Sathesh Kumar M

YOU know that the good old days are gone for good when the world even starts adulterating the milk fed to children. That seems like the bottom of the barrel to me. But its not only your milkman who is running a scam — he is joined by the biggest names in the corporate world to the smallest grocer around your corner.

So it’s no wonder that an organism like the share market which is really nothing but a gigantic money making machine is prone to scams. These range from accounting fraud, rigging, insider trading and audit committees not doing their work to research reports for different audiences, back dating of Employee Stock Ownership Plan (ESOPs) and initial public offerings.

But where consumption of adulterated milk may cheat you of nutrition, participation in a rigged market is going to cheat you of your life’s saving so act with caution:

1. Caveat emptor
During bull runs, people often tend to willingly hand over their money to complete strangers without verifying the stranger’s claims of credibility or even directly invest/buy instruments they don’t really understand. After giving their money, people simply sit back and wait for the returns to start pouring in. This is a surefire way to lose your shirt.

You have to be proactive. Before choosing, research thoroughly. Play one vendor against the other to find out about the loopholes. If it is an insurance policy ask for illustration from the competition to be used as a base for comparison.

2. Look before you leap
If you buy a mutual fund, unit linked life insurance or direct equities, you have to understand that agents/advisors can only do enough to reach information to your doorstep. Thereafter your obligation kicks in.

The person providing financial advice to you has a fiduciary obligation to give you good advice. Of course, that is true only if you are seeking fee-based advice. Check references, understand the compensation system, research their advice, pay attention, understand your investment and remain fully engaged are some of the things you can do.

However, if your banker or broker is your advisor too, then be careful. Set realistic expectations and, if it looks too good to be true, it probably is. By not paying him a fee you may land up paying for wrong advise in other ways. And if you have not hired him (ie you are not paying him a fee), you cannot sack him either.

3. Pour over paper
You have to read and understand every piece of paper that you are given. Every disclosure document must be reviewed until you understand it. Question everything that you find confusing.

Never sign anything that you don’t understand, and always get a copy of everything that you sign. When in doubt, ask. If still in doubt, say NO. It is your money, so do not feel ashamed.

Remember there is no shortage of crooks in the world — there are millions of people out there ready to strip you of your money. However you can help by not making it easy for them. If you’re careless then you’re sitting duck for these scamsters so remember you will get shot!

If I had a penny for all the times people have asked me the secret for winning at the stock markets, I’d be a millionaire by now. The answer I give them is that to win at the stock markets you need the ability to hunt a bear.

Yes, as strange as it sounds, it’s true. No, we’re not talking about the kind of bear-hunting done in the wild but the bear hunting done in the city. The ‘bear’ kind of stocks that haven’t been part of the bull run!

Let me explain further:
The much celebrated stock market party has in fact been the work of only a handful of index stocks. So many small investors may not have gained much from this high. For instance, I know of people who have sold stocks such as RPL (Reliance Petroleum Limited) at Rs 100, a few months back and are feeling terrible – because the price has crossed Rs 200 today. Had they remained invested, they could have benefited 100 per cent growth.

The trick is simple: Look for one rupee coins that are being sold for 50 paise. Hunt the bear!

Which only means look for sectors and companies with strong business fundamentals that have under-performed. They may have assets that are worth much more than the entire market cap, great cash flows and aggressive expansion plans. But their stock prices have not moved up due to various reasons like market imperfection in the short term

For instance, a while back this year, some folks invested in a company called Sesagoa, when the price stood at Rs 1,200. Very few were aware that it was a ‘hot’ stock. The price had stagnated for sometime, but it didn’t matter to some because of its strong fundamentals and the iron ore mines it had. It was obvious that if the demand for steel goes up, iron ore prices will also rise.

Today Sesagoa’s stock price is over Rs 3,500.

One of the best ways to make your investments grow exponentially is to look for undervalued companies. Stocks which have been ignored by the rest but have strong future can be bought at very low prices today and you can see them giving you multiple returns in the next three or four years.

High Value Low Price has been a strategy used by professional investors such as Warren Buffet and even our very own Rakesh Jhunjhunwala.

• Look at sectors which have not participated in the rally at all.
• Look for companies with strong fundamentals and growing profits.
• Don’t just follow the flock that are going up 10 per cent everyday.

Quick tip: Sectors which have under-performed today such as hospitality have some excellent picks which will handsomely reward investors in the near future.

You will find out that this is one of the safest and least risky ways to create wealth. Definitely safer and less riskier than the real bear hunt!

Photograph: Tim Boyle/Getty Images

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LET me tell you a story. In a tiny village, a man decided to engage the villagers by offering them some work.

He announced that he would buy monkeys from them for Rs 10 per monkey. So, the villagers began catching them by the dozen, and as promised the man paid them.

But pretty soon the villagers became laid-back and the pace of work slowed down. So, the man offered to pay Rs 20 for every monkey they caught.

The villagers started catching monkeys with a vengeance, again. But pretty soon the supply diminished, and people returned to their farms. The going price was raised to Rs 25 and then, Rs 50.

Then one fine day the man had to visit the city and asked his assistant to take over.

The assistant came up with a new game place. He asked the villagers to buy the same monkeys that were sold by them for Rs 35 and sell them to the man for Rs 50. The villagers queued up with all their savings to buy the monkeys.

After some days, neither the man nor the assistant could be found. There were monkeys all around!

BUY low, sell high.

This is the most popular theory in stock market investing. But the question is -– how would you know when a stock’s price is ‘low’?

The key: Compare a stock’s price with its ‘value’.

How is price different from value?
– Price is what the market is willing to pay for the share at a given time. It fluctuates from minute to minute.

– Value of a stock is the worth of its underlying business. It is more stable as fortunes of a company do not change overnight.

Buy when price is lower than value
If a share’s value is Rs 150 and price is Rs 125, then you get the stock at a discount of Rs 25.

While there is no guarantee that the price will not go below Rs 125, the probability is low.

This principle is called the ‘margin of safety’ and finds it roots in the teachings of legendary investors — Warren Buffet and Benjamin Graham.

BAD investments or wrong investments are a part and parcel of any portfolio. Broadly speaking, there are two reasons why they happen.

One, of course, is market conditions. Say you invest in a share after due research, but the company fails and you lose money. Or you have a fixed deposit (FD) in a co-operative bank, which runs into problems and your money is stuck. Or you invest in a five-year FD and, immediately afterwards, the rates are revised upwards.

These situations are beyond your control. These are market risks which are part of any investment. You win some, you lose some!

The second reason has to do with your own decisions – your knowledge, your psychology, your research, etc. These factors are under your control. If you exercise this control diligently, you can keep away from bad or wrong investments.

The idea is not to get defensive but to understand the reason(s) and make sure you don’t repeat the mistakes. Here are the top five:

1. It’s greed, of course
Call it the get-rich-quick mentality, double-my-money-soon or maximum-returns-in-minimum-time. In one word, it is greed.

How many times have you invested in a scrip just because someone tips you that the investment would double soon? Or you wrote a cheque because someone offered high interest rates?

When someone talks about giving returns which are higher than the average market returns, he will not give it out of his pocket. He will take unduly high risks with your money or he simply has no intention of returning your money.

More often than not, you lose money in such so-called high-return schemes. The simple rule is to invest where the returns are more or less in line with market realities.

2. The fear of losing
I don’t like losing money. You don’t either. No one does. But does that mean you should sweep money under the carpet and not invest it?

Every investment has a certain risk associated with it. Okay, so you consider equity as risky, and public provident fund (PPF) as safe. You can’t be more wrong in this belief.

A few years ago, I invested in PPF assuming I would earn 12% pa returns for 15-years. But the government started reducing the rates. Now, it earns just 8%. If this isn’t interest-rate risk, what is?
Similarly, those who simply invested in the Sensex over the last 15 years never lost money. In fact, they made a decent 15% pa returns.

The idea is not to run away from risk. Understand it, appreciate it and manage it. This will help you make the right investment choices.