Consumer is King » Equity

Mistakes commonly made by equity investors

ashish — Sun, 09 Aug 2009 18:15:15 +0000

Everybody makes mistakes in the equity market, so one cannot blame retail investors for making many mistakes. Even acclaimed mutual fund and hedge fund investors have made mistakes over the years, but that does not excuse the retail investors from trying to learn about the mistakes that they keep on making so that they reduce the number of mistakes they make in the future. At the minimum, investors should learn about these mistakes so that they can try and learn from these mistakes. Some of these mistakes are:
1. Investors typically join the herd. So, when the stock market crashes, people run to liquidate their holdings, even at a loss. For example, when the market was really down in October, companies that were fundamentally sound were picked up by people who believed in the long term.
2. People look at tips, and even do investment based on tips even if they know nothing about the company or stock.
3. People do not read about the fundamentals of the companies that they are investing in. Typically, company valuations follow the projections of the sectors that these companies belong to, and after that, the company performance also plays a role. However, people do not bother finding out these facts.
4. People invest and forget. There are a number of people who invest in companies or mutual funds and do not re-evaluate the nature of their investments and the performance over a regular period, say every 6 months or every year
5. Diversify your portfolio: Do not invest everything you have in the stock market. Invest in mutual funds, some in debt funds, some in PPF, some in realty, and so on. Make sure that you are properly diversifying your investments, at the same time, make sure that you invest only where are you comfortable in your level of knowledge. Even consider things such as investments in gold and art.
6. Don’t get caught up in greed. When people lost out in January 2008 after markets had climbed to record highs, people were not willing to consider that the market could go down. People were not willing to take some of their investments out of the market, and lock that money in safer investments.
7. Invest for the long term. Don’t get scared by short term movements. Even while tracking them, make sure that if you have invested based on fundamentals, and for the long term, you don’t lose patience.
8. Don’t get tricked by other people. You will always hear people say that they made incredible amounts of money in investing in the stock market, and there is a feeling of being left behind. Remember, you only hear the stories that are positive, and you should never let such stories guide your actions.

Wanting to invest in Mutual Funds ? learn more ..

ashish — Tue, 29 Jul 2008 10:26:00 +0000

Looking to buy a Mutual Fund ? Most investors into Mutual Funds buy on the basis of recommendations from friends, from the broker / agent, or from some research. But if you want to buy a Mutual Fund, there are a lot of variables such as
- the industry into which the fund is investing,
- the aggressive / cautious nature of the Fund,
- the past history of the Fund Manager,
- the level of customer service orientation of the fund house
In a lot of cases, people overlook such information and then later are not happy with the performance of the Mutual Fund (for example, they bought an aggressive Fund that is more risky, and were shocked when it fell more than a cautious fund at the time of a crash).
There is a link on Economic Times that seeks to explain some of these concepts:

It is important to be well informed before you invest in a mutual fund on the premise that the fund will deliver. And when it comes to a fund in which you have already invested, it is even more crucial to be well up on numbers and facts. Sectoral allocation is also important. Excessive exposure to one sector can mar the returns if the sector underperforms. It is also important to compare the stock exposure norms and sectoral allocation over a sustained period of time. This gives you an idea as to how the funds have been deployed and the risk associated with such portfolio diversification.
Two key ratios you must keep in mind are portfolio-turnover ratio and expense ratio.
Portfolio-turnover ratio is a measure of churning the fund has undergone while the expense ratio tells us about the cost of managing the funds.
Higher portfolio turnover is seen in opportunities fund and in more actively-managed fund. Value funds are expected to show a low-portfolio turnover.

Read the whole article, and search for more information regarding such investments. Even though learning about Mutual Funds and their details could take some more time, it is worthwhile since you should make your investment when you are an informed investor. This will also help you to make decisions about investment or withdrawal in a better manner, and make you more money overall.

http://economictimes.indiatimes.com/quickiearticleshow/3279973.cms

How to invest in stock markets ?

ashish — Mon, 26 May 2008 07:36:34 +0000

Another useful email that I got was related to investing in the Indian stock market, especially after the crash and the learnings from that. Topic of the email: How to invest in stock markets?

1. Select businesses with good growth opportunities. Read business magazines that offer research on good businesses and read those articles thoroughly.
2. Select 1-2 good companies in those businesses.
3. Never enter into any stock at unreasonable valuations. Just because a company is good is no reason to buy the stock if it has already run up.
4. Penny stocks are manipulated by big brokers. Never look at them in your life. Take an oath.
5. Good stocks quickly regain their value.
6. Never be sentimental with any stock. A stock is not related to you, and there is no such thing as loyalty in the market.
7. Best stock ideas arise in day to day life like investing in ICICIC Bank stock in 2002 after experiencing their wonderful service when you fed up with Public sector banks. Always look for opportunities.
8. Invest in future sectors. How many of us invested in Infosys in 1997 and Bharti Airtel in 2002? But be careful and selective and do research.
9. Buy and forget will work only to some extent. Indian markets become high volatile zones. There is no reason in keeping your money after RPL reached 300 and RNRL reached 250.
10. If you can’t follow all these things, just put your money in good mutual funds.

Checklist for entering an IPO

ashish — Mon, 26 May 2008 07:02:13 +0000

I came across this post in an email about a sort of checklist about whether to invest in an IPO and thought that this was worth sharing; even if this helps a few people, it will be worth posting.

How to decide whether to invest in a particular IPO?
• First and foremost, find out the listed peers in the secondary markets and if IPO is at a higher valuation then there is no justification for investing.
• Check the results and growth rate in term of sales ,profit growth ,operating margins growth for the last 3-5 years and not only for 1 year as there are chances of financial engineering (manipulation) of balance sheets just before the launch of the IPO.
• Check the background of the promoters and if there are any serious criminal/income tax evasion cases against then avoid the IPO; typically crooked people are easily able to cook the books when trying to do an IPO
• Find out the purposes of raising the money. Some justified reasons are expansion of capacity, new projects, while if the sole purpose is meeting the working capital needs or repaying the debts then it does not inspire enough confidence to invest in that IPO.
• If the IPO is for a new project then we should check the turnaround /breakeven time. One example is Reliance power IPO where this time was huge and hence took a beating (projected capacity of Reliance power in next 3-4 years was less then current capacity of NTPC).
• Study the risk factors in the draft prospectus and see if they are of real concern or acceptable risks in the normal course of business.
• Check the subscription figures in QIB category as they are considered to be smart /intelligent and have access to lot of company information that retail investors do not have. Of course, this is not always true, but this is still a good indicator.
• Check the future growth prospects of the company and if the future expected growth is huge or they are operating in a niche segment or in a high growth sector for which no listed companies exists in secondary markets, then higher valuations may be justified.
• Never go by the grey market premium(GMP) of a particular IPO to make your investment decisions as they can vary daily and are mostly speculative in nature. (E.g. Reliance Power IPO having a GMP of 450 listed at a premium of Rs 10-15 only while TItagarh IPO having a GMP of Rs. 10-15 listed at a premium of Rs 150).
• Subscription figures in Employee quota can tell you whether the employees themselves are confident of the future prospects of the company.
• Some other indicators of the quality of an IPO can be the rating given by the agencies like ICRA, CRISIL or the reputation of the Book running lead managers(Example is Enam financials which manages only quality IPO’s)
• Keep in mind allotment chances as well besides the quality of the IPO. A medium quality IPO with good subscription chances can give you better returns then a very good IPO with very less subscription chances.
• Do not consider any of the above factors in isolation but look at them together to arrive at any conclusion.

And of course, if there are additional factors that you use to evaluate IPO’s, please mention them in a comment.