Adapt To A Bear Market

Witnessing a bear market for stocks doesn't have to be about suffering and loss, even though some cash losses may be unavoidable.

Instead, investors should always try to see what is presented to them as an opportunity - a chance to learn about how markets respond to the events surrounding a bear market or any other extended period of dull returns.

Read on to learn about how to weather a downturn:

https://www.investopedia.com/articles/younginvestors/08/bear-market.asp

How to make a winning long-term stock pick

Many investors are confused when it comes to the stock market; they have trouble figuring out which stocks are good long term buys and which ones aren't. 

To invest for the long-term, not only do you have to look at certain indicators, you also have to remain focused on your long-term goals, be disciplined and understand your overall investment objectives.

Read more at:

https://www.investopedia.com/articles/fundamental-analysis/09/long-term-stock-pick.asp

The Walter Schloss Approach to Investing

Walter Schloss was one of the most successful investors of all time, but outside a small portion of the value investing community, no one knows the name. Mr. Schloss studied under Benjamin Graham at Columbia University and eventually went to work for Graham at the Graham Newman Partnership.

In 1955, Schloss struck out on his own and compiled one of the best track records in the history of investing. Over a 50-year span, he earned gross returns averaging 20% annually. His method emphasized buying cheap stocks with solid financials and holding them until they were considered overvalued. Mr. Schloss emphasized price-to-book value (P/BV) as the best measure of a corporation's value and preferred buying stocks that traded below book value.

In 1994, Walter Schloss sat down and outlined his thoughts on making money in markets to serve as a guide to newer investors or those without in-depth knowledge of the value investing process. The result was one typed page listing the 16 factors needed to make money in the stock market.

Read about the 16 factors here.

Training your Mind in Volatile Markets

Volatility in the stock market can be counter-intuitive. Bull markets aren’t typically filled with huge up days. Instead, rising markets tend to experience a slow and methodical rise higher. 

The best up days are usually seen in the same market environments as the worst down days, which occur during down-trending, volatile markets.

...loss aversion is a big reason why investors tend to make more emotionally-charged decisions when stocks are falling, which causes both panic selling and panic buying during a market downtrend.

Read more at:
https://www.investopedia.com/news/training-your-mind-volatile-markets/

How to Find Tomorrow's Winning Stocks

The holy grail of investing is to find the biggest winning stocks in the market. The outliers. The stocks that break all of the records, i.e. the leaders that go up the most. 

Studies have been published showing that all of the gains in the market over the decades are from only a handful of stocks. This means that, if your portfolio didn't have some of these leading stocks, it didn't outperform the market. 

Read more at:
https://www.investopedia.com/trading/how-find-tomorrows-winning-stocks/

The Raging Bull Market Is Over: So, What's Next?

The stock market is in the midst of several major shifts, and investors should begin to reposition their portfolios appropriately, according to a recent report from the U.S. equity and quantitative strategy team at Bank of America Merrill Lynch (BofAML). 

"The 20-year long risky stock premium has finally been wiped out," is how their report leads off, continuing, "investors should pay for safety and be compensated for risk, but the opposite has been the case for 20 [years]." 

Given their observation that "the gap has finally closed," this has major ramifications for investors going forward. The table below summarizes five big market trends that BofAML sees as being underway right now.

Read more at:
https://www.investopedia.com/news/raging-bull-market-over-so-whats-next/

How Market Psychology Drives Technical Indicators

"When technical tools are used judiciously, their value cannot be overstated. And every time you apply a tool of technical analysis, you are calculating a consensus of bullishness or bearishness among all market participants...

The principles of market psychology underlie each and every technical indicator, so a good understanding of crowd behavior is crucial to your understanding of the fundamentals of particular technical indicators. 

Assuming that most readers already possess some knowledge of interpreting the more common technical indicators, we will specifically describe how market psychology drives these individual tools."

Read more at:
https://www.investopedia.com/articles/trading/02/121602.asp

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, 2018. 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 today for details.

The newsletter has completed 100 issues, with its share of hits and misses. Sensex and Nifty touched lifetime highs in Jan, 2018 and have since been in corrective phases during which small-cap and mid-cap stocks have faced sell-offs. That has affected 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 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 manageable debt, give steady (rather than spectacular) returns and have growth prospects.

Non-subscribers may be interested to know how the recommended (mostly 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 29, ‘18:

• 11 stocks gained more than 25%, of which 6 gained between 25-49%; 1 gained between 50-99%; 4 gained more than 100% (of which 1 gained more than 250%)
• Of the balance 7 stocks, 4 gained between 10-24%, 3 gained between 1-9%

The stock market has been in a consolidation-cum-correction phase from which it is yet to recover fully - thanks to FII selling. Several stocks have lost their gains and some have slipped into the red - despite good fundamentals. 

However, monthly technical updates with suitable stop-losses have enabled investors to preserve their gains and/or kept their losses small.

What is important to understand is that none of these stocks were ‘cheap’ valuation-wise – fundamentally strong stocks rarely are - and some had already run up a lot when they were recommended.

If you wish to learn how 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) today – subscriptions will close on Jul 21, 2018.

How Do Interest Rates Affect the Stock Market?

"The investment community and the financial media tend to obsess over interest rates—the cost someone pays for the use of someone else's money— and with good reason.

...while it usually takes at least 12 months for any increase or decrease in interest rates to be felt in a widespread economic way, the market's response to a change (or news of a potential change) is often more immediate.

Understanding the relationship between interest rates and the stock markets can help investors understand how changes might affect their investments and how to make better financial decisions."

Read more here.

4 ways to predict stock market performance

"There are two prices that are critical for any investor to know: the current price of the investment he or she owns, or plans to own, and its future selling price. Despite this, investors are constantly reviewing past pricing history and using it to influence their future investment decisions. 

Some investors won't buy a stock or index that has risen too sharply, because they assume it's due for a correction, while other investors avoid a falling stock because they fear it will continue to deteriorate.

Does academic evidence support these types of predictions, based on recent pricing? In this article, we'll look at four different views of the market and learn more about the associated academic research that supports each view. The conclusions will help you better understand how the market functions, and perhaps eliminate some of your own biases."

Read more here.

Warren Buffett and Ray Dalio agree on what to do when the stock market tanks

"The money is made in investments by investing and by owning good companies for long periods of time." - Warren Buffett

"It's when you're not scared you probably want to sell, and when you are scared, you probably want to buy." - Ray Dalio

Read more from this recent cnbc.com article.

Spotting A Market Bottom

Stock market bottoms can be challenging to spot. And many times, investors think that they have found this point, only for the major averages to head even lower. 

The big question many have is: just how do you know when a market bottom has taken place? 

This requires the tools and indicators that have identified major market bottoms in the past, and an understanding of what they are, how they work and that each indicator must correlate a similar reading.

Read more here.

The bottom is falling out of the Indian stock market; should you sell now?

The bottom seems to be falling out of the Indian stock market. Re-imposition of LTCG tax (from Apr 1 '18) has badly dented bullish sentiment. Now, imposition of import tariffs by the US President has dented bullish sentiment in global stock markets.

Some experts are suggesting that this 'discount sale' in the Indian stock market won't last long, and investors should use the correction to buy. Others are suggesting that it is not a good idea to try and 'catch a falling knife'.

Small investors are in a quandary. Portfolio values are getting depleted on a daily basis. Is it better to sell and run? Or, hold and wait out the correction?

In a recent article in investopedia.com, Andrew Beattie has advised when to sell and when to hold. Read the article here.

Related Post
When should you 'hold' and When should you 'fold' a stock?

Strategies to Volatility-Proof Your Portfolio

Stock markets worldwide have become quite volatile of late. The first sign of correction has sent many small investors scampering towards the exit door, thinking worse is to follow.

Others have jumped into the market in search of bargains, thinking that markets can't fall much further and the time to buy is now.

Investors who have experienced previous corrective moves and have longer-term views are probably using the market upheaval to rebalance their portfolios. 

A recent article in investopedia.com has suggested strategies for making your portfolio volatility-proof. Read it here.

5 Tips for Reading a Balance Sheet

The Indian stock market indices have come off their Jan '18 tops and have been consolidating sideways for the past 4 weeks. There is every possibility that there will be some more consolidation or correction at least till Mar 31 '18.

From Apr 1 '18, the re-introduced LTCG tax comes into effect. That can put a near-term floor on the indices. From mid-Apr, Q4 (Mar '18) results season will start. 

If Q4 results of India Inc. show any improvement over Q3 results - as they are expected to do - buyers may overwhelm sellers, and stock indices can resume their upward trajectory.

This may be as good a time as any to start preparing a 'buy list' from companies that have performed well in the previous three quarters. 

How to choose which companies to put on the 'buy list' from the several hundreds that declared good results? The best place to start is to read their annual reports, and choose the ones with the strongest balance sheets.

Given below are links to three introductory articles published in investopedia.com to get you started on balance sheet analysis:

1) 5 Tips for Reading a Balance Sheet 

2) Reading the Balance Sheet

3) Breaking Down the Balance Sheet

There are several links in the above articles which can help you to dig deeper into balance sheet analysis.

If you don't feel excited about analysing balance sheets and identifying good companies for investment, fret not. You can start SIPs in highly-rated equity and balanced mutual funds, and leave all the analysis to fund managers.

(Wishing all visitors, regular readers, g+/fb/twitter followers and newsletter subscribers a safe, colourful and happy Holi.)

Why a rising Stock Market isn't Risky (as long as earnings continue to grow)

The New Year has started off in a sensational note for Indian stock market bulls. Both Sensex and Nifty indices have surged upwards - touching new highs on a regular basis.

Most market experts had predicted more moderate stock portfolio returns in 2018 after huge gains made in 2017 on the back of strong liquidity flows into domestic mutual funds.

Instead, bulls have jumped off the block, and been on a buying spree as if there will be no tomorrow. What has caused the sharp parabolic rise in both stock market indices? 

In a post last week, a probable technical reason why FIIs have turned bulls after 5 straight months of net selling in Indian equities was put forth.

There is a fundamental reason as well. After several quarters of muted earnings growth, India Inc. appear to have hit the fast forward button in Q3 (Dec '17) - albeit on a lower base due to the disastrous demonetisation exercise in Nov '16.

Have the bulls over-reacted to the improved Q3 corporate results announced so far? Is the market getting riskier by the day?

In a recent article in investopedia.com, Michael Kramer has argued that a rising stock market isn't risky as long as corporate earnings continue to grow.

Stock market players have a habit of looking ahead. Index P/E can look expensive based on last year's earnings, but may not look so expensive based on projected one year forward earnings.

Read the full article here. 

Sunday musings: Lessons for small investors from Vishwamitra's dalliance with Menaka

Once upon a time, King Kaushika was touring his kingdom with a large army when he chanced upon the ashrama (hermitage) of Rishi (Sage) Vashishtha near a forest.

The Rishi greeted the King and offered his hospitality. Kaushika declined the offer because he thought it will be a great financial strain for Vashishtha to feed such a large army.

Vashishtha insisted and said it would not be a problem as he owned a wish-fulfilling (kamadhenu) cow, Sabala. Sure enough, Sabala arranged a grand feast which greatly pleased the King.

But a King won't be a King unless he coveted the possession of others. Kaushika felt that Sabala will be of more use to a King than a Sage. So, he offered ample monetary rewards to Vashishtha in exchange for Sabala.

The Sage politely refused the offer, which angered the King. He ordered his army to forcibly seize Sabala, at which point Sabala mournfully requested Vashishtha not to part with her.

Vashishtha suggested that Sabala raise an army of her own and defeat King Kaushika's soldiers - which she promptly did.

Kaushika decided to perform spiritual penance for 12 years. That pleased Lord Shiva, who granted him a wish. Being a King, who was humiliated by a humble Sage, Kaushika wanted the best weaponry that Lord Shiva could offer.

An emboldened Kaushika went on the attack and hurled his newly acquired divine weaponry at Vashishtha. But to no avail. Vashishtha's superior spiritual (yogic) powers repelled the attack easily.

Kaushika realised that physical powers were no match for spiritual powers. This time he went ahead with a more serious effort at penance to become the spiritual equal of Vashishtha.

In the process, he became Sage Vishwamitra. Lord Indra, King of Heaven, was disturbed by the severity of Vishwamitra's meditation and the yogic powers he might attain, and sent the beautiful apsara (celestial nymph) Menaka to seduce him.

Menaka did as she was instructed. Vishwamitra's spiritual resolve was overcome by the sheer beauty of Menaka. Their dalliance resulted in the birth of a daughter. 

Unfortunately, Menaka revealed to Vishwamitra the real reason why she had descended from Heaven. Vishwamitra was enraged by Lord Indra's devious move. He banished Menaka, abandoned their daughter and returned to his meditations.

[The daughter - named Shakuntala - was raised in Sage Kanva's hermitage. She later married King Dushyanta. Their child was called Bharata, after whom India was originally named.]

Moral of the story? There are two:

1. Thou shalt not covet others' possessions - which can be paraphrased as 'Keeping up with the Joneses'. It is a futile activity. Be happy with what you own. Greed isn't always good - particularly near a stock market top.
2. Dalliances should be avoided - regardless of the attractiveness of the opportunity.

The second moral is of particular importance to small investors. Remain steadfast in your discipline of maintaining a financial plan and following an asset allocation plan. Financial powers will follow inevitably albeit gradually.

Let not the Menaka's of the investment world - penny stocks, F&O trading, commodities trading, forex trading - lure you. Behind these Menaka's are the devious moves of the Lords (i.e. Professional Traders) of the stock/commodities/forex markets - designed to test your financial resolve.

To know why FIIs are buying, look at the Dollex-30 chart

After five straight months of net selling in equity shares (from Aug '17 to Dec '17), FIIs have turned net buyers in Jan '18.

They have been net buyers in 10 of the 14 trading days this month. Today's net buying was worth Rs 18.9 Billion.

What made them change their bearish stance? Anticipation of better Q3 (Dec '17) results of India Inc.? Overbought US and UK stock markets?

May be a bit of both. For a technical reason, take a look at the long-term Dollex-30 monthly chart (courtesy:investing.com) below:

For the uninitiated, Dollex-30 is the BSE Sensex chart in US Dollar terms. The blue horizontal line has been used to mark the Jan '08 top, which acted as a resistance level in Dec '17.

While Sensex has been conquering new highs on a regular basis, the Dollex-30 has just managed to cross above its Jan '08 top after 10 long years.

Remember that when a long-term resistance level gets breached, it usually turns into a support level for future corrections.

Reality check about Moody's ratings upgrade and Why investors should avoid IPOs

Moody's Ratings Upgrade - a reality check

"Moody's Investors Service upgraded its ratings on India's sovereign bonds for the first time in nearly 14 years on Friday (Nov 17 '17), saying continued progress on economic and institutional reform will boost the country's growth potential.

The agency said it was lifting India's rating to Baa2 from Baa3 and changed its rating outlook to stable from positive as risks to India's credit profile were broadly balanced."

The Finance Minister and various government functionaries wasted no time in appearing on various TV channels to tom-tom the 'achievement' as an endorsement of the NDA government's financial reforms and fiscal prudence by an 'internationally reputed ratings organisation'.

Now, here is the reality check (from a Reuter's article):

"Moody's upgrade, its first since January 2004, moves India's rating to the second lowest level of investment grade. Standard & Poor's has kept India at the lowest investment grade just above junk status for a decade and Fitch Ratings for one year longer."

There is no guarantee that S&P or Fitch will follow Moody's in upgrading India's sovereign bonds ratings. In other words, as of now, two out of three 'internationally reputed ratings organisations' have kept India's sovereign bonds ratings just above junk status.

The ratings upgrade by Moody's is definitely a positive sign - but not a huge deal just yet. Expecting FDI to pour in may be a bit premature. However, FIIs did join DIIs as net buyers of equities on Friday (Nov 17). The rally in the stock market is likely to continue next week. 

Why investors should avoid IPOs

A recent article in bloombergquint.com mentioned that 32 companies have cumulatively raised Rs 50,000 Crores from IPOs so far this year - the highest on record. "Promoters and (existing) shareholders walked away with the bulk of the gains by offloading stakes."

"Shares of 23 of the 32 companies that have gone public this year either declined or gave low returns since the close on the first day of trading." 

20 companies have provided negative returns from the closing level on the first day of listing till Nov 15. 3 companies have gained less than 5%. 5 companies have gained between 10% & 49%. The balance 4 companies - Avenue Supermarts, PSP Projects, Apex Frozen Foods and Shankara Building Products - have gained between 72% & 132%.

If you have been thinking about jumping on to the IPO bandwagon in the hope of making gains on listing, think again. The odds are not in your favour. 

How to Use Volume to Improve Your Trading

Most small investors I interact with are either looking for a multibagger stock that will generate quick profits, or trying to find that elusive technical indicator that can predict price movements with greater accuracy than anything known or available in the stock market.

A few experienced and knowledgeable analysts have even devised their own proprietary technical indicators, which enable them to charge higher fees from their clients.

At the end of the day, it is not the sophistication of your trading strategies or your incredible ability to take risks that will turn the tables in your favour. 

It is how well you have selected the companies you wish to trade in, and whether you can identify and capitalise on important turning points on a price chart.

One of the simplest and easiest to understand indicators that can be of immense help is the volume of trading in a stock or index. Yet, so many analysts who opine on price charts have very little understanding of how volume (or the lack of it) affects price movements.

In a recent article in investopedia.com, Cory Mitchell explains how understanding and analysing trading volumes can improve your trading. Read the article here.

(Wishing blog visitors, regular readers and newsletter subscribers a very happy and safe Diwali and a prosperous New Year.)