This step is the most important and the most difficult step a long term investor faces, especially when he is new to stock market. Problem is that most of us are attracted to market when it is going up and hates the market when it goes down. It should be exactly opposite. The best time to have a ride on a bus is when everybody is getting down. Believe me you will get the window seat :)
When we like a company and decides to invest in it, it is almost difficult to resist that temptation to go and buy. When you are attracted by fundamental analysis (I will refer step 1 in previous post as “Fundamental Analysis”) of a company, you immediately want to invest in it after reading all those good things. But a share price doesn't reflect just the fundamentals. Daily share price movement reflects lot of sentiments which keeps going up and down. Take the benefit of this price movement to enter only when it's available at some cheap valuations.
What we can do is to minimize the risk. In this step, we need to see valuations part. When you go to shopping of a shirt, How do you decide a shirt is costly ? You compare the price with other brands. Same strategy is to be used here.
I have finalized following strategy for buying a stock :
1. Valuation information : Nowadays, this information is available at a click on net. You can get information on moneycontrol, Indiaearnings, ICICIDirect and many other finance sites.
2. Once I like some stock, I add it to my watch list on any of above site. Then I first check the “Financial” section. This will give last year's EPS, last quarter's EPS and current P/E. (Current price/EPS).
3. Next step should be checking “News” section. This will give all news releases happened for this stock in past. I generally check “analysis of last quarterly result” and “management interview”. Management interview will give you how company management perceives the results and what are their plans for next quarter or year.
4. Brokerage Reports : on CNBC/NDTV profit channel, you might have seen in ticker something like this : “CLSA keeps buy on Infosys : Target 2500 Rs”. This is actually full brokerage report. This one is a must read, as it gives expert's analysis about valuations for a particular stock. Check some example reports here. You can go to that stock's page and find brokerage reports available for the stock.
It's not necessary that you agree with that report or expert but you get some useful information here. i.e. Current EPS, Next year's estimated EPS and possible P/E ratio. If you think, what report is saying is totally absurd, just neglect it. Common sense will help here a lot. But finding and analysing brokerage reports for your stock is a must.
5. You can compare it's P/E with its peer group companies also. P/E for different Sector is generally different, i.e. For commodities (cement, steel) , P/E is generally low 6-10. For IT sector, P/E is in 15-25 range.
6. Now you should have idea that stock price is expensive or cheap. Is it near to it's lifetime high price or available at good price ? Is it expensive compare to it's peer stocks ?
7. Now keep the track of that stock price for 2-3 months. Yes, that long. Many people are not ready to wait this much. Since we are investing for time frame more than one year, it's always better to wait for a good time to enter. There are lot of reasons like liquidity, govt policy changes, international market trends, F&O Expiry etc. for which market keeps going up and down. So take benefit of this and whenever market or the particular sector or your favorite stock is going through correction phase or available at very cheap valuations , buy your stock at minimum 15-20 % lower price than price which you have seen at first.
8. Suppose even after waiting for 2-3 months, you didn't get that stock at low price and still it looks very attractive, then you can buy it in small chunk. i.e. If you want to invest 15k Rs in that stock, at first transaction, generally buy only stocks worth only 4-5 k Rs. Every time stock falls by 10-20 %, invest 5k Rs more.
9. Resist the temptation : Even after waiting for some months, if you don't get chance to enter at low price and price keeps going up without any fundamental change (P/E keeps increasing without any good news or EPS growth), then forget that stock. It's not only company available in market and you are not in gambling.
Buying a stock is a longer step and requires some analysis. All companies are growing at certain pace, so their stock prices can not go high without any limit. Better to have patience and enter at good price. Last few steps (7 to 9) will add to your “Margin of Safety”. Check this definition for more help.
These steps had helped me a lot in maximizing my returns. Hope this helps you also !!!
Read more on :
The IPO Checklist
First Year Portfolio Strategy
Sunday, May 27, 2007
Monday, May 21, 2007
Buying a stock : Step 1
Finding a good growth/value stock is not that difficult. But most of us forget the second part : Buying it at good price. So I will divide this post in two steps :
1. Find a good stock.
2. Buy it at good price.
Step 1 : Typically this should be titled as “Find a good company or business.” In this step, you don't look at stock price, but you find about what company does. Question is : How can I evaluate sectors other than sector in which I am working. Don't worry, there are experts sitting there, writing about all companies with keeping only investors in mind. It's not that difficult.
Below is the list of resources which I use to identify good companies :
1. Business Today Magazine : I never miss a single issue of BT and I am a great fan of it. Excellent coverage with excellent details. The writing style is also quite clear and simple so you won't feel bored.
2. Business Line Newspaper (Sunday edition) : Check example company review here. Economic Times also has such weekly stock reviews.
3. CNBC TV 18 : I also don't miss daily broadcast of “Your stocks with Udayan Mukerjee” and weekend broadcast of “Taking stocks”.
First show covers particular stock queries from viewers and answers are given from two experts : “Fundamental” expert and “Technical” expert. Fundamental view is more important for long term. Technical is for short term view and sometimes useful for traders only. You don't need to listen everything in this show, be selective and try to judge on your own senses also. They broadcast this show number of times during the day and videos are also available on moneycontrol.com. Click here for more details.
Second show is more important. They invite some top experts from Financial Institutions like DSP-ML, Citigroup, ICICI securities etc. and experts give sectoral and long term views.
Other than these resources, you can find useful information at moneycontrol.com,icicidirect.com and live at CNBC. By the way, This is not one time step. It should be always going on process.
Another important point is that selection of a company also depends on every individual's own likeliness. I may like TCS and you may find Infosys a better choice. Along with time, our understanding changes and likeliness for a sector/company may also change. More time you spend reading and listening, better you get.
More in "Buying a stock : Step 2"
1. Find a good stock.
2. Buy it at good price.
Step 1 : Typically this should be titled as “Find a good company or business.” In this step, you don't look at stock price, but you find about what company does. Question is : How can I evaluate sectors other than sector in which I am working. Don't worry, there are experts sitting there, writing about all companies with keeping only investors in mind. It's not that difficult.
Below is the list of resources which I use to identify good companies :
1. Business Today Magazine : I never miss a single issue of BT and I am a great fan of it. Excellent coverage with excellent details. The writing style is also quite clear and simple so you won't feel bored.
2. Business Line Newspaper (Sunday edition) : Check example company review here. Economic Times also has such weekly stock reviews.
3. CNBC TV 18 : I also don't miss daily broadcast of “Your stocks with Udayan Mukerjee” and weekend broadcast of “Taking stocks”.
First show covers particular stock queries from viewers and answers are given from two experts : “Fundamental” expert and “Technical” expert. Fundamental view is more important for long term. Technical is for short term view and sometimes useful for traders only. You don't need to listen everything in this show, be selective and try to judge on your own senses also. They broadcast this show number of times during the day and videos are also available on moneycontrol.com. Click here for more details.
Second show is more important. They invite some top experts from Financial Institutions like DSP-ML, Citigroup, ICICI securities etc. and experts give sectoral and long term views.
Other than these resources, you can find useful information at moneycontrol.com,icicidirect.com and live at CNBC. By the way, This is not one time step. It should be always going on process.
Another important point is that selection of a company also depends on every individual's own likeliness. I may like TCS and you may find Infosys a better choice. Along with time, our understanding changes and likeliness for a sector/company may also change. More time you spend reading and listening, better you get.
More in "Buying a stock : Step 2"
Wednesday, May 16, 2007
Sensex and Valuations
For this post, I assume that you know these terms : Earnings Per Share (EPS), Price/Earning Ratio (P/E) and Sensex. Also a disclaimer is required : This is just a possible guideline, not any prediction. So do not blindly follow up based on this post. “Take wise decisions”.
Now checkout following table :
Note : FY08E – 'E' here indicates 'Estimated value'. This estimation is not done by me, but it's a consensus value available in different broker research reports. Also Sensex EPS means total EPS of companies represented by Sensex.
For Emerging markets (BRIC countries : Brazil, Russia, India, China),range of P/E ratio is 15 to 20. P/E ratio of 15 is on cheaper side and P/E ratio of 20 is expensive side. So you can say for FY08, good range of Sensex is between 12375-16500.
Now some mathematics. Today we have sensex at 14000 : almost near to expensive border with FY07 EPS. At the same time, if you calculate with EPS of FY08E, P/E comes to almost 14000/825 = 17. This P/E is called “Forward P/E” (Calculated with forward “next year”'s expected earnings – hope I am correct).
Point is : We are at the expensive valuation of Sensex. Even with forward P/E of 17, it looks expensive. Because Earnings of FY08 are still on paper, only estimated values. Q1 results are still 2 months away. So this indicates “avoid any type of buying new shares”. And if you are sitting on Profits, then it also indicates Selling (remember : Sell at high).
As per my Dad's logic and after seeing history of sensex, every year during May-June, market crashes. One common reason given by most of analysts (which I also found convincing) is : Major money invested in Indian Markets is by FIIs. FIIs must be keeping targets (like EPS estimation) for a financial year. After every quarterly result, they adjust their investment i.e. Churn/ Reshuffle their portfolio to invest in better companies. By the time forth quarter results (May-June) are out, they start booking their profits and so we have this “Sensex” crashing every May-June.
By the way, they (some reports) say that by FY2009-10, Indian MF industry will be bigger than FII. So one can expect less volatile movements of Sensex after then.
In general, this is just an indication of what range we can expect for Sensex during next year. Also as an investor, you should be tracking EPS of your company. Sensex is just representative of the overall market. It might be possible that your company might be doing better or worse than Sensex.
Read about buying guidelines here :
Buying a stock : Step 1
Buying a stock : Step 2
Now checkout following table :
Note : FY08E – 'E' here indicates 'Estimated value'. This estimation is not done by me, but it's a consensus value available in different broker research reports. Also Sensex EPS means total EPS of companies represented by Sensex.
For Emerging markets (BRIC countries : Brazil, Russia, India, China),range of P/E ratio is 15 to 20. P/E ratio of 15 is on cheaper side and P/E ratio of 20 is expensive side. So you can say for FY08, good range of Sensex is between 12375-16500.
Now some mathematics. Today we have sensex at 14000 : almost near to expensive border with FY07 EPS. At the same time, if you calculate with EPS of FY08E, P/E comes to almost 14000/825 = 17. This P/E is called “Forward P/E” (Calculated with forward “next year”'s expected earnings – hope I am correct).
Point is : We are at the expensive valuation of Sensex. Even with forward P/E of 17, it looks expensive. Because Earnings of FY08 are still on paper, only estimated values. Q1 results are still 2 months away. So this indicates “avoid any type of buying new shares”. And if you are sitting on Profits, then it also indicates Selling (remember : Sell at high).
As per my Dad's logic and after seeing history of sensex, every year during May-June, market crashes. One common reason given by most of analysts (which I also found convincing) is : Major money invested in Indian Markets is by FIIs. FIIs must be keeping targets (like EPS estimation) for a financial year. After every quarterly result, they adjust their investment i.e. Churn/ Reshuffle their portfolio to invest in better companies. By the time forth quarter results (May-June) are out, they start booking their profits and so we have this “Sensex” crashing every May-June.
By the way, they (some reports) say that by FY2009-10, Indian MF industry will be bigger than FII. So one can expect less volatile movements of Sensex after then.
In general, this is just an indication of what range we can expect for Sensex during next year. Also as an investor, you should be tracking EPS of your company. Sensex is just representative of the overall market. It might be possible that your company might be doing better or worse than Sensex.
Read about buying guidelines here :
Buying a stock : Step 1
Buying a stock : Step 2
Sunday, May 13, 2007
Investing in Stocks : Basic guidelines
Following is a list of guidelines that might help someone to decide whether to jump into this bandwagon or not :
1.One should invest in stocks only if he/she has extra money. Here I mean extra money means put aside, and forget it.
2.He/she should be able to take risks. Think of your stock account as an crazy account. You may loose all your money. So if you are not kind of that person, better you go ahead with mutual funds or debts.
3.Enterprise / aggressive investor : As per Benjamin Graham's definition, here aggressive means the person who will find time to analyze his portfolio and stock regularly. If you are again a person who is not willing to go through company's results each quarter, then you better off with mutual funds.
4.Love for mathematics and numbers : I would say it's easy to find a good value/growth stock. But most of us always buy it at wrong price. Finding a correct price/fair price also needs you to go through company's balance sheet, finding EPS and PE ratios along with that company's performance. If you don't like doing maths, again investing through MF is a better way.
5.Patience : I believe, 3 to 5 years is good time horizon to invest in stocks. But most of us don't look beyond 6 months, sometimes not even beyond 2 months. Having patience is a must requirement for investing in stocks. Many times, your stock purchases at wrong price will be taken care by Time Factor.
6.Difference between Trader and Investor :
Traders buy at high and sell at low. They do transactions everyday. They bet on P-E ratios and market sentiments.
As an investor, you should “buy at low and sell at high”. You should do transactions may be once in quarter or may be, as someone had said, only few transactions in whole lifetime. AS an investor, You should be betting on company's performance i.e. Growth in EPS (Earning per Share), not on P-E ratio.
If you put simple logic, in no business, you can make profit by buying at high and selling at low. Traders think that they can predict the trend of a stock price and so bet accordingly. As an investor, you should not be seeing at daily price movements.
Graham's advice : Think like this. You are investing 1000 Rs in a good company. Every weekday, Mr. Market (a crazy person) comes to your doorway and tells you that he is willing to buy your stocks for some amount. Some day he tells 2000 rs and some day 500 Rs. If you are happy with price, take the profit, otherwise you ignore him and do your work.
Before you invest in stocks, think that if stock exchange closes down for some time, may be a year or two, are you going to loose your money ? If company you have invested in is doing just fine, then you should be fine. Daily price movement of the company should not bother you. If market offers you good price for buy or sell, then go ahead, otherwise ignore it.
This is the biggest advantage of being a retail investor. “You don't have to follow the market”. Others like Traders and Mutual Fund Managers have to follow the market i.e. If market falls, they have to start selling, if market goes up, they have to start buying. You don't have to do it.
You should bother about your stock investment :
1.when company you have invested is not showing good performance i.e. Losses or lockdown or closing down.
2.When economy is not doing well and lots of roadblocks are there.
Sometimes , May be these are opportunities in disguise, who knows.
Happy Investing !!!
Read about buying guidelines here :
Buying a stock : Step 1
Buying a stock : Step 2
Read about Sensex and Valuations here :
Sensex and Valuations
1.One should invest in stocks only if he/she has extra money. Here I mean extra money means put aside, and forget it.
2.He/she should be able to take risks. Think of your stock account as an crazy account. You may loose all your money. So if you are not kind of that person, better you go ahead with mutual funds or debts.
3.Enterprise / aggressive investor : As per Benjamin Graham's definition, here aggressive means the person who will find time to analyze his portfolio and stock regularly. If you are again a person who is not willing to go through company's results each quarter, then you better off with mutual funds.
4.Love for mathematics and numbers : I would say it's easy to find a good value/growth stock. But most of us always buy it at wrong price. Finding a correct price/fair price also needs you to go through company's balance sheet, finding EPS and PE ratios along with that company's performance. If you don't like doing maths, again investing through MF is a better way.
5.Patience : I believe, 3 to 5 years is good time horizon to invest in stocks. But most of us don't look beyond 6 months, sometimes not even beyond 2 months. Having patience is a must requirement for investing in stocks. Many times, your stock purchases at wrong price will be taken care by Time Factor.
6.Difference between Trader and Investor :
Traders buy at high and sell at low. They do transactions everyday. They bet on P-E ratios and market sentiments.
As an investor, you should “buy at low and sell at high”. You should do transactions may be once in quarter or may be, as someone had said, only few transactions in whole lifetime. AS an investor, You should be betting on company's performance i.e. Growth in EPS (Earning per Share), not on P-E ratio.
If you put simple logic, in no business, you can make profit by buying at high and selling at low. Traders think that they can predict the trend of a stock price and so bet accordingly. As an investor, you should not be seeing at daily price movements.
Graham's advice : Think like this. You are investing 1000 Rs in a good company. Every weekday, Mr. Market (a crazy person) comes to your doorway and tells you that he is willing to buy your stocks for some amount. Some day he tells 2000 rs and some day 500 Rs. If you are happy with price, take the profit, otherwise you ignore him and do your work.
Before you invest in stocks, think that if stock exchange closes down for some time, may be a year or two, are you going to loose your money ? If company you have invested in is doing just fine, then you should be fine. Daily price movement of the company should not bother you. If market offers you good price for buy or sell, then go ahead, otherwise ignore it.
This is the biggest advantage of being a retail investor. “You don't have to follow the market”. Others like Traders and Mutual Fund Managers have to follow the market i.e. If market falls, they have to start selling, if market goes up, they have to start buying. You don't have to do it.
You should bother about your stock investment :
1.when company you have invested is not showing good performance i.e. Losses or lockdown or closing down.
2.When economy is not doing well and lots of roadblocks are there.
Sometimes , May be these are opportunities in disguise, who knows.
Happy Investing !!!
Read about buying guidelines here :
Buying a stock : Step 1
Buying a stock : Step 2
Read about Sensex and Valuations here :
Sensex and Valuations
Saturday, May 12, 2007
Stock Market : Should you invest or not ?
Before I give my opinion, check out these facts and stories.
Fact 1 : An investment of Rs 1000 in Infosys 10 years before would have increased to a whopping Rs 17,46, 782.
Fact 2 : Investment of Rs 20000 in Reliance Debentures 10 years back, would have become today more than 5,00,000 Rs.
Fact 3 : Out of 88 Companies with a market capitalization of over Rs 500 crore 10 years ago, only five companies gave negative returns.
Fact 4 : People have lost all of their savings in Stock market crashes and even many of us believe it's a fictitious wealth. One day price of one stock is 1000, next day it might be 1200 and another day it might be 500.
I believe everyone might have came across such facts/stories many times. During my college life, I swore many times that stock market is a gambling, and believed that nobody should invest in it.
Around two and half years back I attended a road-show, organized by TCS for its employees. There was an Q & A session for its upcoming IPO. During the session, people came up with lot of questions on Earning outlook, valuations and P/E ratios etc. First time I realized that price of a stock is not totally a blind game, and it looks like some rationale is there behind it. There is something I should be aware of. I went through a number of articles on Rediff (Business and Get Ahead sections) and on ICICIDirect.com.
Today, Here I am, analyzing quarterly results of my stocks, checking their P-E ratios and deciding the next move. I feel that investing in stocks without understanding valuations part is almost like loosing your money blindly.
The answer to the title of this post depends a lot on every individual. Stock market doesn't behave rationally all the times, but it's not total crazy also.
I have came up with some guidelines for those looking for venturing into stock market, Read more on that in Basic Guidelines post.
Read about buying guidelines here :
Buying a stock : Step 1
Read about Sensex and Valuations here :
Sensex and Valuations
Fact 1 : An investment of Rs 1000 in Infosys 10 years before would have increased to a whopping Rs 17,46, 782.
Fact 2 : Investment of Rs 20000 in Reliance Debentures 10 years back, would have become today more than 5,00,000 Rs.
Fact 3 : Out of 88 Companies with a market capitalization of over Rs 500 crore 10 years ago, only five companies gave negative returns.
Fact 4 : People have lost all of their savings in Stock market crashes and even many of us believe it's a fictitious wealth. One day price of one stock is 1000, next day it might be 1200 and another day it might be 500.
I believe everyone might have came across such facts/stories many times. During my college life, I swore many times that stock market is a gambling, and believed that nobody should invest in it.
Around two and half years back I attended a road-show, organized by TCS for its employees. There was an Q & A session for its upcoming IPO. During the session, people came up with lot of questions on Earning outlook, valuations and P/E ratios etc. First time I realized that price of a stock is not totally a blind game, and it looks like some rationale is there behind it. There is something I should be aware of. I went through a number of articles on Rediff (Business and Get Ahead sections) and on ICICIDirect.com.
Today, Here I am, analyzing quarterly results of my stocks, checking their P-E ratios and deciding the next move. I feel that investing in stocks without understanding valuations part is almost like loosing your money blindly.
The answer to the title of this post depends a lot on every individual. Stock market doesn't behave rationally all the times, but it's not total crazy also.
I have came up with some guidelines for those looking for venturing into stock market, Read more on that in Basic Guidelines post.
Read about buying guidelines here :
Buying a stock : Step 1
Read about Sensex and Valuations here :
Sensex and Valuations
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