Archive for the ‘Education’ Category

How does media explain market moves?

Tuesday, December 8, 2009 7 comments

Today was an interesting day. The markets suddenly spiked up in the afternoon and I saw TV analysts scratching their heads trying to explain the market moves!

It is so easy for media guys to explain the market moves- If Asia is down and our markets are down then say that we are following Asian markets. If European markets are in the green and Indian markets are in the positive territory, then simply explain it by saying that markets are taking cues from Europe!

Today’s spike could neither be explained by Europe or Asia. That’s why all the experts were running for cover. Finally one of the experts pointed out that markets are rising because of India’s strong GDP number!

That way every investor can explain each and every move in the market.

So do you really think these media channels help take you take better investment decisions? Unfortunately many of the gullible investors take these TV commentators to be great financial experts and lose their shirts in the markets by following their advice!

Categories: Education

Are you catching the big winners?

Thursday, December 3, 2009 7 comments

This market is all about catching the big movers. If you are riding the current moves in auto and pharma ( say a Ranbaxy or a Tata Motors), you’d understand what I am talking about.

Many investors are missing out on these big moves because they are quick to realize their profits.

Many failed to enter as they were waiting for a big correction!

Those who are  riding this upmove might also end up riding the downmove as they have no idea about their exits!

And many others will leverage so much that one sharp correction will throw them out of this market!

Do you belong any of the above categories?

Categories: Education

Kwality Dairy- 25x in 10 months!

Wednesday, November 11, 2009 6 comments

If you had a chance to see the chart of Kwality Dairy again, you’d have noticed that the stock has now run to 1100 levels!

From 40 odd levels in Jan 2009, this stock has multiplied more than 25 times in less than 1 year. This must be some sort of record even in Indian markets! This means that if you invested 1 lakh in the stock, you’d now be having 25 lakhs worth of stock.

This is an excellent example of how market trends work and how stock moves can go beyond all expectations!

Investing Principles by Charlie Munger

Tuesday, November 10, 2009 Leave a comment

Charlie Munger is the partner of Warren Buffet and is considered by many to be the brain behind Buffet’s success. I found his investment principles which are worth reading.

Risk – All investment evaluations should begin by measuring risk, especially reputational

  • Incorporate an appropriate margin of safety
  • Avoid dealing with people of questionable character
  • Insist upon proper compensation for risk assumed
  • Always beware of inflation and interest rate exposures
  • Avoid big mistakes; shun permanent capital loss

Independence – “Only in fairy tales are emperors told they are naked”

  • Objectivity and rationality require independence of thought
  • Remember that just because other people agree or disagree with you doesn’t make you right or wrong – the only thing that matters is the correctness of your analysis and judgment
  • Mimicking the herd invites regression to the mean (merely average performance)

Preparation – “The only way to win is to work, work, work, work, and hope to have a few insights”

  • Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day
  • More important than the will to win is the will to prepare
  • Develop fluency in mental models from the major academic disciplines
  • If you want to get smart, the question you have to keep asking is “why, why, why?”

Intellectual humility – Acknowledging what you don’t know is the dawning of wisdom

  • Stay within a well-defined circle of competence
  • Identify and reconcile disconfirming evidence
  • Resist the craving for false precision, false certainties, etc.
  • Above all, never fool yourself, and remember that you are the easiest person to fool

“Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things.”

Analytic rigor – Use of the scientific method and effective checklists minimizes errors and omissions

  • Determine value apart from price; progress apart from activity; wealth apart from size
  • It is better to remember the obvious than to grasp the esoteric
  • Be a business analyst, not a market, macroeconomic, or security analyst
  • Consider totality of risk and effect; look always at potential second order and higher level impacts
  • Think forwards and backwards – Invert, always invert

Allocation – Proper allocation of capital is an investor’s number one job

  • Remember that highest and best use is always measured by the next best use (opportunity cost)
  • Good ideas are rare – when the odds are greatly in your favor, bet (allocate) heavily
  • Don’t “fall in love” with an investment – be situation-dependent and opportunity-driven

Patience – Resist the natural human bias to act

  • “Compound interest is the eighth wonder of the world” (Einstein); never interrupt it unnecessarily
  • Avoid unnecessary transactional taxes and frictional costs; never take action for its own sake
  • Be alert for the arrival of luck
  • Enjoy the process along with the proceeds, because the process is where you live

Decisiveness – When proper circumstances present themselves, act with decisiveness and conviction

  • Be fearful when others are greedy, and greedy when others are fearful
  • Opportunity doesn’t come often, so seize it when it comes
  • Opportunity meeting the prepared mind; that’s the game

Change – Live with change and accept unremovable complexity

  • Recognize and adapt to the true nature of the world around you; don’t expect it to adapt to you
  • Continually challenge and willingly amend your “best-loved ideas”
  • Recognize reality even when you don’t like it – especially when you don’t like it

Focus – Keep things simple and remember what you set out to do

  • Remember that reputation and integrity are your most valuable assets – and can be lost in a heartbeat
  • Guard against the effects of hubris (arrogance) and boredom
  • Don’t overlook the obvious by drowning in minutiae (the small details)
  • Be careful to exclude unneeded information or slop: “A small leak can sink a great ship”
  • Face your big troubles; don’t sweep them under the rug
Categories: Education

Value Investing Ideas

Monday, November 2, 2009 Leave a comment

In one of my earlier posts, I had emphasised the fact that “value” and “momentum” style of investing can be complementary to each other. I have been sharing my philosophy regarding the “momentum style” on this blog for some time now. Now I have partnered with a good friend of mine to bring some “value investing” style of thinking to you. We intend to share our experiences and learning when it comes to value investing via I hope this will allow you to combine two different styles of investments in your portfolios and achieve superior risk adjusted returns.

Categories: Education

How to deal with sudden price reversals ?

Tuesday, October 27, 2009 2 comments

Yesterday was particularly challenging as a stock like Punj LLoyd in which I had some trading positions suddenly reversed. The stock had  a gap down opening and slid 17% by the time it closed!

What can one do if one is faced with a situation like that?

I’d say- just get out! And that’s what I did . Taking a loss is never easy but that’s how this game is played.

One might ask- what if the stock bounces up again? My answer to that would be – what if the stock slides even more?

The future is not known, so by cutting my loss I can think clearly and focus on making the next strategy. I might take countertrend trades at lower levels or wait for enother buy signal to emerge before I jump again.

On the other hand, by leaving my position in the hands of the market, I’d be feeling more pain.

Markets are in a corrective phase and it will force you to make some hard choices!

Categories: Education

Why do stocks go down despite good results?

Saturday, October 24, 2009 Leave a comment

A reader asked me :

“I have 100 L&T at Rs.1660. I cannot understand even though its performance for Q2 is good, this scrip has come down to Rs.1558…!!! Why? On what basis the market is traded?”

Analysts have this funny way of “explaining the stock moves”. If the stock moves down on good results, it is said that expectations were “missed”. On the other hand, a stock moves up even after bad results because of “better than expected” results. How do you define these “expectations”? Even if you look at broker reports, there is wide range of these “expectations” because all of them are based on different assumptions and estimates.

Now most of us know how good these “predictions” are. A recent example was the forecasting of UK GDP – “GDP fell 0.4 percent from the previous three months, the Office for National Statistics said today in London. Economists predicted a 0.2 percent increase, according to the median of 33 forecasts in a Bloomberg News survey. None forecast a contraction.” The best of the best couldn’t predict the direction of UK economy!

Also you might have observed that markets are good at pricing these expectations in advance. Many stocks have already doubled or tripled in price since March in expectations of good results. So why  do we feel surprised if stocks fall down after delivering good results? They simply failed to meet the ever growing expectations.

This is also the reason why ” market news” is not very important but how the market reacts to that “news” is much more important. A bullish stock might continue to go up despite negative news while a bearish stock might continue to go down despite good news!

If you select your stocks solely based on news flow, you might be in for nasty surprises.

Categories: Education