3 Types Of Stock Investment

Let me give you some basics to stock market investment today. I’m going to cover three types of stock investments that are being done on the market:-

Short Term Investment – This kind of investment is mostly done by stock traders who buy stocks from a very short period of time, perhaps a day (intra day) or a couple of days to a few weeks. Short term investors always keep a target price and a stop loss in mind. If any of the price hits, they exit the stock. The basic idea in mind is to get into a stock that is going to give some appreciation in a short time and book profits and shift to another stock. For short term trading, you need to invest a lot of time into the stock market, whole of the week is gone doing this. Most of the people who have a full time earning through the stock market are into this kind of investment.

Medium Term Investment – This kind of investment is done by the investors who want to put their money into the stocks for a few months to a year. They are mostly the working people who don’t have a lot of time in hands to give to the stock market but want to grow their money through investing in stocks. They are majorly looking to enter stocks that is going to give them a good appreciation in the medium term. They mostly never exit any stock in a loss but only after they’ve got some appreciation. Sometimes medium term investment becomes a long term investment if markets fall a lot. The goal of medium term investors is to get any appreciation that is better than bank fixed deposits or any other kind of low return investments.

Long Term Investment – This kind of investment is done by people who believe in buying a stock and forgetting it. These people never enter the bad stocks, they only invest into companies they know or heard about. They believe that the market is going to continue growing in the longer term period and so will their wealth. They only look for opportunities to buy at the correct time and then forget it. They don’t care what returns they’re getting on a day to day basis because they want to exit the stock several years later. They invest from a very long time period and market ups and downs really don’t concern them as they know by the time they check out, market will be back to its highs.

Guide To Midcaps And Smallcaps Investment

Mid-cap and Small-cap stocks are very volatile and go up and down sharply. They are the first ones to crash when things go wrong in the stock market. So you need to understand the fact that you’re in for some risk and you need not feel down if you see your money down by a big margin if by chance markets crash. However, it markets are on a bull run, then these small stocks rally like anything thus maximizing your gains. So if you are looking to invest into mid-cap and small-cap stocks, then have a look at 3 rules below : –

Identifying Quality Mid-caps and Small-caps

This is the first step towards investing into these small companies. You need to first make a list of all good small and mid stocks that are expected to do good in the current year. If a stock is not supposed to give good growth this coming year, then it is NOT the best investment you can do now. So look for only companies that are expected to post strong set of numbers this year. It does not matter which sector the stock belongs do, the earnings outlook should be good that’s it.

Shortlist Attractive Valuation Stocks

Now that you have a list of a lot of good stocks, you are going to shortlist the stocks as per their valuations. Some stocks might be trading at a high valuation and some must be trading at a very low valuation. High valued stocks are a big NO! Low valued stocks are the way to go, if you notice, most low valued stocks have been corrected and thus they look attractive. For example, I can say that I found a small cap company that is expected to grow at 30% in the current financial year and right now the stock has been hammered 15% from it’s highs and is trading at a P/E of 5 as per previous financial earnings. So that is attractive and forms a buy.

Don’t put all your eggs in one basket

One of the most common phrase which is extremely important when investing into these smaller companies. A lot of times it happens that the companies don’t get value it deserves from the market and thus you cannot put all money in a couple of companies and miss out on the returns which you could have got by diversifying into a lot of stocks. This is not entirely the case with large-caps but with small-caps, it is. Sometimes there are stocks that give really good results but still don’t move up. So the best case is diversifying into several such good stocks and minimizing the downside risk to returns. For example if you are investing 1 lakh rupees, I’ll say invest into 10 such stocks by putting 10,000 each. If one or two don’t move at least the others will since you don’t know which are those selective stocks that will fail to attract attention from large investors. So it is best you diversify among various such small stocks.

Mid-caps and Small-caps make you the most money but can also erode most of your money, so be careful and only enter into quality stocks that are looking good. Stay away from bad fundamental stocks as they are in the best position to erode your money.

Small Cap: Multibagger or Fraud?

So what to look for in small cap or just about to become a mid cap company? Is it a “multibagger” or a fraud?

These are some of the points that I look for and in no way this list is exhaustive

1. Cash Flow statement

Yes P&L is great for ratios and all but in a small company with not a lot of data, it is important to see if it is actually making any money.
Look for cash flow from operations and check if it is growing or not.

2. Short term liabilities

If there is one thing that I have to have to look in a company it will be it short term liquidity.

“You need to survive short term to be alive to see the long term”

Is the company raising short term debt to manage its working capital? If yes, how much of short term debt was for just meeting the WC needs? Can the cash flow support the short term obligation?

3. Working capital management

Great people at top have one thing in common – they know how to manage the working capital

How is the inventory moving with respect to sales? Is the inventory at the risk of going obsolete? In how many days do they take get the money from their buyers? How quickly do their suppliers need money?

4. Off balance sheet items

Check for unfunded pension liabilities (it should not be a problem in a young company but do check it)
For sure check for contingent liability – This is the MOST IMPORTANT item to check in any company financials.

5. Cost of goods sold

Is the gross margin constant or in a tight range or is it moving wildly?
If it is all over the place, exit immediately as the company is either a fraud or the management has no idea on how to purchase raw materials

6. Employee cost and management pays

Great management comes at a great cost. Check for management salaries. If the company has good disclosures they may even mention the parameters that decides the bonus of the management (large cap companies will give this). If stock price is one of the parameters, smile.

If employee cost is not increasing while sales is jumping, there is a high chances there is a fraud. The company is bumping up its margins to push the stock price. Take your call.

7. Depreciation

How is the company depreciating it’s fixed assets? Too aggressive? Or slow?
It is a subjective call so talk to a CA friend on this.

8. Are there Convertible bonds on the balance sheet?

If there are, your small stake in the company may get diluted further. So think about it

9. Dividends

Most small caps and mid caps don’t give dividend as the company usually get invested back into the business. But if they do, love them. They want to reward long term investors and for sure they are making cash flow.

10. Do you see their product?

If the company sells its product directly to consumers, do check with your local kiranawala or the shelves in big bazaar.
In fact, stroll around the shelve in a big bazaar and check who all picks it. And when they pick, have a look at their cart – what all are they buying other than this product? It will give an idea of the consumer profile.
But please don’t stalk the consumer.

Finally, if you have done all the above, you can do the Discounted cash flow and ratio analysis.

10 Simple Tips To Help You Invest In The Stock Market

It usually turns out that doing things as simply as possible is better than allowing intricacy and details to complicate our lives. Simple strategies give us the opportunity to sort things at a basic level and know them from the inside out. Based on this easy principle, here are 10 very simple things that every investor needs to know about the stock market:

1. Moves and Counter Moves Determine Price Trends.

When a stock either goes up and remains there without going down for a period of time or goes down and remains there, it is considered to have made a move. After the move occurs, if the stock price moves in the opposite direction again but not as far as it moved the first time, that’s considered a counter move. Uptrends hook up with the bottoms of counter moves while downtrends are at the top edge of counter moves. A stock trend happens in a series of moves upward interspersed with smaller, shorter counter moves downward. While this trend is occurring, investors are able to draw a line between the lows created by the counter moves and still see the line slant upwards overall.

2. Inevitable Changes in Irrational Valuations

Stock prices that are much higher than the estimated earnings potential of the company are known as irrational valuations. What the market strives to do is determine what a company’s future worth will be. Therefore, rational stock prices are based on what the future earnings expected of a company are presently valued at. When stock prices are irrational, you can expect them to change as the behavior that caused them is modified.

3. Sometimes Irrational Behavior Lasts Longer Than You Can

Short term mistakes happen in the pricing of stocks. Although the market is usually very efficient in the method it uses to set prices, don’t take this to mean that prices will always be set correctly. Prices are often based on the emotions of the investors which are never rational as far as stock trading is concerned. If the market stays irrational for a longer period of time than expected, all of those who have invested in a stock stand to lose. The wisest course of action is to go with the flow of the market, because it will always be right.

4. Buyers Have Control with Rising Bottoms

Counter moves that rise left to right over time on the stock charts are indicative that buyers are controlling the market. If you wait until such times when the buyers are in control like this, you will have much better success with the stocks you invest in.

5. Sellers Have Control with Falling Tops

Whenever you see highs of counter moves falling from left to right over a period of time on the stock charts, you’ll know that the market is being controlled by the sellers. If you want to be successful when shorting stocks, wait for a time when the sellers are controlling the market.

6. Uptrends: Slow Starts and Quick Ends

It takes a while for a bull market to develop, due to the skepticism that is inherent amongst investors. Eventually people will start to gain the confidence they need to start investing, and the trend upwards will pick up. The end comes quickly, however, because when too many investors start buying a stock, the price will skyrocket to irrational levels that will force an immediate downward trend to correct the situation.

7. Downtrends: Quick Starts and Slow Ends

As stated above, downtrends start quickly as a way of correcting irrational prices. Luckily, however, the downtrend will moderate over a period of time as the trend flattens out and more rational pricing appears. What started as a deluge ends with a trickle.

8. Give Trends a Chance to Reverse Themselves

When the market starts showing irrational behavior, investors get nervous. They realize that something is going to change in order to correct the problem. It’s always wisest to give trends a chance to reverse themselves before selling. After all, it only takes a few seconds to sell when you execute a stop loss order, while trend reversals will take considerably longer to start.

9. Avoid Stock Information that is Already Public

Never forget that by the time a company makes an announcement that their business fundamentals have changed, the knowledge has already been acted upon by those in the know. Positive public information always results in a stock price surge as less-savvy investors rush to take advantage of it, but it’s really already too late to cash in big by that time.

10. Abnormal Activity Means Something is Taking Place

In order to score big in the stock market, you must trade on information that hasn’t yet been made public. Do your research and act on inside knowledge. Every company has people who know what’s going on prior to the information being announced publicly, and when they act on their knowledge, it shows up as abnormal trading activity which you can use to get in on the action.

Investing in Gold and Gold ETFs

Investing in Gold provides a sense of security as it is tangible unlike many other financial products which are intangible. Gold prices are purely determined by supply and demand and less likely to fluctuate wildly. There are many time tested advantages of having gold as an investment:

  • Safety: In volatile and uncertain times (as seen recently due to recession) Gold provides safe haven as there is no default risk. Gold has its own intrinsic value.
  • Brings diversification and stability to a portfolio: the forces acting on gold are different from those acting on other financial assets. Most of the time it is negatively correlated to stocks and bonds.
  • Highly liquid and portable: Gold can easily be converted to cash and vice versa, prices are internationally determined.
  • Tool against inflation: Irrespective of market cycles the purchasing power of Gold stays intact over a long period of time. It’s better to keep your cash in the form of gold.
  • Less regulatory intervention: you don’t have elaborate disclosure norms for gold as it is for many other asset classes. Gold can be a very private investment.

Diwali is an auspicious time for buying Gold and it should be used wisely to invest. But there are many ways to invest and it can be a daunting task. Let us see the pros and cons of  the options you have:

Jewelry:  It is one of the oldest forms of investment which also has some amount of pride and honor attached in Indian families. It is something you can use and enjoy but at the same time it keeps appreciating in value. But the price of jewelry is usually marked by anywhere between 20 to 200% depending on the complexity of design. This makes it unattractive as an investment.

Gold bars and coins: Gold coins and bars are increasingly becoming popular not only as investments but also as gifts. But they have to be physically stored which can be a security nightmare. You might have to incur extra cost in renting a bank locker or insuring your possession. Moreover you have to be careful about adulterated and fake ones. There can be a substantial difference between buy and sell rate of gold coins and bars.

Electronically traded Funds: More popularly known as ETFs are open-ended mutual fund schemes that invest the money collected from investors in standard gold bullion (0.995 purity). The investor’s holding is denoted in units, which is listed on the stock exchange just like a share. It is expressed as NAV (Net Asset Value) which represents the price of one unit (equivalent to 1 gram gold) on that particular day.

These are many advantages of ETFs vis-à-vis physical gold when seen from an investment perspective:

a. No need to worry about the security and storage
b. No need to worry about quality of the gold
c. No need to worry about resale as the exchange provides comfortable liquidity (just like shares)
d. No making charges
e. You can invest very small amount of money (minimum 1 unit) which is not possible in case of jewelry and coins/bars.
f. No wealth tax. Long Term capital gains just after 1 year whereas it is 3 years in case of physical gold.

ETF is a tax smart investment as well.

5 ways to make your children financially smart

1. Make your child understand the difference between needs and luxuries

Children need to understand that they can still go on without cool gadgets, designer accessories but not without essentials like ‘Roti, Kapda aur Makaan’. Hence they have to prioritise accordingly. Sit with your child and help him prioritize according to needs and luxury. Once this concept is clear your child will transform into a better decision maker.

2. Set a goal for your child and help him achieve this through a budget

Goal setting is easy enough in today’s materialistic word. Sports equipment, a gadget or an item of clothing, motivate your child by setting a goal and encourage him to earn this through household and other chores. Make him draw up a budget from what he earns every week and show him how to save from this. Definitely reward him with something extra (besides his goal) the first couple of times, so that he is geared up and excited about the next goal and starts planning – the secret mantra to financial happiness. This will also help your child become competitive in life and be focussed on goals.

3. Understand your child’s money personality

He could be a spender by nature. If so, you can guide him early on to curb this by encouraging him to not keep too much cash and ensuring that it is not easily accessible. If he keeps borrowing money from his friends then this could be a warning signal. Later on he could get into a debt trap. You can counsel him and also understand the source of his needs.

4. Involve your child in day to day financial activities

Entrust him with the responsibilities of paying bills i.e. going to the collection centres and paying the bills through cash or dropping a cheque. If he is not old enough than at least take him along when you are doing this exercise. It is a good way for him to learn that life is not just an ATM machine, you got to pay as well!

5. Open a bank account for your child and make him operate it

Buy your kid a piggy bank when he/she is very small and encourage saving for achieving his little goals. Open a bank account when he grows up. This the best way for him to understand how money grows, what interest is and how financial institution like banks work. You should opt for a joint account as it will give you the ability to oversee what your kid is doing. Step in whenever you think that he/she is going off track and try to rectify the situation by helping him with basic financial concepts mentioned above.

Use this Children’s Day as an opportunity to gift financial literacy to your child. In the long run this will be more valuable than anything else.

What is Financial Planning?

Financial planning is a process of setting goals (For example buying a house/car, child’s education/marriage, retirement corpus etc), assessing income, assets, investments, expenditure and liabilities, estimating future financial needs, and making plans to achieve them. There are many elements which are involved in financial planning, including budgeting, investments, Taxes, estates, retirement, insurance etc.

Financial planning plays a crucial role in helping individuals get the most out of their money. A good plan can help in creating long term wealth and provide considerable immunity against fluctuating economy. It also provides protection against the unexpected events like loss of income or major illness. Financial Planning is different for different people and depends highly on income level, age, risk appetite, responsibilities etc. What suits one person may not be suitable for another. However there are some components which remain common across plans.

Investment planning:

Planning, creating and managing capital accumulation to generate future capital and cash flows for achieving pre-determined goals and spending

Insurance Planning:

Managing cash flow risks through risk management and insurance products

Retirement Planning:

Planning to ensure financial independence at retirement including PPF,EPF and other pension plans

Tax Planning:

Planning for the reduction of tax liabilities and the freeing-up of cash flows for other purposes

Estate Planning:

Planning for the creation, accumulation, conservation and distribution of assets

Liability Management:

Maintaining and enhancing personal cash flows through debt and lifestyle management

Many individuals choose to use the services of financial planners to help them reach their goals. A qualified planner can help you navigate through the whole process by virtue of his training and experience. Before you use the services of a financial advisor go through this article: Do you have the right financial advisor. A basic financial plan can also be created by referring to self help books and online resources.

People often delay planning for the future. In good times the value of a plan is not realized but it seems so logical when some unfortunate event happens. Do not procrastinate something as important as this. Start with creating a budget. Prepare a budget and track your monthly expenditure. It will help you find ways to trim or even eliminate unnecessary or out-of-control expenditures.

Start now!

The Real Face of Company Fixed Deposits

These days, there has been a lot of talk around the street and every debt investor is considering company deposits as an investment option. There are reasons behind this rationality. Fixed deposits rates offered by various public sector banks is 6-6.5% per annum which is often called bank fixed deposits where as private companies are offering 8% per annum to its investors. Interest rate on fixed deposits mainly depends on the RBI policy rate actions and the riskiness of the sector to which the company is belonging

As a financial planning advice, one should not blindly get into fixed deposits offered by these companies . One must understand the various risk factors associated with this investment instrument.

What is fixed deposit offered by Companies

The companies offer fixed deposits products in order to build a capital for the company in long term when the company needs capital for its expansion plans that may be foraying into some other sector which may prove risky for the company and its investors. Generally, the interest rates of fixed deposits offered by companies are high as compared to bank fixed deposits interest rates.  The interest income is paid on a monthly/quarterly/half yearly/yearly basis or on the maturity of the fixed deposit. As interest incomes are paid on a monthly or on quarterly basis in most of the plans, which means there won’t be any capital or principal amount appreciation.

One school of thought says that fixed deposits are meant for conservative investors who have low risk profile but investing into company deposits requires some research and due diligence just like you need some research to be dome before buying a stock of any company.

Benefits of investing in Company Fixed Deposits

  • High Interest Rates as compared to other debt products
  • Lock in period of only 6 months for most of the companies
  • No TDS is deducted when interest income earned by an individual in a financial year is less than Rs 5000
  • Investor has the option to diversify his portfolio in fixed deposits offered by companied belonging to various sectors to diversify his risk

Are Company Fixed Deposits risky?

In simple words, unlike the bank fixed deposits, there is an element of risk attached with this instrument. Higher the rate of interest offered by the company fixed deposit, the higher would be the risk attached with this investment option. These company deposits have only got a reputation or public image which assures the investors of the future payments in terms of interest and the principal amount.

Tax Implications

Interest income earned by company fixed deposits is taxable. So it becomes lucrative option for investors who comes under 10% tax bracket as compared to individuals coming under 30% tax bracket.

Finally, Is it for you?

It all depends on the risk profile of any investor. But from the brief analysis which we have done, we can make out that one should not have more than 10% asset allocation to company fixed deposits for a individual who have high or moderate risk. There is also a need of diversification by spreading risk by investing fixed deposits under 4-5 companies. Secondly, one must check the Credit rating of the fixed deposit. It is a very important indicator which highlights the underlying risk of the company. It shows the ability and willingness of the company to pay its debt obligations in time in the form of principal and interest payments. CRISIL and ICRA are always one of the preferred rating agencies by institutional investors. AAA rated instrument shows highest level of safety followed by AA and A. Generally AAA rated instrument will have least rate of interest as compared to a instrument which is rated lower than that.

What is a mutual fund, a simple explanation

The most popular & simplest way to invest in equity market and earn returns more than 8% returns which is a normal PPF or Fixed Deposit rate is of course Mutual funds but a very few people know the purpose of this instruments or know how does it work. There are around 40-50 mutual fund companies offering around 1000 different types of fund, a retail investor becomes confused as to is he doing right by investing in mutual funds & he does not have an idea what should he choose.

What is a mutual fund?

Suppose there are 100 people who have little knowledge about investing want to invest in equity markets but they want to invest only Rs 1000. Now they have also learnt from media and by reading newspapers that one need to invest in different stocks and stocks from different sectors to diversify their risk and also maintain an asset allocation between debt and equity. They have also learnt that just like a doctor take care of a person’s physical health, they realised the need of fund manager to take care of their financial health, i.e their investment money. Now with Rs 1000 it is impossible for them to invest in shares of 15-20 companies and also invest in debt. Just to support with an example, they can’t buy Infosys of Rs 3000 with his investment amount of Rs 1000. Even all other 99 investors are also facing the same problem. So all 100 investors decided to pool in their money of Rs 1000 each and make it lump sum to Rs 100000 & gave it to a professional fund manager to manage their investments in different stocks and debt. And the fund manager decided to charge a nominal fee for his professional services. By this, the investors were able to diversify their portfolio and also get professional advice. Now, this fund managed by professional expert is known as mutual fund.

In all mutual funds schemes, there are units allotted to an investor unlike number of shares allotted to an investor in company. So if someone wants to invest Rs 10,000 in one of the schemes of a mutual fund and price for a unit is Rs. 20, he gets 500 units of that particular scheme of mutual fund, and as the equity market grow, the mutual fund investment grows and thus his per unit value grows which is called Net asset value (NAV) which you read in various financial dailies & on money control website.

Benefits of investing in Mutual Fund

Now talking about the benefits of mutual fund investment. The biggest advantage is the Diversification by which you are able to invest in various stocks across various sectors. He therefore minimizes his risk by dividing his investments in many shares of various sectors. There are also categories of fund, i.e balanced funds by which you are also able to diversify your portfolio in equity as well as debt.  Another advantage of investing in mutual funds is that the investor gets investment decisions from an expert and the cost of managing funds is minimal and one can liquidate his invest anytime apart from ELSS schemes where the lock in period is 3 years from the date of investment.

A fund manager can invest their corpus in different type of financial instruments ranging from shares, debentures, gold, FD, money market instruments and can maintain some cash also during bad economic times.There are two categories of mutual funds.

1. Open-ended: One can buy and sell mutual fund at any time

2. Close-Ended: Buy and selling points are restricted for some time.

What is NFO?

NFO stands for New Fund offer. Any new mutual fund which is offered to the public for investment is called NFO. Generally, NFO’s are more risky than the existing mutual funds as they don’t have any past record of performance or the track record of fund manager efficiency. One must avoid NFO even when they are highly publicised by the mutual fund companies and by the media.

8 Lessons Warren Buffet Did not Teach Me!

Today marks the 10th anniversary of the day when my portfolio had breached the negative 50% mark. In next 30 days it went further red to negative 77%.

What did I learn from this carnage in my portfolio:

1. Never invest in an IPO

I had “invested” in most of the IPO between 2005 to 2007. I lost money in almost all of them. I was in my first year of MBA. All the companies vanished from the placement season. I saw 23-24 year old people cry when they missed out on the 1-2 companies that did come. It gave me so much perspective in my life

Lesson: Invest in businesses and management who have a proven track record. Managing a company when it is private vs when it is public are 2 different things.

2. Always watch for beta

I caught Jai Corp before it hit 33 straight upper circuits. I had Unitech before it had split 3 times. I had SESA Goa at cheap valuations. I made a killing in RPL and RNRL. I lost everything in March of 2008 and then in Sep 2008.

Lesson: Today I follow the beta of my stock like it is a laxman rekha.

3. Return of capital is more important than return on the capital

I wanted returns and fast. Market gave me both. And then took away everything.

Lesson: Risk management is way more important than return management.

4. Equity is not everything

Every building must be built on a strong and rock solid foundation. I was 100% in equity because they told me young people should invest in equities (I was 23yrs old).

Lesson: Today my target is more to find a decent fixed income product over an exciting stock. PPF, Bank FD, and NCD – I want them to be my base.

5. PE sucks

High PE means the market is giving a premium to the future earning

Lesson: Never ever look at a PE ratio. It is for suckers.

6. Profit is the key. I want to see the bottom line

I always looked at the Year-on-Year Sales growth and profit growth. If this number beats the estimate, it is a buy.

Lesson: I bought the book by Damodaran. Learnt valuation. Learnt financial statement. And most importantly learnt how to read the notes. I attend almost all the analyst calls. I talk to store managers at grocery shops on sales. I talk to moms and cooks of what they like to use in kitchen and why (this is how I got into TTK in 2011). Never watch CNBC TV18.

7. What is the most important thing in a company?

Profit? Cash flow? Business model? Market share? Valuation? I was told it is something on these lines

Lesson: The most important thing is management. Ethical, honest, smart and hard working management beats every other metrics by a mile. Find a company with good management and you are set on your retirement.

8. The best trade advice will come from real people, not experts

Never underestimate the knowledge a simple store owner can give you. I was shopping for my underwears in Delhi. I asked the owner why Hanes stock is kept behind and jockey in front. He told me “sabko jockey hi chaiye”. I had no idea Jockey’s parent was listed. I bought page industries just because I had a chat with this shop owner in 2016.

Lesson: I prefer to shop from a small shop and not from big stores. Small shop owners open up to the ideas that are selling in the market.

Have these lessons helped me ace the markets?

No. I have under-performed the index for straight 3yrs now. I still buy garbage. My portfolio is not even close to perfection. But I now respect the market. I don’t ever think it will give me return because Indian economy is growing. I am an eternal student now.

Some books I recommend to those who have been in similar situations are listed below.

1.Principles: Life and Work8 lessons warren buffet did not teach me! 1
2. Zero to One: Note on Start Ups, or How to Build the Future8 lessons warren buffet did not teach me! 2
3. The Intelligent Investor (English) Paperback – 20138 lessons warren buffet did not teach me! 3