Taking Stock

Yesterday was one of the most memorable days in world economic history. Not everyday you get to see a coordinated rate cut by central banks across the globe. Countries like US, UK, China, Canada, Sweden, Switzerland, European Central Bank, and other Asian countries had cut rates. It is hard to believe that the US rates are as low as 1.5% only. How low can one go? Well, these are some of the extraordinary steps taken at really extraordinary times. Not since the Great Depression, the economies around the world are shaking. The banking sector in few “bankable” countries is in a state of total hara-kiri. The situation is so bad that the governments are bailing out banks with mind boggling sums of money. Big steps like curbing short selling have been taken by many countries. Even in India, the central bank cut rate and securities exchange board eased norms for foreign investors. In fact, the board just reversed the P-Notes clause that it introduced last year. The clause was introduced to curb huge inflows of foreign money into India. Now it is removed to attract more foreign capital inflows. Oh! how the mighty has fallen.

On any other day, steps like these would have resulted in 1000 points rally in the equity markets. Amazingly it did not happen. In fact, the US stock market fell more than 10% after the “mother of all bailouts”. We too went down heavily even with the rate cuts and investor friendly policies. Not only this, the fall in crude oil prices is having absolutely no impact on market sentiments. The mood is absolutely somber and the risk appetite is gone. For the past few months, analysts all over the world were in self denial. They assumed that it is a blip in market system and we would get through this pretty soon. However, the environment today is echoing a very different and negative story. The world markets are in a bear hug and that too with some vicious force. Even being one of the most resilient economies, Indian stock market fell almost 50% from its all time highs within a year. If the rise was quick and ferocious, the fall was even faster and vicious. This may make you question the micro and macro fundamentals of Indian economy, but to tell you the truth, the answer still would be the same as it was a year ago. There is no reason to doubt the Indian story because we, being a well regulated economy, are shielded with outside madness and greed.

Even after the realization of great Indian dream, I wonder why the heck our markets are falling like pack of cards. Well there are no easy and quick answers to this question, but with all my little stock exchange experience, I came out with the following market pointers:

Sentimentalism – It may sound like total BS, but I have found that the stock market is very sentimental and finicky in nature. Very often, it doesn’t even look at the fundamentals of a particular sector or organization. The prices may rise and fall – just like that – sometimes without any reason. So if someone is advising you to buy/sell a particular stock, don’t follow the advice blindly. Go by the sentiments for that stock in the stock market. A real life example of this would be Essar Steel. The stock was about to be de-listed from the exchange, but in the last couple of weeks, it always used to hit the upper circuit. Mind blowing, isn’t it?

The great hope – Information is real-time these days. It spread faster than a wild fire. With the advent of online trading, many computer literate average Joes have entered the stock bullring. They latch on to any small positive tit bits about a stock and buy it at any cost. Valuations and PE are alien concepts to them. RNRL and RPL are examples of such great hopes – at the time of boom madness, they used to jump 20-30% on a regular basis. The only reason behind it was hope. Funny thing was (and still is), both of these companies haven’t even started their business and their valuations were among the most expensive in the world.

Invest slowly and widely – Spread your wings, but slowly. Do not enter into market with all your life savings and never put all your eggs in one basket, even if the basket is made up of solid gold.

Get out and get out fast – Most of us tend to have unrealistic price goals, particularly selling price. We look for instant gratification – doubling the money in no time. Well you may get lucky once or twice, but not always. Keep your stop losses and selling price reasonable and strict. It doesn’t matter if the stock you sold skyrocketed another 50%. When we sell a stock (even at good profits) and it jumps, we tend to loose heart. We think that we sold it too soon. Believe me, this guilty felling led us into setting unreasonable sell/buy price. As a trader, if you have set a profit margin of 5-10%, then get out at your initial decided price. A recent incident makes me laugh my brains out. You must have read this in newspapers – Microsoft offered Yahoo $40/share and Yahoo rejected it by saying the price is ridiculous. Even when the big corporate estimators said that it’s a very good price. But the deal was rejected. The last time I cheeked Yahoo’s stock price, it was $14. So even if the price doubles, it won’t be anywhere near to the initial offer. Sometimes selling really makes sense.

Buy low and sell high – Do you know who gave this simplest of philosophy? Mr. Warren Buffet – the world’s greatest investor. Just remember that there is a difference between ‘price’ and ‘value’ of a stock. If you have studied a stock, then look at its value and growth potential. If you have good reasons to believe that there is good chance of upside in a particular stock, buy it. As I’ve told you, market doesn’t always go by the valuations. At times of panic, some stocks goes well below their real value. Whenever you encounter such situation, grab the opportunity and invest. Don’t worry if the price falls because if you are patient enough, the stock will be back to its real price. Remember, market may be sentimental, but it is not a fool. Market always has a way of finding good stocks, even if it may take a while.

Never say never – Never assume that the prices will rise or fall forever. Nothing is written on stone in stock market. If a stock is really blue chip today (I mean expensive), it won’t remain that way always. I’ve seen few stocks which flew like eagle but tanked like a bomb. If you think you won’t get that stock at this price, then you my dear friend are wrong. Market has a very bad habit of humbling biggest of players. One of the biggest investors in India, Rakesh Jhunjhunwala once said - Market is like weather, you got to bear it weather you like it or not.

Do not get overboard – There is a saying in Hindi – इंसान को पैर चद्दर से बहार नहीं फैलाना चाहिए. Roughly translated – Person should not protrude the foot out of the sheet. If you are a small fry, try to avoid trading on margins. You should trade within your capacity. Buy/sell stocks only if you can back it up with money in your bank account. Do not do margin trading because it may land you on sticky wicket.

Don’t panic – Yesterday (when market tanked again), I bought few shares of one of the most stable banks at a very attractive price. But then it fell more, and then some more. I kept on buying it at every fall in small quantities. Ultimately, the average cost of that stock came out to be really really cheap. By the end of the day, I sold all of them for a good profit. If you have invested in a good stock, don’t panic. Once the dust is settled, it will be back to its real value.

Be brave – We are human and we will make mistakes. Sometimes we invest in some stock and then we realize our mistake. Do not hang on to it. Get rid of it as soon as possible, even if it means selling at losses. Do not get disheartened. Because the capital that you recovered by selling the bad stock, can now be put to better use. Invest it in some good stock and you will soon offset all your losses. In the end, your portfolio may look bad with few reds, but when you see the final figure at the bottom, you will feel good. Just remember, you are not the god of market. You will make mistake and try to use that failure as a founding stone of your next big profit.

Be alert – Keep yourself updated with latest news and developments and try to analyze them. Listen to educated/experienced voices. The more the information, the faster the information - the better it will be for your portfolio. Don’t just sit on your bum once you buy a stock. Just buying and forgetting about a stock is not a long term investment. You got to keep analyzing the situation in timely fashion to protect your investment. If you buy a stock for long term, but it yields great results in shorter duration, then don’t hesitate to sell it, unless you have good reasons to belive that there is more upside in future.