THUMB RULES FOR INVESTING

• When you invest in the stock market you should always diversify.
• Invest only in the stocks enjoying easy liquidity in the market.
  
• A good company usually increases its dividend every year.
• You can lose money in a very short time but it takes a long time to make money.
• The stock market really isn't a gamble, as long as you pick good companies that you think will do well, and not just because of the stock price.
• You can make a lot of money from the stock market, but then again you can also lose money.
• You have to research the company before you put your money into it. This includes :
  1. Looking at the quality of its management, its track record and intentions.
  2. After this you should take a view of the future prospects of that industry and how the company you have selected is placed therein like its market share, promotional policy, future plans, cost of operations and transparency in its financial statements.
• You should invest in several stocks because out of every five you pick one will be very great, one will be really bad, and three will be OK.
• Never fall in love with a stock; always have an open mind.
• You shouldn't just pick a stock-you should do your homework.
• Buying stocks in utility companies is good because it gives you a higher dividend, but you'll make money in growth stocks.
• Just because a stock goes down doesn't mean it can't go lower.
• You should buy a stock keeping in mind its intrinsic strength but not because it's cheap.

THE ART AND SCIENCE OF STOCK PICKING

Every investment banker worth the name knows that adopting a micro-focus is critical to making successful investment decisions in the stock market. Yet, the micro-focus continues to be ignored, by and large, by most investors. What does the term micro-focus really mean? Micro-focus goes far beyond peeping at a company's balance sheet, and it certainly isn't a cursory analysis of financial ratios by a chartered accountant.

Micro-focus emphasis has always implied a rather more interpretative analysis of data, the ability to crunch numbers in such a way that you can evaluate the real current worth of a company and predict its future shape as well. Let us give you a specific example. MRF Ltd had an annual advertising budget of around Rs 16-plus crores which has kept on changing on year to year basis. An accountant will view this as an unavoidable expenditure that MRF must incur while carrying on its tyre business.

As investment analyst, one should look at this sum as an entry barrier that MRF puts up to deter other firms from jumping into the tyre industry. It could also be partly-viewed as capital expenditure, even though the company may have treated it as revenue expenditure for taxation purposes. And MRF's value - and the value of its shares - can be derived only by assessing such things from this kind of creative perspective.

Consider another of our favourite examples. Some years ago multi-product giant ITC Ltd had an Rs 800-crores excise claim slapped on it by the government. Now ITC's marketing strengths, its brand equity, and the sheer inelasticity of cigarette demand et al were well-known at that time. All that an analyst needed to assess was whether the claim made against ITC was realistic or not. And accordingly, buy or sell its scrip.

Another important factor in making sound investment decisions is trend-spotting. What's important here is to identify trends in the market the industry or the economy early enough. Sooner or later, everyone will tumble on to what's happening, and it becomes a fashion. And as demand zooms, the concerned shares quickly become overvalued.

Apart from trends, most stock markets are also marked by what one calls a dominant theme. It may be an idea, an industry, or a particular way of doing business. It is the most favoured and most sought-after idea in the business community at that point of time. While some themes are long-lasting, others may just fizzle out quickly.

For example, we believe that global competitiveness of Indian industry - that is, the ability to produce according to global standards - is currently an important theme. We favour companies and industries which are cost-competitive internationally, at a 25 percent rate of customs duty. Those who pass this test, could be very strong corporates. A dollar-denominated industry, like shipping, would also qualify. Apart from these, service sectors like information technology, entertainment, media and telecommunications should do very well in the coming years. Even drugs and pharmaceuticals should be looked into seriously.

The strengths and weaknesses of a company in the market, or the qualitative factors governing the performance of an industry, are best learnt by constant interaction with industrial experts. Abroad, it is common to have investor relations managers, who help to disseminate such information. And don't forget a company's worth is not merely a function of its earnings. It's also a function of the management's vision, which can be best understood by talking to the entrepreneurs themselves.

One also needs to evolve new concepts. For instance, the earnings per share ratio is commonly misunderstood today as the master key to unlocking all the secrets of investment. While the utility of the ratio as a guiding factor should not be underestimated, it cannot yield good results by itself. While cash earnings per share have now become popular, gross earnings per share are still ignored. In fact, anomalies can be found where a company with high gross earnings per share is quoted cheaper, merely because it's net earnings per share is low. Another useful ratio, not in vogue today, is gross profit to market capitalization.

One should also continuously search for qualitative factors to gain an edge in the market. Here again, the assessment is based on one's understanding. It will be wrong to assess, for instance, cement units on a replacement cost basis, because most old units were producing cement using the wet process, which was hardly cost-effective. On the other hand, most sugar units can be evaluated using the replacement-cost technique as there has not been much change in the sugar industry. Moreover, the technology is indigenously available, and even marginal investments in modernization allow sugar units to maintain their efficiency.

Time has now come when brand values, technology, globalization import competitiveness, and franchise values command a premium on the stock markets. For instance, Infosys and Wipro are always highly-priced shares because of their high intellectual capital. HDFC is valued for its franchise value.

There's one more tip you might like to remember. When it rains, everybody gets wet. In some phases of the market, good stocks and good industries are available at cheaper prices than usual. You can take advantage of this profitably. Similarly, favouring a stock when there is mass aversion to it can yield good results.

But you can't be a contrarian just to be contrary. For example, you can't be a contrarian in an industry whose life cycle is over. This approach is applicable where something is ignored currently but its long-term potential could be excellent. In the coming months, the cement industry may throw up such an opportunity. But never forget; being contrary is an art.

Finally, here are three of our favourite investment aphorisms. We hope you enjoy them : · It is easier to predict what is going to happen to a scrip rather than when it is going to happen. · In the stock market, the ability to do nothing is sometimes more useful than the ability to act fast. · Temperament is more important than experience and knowledge in the world of investment.

HOW TO SUCCEED AS AN INVESTOR

LEGENDARY investor Warren Buffett thinks that to succeed as an investor you must have six qualities :

You must be animated by controlled greed, and fascinated by the investment process. You must not, however, let greed take possession of you; you must not be in a hurry. If you are too interested in money, you will kill yourself; if not interested enough you won't go to the office.

You must have patience. He often repeats that you should never buy a stock unless you would be happy with it if the stock exchange closed down for the next ten years. Buy into a company because you want to own it permanently, not because you think the stock will go up.

You must think independently. Jot down your reasons for buying. For example, the market capitalisation of a company may be undervalued by Rs.50 crores. When you have them all down, make your decision and leave it at that, without feeling the need to consult other people: no committees. · You must have the security and self-confidence that comes from knowledge, without being rash or headstrong. If you lack confidence, fear will drive you out at the bottom.

Accept it when you don't know something.

Be flexible as to the types of business you buy, but never pay more than the business is worth. Calculate what the business is worth now, and what it will be worth in due course. Then ask yourself, "How sure am I ?" nine times out of ten you can't be. Sometimes, though, the bell rings and you can almost hear the cash register.

VIOLENCE IN SOCIETY - IMPACT ON STOCK MARKET

Those who believe that stock markets are uncertain places would do well to take a look at the situation in the country today. Consider the traumatic times we are living in. The violent and hostile climate has made day-to-day existence a matter of great insecurity. Look at the threats:

Travelling in a plane or train is not safe because of terrorist attacks. Walking on the road, an innocent person could become a victim of a shoot-out. Even pursuing one's professions isn't safe. Government servants could be kidnapped for securing the release of militants. Journalists could be killed for honest reporting. Businessmen have to ensure safety for themselves and their families by paying 'protection money'. Even decent and honourable persons use musclemen to terrorise their friends for imaginary or other grievances. Honest trade union leaders are physically eliminated and, in turn, honest businessmen are terrorised by unprincipled trade union leaders. In short, terror is stalking the land.

This volatile bubbling over of the world we live in is bound to have its impact on the stock market as well. The uncertainty has crept into the investor's psyche. This sense of uncertainty has also induced a sea-change in the psychology of investors. Earlier, the timeframe for long term investments was considered to be at least two to three years. For most investors this period has now come down to six months.

Nor has it ended there. As a matter of fact, some investors have started looking at investment proposal in terms of days. If someone buys a scrip and it does not rise within two or three days, he starts panicking. This may sound like an exaggeration, but I have clearly observed this phenomenon during the last one year in my day-to-day interactions with investors. Today investors look for very quick returns, instead of waiting for a reasonable period of time. And this has added further volatility to the markets.

That's not all. Wildly fluctuating interests rates have also compounded the problems of volatility in Indian money and stock markets. Does all this mean, then, that the lack of stability will lead to a situation where the individual investor simply cannot anticipate developments and is therefore doomed to relying on chance for success of failure? Not really. For, the very volatility can be turned to advantage by the intelligent investor. Those who buy when others press panic buttons, inducing nervous selling, will almost certainly make a killing.

As a matter of fact, many have made their fortunes in this way during the last two years. All it needs is to stay tuned to the market antenna, and to muster up enough courage to buy when the going is bad.

After that, let volatility do its worst.