you need to invest in so that when you eventually stop working you will be able to live comfortably on what your assets will earn?

Probably not - as per anecdotal evidence from a few young working people. 

One complained she hardly has any savings left after paying for rent, food and the daily commute. Another said he is putting some money into a mutual fund every month, but hasn't figured out how much he will need 30 years from now.

Would it be a surprise to know that both own high-end smartphones and laptops, commute only by app-cabs, wear designer clothes, eat out 2-3 times a week and rent apartments in posh localities?

Living the good life now may mean that you will neither be able to retire early to do the things you really love, nor will you be able to enjoy retired life without cutting corners. 

Is there a way to live reasonably well now - and in future when you will not be able (or willing) to work any more?

There is - but you will need to plan for it:

- Set financial goals - near-term, medium-term and long-term
- Figure out how much money you will need at each stage
- Save and invest accordingly

For longer term goals, you can and should invest in riskier assets like equity or equity funds for better returns. For nearer term goals, invest in less risky assets like bank fixed deposit or debt funds.

From your monthly/quarterly earnings, invest first (according to your financial plan) and then spend. 

Stay a bit farther away from town, commute by autorickshaw or train, eat out only once or twice a month, buy a cheaper phone and laptop, pay off your credit card dues in full every month. 

You will be amazed how much these small sacrifices now can lead to a more comfortable retired life. (Believe it or not, you will get old and retired life will be upon you sooner than you expect!)

Is stock investing risky?

To be able to answer that question, one has to understand the meaning of risk. The problem is: there is no clear cut definition of risk, or the best way to measure risk.

Volatility is often considered a measure of risk - particularly by inexperienced investors. But seasoned traders thrive on volatility and make most of their money from it.

One often thinks of a bank fixed deposit as 'safe'. Why? Because there is very little chance of losing your principal amount. 

Compared to a bank fixed deposit, stocks seem more 'risky'. Why? Because during a bear phase the price of a stock can fall below the price at which it was bought.

Many small investors fall into the trap of such a simplified view of risk and choose the 'safe' option. What they fail to realise is that safety also comes at a price.

Returns from fixed deposits are taxable and subject to fluctuations in interest rates. A 3 years deposit earning 8% interest may seem like a good safe return, but the real rate of return is only 2% if inflation is 6%.

There are a couple of ways that risk can be reduced when investing in stocks. The first is by diversification: (i) across market capitalisation, i.e. investing in a mix of large-cap, mid-cap and small-cap stocks; and (ii) across sectors, i.e. buying stocks from auto, pharma, FMCG, financials, etc.

The second is by portfolio diversification through investment in different asset classes, like stocks, funds, fixed income, gold.

Another way to reduce the riskiness of stock investing is by learning the basics of technical analysis. 

While fundamental analysis is a must in understanding the financial robustness and competitive advantage of a company, technical analysis provides signals of when to buy, when to sell and when to sit tight.

Plus, the concept of a 'stop-loss' allows an investor to exit with a smaller loss when a stock's price is tumbling down.

If you are not adept at picking stocks, you can still invest in stocks and diversify your portfolio by buying units of different mutual funds.

By choosing the 'dividend option' in a fund, risk is reduced because the periodic dividend payments act as partial profit booking and freeing up some cash that can be utilised elsewhere.

So, the answer to the question is: No - provided you know what you are doing.

To learn more about risk, here is an interesting article from investopedia.com.

3 Timeless Investment Principles

In his well known investment book "The Intelligent Investor", Benjamin Graham has explained several investment principles that have withstood the test of time.

If you haven't heard of Graham, he is considered the 'guru' of value investing and was a teacher of Warren Buffett. Graham's book is recommended reading for all small investors.

To appreciate and understand Graham's value investing principles, here are three time-tested ones:

1) Margin of Safety

It means buying a stock  at a price below its intrinsic value. What is intrinsic value? Investopedia.com defines it as the true value of a company's stock based on all aspects of the company's business, including qualitative and quantitative factors. That means putting a value to the company's reputation, business model, competitive advantage, as well as calculating its financial ratios to assess profitability, sustainability, financial prudence.

A DCF (Discounted Cash Flow) method that takes into account a company's free cash flow and weighted average cost of capital is often used to calculate intrinsic value. But even such a calculation is subjective, as it requires certain assumptions to be made about future earnings that may or may not turn out to be accurate.

Is there an easy way to figure out 'Margin of Safety'? One way is to compare the average 'earnings yield' of a company (inverse of the P/E ratio) over a period of 5 to 10 years with the fixed deposit rates of banks. If the average E/P is more than the current FD rate, you have some 'Margin of Safety'. (Otherwise, you may be better off investing in a bank FD.)

Note that higher E/P means lower P/E, which usually happens in bear markets or when a company is not performing well. A company with strong fundamentals in a bull market is likely to have a high P/E ratio and hence low E/P - not leaving much 'Margin of Safety'.

'Margin of Safety' can also be thought of as 'buy low and sell high'.

2) Profit from Volatility

A young investor had once asked John Pierpont Morgan, the famous American financier, banker and art collector, what the stock market will do on that particular day. Morgan had responded: It will fluctuate.

Warren Buffett had said: Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.

Volatility is an integral part of stock market movements. Sometimes a market fluctuates so rapidly and wildly that it scares off most investors. But irrational market movements can be your friend, because it allows you to avail of sudden extremes of low or high prices.

If you are a long-term investor and not a day trader, there can be a couple of ways you can benefit from market fluctuations. First is 'Rupee Cost Averaging' (or, SIP), where you invest a fixed amount of money at regular intervals, which smooths out day-to-day fluctuations. Second is investing in a balanced fund, which has a mix of stocks and fixed income instruments; stock price fluctuations are 'balanced' by steady returns of fixed income instruments.

For novice investors, or, for those who don't have the time or inclination for detailed fundamental and technical analysis before buying a stock, regular investment of monthly savings in a good balanced fund is an excellent way to build wealth for the long-term without much effort.

3) Know Thyself

You know yourself better than anyone else. At least, you definitely should. Your investment style and strategy should depend on your personality. Otherwise your market returns will not be up to the mark.

Are you an active and enterprising investor, who loves nothing better than to dig out less-known small-cap or mid-cap companies and then do detailed analysis of their annual reports for selecting future multibaggers? Or, do you prefer to be a passive and defensive investor, who hates bothering about the economy, inflation rate, currency fluctuations, price chart patterns?

Do you enjoy the adrenaline rush of picking an unknown stock based on a friend's recommendation and seeing it rise into the stratosphere, or, would you rather make a detailed financial plan and asset allocation plan and then regularly invest according to your plans to achieve your investment goals?

Only you have answers to such questions. And there are no right or wrong answers. The bottomline is that your personality should match your investment strategy. 

However, remember that wealth can not be built by constant activity of buying and selling. It is built by buying with a 'Margin of Safety', using volatility to book part profits and re-entering at lower levels, and holding on for the long-term to get the benefit of dividends, rights issues, bonus issues and stock splits. 

Read more about the three timeless principles.

Related Post

What exactly is the Margin of Safety?

Announcing re-opening of paid subscriptions to my Monthly Investment Newsletter

I am pleased to announce the re-opening of paid subscriptions to my monthly investment newsletter for a 3 weeks period from Jul 1-21, 2016. A limited number of subscriptions are being offered to blog visitors, blog followers, blog subscribers and twitter followers – on a first-come first-served basis – to enable me to provide personalised attention and guidance to each subscriber.

If you are interested in subscribing, please send an email to: mobugobu@yahoo.com at the earliest for details.

The newsletter has completed 78 issues, with its share of hits and misses. Sensex and Nifty had touched lifetime highs in March, 2015. The subsequent 12 months long correction brought down almost all selected stocks from their peaks – affecting overall performance. It is gratifying that subscribers have still kept faith in my stock picking abilities.

Those who have been regularly following my blog posts over the past few years already know what kind of stocks to select, and what type of stocks to avoid. The guiding principle is to choose well-managed, financially prudent companies that generate cash from operations, have low debt, give steady (rather than spectacular) returns and have growth prospects.

Non-subscribers may be interested to know how the recommended 18 mid-cap and small-cap stocks have fared during the past 18 months. Without revealing the names of the stocks (it won’t be fair to my subscribers to do so), here is a brief summary of performance as on Jun 30, ‘16:

• 8 stocks gained more than 25%, of which 4 gained between 25-50%; 3 gained between 50-100%; 1 gained more than 200%
• Of the balance 10 stocks, 7 gained between 10-25%, 2 gained between 0-9% and 1 gave nil gain

That may not seem great, but remember that the market had been in a long down trend from which it hasn't yet recovered fully - thanks to FII selling that affected large-cap stocks the most. So, let me provide a different perspective on the above performance:

By blindly investing (not recommended - you should always do your own due diligence) Rs 20,000 in each month's recommended stock and holding on till Jun 30 '16, a subscriber would be sitting on gains of close to Rs 76,000 (21.1%) – outperforming the Sensex (- 8.6%), Nifty (-7%), BSE Mid-cap index (8.4%), BSE Small-cap index (3.8%) and Bank Fixed Deposit (9%).

What is important to understand is that most of these stocks were not ‘cheap’ valuation-wise – fundamentally strong stocks rarely are - and some had already run up a lot when they were recommended.

If you wish to add fundamentally strong mid-cap and small-cap stocks with growth potential to your portfolio, why wait? Just subscribe to my Monthly Investment newsletter. Send me an email (at mobugobu@yahoo.com) soon – subscriptions will close on Jul 21, 2016.

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.  

Is the stock market rallying only on hopes of a repo rate cut? - a guest post

Sensex and Nifty had touched lifetime highs in Mar '15. A year-long correction led to both indices touching 52 week lows on Feb 29 '16 - losing 25% from their Mar '15 tops.

The stock market did a sudden volte face from the beginning of Mar '16 - as bears (i.e. FIIs) turned bulls and bulls (i.e. DIIs) became bears. What triggered the abrupt change in sentiment?

Was it belated awareness of market players that the global economy was not doing as badly as they thought? Did FIIs get encouraged by the governments decision of sticking to its fiscal deficit targets? Or, was it a mix of both? 

In this months guest post, Nishit argues that expectation of a repo rate cut by RBI in its policy meeting on Apr 5 '16 may be the real reason for the current market rally.

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The Government recently slashed interest rates on Small Savings, thereby dealing a very big blow to Senior Citizens who depend on interest income. Postal Saving Schemes have suffered big cuts. The whole idea was to bring interest rates in line with Bank Fixed Deposit rates and thus make it a level playing field for banks.

The Government should have excluded special schemes - like the Senior Citizen Savings Scheme and the Girl Child scheme - which were specifically targetted at financially vulnerable sections of the population.

The Government has also committed to stick to its fiscal stability road map. With inflation under control, this has set the stage for a 25 basis point (0.25%) rate cut in the RBI policy meeting on April 5th. Optimists are expecting a 50 basis points (0.5%) rate cut.

Reduced Fixed Deposit interest rates are going to put a lot of people in difficulties - especially those who have retired and depend on Fixed Income.

Repo and Reverse Repo rates are most likely to be reduced by 25 basis points now and 25 basis points in June, depending on the progress of the Monsoon. The markets have rallied based on this. The 10 year Government Bond is trading at an yield of 7.51%, which is the lowest in past several years.

The Government will have to kick start several infrastructure projects if demand has to be generated. Only slashing interest rate is not enough. Road projects are a prime example.

Cheap funds for the banks to lend out are just one aspect. What the Government is ignoring is the social aspect as well of welfare schemes.

A stock market rally based only on expectations of an interest rate cut is a temporary phenomenon. Unless backed by pickup in demand and increased Government spending, the rally will fizzle out.

The Government is helping the RBI cut rates, but the transmission of lower rates to borrowers and huge NPAs of PSU banks need to be factored in. The current market rally should last till the RBI policy. What happens next should be a period of consolidation.

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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)

Have you been caught swimming naked?

"Only when the tide goes out do you discover who has been swimming naked" - Warren Buffett

What did Buffett really mean? During bull markets, almost all stocks - the good, the not-so-good and the downright rubbish - tend to move up. Everyone seems to be elated because the value of their portfolios are moving up with leaps and bounds.

So, you really won't know how resilient your portfolio is to a strong down turn. When selling becomes relentless - like it is happening in the market now - almost all stocks tend to lose ground. But the good lose less. The rubbish collapse in a heap.

Many small investors are in a panic. Panic affects rational decision making. The irrepressible urge is to exit at any price. That only adds to the selling pressure.

And so the cycle repeats. A bull market is followed by a bear market, which is followed by another bull market and then again a bear market. Investors buy stocks without proper analysis at high prices during bull markets, and then dump them at huge losses during bear market sell-offs.

Is there no respite from this cycle? The answer is: No, because it is the inherent nature of markets. What should small investors do?

The short answer is: Learn and practice. In other words, learn all you can about how the stock market works. Then enter gradually.

Not the other way around. Most small investors jump into the market first and then try to learn why they lost money. A typical query in one of the business TV channels today: "I bought 1000 shares of Suzlon at 25; now it is down to 13. Should I hold or sell?"

Smart investors learn to prepare a financial plan and an asset allocation plan before entering the market. But they are in a minority. Many have been in the market for years and fail to comprehend why their portfolios are not generating returns to beat inflation and bank fixed deposit rates.

A good financial plan and an asset allocation plan based on an investor's risk tolerance act as guides to investing in a systematic way for generating long term returns. It is a process that is methodical but boring. If you are having fun with your stock investments/trading, you are probably not making any money.

The two plans put your investment decisions almost on auto-pilot. Your monthly savings are invested regularly according to your plans. During bull periods, your equity component will become overweight. Once it goes beyond your pre-set limit, you automatically book partial profits and reinvest the proceeds in other asset classes like fixed income, gold, cash.

During bear market sell-offs, there will be no need to panic. Your equity component will become underweight, and the other asset classes in your portfolio will become proportionately overweight. Once your equity component falls below your pre-set limit, re-balance your portfolio by liquidating part of your fixed income, gold and cash holdings to buy equity.

It is not rocket science - but requires discipline and patience. If your motivation to enter the stock market is to make some quick profits so you can buy a Royal Enfield or the latest mobile phone from Apple, the result will be a hat-trick of no's: no Royal Enfield, no iPhone and no money.

So, dear investor, you really have two choices. You either learn from those who have long experience in the market, or you will learn by losing money. The ball is in your court.

Related Post

How to Reallocate your Assets

How to survive and thrive during a bear phase in the stock market

During bull phases, the general direction of the stock market is upwards, but there are frequent corrections and consolidations along the way.

In bear phases, the general direction of the stock market is downwards, but there will be intermittent rallies in between. That is the way a stock market behaves.

Yet, small investors tend to become joyous and euphoric in bull phases – forgetting that a bear phase is around the corner.

They also become despondent and depressed during bear phases – even though duration of a bear phase is often less than that of a bull phase.

The current bear phase is into its 9th month. And, there seems to be no end in sight. BJP’s popularity seems to be waning. Economic growth is sluggish. Corporate earnings are stagnant.

What should small investors do in such a situation?

Stay out of the way of a bear: they are powerful and fearless animals, and will maul you if you try to fight back. The sensible strategy would be to climb a tree to safety. In investment terms, put your money in fixed income instruments or liquid funds, or ‘defensive’ sectors (like FMCG, Pharma) – so that you can earn some returns.

Continue with your fund SIPs: the best way to build wealth from the market is to stay invested for the long term. Bear phases allow you to buy more units of the fund. Allow the fund manager to churn the fund portfolio – it is in his vested interest to do so for best results.

Control your emotions: decision making – specially under uncertain conditions – has to be fact-based and dispassionate. This applies particularly for investments, where your hard-earned money is at stake. If a stock you hold is losing ground fast, don’t try to ‘average down’ because you don’t know how low it can go. Wait for the stock price to turn around. Then ‘average up’.

Follow an asset allocation plan: distribute your investments among equities, debt instruments, gold and cash. The plan will take the guess work out of your investment decisions. Only equities get affected by bear phases. When your equity allocation falls below the threshold you have set in the plan, use the cash to rebalance your assets.

Related Posts

Five things you should avoid in a bear market

Five more things to avoid in a Bear Market

Five strategies to follow in a bear market

How to reallocate your assets

About asset allocation

Will the likely interest rate cut by RBI be a non-event? – a guest post

Will he, or won’t he? That seems to be the question. Experts of different hues are expecting a 25 bps (0.25%) interest rate cut by the RBI Governor. That means, there will be no positive surprise for the stock market if the rate cut does come through.

There is also a possibility that the RBI Governor maintains status quo. That will be a negative surprise for the market and initiate a sell-off.

What if the rate cut is 50 bps or higher? The probability of that – based on Dr Rajan’s track record so far – is low. But it will be a definite positive surprise for the stock market.

In this month’s guest post, Nishit explains why the three tranches of interest rate cuts by Dr Rajan has failed to stimulate the Indian economy, and why he doesn’t expect the RBI Governor to be dovish in his announcement.

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Over the past few weeks, the impression given in the media is that an interest rate cut by RBI will stimulate the Indian economy. This is a wrong picture being portrayed. Tweaking interest rates is just one of the tools for stimulating the economy. More important are tax reforms and simplifying ease of doing business in India.

Implementation of GST will be the single biggest factor for growth of the Indian economy. Now, let us look at the interest rate cuts. Since, January the RBI has cut rates by 75 basis points (0.75%) in three tranches. The Banks have passed on barely 30 basis points (0.3%) to the end customer, citing high cost of deposits. The only exception has been HDFC Bank which has passed on 0.5-0.6% rate cut to the consumer.

What interest rate cuts do is lower the cost of deposits for Banks (has anyone noticed how quickly Banks are lowering fixed deposit rates?), but banks are not passing on the benefit of lower rates to people who borrow from Banks. This will only lead to Banks making more profits.

Also, if the RBI Governor cuts rates at a faster pace and tomorrow inflation rises how does he deal with it? In US the rates are near to 0 and they can stimulate the economy by ‘Quantitative Easing’, i.e. injecting huge sums of money into the economy by printing Bank notes. Is India in a similar position to do so?

Instead, by cutting rates slowly and allowing Banks to first transmit the rate cuts to its borrowers there are two advantages. The Governor gets more time to evaluate the inflation scenario and rate cuts get fully passed on to borrowers.

Hence the drama dutifully played up by television anchors is actually harmful in the long term. Simply cutting rates is  not the solution to all the problems in the economy. If it was that simple the World economy would not be where it is now and the US would not look at raising interest rates.

On Tuesday (Sep 29 ’15) I expect a maximum 25 basis points (0.25%) cut and I would not be surprised if there is no rate cut also.

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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)

Add some stability to your stock portfolio with bonds/debentures

For the past few months, the stock market has been all over the place – rising 300 points one day and falling an equal amount a couple of days later. The end result of such gyrations have left Sensex and Nifty with negligible gains since Jan ‘15.

An investment portfolio that is overweight in stocks may have given zero or even negative returns. Though a stock market seldom moves in one direction – even during rampant bull or bear markets – periods of uncertainty and volatility often come as a jolt to small investors.

To ensure a less volatile and more stable investment returns, it is imperative that investors appreciate and understand the need for a proper asset allocation plan. That means, balancing your stock portfolio with fixed income instruments like bonds/debentures.

As per my interactions with many small investors, very few of them fully understand the benefit of bonds/debentures. To most small investors, fixed income instruments mean bank fixed deposit, or Post Office MIS, or NSC.

Debt oriented mutual funds and tax free bonds often provide better post-tax returns, and have the added advantage of being liquid. That means they are more easily tradable.

If you want to learn the ABCs of investing in bonds and how interest rates affect returns, check out a set of links to articles published in investopedia.com:

1) http://www.investopedia.com/articles/bonds/08/bond-market-basics.asp

2) http://www.investopedia.com/articles/bonds/08/credit-invest.asp

3) http://www.investopedia.com/articles/bonds/07/price_yield.asp

4) http://www.investopedia.com/articles/bonds/08/bond-risks.asp

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How to reallocate your assets

Add some stability to your portfolio with bank fixed deposits – a guest post

The younger you are, the more should be your allocation to equities. Why? Because the longer you stay invested in equities, the greater is going to be your likely returns. Also, your financial commitments are lower when you are younger. So, you can afford to take more risks.

As you grow older, start a family and care for elderly parents, you will need more stability in your investment portfolio and additional cash flow to support your primary earnings from business or profession.

In this month’s guest post, Nishit argues in favour of bank fixed deposits. The downside to bank FDs is low returns which are taxable. The upside is safety of principal amount and facility of regular cash flows through quarterly interest payments. Using some simple investment strategies, the unexciting bank FD can add stability to your portfolio.

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Interest rates are falling. That is being touted as good news for the economy and for borrowers. Lower interest rates mean higher growth and more jobs. More jobs mean more income and more purchasing power. This whole cycle of spending, consumption and growth is likely to be triggered off by the cutting of interest rates by RBI.

RBI has already reduced rates by 75 basis points (i.e. 0.75%), and is further expected to reduce rates by about 1-2% before this cycle is over.

One of the casualties of this rate-cut cycle who goes unlamented is the senior citizen, who depends on fixed deposit (FD) interest for his livelihood. Banks are very quick to cut deposit rates and those FDs which were giving interest of 9.7% have already been reduced to 9%. In fact a study across PSU and Private Banks shows that maximum interest on FD which can be obtained now is 9%.

How does one work around this? To explain the impact, if a senior citizen has Rs 10 lakhs in FD, 9.7% interest gives him Rs 97000 and 9% gives him Rs 90000 per year. How does he make up for this Rs 7000 shortfall?

One way of doing it is locking in FDs for a period of 5 years when the rates are high. 5 years is a sufficient long period for one cycle of rate cuts to play out.

Also, once the rates start being cut, the 2-3 year FDs offer the highest rate of interest. At such times, one can go for such shorter-duration FDs.

The Senior citizen scheme from the Government, which has a 1 year lock in period, still offers 9.3% rate of interest. This rate changes only in April every year. So, one can lock in up to Rs 15 lakhs in this scheme till April ’16.

Next common question is: what about liquidity? What if one needs money urgently then how does one break the Fixed Deposit? A simple option is to break the one giving the least amount of interest. Even this can be circumvented by ensuring and planning the FDs in such a way that one FD matures every 3 months.

To do this, it requires certain amount of planning and the staggering of the FDs. Also, one can plan the FDs in such a way that every month some or the other FD gives interest. Quarterly credit of interest gives the highest returns and by staggering the FDs one can ensure a monthly flow of income while enjoying the higher returns of quarterly Interest.

The protection of capital is a must and only nationalized or top private banks FDs can be considered. This can be spread across 2-3 banks so that the risk of default is minimised.

These are some simple strategies, if followed scrupulously, can give maximum bang for the buck.

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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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About Asset Allocation – a guest post

How to make money in the stock market the easy way – a guest post

There are two kinds of investors in the stock market. Those who know, and those who don’t. Those who know what is going on (a minority), use their knowledge to ‘take’ money from those who don’t have a clue about how and when to buy or sell stocks (a majority).

There is no harm in not knowing something – as long as you acknowledge the fact, and don’t put your money in it. The majority of small investors lose money in the stock market because they fail on both counts. They are in denial about their market knowledge (rather, the lack of it), but invest their money any way.

In this month’s guest post, targetted at the majority of investors, Nishit suggests a simple and easy way to make money in the stock market. In fact, it is a ‘no-brainer’. The only drawbacks(?) of this simple strategy are that it is boring, requires discipline and works only over the long-term.

If you are looking for excitement or adrenaline rush while ‘investing’ – visit a casino or a race course. You may enjoy yourself while you lose money!

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The stock market is a complex place and it keeps rising and falling without any apparent logic. Those who are acquainted with the market can make a killing by picking the right stock at the right price and at the right time. A vast majority of the population does not have this skill set. So, what can they do to participate in the gains?

There are various asset classes like fixed deposits, real estate, gold and equities. Equities far outclass the other asset classes as they give significantly high returns over a long period of time. Real estate is illiquid and one needs to have vast sums of money to invest in real estate. Gold also has long periods of time where it moves nowhere and inflation eats away the returns.

For those who have no clue about equities, the first step is to identify 3-4 good Mutual Funds. There are several funds, like HDFC Top 200, which have given compounded returns of 20% for the past 20 years.

Next, they have to invest a fixed amount every month (SIP) - which could be as low as Rs 1000. Over a period of time, the bull phases and bear phases will be taken care of to give smooth annualised returns.

Of course, somewhat alert and savvy investors can tweak this model further by investing more amounts when markets have tanked and booking profits after significant run ups. Nowadays there are many free blogs (like mine and Subhankar’s), which can guide investors about the trend in the market. Also, there are general phenomena - like the market peaking in Feb-March and then correcting 20-30%. The current year is a classic example of this.

Someone may ask the question: How does one identify the right mutual fund? For this one can ask a savvy investor friend, a financial planner or check out the website www.valueresearchonline.com.

This website gives a list of 5 star rated funds in various categories. Based on this, one can shortlist the funds and do a periodic investment in these selected funds. A handful of funds should be more than adequate.

With the advent of the internet, it has become very easy even for those with limited financial knowledge to invest and earn money from the markets.

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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)

5 reasons why the stock market sold off after the surprise 25 bps interest rate cut by RBI today

The budget lacked any populist measures, and laid emphasis on fiscal consolidation. Inflation is on a downward slide. Many experts had expected a second interest cut after the budget. So, why did the stock market fail to celebrate? Here are five reasons:

1) It was a case of ‘sell on news’. Though the timing was a bit of a surprise – as was the earlier rate cut in Jan ‘15 - a second rate cut was expected around March-April. After the initial surge today, profit booking set in.

2) Nifty had touched the psychological 9000 mark on Tue. Mar 3. Today (Mar 4), Sensex touched the 30000 level. When an index is at lifetime high with no known resistances, there is a tendency for traders and investors to book profits when the index reaches a nice, round level (i.e. with several zeroes).

It happens for stocks, too. How often have you waited for a stock to touch 200, or 500, or 1000 in order to book profits?

3) Some more PSU divestments are lined up this month. Cash will be required – particularly by DIIs – to invest, and/or bail-out the issues in case of under-subscriptions.

4) The 25 bps rate cut in Jan ‘15 was immediately followed by a reduction in fixed deposit rates by banks, but the interest rate benefit was not passed on to borrowers. PSU banks in particular have a lot of NPAs/restructured assets on their books. They chose to utilise the rate cut to shore up their books. They may do so this time as well.

5) Last – but not the least – is the realisation by RBI that economic growth is still sluggish on the ground, despite the government’s ‘new formula’ of calculating GDP that indicated a higher growth. And investors didn’t like the confirmation about slow growth.

This is what L&T Chairman Anil M Naik said in an interview to Business Standard: “It’s too little, too late. For the economy to bounce back as against crawl back, you need a cut of another 50 basis points. Not just that, banks have to pass it on. If banks don’t pass on, consumer demand will not come back. Our infrastructure is high-cost because interest rates are as much as 12 per cent for some groups, which make projects unviable.”

Q. E. D.

Nifty chart: a mid-week update (Nov 19 ‘14)

DIIs have been relentless sellers of equity this month. FII buying has ensured that Nifty’s sideways consolidation continues with an upward bias. Today’s slight correction followed the formation of a small ‘double top’ pattern (at a new lifetime high of 8455).

The government is trying to push through share divestments in Coal India and ONGC by the end of this calendar year to raise about Rs 40000 Crores. That may be the motivation for DIIs to sell.

Trade deficit during Oct ‘14 eased a little from the previous month, but remained high. Exports slid while imports rose – mainly due to a spike in gold imports. The Rupee slumped to its lowest level in more than 8 months against the US Dollar.

Credit off-take in banks remain sluggish, which is affecting their interest income. With liquidity at comfortable levels, some banks have been forced to lower interest rates on fixed deposits. This may be a good time to lock some market profits in bank FDs before rates fall further.

Nifty is trading above its three rising EMAs – which is the sign of a bull market. However, all four technical indicators have started correcting overbought conditions, and are showing negative divergences by failing to touch new highs with the index.

MACD is moving down towards its rising signal line just below its overbought zone. ROC is falling below its 10 day MA, and looks poised to enter negative territory. RSI and Slow stochastic are inside their respective overbought zones, but have started to slide down.

Expect the sideways consolidation to continue a while longer. In case Nifty decides to correct a bit, down side support can be expected from the 8180 level (marked by blue dotted horizontal line).

Despite bullish sentiments and brokerage estimates of ever higher Nifty levels, real money will be made by being circumspect and waiting for good opportunities to enter. That means buying on dips (or through a SIP - for those not adept at market timing).

The best thing to do near a market top is to get rid of non-performers in one’s portfolio when there are buyers aplenty.

Stock Market Outlook: Keep Your Expectations in Check

Sensex gained almost 57% (~9900 points) from its Aug 28, 2013 intra-day low of 17449 to its Sep 8, 2014 intra-day high of 27355. That is an exceptional performance considering it occurred during a period of high inflation, low GDP growth and high interest rates.

Inflation has started moderating. GDP growth is showing signs of picking up. But interest rates still remain high. From its all-time high of 27355 touched on Sep 8 ‘14, Sensex underwent a moderate correction of 4.4% by losing 1200 points to touch an intra-day low of 26150 on Oct 8 ‘14 – thanks mainly to FII selling.

Today’s bounce up from trend line (UL3) support is an indication that the correction may have run its course. Can the index gain another 9900 points to touch 36000 over the next one year? The possibility can’t be ruled out. But note that in percentage terms (~38%), the gain will be lower because of the higher base-effect.

In a recent article at morningstar.com, investors were advised to keep their expectations in check because the US market looks fully valued. The same can be said about the Indian market. With both markets near lifetime highs, there are no easy pickings left for new entrants.

Stock-picking skills will be tested, and return expectations should be moderate. That doesn’t mean stocks will not give better returns than bonds, NCDs or bank FDs over a 3-5 years period.

You can read the full article here.

Has gold lost its lustre? – a guest post

We Indians tend to be conservative as far as investments are concerned. Why is that? Perhaps because several generations of Indians have faced hardship and deprivation due to exploitation by our ‘rulers’ – both overseas and Indian. Lack of education and infrastructure have contributed to the tendency to ‘hoard’ rather than ‘invest’.

For generations, two of the avenues for investing our little savings have been in land and gold ornaments. This is true even today in the hinterland – where infrastructure and banking services remain primitive or non-existent.

In larger towns and cities, infrastructure and services have improved to the extent that other avenues of investment – like post office and bank fixed deposits, mutual funds and equity are readily available. But our fascination for investing in real estate and gold has not dimmed.

In this month’s guest post, Nishit suggests that it may be time to reduce investment in gold. Debt and equity investments are likely to provide better returns in the foreseeable future.

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Indians are obsessed with Gold. The most common question which I am always asked is: “Should we buy Gold now or should we wait?” The Government has increased the price of Gold in India by increasing import duty - thereby reducing Gold imports and positively impacting the Current Account Deficit.

Gold by itself has no value in terms of utility and returns. Its status as a safe haven in times of uncertainty lends value to it. Gold’s price rises when uncertainty increases in the world. Earlier, the US dollar was linked to Gold’s price, but after it was delinked and the printing presses took over, the US dollar weakened. More dollars were required to buy the same amount of Gold.

Gold’s price had seen a parabolic rise in the past few years on the basis of fears of a worldwide economic collapse led by the US. Quantitative easing, the flooding of the markets with additionally printed dollars led to Gold’s price spurting up. It finally touched a peak of US $1920 in September 2011.

Gold’s price has been on a steady decline since then and has corrected to about US $1200 from $1920 - a decline of about 37.5% from its peak value. It had risen from a low of US $264 hit in 2001-2002 to $1920. The great Gold bull run may be over for now.

There are various reasons for this prognosis and they are:

1. The World economy seems to be recovering and the immediate crisis seems to over
2. US is reducing Quantitative easing; the easy money was one of the main reasons for Gold’s price to sky rocket

When Gold’s price hit a peak of $1920, the Rupee was at 46. Now, when Gold’s price has corrected 37.5% in Dollar terms, the Rupee has depreciated about 35%. Hence, in Rupee terms - thanks also to Government duties – Gold’s price has remained almost stagnant. The future movement in Gold’s price can come due to the Rupee weakening further, leading to appreciation in Gold’s price. The Rupee has been stable for the past few months.

Conclusion:

The value of Gold investing as a portfolio choice is no longer as significant as it was say about a couple of years back. Gold should still occupy maybe 5% of your portfolio instead of the earlier 10-20%. Thanks to the weakening rupee, there is still a chance to exit Gold at a very small loss or profit. Better options can be seen in debt or equity currently.

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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.)

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Gold and Silver charts: an update