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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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.

SOME guys have all the luck. A year ago, a friend of mine sold some ancestral property and hit the jackpot.

He asked me, quite sensibly, to help him invest it in stocks.

Being totally new to the stock market, he thought he would need to watch a business channel throughout the day, be on the phone and carry a laptop, so that he could trade all the time!

I didn’t ask him to do any of it. Instead, I told him to pursue a hobby, take a holiday, meet his family, start a business, do just about anything, as long as it was not trading.

Invest and wait
I believe investments are not meant to keep you busy. They are meant to make you rich. People who can’t have their morning coffee without watchingthe stock prices don’t know the real meaning of investing.

The true investors select their stocks carefully and go fishing in Alaska. No, that’s not bizarre. Staying diverted actually helps stay invested for a longer time and let the money grow along with the invested company. See how the power of compounding helps grow your money!

My friend took my advice. He invested the money in a few companies with strong fundamentals and a visible growth.

In one year, his investments fetched around 95 per cent returns.

So, when you forget about your investments, you:
a. Save time

b. Save cost involved in the form of brokerage. The smart brokers who tell you to trade actively are only filling their own pockets.

c. Avoid fretting and the temptation to sell if the stocks prices fall by 10 per cent.

d. Avoid greed and the temptation to buy if it rose by 30 per cent.

e. Follow the Warren Buffet style of investment. Do you think the champion stockbroker would care if the stock markets closed for a whole year? And we all know how rich he is.

f. Give time for your seeds to sow. If you keep removing your seed and change soil every other day, your seed will remain a seed.

g. Enjoy your morning cup of coffee.

Remember, the people who check their stock price every 30 minutes don’t become rich, they just become busy.

Markets are a cycle, no rocket science there! But somehow we tend to believe that the market is uni-directional – irrespective of whether is it a bull run or a bear trend! When the markets were at 21000 levels D street was full of positive news that markets in a short term will touch 25000 levels, so much optimism turned to complete pessimism in less than a year when in Oct ’08 markets hit a low of 7.6k. But markets, they never grow tired of throwing surprises, which makes even the best of market pundits sit up and watch!

1.    Stay  cautious when markets turn euphoric

Although the force of gravity is something that would apply pre-dominantly to physics, this holds true for equity markets as well. What goes up, comes down – if there is a steep run-up and valuations get expensive, then it is bound to make a turnaround and come down to moderate levels. Hence, it becomes important to stay cautious when the markets turn euphoric.

Since, October 2008, markets have not looked back; we scaled all the way up to 18k levels by July – 2010, it’s been a choppy ride over the past 21 months, with an upward bias. The P/E (price / earnings) which is a key indicator of whether the underlying instrument is overvalued or undervalued, was at 12 levels when the markets went all the way to 7.6k levels after it hit an all time peak at 21.2K levels in Jan-2008 when the P/E stood at 25.5 levels and markets were grossly overvalued.

At current levels, Indian economy is definitely healthy, however, at the rate the market is scaling new heights despite very moderate fundamental change, it definitely requires us to be cautious of a possible correction.

2.    Avoid herd mentality

‘Buy low, sell high’, now how hard could that get! While we were young, we always wanted to have what the other person had. When it is the time to book some handsome profits and sit tight on cash, we end up entering the markets precisely then!

Source – AMFI, BSE India

This graph tells us how many times we have gone wrong and the best part is that we have never bothered to learn anything from the past. The past few months seem to have an inverse correlation where the markets have scaled up, possibly due to factors like change in regulations and thus may not be truly reflective of the state of affairs. Only time will tell if we have walked wiser from the experience we had during the 2008 fall.

3.    Systematic Profit booking at market high

‘Just a little more and I promise to get out of the stock’, this approach really does not work – you will never get the peak or trough right! It is always advisable to exit from market in phases; a certain percentage of portfolio should be sold when markets breach a certain level. This not only helps to reduce the risk but also provides an opportunity if the markets move on further. In the whole bargain of ‘just a bit more’ we often see the returns completely erode and sometimes get into red! This infact is a dangerous preposition and hence, would make sense to fix the target and stick to it at all costs.

4.    Get rid of penny stocks

Certain stocks see phenomenal rise may be more than 30%, however this rise is purely on rumours and such companies could be lacking sound fundamentals. Every time you will notice that the penny stock which was a hot pick in a bull run will be nowhere when the markets tank – they are the first ones to go down, infact they may even shut their businesses, so one should always get rid of such investments.

5.    Fear and greed steal the show

When the markets were at 21k there was a sense of déjà vu, everybody was sure that the markets had formed a unidirectional pattern and it would simply keep moving northwards, however, the turnaround happened when least expected and when the markets did turn sharply, panic selling occurred which pulled down the markets sharply.

Fear and greed always have an upper hand in markets, during bull run markets are driven 70% by greed and 30% by fear whereas the same is reverse in case of bear phase. A contrarian strategy always helps, when people are fearful that the markets will come down be greedy to grab the stocks at a particular price, when people are greedy that the markets will climb further be fearful and start exiting from the markets.

6. Heady mix of debt & equity

Amidst all this hoopla, there is one thing that comes to rescue – Diversification. Too much into equities or too little – both are situations that you do not want be caught in. Statistics have proved that equity is one of the best asset class to invest in, global averages indicate that in the long term horizon it gives a return of atleast 15% p.a – however it is a game of patience and strategy which requires commitment from a medium to longer term frame. Also, it is important to de-risk your portfolio at regular intervals; this can happen only if we are stringently booking profits at relevant levels of the market.

It is probably the right time to evaluate your asset allocation and look at derisking your portfolio.  For investors who are getting into the markets one needs to be cautious especially if one is making lumpsum investments.  Systematic investments could be a better option at this time.
Since we are all euphoric about markets scaling new heights, this author may be accused of playing spoil sport, but all I want to say is ‘Tread with care!’