Market Term - Rule of Eighteen

This rule applies to the DOW Jones Industrial average and so it can be skewed a little bit for the emerging markets. Also, the fact to be taken into consideration is that DOW just has old economy stocks and no tech stocks.

Basically, this rule states that sum of Inflation and P/E of the Index determines how the stock market should move. If its greater than 18, then the stock market moves down, if its less than 18, the stock market will move up.

When Fear and Greed Take Over

There is an old saying that the market is driven by just two emotions: fear and greed. Although this is an oversimplication, it can often be true. Succumbing to these emotions can have a profound and detrimental effect on investors’ portfolios and the stock market.

In the investing world, one often hears about the juxtaposition between value investing and growth investing and although understanding these two strategies is fundamental to building a personal investment strategy, it is as important to understand the influence of fear and greed on the financial markets.

There are countless books and various courses devoted to this topic. Here our goal is to demonstrate what happens when an investor gets overwhelmed by one or both of these emotions.

Greed’s Influence

So often investors get caught up in greed ("excessive desire"). After all, most of us have a desire to acquire as much wealth as possible in the shortest amount of time.

The Internet boom of the late 1990s is a perfect example. At the time it seemed all an advisor had to do was simply pitch any investment with a ".com" at the end of it, and investors leaped at the opportunity. Buying activity in Internet-related stocks, many just start-ups, reached a fever pitch. Investors got greedy, fueling further greed and leading to securities being grossly overpriced, which created a bubble. It burst in mid-2000 and kept leading indices depressed through 2001.

This get-rich-quick mentality makes it hard to maintain gains and keep to a strict investment plan over the long term, especially amid such a frenzy, or as Federal Reserve Chairman Alan Greenspan put it, the "irrational exuberance" of the overall market. It’s times like these when it is crucial to maintain an even keel and stick to the basic fundamentals of investing, such as maintaining a long-term horizon, dollar-cost averaging and avoiding getting swept up in the latest craze.

A Lesson From "The Oracle Of Omaha"

It would be remiss to discuss the topic of not getting caught up in the latest craze without mentioning
a very successful investor who stuck to his strategy and profited greatly. Warren Buffett showed us just how important and beneficial it is to stick to a plan in times like the dotcom boom. Buffett was once heavily criticizeed for refusing to invest in high-flying tech stocks. But once the tech bubble burst, his critics were silenced. Buffett stuck with what he was comfortable with: his long-term plan. By avoiding the dominant market emotion of the time, greed, he was able to avoid the losses felt by those hit by the bust.

Fear's Influence

Just as the market can become overwhelmed with greed, the same can happen with fear ("an unpleasant, often strong emotion, of anticipation or awareness of danger"). When stocks suffer large losses for a sustained period, the overall market can become more fearful of sustaining further losses. But being too fearful can be just as costly as being too greedy.

Just as greed dominated the market during the dotcom boom, the same can be said of the prevalence of fear following its bust. In a bid to stem their losses, investors quickly moved out of the equity (stock) markets in search of less risky buys. Money poured into money market securities, stable value funds and principal-protected funds--all low-risk and low-return securities. In fact 2002 saw the largest amount of outflows, about US$40 billion, from the equity markets since 1988, a year after one of the worst stock market crashes in history, and a record $140 billion flowed into the bond market.

This mass exodus out of the stock market shows a complete disregard for a long-term investing plan based on fundamentals. Investors threw their plans out the window because they were scared, overrun by a fear of sustaining further losses. Granted, losing a large portion of your equity portfolio’s worth is a tough pill to swallow, but even harder to digest is the thought that the new instruments that initially received the inflows have very little chance of ever rebuilding that wealth.

Just as scrapping your investment plan to hop on the latest get-rich-quick investment can tear a large hole in your portfolio, so too can getting swept up in the prevailing fear of the overall market by switching to low-risk, low-return investments.

The Importance of Comfort Level

All of this talk of fear and greed relates to the volatility inherent in the stock market. When investors lose their comfort level due to losses or market instability, they become vulnerable to these emotions, often resulting in very costly mistakes.

Avoid getting swept up in the dominant market sentiment of the day, which can be driven by a mentality of fear and/or greed, and stick to the basic fundamentals of investing. It is also important to choose a suitable asset-allocation mix. For example, if you are an extremely risk-averse person, you are likely to be more susceptible to being overrun by the fear dominating the market and therefore your exposure to equity securities should not be as great as those who can tolerate more risk.

Buffet was once quoted as saying, “Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.”

Easier Said Than Done

Keep in mind this isn’t as easy as it sounds. There’s a fine line between controlling your emotions and being just plain stubborn. Remember also to re-evaluate your investment strategy and allow yourself to be flexible to a point, and remain rational when making decisions to change your plan of action.

Conclusion

You are the final decision-maker for your portfolio and thus responsible for any gains or losses in your investments. Sticking to sound investment decisions while controlling your emotions, whether it be greed or fear, and not blindly following market sentiment is crucial to successful investing and maintaining your long-term strategy. But beware: never wavering from an investment strategy during times of high emotions in the market can also spell disaster. It’s a balancing act that requires you to keep your wits about you.

Article sourced from Investopedia

Stock Tips: A Big Waste of Your Time and Money

We all get stock tips and we dont think twice before giving one or two ourselves too. This article now will probably end the visitors to this site :-) and the tip asking/giving on messageboards. You must remember that the tips/recommendations on this site should not be taken for granted.

From the famous turtletrader.com ( a must visit site - if you already haven't, go there now ! ). This is another and weird way of looking at the market. So the mantra is buy when its going up and sell when its going down. Simple isn't it ? So, enjoy the reading.

In the last few years the majority of the general public seems to have accepted online stock chat rooms as somehow useful. Some of the over-hyped chat boards and news services include:

• CBS MarketWatch
• The Street
• Motley Fool
• Raging Bull
• Silicon Investor

Let us be blunt. Imagine you are at Motley Fool and you receive a stock tip. You now know it is time to buy whatever the tip is. Big problem here now. When do you sell? How much do you buy? Of course, the tipsters never try to answer these questions. Stock tips are kissing cousins to the ever-popular lottery tickets. They might feel good, but stock tips are for losers (just like lottery tickets).

For example, the stock market crash painfully proved the worthlessness of stock tips. No tip predicted the NASDAQ crash. How in the world could an opinion of some anonymous message poster, that only knows how to yell BUY, ever be useful?

Trend Following trading does not attempt to predict the market. We couldn’t care less what a company does or what its new economy potential might be. It does not matter what a company's business plan is or even whether they have a potential to make money. When you trade properly, your only concern is price. If the price is going up you buy. If it's going down you sell. Don’t waste your time trying to determine the potential of a company. And don’t waste your time looking for tips on chat boards. You will only lose money if you go down the stock tip path.

The comments section is open for some screaming ;-)

Dead Presidents on RSS

This site is available as a RSS News Feed. If you have a RSS News Reader - The RSS feed link is Here (http://deadpresident.blogspot.com/atom.xml). If you use Mozilla Firefox, you can add that above link to your Livebookmarks !

Bhavin's Numbertalk -Nava Bharat Ferro Alloys

Nava Bharat Ferro Alloys trades currently at 343.8 and has Book Value of Rs. 127.6. Buy with a Target of 500

Support
350 and 310

Resistance
375, 390 and 425

Recommendation
Uptrend to resume.

E.P.S for last year
41.88

P/E Ratio
8.20

E.P.S for last two quarter
57.03


Bhavin Mehta lives in Mumbai and can be contacted at bhavin_mht(at)yahoo.com

Valueresearchonline Learning Centre

Learn about mutual funds - very impressive and informative at Valueresearch Online Learning Centre

Markets: Follow the fundamentals!

After a tumultuous 2004 that saw the Indian stock markets crash from their historically high levels (mid-May) only to create history as the year moved towards its close, there has been growing apprehension in investors' minds whether this rally would continue into 2005.

Before moving any further, let us take a note of key reasons that led to the rally in 2004 and the factors that might determine the fate of the same in 2005.

Liquidity was one of the biggest factors helping the markets to sustain high levels of a considerable period of time in 2005. This liquidity was spurred by huge FII inflows that followed the Indian growth story. The depreciation of the US dollar against the rupee under pressure from a huge US current account deficit played a major role in this depreciation of the dollar. One might wonder that, as against expectations that the rise in US interest rates will lead to FIIs diverting their money back to the relatively safer US T-bills and bonds, nothing of that sort has actually happened.

What more, FII activity has heightened during the second half of the year. One important reason for this is the fact that despite the rise in US federal funds' rates (2% currently), the real interest rate (adjusted for inflation of around 4%) is still a negative 2%. This means that it is still beneficial for US investors to borrow at negative rates and invest in attractive emerging market equities and debt.

Now, the looming danger of rising inflation in the US economy spurred by a slide in the value of the dollar might, thus, be an important factor that Indian investors need to keep in mind. Fears of inflation rising out of proportion might lead to the Fed raising interest rates 'faster than anticipated'. And this might then lead to the much-touted FII inflows to reverse their flow towards the US.

Now, apart from this big 'negative' there are some (positive) factors that are likely to continue to help the cause of Indian markets in 2005. Key amongst these are -

1. The reform orientation of the incumbent government

2. Strong credit-offtake from the non-farm sector

3. Improving 'measurable' risk-taking capacity of India Inc.

4. Lowering of trade barriers across nations

5. Rising internal demand for goods and services

All in all, while 2005 might witness a continuation of the trend that was witnessed in 2004 with respect to strong growth across sectors and robust FII inflows, we believe that just banking on the latter to take the markets to new highs is fraught with risks. Over the long term, even FIIs will chase fundamentals (read, earnings growth).

Courtesy : Equitymaster Newsletter

Deadpresident's Valuepicks

Buy Bharat Electronics - good company with many defence projects. Will be doing/announcing some interesting projects in near term.

Deadpresident's Valuepicks

Strong Buy for Nava Bharat Ferro Alloys - and hold for medium to long term. Very strong financials and a good business to be in the current year. Very impressive list of clients and well diversified company.

23 stock-picking lessons learned for 2005

Every investor suffers a few losses. For the new year, I'm turning what I learned in 2004 into a stock-picker's survival guide.

By Harry Domash

Every investor makes mistakes. We're told that's how we learn. If that's true, I learned plenty last year. I counted 23 different learning experiences that I'd prefer not to have to learn again in 2005. Rather than dwell on the mistakes, I've translated them to a set of guidelines that I call my 2005 Survival Guide, which I'm about to share with you.

I've grouped my survival rules into categories: behavior, tips, price action, and fundamentals. Have a look, and have a better year in 2005.

Mind your behavior

I will not try to predict the direction of the market. Making decisions based on my view of which way the market was headed didn't work. I was wrong more than I was right. No more! Now I'm basing my buy and sell decisions on each stock's fundamental and technical outlook. I'll let the market take care of itself.

I will not invest based on my prediction of:

* Oil prices
* Price of gold
* Value of the dollar
* Interest rates, etc.

Some very smart people have gone broke over the years trying to predict such things.

I will not place a limit order when I'm buying or selling. I know; conventional wisdom says limit orders are the way to go. Maybe it's just me, but I often outsmart myself when I use limits. If I'm buying, I'll end up not getting the stock and paying more the next day, and vice versa. Worse, I waste time all day checking on my trade. It's not worth the hassle to save 20 cents per share.

I will not check on stock prices during market hours. Some days I drive myself crazy watching my stock's minute-by-minute price moves. That's when I realize that I need a life.

I will not check after-hours trading prices on my stocks. Somebody sells 100 shares at $1 below the close and I'm up all night stressing over it. Then, the next day, the stock makes up that dollar in the first trade. No more.

I won't make decisions based on how much I've made or lost on a stock. It's crazy! Say I buy a stock at $5 and it goes to $10. So I sell because I don't want to be greedy. Then the $10 buyer makes the same decision and sells when it hits $20. The market doesn't care what you or I paid for the stock. It's all about its future growth prospects.

Tune out the tips

I will not buy a stock based on a guru tip. Okay, the guy on TV has beaten the market every year since Madonna's first kiss. But 2 million other investors are hearing the same tip. It's too late.

I will not buy a stock based on a tip I hear at the gym. The guy at the gym probably got it from the guru on TV.

I will not buy a stock because most analysts are rating it "strong buy." My experience says "hold" or "sell" rated stocks perform just as well, if not better, than "strong buys." Think about it. Analysts change their ratings frequently. If the rating is already at "strong buy," the next change has to be a downgrade. (Here's a link to more on that topic.)

I will ignore market predictions from gurus who predicted the last market crash, the start of the last bull market, etc. Last year, a guru who supposedly predicted when the bubble would burst, scared the you-know-what out of me when he saw even worse times ahead. It didn't happen. At any given time, there's always someone predicting just about anything. Just because one of them got it right once doesn't make him or her Nostradamus.

Price action protocol

I will only buy stocks trading above both their 50- and 200-day moving averages. Despite my best research efforts, sometimes I get it wrong. A stock's price chart is a valuable second opinion. Stocks trading above their 50- and 200-day MAs are in uptrends, meaning the market agrees with my assessment. Downtrends means it doesn't. Chances are, I overlooked something or there's unannounced bad news lurking.

I will not buy just because a stock has gone up a lot. Sometimes stocks go up for all the wrong reasons. In the end, fundamentals rule. You have to do the research.

I will not average down. It's bad news if a stock heads down, instead of up, after I've bought. It means that the market doesn't agree with my assessment. Averaging down means buying more shares to reduce your average cost. Bad idea! All too often, the market's right.

I will not buy stocks making new lows. As much as I've tried, I still can't pick the bottom. New lows all too often lead to more new lows.

I will not place sell stops. It's uncanny; I have a great knack for placing my sell stop at the bottom. Once it hits my stop price, the stock usually soars and never looks back. For me, it works better to evaluate the problem that caused a stock to drop and make my decisions based on its fundamental outlook.

Focus on fundamentals
I will only buy stocks with real sales, earnings and cash flow. No more! I've bought too many stocks on the premise that sales and earnings are about to materialize big time. Somehow, it doesn't happen. Starting now, I want to see real sales, say at least $10 million in the last quarter. But sales aren't enough. I'm not touching a company unless it also reported positive earnings and operating cash flow. The dollar amounts aren't important. I just want to see money flowing in, not out.

I will always sell when management significantly reduces sales or earnings forecasts. I must be too gullible. Company execs always portray shortfalls as one-time events, and I believe them. That's usually a mistake. Bad news leads to more bad news. From now on, I'm selling at the first sign of faltering growth.

I will not buy stocks with price/sales ratios (P/S) greater than 14. Most growth stocks have P/S ratios in the 3-8 range. Anything much above 10 is in la-la land. Sky-high ratios signal over-exuberant expectations that will soon be deflated. Count me out.

I will only buy stocks if I understand what they do for a living. I can't analyze a firm's prospects if I can't figure out what it sells.

I will sell any stock when a competitor says business is tough. It's a godsend if a competitor announces bad news before your stock does. The competitor's stock probably drops big time, while you stock merely hiccups. Your company's execs will say that the competitor's problems are company specific. Wrong! Everybody in the same sector faces the same problems.

I will diversify my portfolio between industries and sectors. It's so tempting to load up on a bunch of stocks in today's hot sector. But it's not like the good old days when strong sectors stayed that way for years. Now it's more like 15 minutes.

I will sell any retail or restaurant stock when it reports negative same-store sales growth. Same-store sales growth is the sales growth at units open at least one year. Trust me on this one. There are dark days ahead for any stock whose existing store sales are shrinking instead of growing.

I will not make a buy or sell decision based on a stock's "fair value." Analysts have bought into the concept of calculating the "fair value" of stocks they're covering. They advise buying stocks significantly below, and selling those at or above, "fair value." Problem is, their "fair value" formulas are based on unrealistic assumptions. They are meaningless. Consider a downgrade to "hold" or "sell" based on valuation alone as a buying opportunity.

In my experience, investing success is more about discipline than fancy analysis. Start with my rules. Change them if they don't work for you. The key is following a set of rules that you keep improving over time.

Market Term - Skirt Length Theory

The idea that skirt lengths are a predictor of the stock market direction. If skirts are short, it means the markets are going up, whereas longer skirts mean the markets are heading down.

The idea behind this theory is that shorter skirts indicate that confidence and excitement is high, meaning things are bullish. In contrast, Long skirts indicate fear and general gloom, hinting that things are bearish.

Happy New Year !

From 6200 to 4200 to 6600, We have experienced it all ! This has been a very profitable year for stock market with more people entering equity and making profits. Looking forward, if the Sensex was at 6200 in Jan of 2004, then we have every reason to believe that its undervalued at 6600 now ! The future looks good especially considering the "Growth Enablers" we have at the present time.

Here are some of the reasons ( borrowed from Rakesh ) why India looks so DAMN GOOD a place to be in!

Cultural

Tolerant People
Educated
Skilled
Savings Oriented

Demographics

54% people under 25
Vast Domestic Market
Young Working Population

Economics

Enterpreuner Class Well-developed
Resilience - No Frequent Boom Or Bust Cycles

Political

Democratic
Secular
Populous
Consensual System
Judicial

Geo-Political

Vast Natural Resources
Nuclear Power
5th Largest Economy
2nd Fastest Growing Economy

Ofcourse, there are things which can spoil it all which we wont discuss it right now ! Now is the time to celebrate on the profitable year we had and spare a moment & little money for the people who have lost their lives & were displaced from their houses due to the Tsunami.

Happy Investing

God Speed

Stock ratings: How dependable?

Here is an extended more comprehensive article on investment house ratings and what it means !

Benjamin Graham says, '...in the short term, the market is a 'voting' machine whereon countless individuals register choices that are product partly of reason and partly of emotion. However, in the long-term, the market is a 'weighing' machine on which the value of each issue (business) is recorded by an exact and impersonal mechanism.'

It has always proved to be a challenge when it comes to determining the ‘right’ price of a stock. The complication arises because stock prices are not only a factor of historical track record of a company, but also ‘expected’ earnings growth in the future. But when it comes to ‘expectations’, there is a great deal of analysis involved (subjective and quantitative). Economic growth projections of various research agencies are one classic example.

Expectations vary person and person (individual investors, research houses, institutional investors, technical analyst, traders and so on) and this is what makes the stock market very interesting and at times, complicated. Given the complexities involved, how do individual investors take investment decisions?

Apart from a few set of investor who depend on their own assessment, investment decisions are taken based on what brokerages/research houses recommend. The recommendation could be a broader sectoral view (i.e. whether the cement sector looks promising) or what should an investor do about a stock (say, Tisco)?

Therein lies another complication. There are no universal standards when it comes to stock recommendations. While some brokerages follow the traditional Buy-Sell way, there are some who recommend stocks with an Overweight-Underweight-Neutral strategy. In this article, we try and simplify some of these ratings for You, the individual investor! But one extremely critical factor that we have not focused on is the rationale behind these recommendations, which needs utmost questioning. We limit ourselves to only the ratings part in this article.

Buy – Sell – Hold

Generally, a stock is recommended a Buy when it is expected to give a return, say around 15% per annum and a Sell if the upside from the date of recommendation is, say less than 10%. Hold is generally for those stocks, which have been already recommended by the brokerage. But again, the standards are not common for all.

Out-performer – Under performer – Market performer

In the institutional and the fund management side of the equity market, what is more important is the relative performance to the benchmark index. Simply put, if a Fund X benchmarks itself against the BSE Sensex, the fund manager focuses on bettering the index (i.e. Rs 100 in his fund should yield more than Rs 100 invested in the BSE Sensex). The rationale is simple. Why would an investor buy the Fund X (with a entry or exit load) when it is expected to perform like the BSE Sensex (index funds usually charge lower load as compared to let’s say, a diversified fund)?

So, if a brokerage puts out a Out-performer rating on a stock, generally, the stock is expected to outperform the benchmark index by around 10%-15% (varies across the board). Here, one critical factor needs to be understood. If a brokerage expects the stock market to fall by say 10% and recommends an out-performer rating on a stock, even if the stock falls by 5% in the similar period, it has still out-performed the index!

Under-performer is recommended when the stock is expected to appreciate/depreciate lower than the benchmark index and Market performer is one where a stock is likely to track the index performance. In these kinds of recommendations, the view on the stock is as important as the view on the stock market as a whole.

Overweight – Underweight – Equal Weight

Sounds like a report card from a weighing machine in the local railway station! This is actually a fund management strategy. In order to outperform the benchmark index, the fund house needs to a different stance as compared to the market. In the BSE 30 for instance, if the software sector has a 15% weightage (i.e. the combined market capitalisation of software stocks in the BSE 30 divided by the total BSE-30 market capitalisation) and if a brokerage is overweight on this sector (more positive), the sum invested in software stocks could be higher than the overall benchmark index. Thus, it expects to outperform the benchmark index.

In the 2000 tech boom, a number of funds were overweight on software stocks only realising later that weight loss is the only way out of the mess! From an individual investor perspective, a whole host of factors needs to be understood and we suggest not following such a strategy. Individual investor’s risk-return profile and a risk-return profile of a group of investors (which is what a mutual fund is) are different in most cases.

Attractive – In-line – Cautious

Mostly, these recommendations are sectoral or for the economy as a whole. If a brokerage believes that the cement sector looks good from a long-term perspective and the stocks are likely to outperform the broader benchmark (say the BSE Sensex), it recommends an Attractive rating. If it is not, then it takes a cautious stand. Since these recommendations also involve relative benchmarks, from an individual investor perspective, the complications increase.

Common sense matters the most…

Before you take an investment decision based on the news of a recommendation by a brokerage, it is important to understand one’s own risk-return profile i.e. how much am I willing to forgo? This will determine your rating and the investment style.

The word ‘strategy’ sounds exciting but has its own limitations. There have been instances of a brokerage changing its rating style each year in the past. If you have a copy of a research report, we suggest you to read the finer print. If you do not have a copy (most of the times, inaccessible to individual investors), atleast understand the rationale behind the recommendation. One day here and there will not make a much difference to the final outcome of the investment decision, if one is looking to build a viable portfolio of investments that is dividend paying and gives capital appreciation along the way. Following the herd is not the sure shot way of improving one’s own financial rating!

Investing: It's human nature after all!

'Human nature is human nature and human nature would continue to remain human nature till human nature remains human nature,' said the eminent constitutional lawyer, (Late) Nani Palkhivala. This phrase, when used in context of investing in equities, holds true to a very high extent.

History is replete with examples when greed and fear have taken over discipline, resulting into windfall gains and, of course, 'windfall' losses for investors. And more sadly, small investors are the biggest losers in these phases of indiscipline (recollect the year 2000 stock market boom and bust). While greed results into bulls taking the centre-stage and leading markets towards nauseatingly high levels, fear brings them back to ground zero. And small investors suffer in both these situations.

As we enter the year 2005 AD, Indian equity markets are at their all-time highs. While such a situation brings in factors that cause the 'greed' element to rear its face, investors need to practice utmost caution and not give in to temptations that rising markets like these bring with them. This calls for high levels of discipline and, in these times, two key rules of investing given by Benjamin Graham should be held in high regard. The two rules are:

1. Don't lose money, and

2. Don't forget the first rule.

While investors ardently wish to follow the first rule, in this devotion, they tend to forget the second and the more important one. If, and only if, investors could practice the second rule, the first one would need no effort. Sure, all new year resolutions do not make it past the second of January, but wisdom would be in believing that this year is going to be 'different'. Right?

Sona Koyo - Steering Ahead

Sona Koyo Steering Systems, the largest Tier 1 supplier of steering systems in India and only player to offer entire range - Manual Steering, Hydraulic Power Steering (HPS), and Electrically Powered Steering (EPS) Systems for passenger vehicles along with design and development services, is on strong growth path driven by rising demand for power steerings in domestic market and also, riding the global outsourcing wave with large orders from global majors, thus, expecting to double turnover in three years.