Skip to main content

Strategies for Safe Equity Investments

These New Year2011 resolutions will help you avoid past mistakes and enable you to make disciplined stock choices

 

Risk can never be avoided; it can only be reduced or contained.

 

   CALL it the magic of New Year. There is something in the air that gives you the confidence to set things in order. And the mood is no different among investors. There is a desire to avoid the mistakes made in the past to ensure better growth in the future.

Avoid The EFGH Factor:

We have learned alphabets in the school. But it's time we revisit a few of them. Investors should keep the EFGH factor in mind when they invest in equity markets.

 

In EFGH, E stands for excess of 'Emotions', F for 'Fear', 'G' for 'Greed' and 'H' stands for 'Hoping Against Hope'.

 

Since these four factors have the potential to ruin the prospects of any equity investor, you should always try to keep them under control. They have the power to take control of an investor's rational faculties by making him run after impossible goals that can cost him dear.


   As the wise men in the market say, an equity investor should learn how to become fearful when others are greedy and greedy when others are frightened. Well said, because the best of the opportunities are available in the equity market when fear runs amok on Dalal Street. It's the time when one can shop at bargain prices.


   This doesn't mean that one shouldn't be optimistic. This is just to caution against being incorrigibly optimistic — hoping against hope that things will turn around the way you want them to b e. This is painfully true when one buys the wrong stock or a stock which costs more than its fundamentals can justify. In such cases, small investors generally enter into the last leg of the upward trend due to their greed. But as the stock starts falling below its purchase price, investors get stuck and keep waiting to exit at the purchase price. Their hope of exiting at 'the purchase price' is a classic case of hoping against hope as in most cases such overvalued stocks drop to very low levels. The investor then remains saddled with such junk for a long time. And, even if he manages to exit at the purchase price, the time that has elapsed between the buy and sell ensures he loses in terms of 'time value'.

Be Objective:

You will gain most by being objective. You have to be objective when it comes to valuation of a business. There is a tendency to value one's own belongings at a price more than the fair price. An investor tends to think the shares that he owns are better placed to move up than the shares he does not own. Experts in behavioural finance call it the 'endowment effect'. It makes sense for investors to listen to the arguments against their investment decisions. There are instances where investors get into the 'denial mode'. In dynamic markets, the business conditions may not remain favourable always. This is especially true for cyclical stocks. Changes in regulatory frameworks also impact business prospects. In such cases, getting into the denial mode can be fatal. A case in point is the telecom sector. Till 2007, telecom was one of the biggest wealth creators for investors. But many could not accept the possibility that the earnings may see a downward trend due to increased competition in each circle. Those who could not accept the changed matrix of telecom, could not capture their gains at the top.

Do Due D
iligence:

Investors should start their new year by looking at their existing portfolios through the 'due diligence' lenses. Due diligence helps investors identify fundamentally sound companies and avoid stocks with no fundamentals. Small investors should avoid the temptation of buying operator-driven stocks, as one may get caught at higher levels. Do your homework well and then commit your hard-earned money. Try to gather information about the company from independent and authentic sources of information such as the stock exchange and industry forums. It makes sense to have critical opinions about the business at hand to form the right opinion about it. At times when there are scams mushrooming up, leading to stock price crashes overnight, it is imperative that you partner with the right stocks. Though it is a tedious process, it is better to inculcate the habit of doing the home work on your own.

Stay Independent:

It is a sought-after trait in the equity markets. Successful investing in most cases is not a group activity but the outcome of an individual's brain that can think independently. Subscribing to consensus is the common tendency most investors exhibit. This deprives them of many opportunities. Take the simple example of the exuberance of early January 2008. The market was quoting at the highest valuations (Nifty P/E was at 28) after the magical bull run that started in 2003 and the fundamentals were lagging by a wide margin. But that did not prevent most of the small investors from investing fresh money in the market, forget taking money home by selling out their equity holding. No wonder then that many such naïve investors came crashing down from those unrealistically higher levels. And then as most investors subscribed to the 'consensus' estimates of a doomsday, few could think independently. The obvious outcome was that most could not buy into equities near the bottom in October 2008 when the Nifty was quoting around 10 times its trailing 12 months' earnings. The fear in the air immobilised investors, making them incapable of using their common sense since most could not think independently.


   Investors should develop the habit of thinking independently to earn alpha returns in excess of market returns. At a time when global investors have recognised the India growth story, the opportunities will come only from independent thinking. Those seeking social approval generally end up with mediocre investment opportunities that offer market returns or less than that.

Just Be Yourself:

Understand your abilities and your weaknesses as an investor. If you don't have time on hand or lack the necessary skills to analyse individual stocks, it's best to no gamble in the market. It makes little sense to envy your neighbour who is making some quick money in the markets. It pays to invest for the long-term after doing some homework.


   As the complexity of the equity market increases, most individual investors find it difficult to invest in equities on their own, which makes a strong case for mutual fund systematic investment plan that offers expert handholding in equity investing at least cost," says Sadanand Shetty, vice-president and senior fund manager, Taurus Mutual Fund. Stay with diversified equity funds with a good track record.


   It is time to stick with good long-term solutions than to keep jumping from one fund to another looking at short-term performances. Then there are instances where the distributors may push the wrong product in the 'tax saving mania' scheduled to be unleashed from January to March, 2011. Better ask questions till you get the complete picture with the underlying risk-reward proposition. This will help you understand the products on offer and avoid those that you do not need. The New Year will reward you if and only if you resort to a more disciplined investment approach.

PROMISES TO KEEP



For direct equity investors: I shall…

Ø      Keep my returns' expectations at realistic levels

Ø      Do my homework before investing in equities

Ø      Not invest in any stock on tips

Ø      Invest for long-term in fundamentally sound companies

Ø      Try to balance my emotions in all market scenarios

Ø      Remain open to views that contradict my views

Ø      Keep my actions based on reasoning than anything else

 

For indirect equity investors: I will

Ø       Understand my needs before I look at the investment options

Ø       Not buy anything that does not address my requirements

Ø       Gather information about the product on offer

Ø       Not invest in a scheme looking at short-term performance

Ø       Invest in schemes with long-term track record across market cycles

Ø       Stick to long-term solutions and invest in diversified funds

 

Popular posts from this blog

SBI Magnum Tax Gain Scheme 1993 Applcation Form

    https://sites.google.com/site/mutualfundapplications/tax-saving-mutual-funds-elss     Investment Details Basics Min Investment (Rs) 500 Subsequent Investment (Rs) 500 Min Withdrawal (Rs) -- Min Balance -- Pricing Method Forward Purchase Cut-off Time (hrs) 15 Redemption Cut-off Time (hrs) 15 Redemption Time (days) -- Lock-in 1095 days Cheque Writing -- Systematic Investment Plan SIP Yes Initial Investment (Rs) -- Additional Investment (Rs) 500 No of Cheques 12 Note Monthly investment of Rs 1000 for 6 months and quarterly investment of Rs 1500 for 4 quarters.

Impact of Demonetisation

The government's move to demonetise `500 and `1,000 currency notes will immediately impact reserve money and money supply in the system along with the balance sheet of the Reserve Bank of India, the sole authority in the country for accepting currency notes and coins as legal tender. ET explains the interplay of currency, reserve money and money supply. 1. What is currency in circulation? It is the total value of currency (coins and paper currency) that has ever been issued by the central bank minus the amount that has been withdrawn by it. Currency in circulation comprises currency notes and coins with the public and cash in hand with banks. It is a major liability component of a central bank's balance sheet. 2. What is reserve money? It is essentially the central bank's money . It is also called high-powered money , base money and central bank money . As per the definition, reserve money equals currency in circulation plus bankers' deposits

Birla Sun Life Tax Plan Online

Invest Birla Sun Life Tax Plan Online   An Open-ended Equity Linked Savings Scheme (ELSS) with the objective to achieve long-term growth of capital along with income tax relief for investment.   After a bad patch from 2008 to 2010, Birla Sun Life Tax Plan has made a big comeback in the last five years, with a particularly good run since 2014. The fund's rankings, which had slipped to two stars in 2011-12, recovered sharply to three-four stars in the last three years. The fund has delivered a particularly large outperformance over its benchmark and peers in the last couple of years. The fund's investment strategy focuses on a diversified and high-quality portfolio, with parameters such as capital ratios and balance-sheet strength used to judge quality. It uses a combination of top-down and bottom-up approaches to take sector/stock positions. The fund avoids highly leveraged plays. Staying more or less fully invested at all times, the fund parks roughly half of its portfoli

Should you Roll Over 1 year Fixed Maturity Plans?

The period between January and March typically sees an uptick in the launch of fixed maturity plans, or FMPs. Not this year. Instead, fund houses are busy rolling over or extending the tenure of their one- year FMPs launched last year to three years. Investors in one- year FMPs have a choice. Either redeem units or roll over to three years. If you exit now, your gains will be added to your income and taxed in line with your individual slab rate of 10, 20 or 30 per cent. If you stay invested for two more years, you pay 20 per cent tax with indexation benefit. Yields have softened in the past few months on expectations of a rate cut. If the central bank continues its soft monetary stance, yields are likely to fall further. In such a scenario, it makes sense for investors, particularly those in the 30 per cent tax bracket, to roll over their investments and lock in at a higher yield now. In a surprise move, the Reserve Bank of India cut repo rate by 25 basis

Max Life Monthly Income Advantage Plan

Money back policies are highly expensive, they mostly don't offer adequate insurance cover and they don't offer good returns Max Life Monthly Income Advantage Plan is a traditional money back policy. Money back policies are similar to endowment insurance plans where the policy provides for partial survival benefits during the term of the policy. These type of products are expensive, they mostly fail to offer adequate insurance cover and they don't offer good returns. What the agent has told you isn't correct. In this policy, the money back is in the form of regular income after completion of 10 years. At the end of premium paying term, you will get a guaranteed monthly income for 10 years which will be 1/12th of 10 percent of the sum assured.  So for instance, if your sum assured is R 10 Lakhs, then the guaranteed monthly income will be R 8333 (100000/12). The reversionary and terminal bonuses mentioned are not guaranteed. You will pay a very high pr
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now