Multibagger stocks of tomorrow

1.Which is a good stock to buy?. 

2. I want to do SIP in quality stocks as a long term investment, which are the good stocks to choose from?

3. Please help me identify some good stocks to buy.

These are some of the commonly asked questions that is being asked in some of the  web forums that I have been visiting.

There are many enthusiastic people who reply with answers like 

1. Choose L&T, HDFC bank, Asian paints , etc. These stocks have multiplied many times over the past decade, so they will continue to grow

2. Buy Eicher Motors, this stock has been a multibagger and Vanguard or someone has recently bought a stake in this company 

3. Buy Company XX because ace investor YY has acquired stakes in it.....

such answers go on!....

This takes me to some discussion a few years back (2006- 2007/08) like

1. Reliance power IPO is a great investment because the stock of the group companies have always made investors wealthy.

2. Unitech has yielded X times return in short span of time. That has been a jackpot!.

I am not trying to say that the answers mentioned above  are correct or wrong. The post is  not to compare the quality of stocks mentioned here and do a performance analysis of the past or prediction for the future.

The message is to say that nobody knows how any stock will perform in the future. Saying that investment in a particular company "can never go wrong" is foolish .

Making an investment decision purely based on suggestions from a web forum can prove to be disastrous. If stock picking was so easy, then you would have had billionaires all over!

Return of capital is more important than return on capital. So, please make right choices with your money.

If you ask me " How to make the right choices"... my answer is " I don't know the perfect answer" :-) !

Disclaimer:  

If you make any decision to buy or not buy any of the stocks that are mentioned in this post, it will be " your decision" and you cannot blame this post for any losses or loss of  profit.:-)

 I am not a SEBI registered analyst. While writing this post, I do not own any of the shares (direct equity investment) that are mentioned in this post.This is not a recommendation to Buy-Sell-Hold any of the stocks mentioned above.

Peeping into 2012

Here's an article which states that 2011 has been the second worst year for the Indian markets in last 14 years!.

Although ,such plain statistics do not matter a lot for the individual investors, the fact is 2008 has been the worst year. 2009 the best i.e the one which followed the worst. ( in the last 14 years,-I am not sure why 14 years were picked up)

So , what do you expect after the second worst year.. No predictions :-))

http://business-standard.com/india/news/2011-second-worst-for-investors-in-14-years/460101/

5 years , still no gains

Whenever someone asks , what do you think is a long time horizon from an investment perspective, my answer has been always, time span > 5 years.

Imagine some one who started 'investing for the long term' in 2007 ( that too buying stocks in one go , holding it for 5 years , they would  not be so happy now)- The so called long term  stocks bought in 2007  most probably would still be in RED.
Now, the questions that may arise are -Does investing in equity really work??. Even a fixed deposit would have helped increase your base amount by 80% before tax. Was it a mistake not to sell off in 2010 rally??. Doesn't it defeat the purpose of long term??

Even a good stock bought in a wrong time may chicken out for a long time and not yield good results. So. how to know whether it is a right timer to buy. Again, a question that cannot be answered so easily.

What's the way out?

1. SIP in Equity mutual fund spread over a greater span ( 36 to 60 months) can diminish the risk.

2. Buying a stock after solid analysis ( this is not fail proof , but helps avoid major glitches) and buying at a time when everyone is panicking .

Any day no.1 is the best option for a retail investor. Simple looking things at times can do wonders.

Understand the contradiction in advices

After introduction and a bit of eulogizing of ET wealth, here's a general comment on the article titled 'Four reasons why not to buy IPOs' 

If IPO should not be bought why do papers like ET publish a buy/ no buy recommendation for IPOs. Is the recommendation not for the retail investor. Or is any FII or QIB is interested on a ET recommendation? ( I have taken this article just as an example and no offence intended to the author of the article. you will realize this by the end of the post)

The answer is simple. The world of investment advice is full of such contradictions and this article  is no exemption. Every advice is valid from one perspective and stupid from another perspective.

Equity market is not a casino!

Recently, I received a query from a person

The query ~ I have withdrawn rs 50,000 from my GPF (General provident fund- provident fund for government employees), How can i double it within one or two years .

This is the attitude that most of us carry towards equity markets. It's treated like a casino which can make you rich over night. Once  you loose your money and burn your fingers , the episode of bad mouthing that equity " investing " starts.

Investing ( trading) when you are in debt trap

Recently, got a mail from a person who is struggling to pay his EMIs. The person had withdrawn cash from a credit card when his variable pay got down and has a huge outstanding amount on his credit card.

When his company announced an increment this year, the person was keen to invest the incremental income in the stock market , to multiply the money quickly to pay off his credit card dues.

I was shocked on reading this mail. When you are in a deep debt trap, you should try to get out of it first. In fact credit card cash withdrawal should be the last mode you should look into.

When you are in a debt trap, one should try to use any excess or surplus cash to pay of the debt. Investing (Trading!) with borrowed money or when you are in deep debt trap would potentially lead you to more trouble.

One should always try to live within the means and borrow within the means too.!

2010 - An interesting year ahead !!

Early 2009 , was an easy phase for seasoned investors as they could spot gold just walking on the road!!. Yes, most of the stocks were trading well below their real values. Anything you would have invested should have at least doubled by now. Having said that, it was only the people who were greedy when others were fearful and those who would have invested regularly ( say SIP) have benefited immensely out of the down turn.

2010 is showing a lot of promises (esp. media blowing a lot of good news like new jobs coming in, salary increments ,etc for Indian economy). But, the returns of 2009 would be unrealistic to expect from 2010.

At this stage there are a few who are sitting on decent profits from equity. So, the question is whether to stay invested or reap the rewards. If you are in need of money in next two, three years time frame , it may be prudent to book profits at least partially (depending on your need). However, if you are ok to hold your money for a long time, say 5 years then you may choose to hold on. The west is not completely out of the woods. So , FII flows, fluctuating exchange rates might lead to volatility of the markets.

It would be interesting to see how the markets turn about. There are a lot of predictions about markets touching new highs. We know how predictions work:-).

But as a retail investor, following a path of extra caution while making investing decisoins( in 2010) would definitely help protect your money .

Telecom- the fall of tariff and stock prices

Reliance's "50 paisa for all calls" announcement and TRAI's per second tariff suggestion have brought down all the telecom stocks . The leader Bharti is down almost 23% in 3 days and idea is trading below it's issue price. So, is it an end of all situation for the telecom world?.

Telecom has the widest reach of customers and no one can beat them in reach ( bottom of pyramid). There is a lot of rural penetration left . 3G, Net usage over phone are in their intial years. Banking opportunities are also foreseen for the telecom operators in rural areas ( may be in urban India too).

Tariff war, reduction in ARPU and more competition waiting to jump in are definitely negative factors. But some how I see a great future for telecom.

With reduction in tariff over the years, my bill has never come down and Internet usage over telephone network is going up. So, I see a huge opportunity in these big falls of telecom stocks.

In the long run these companies ought to bounce back strongly. Let's keep our fingers crossed till then . Such chaos mostly provide great opportunities.

should I buy bhart, rcom, idea, MTNL, BSNL at this level? is it a good buy. what returns will telecom give

Active vs Index (Passive) Investing

Index Investing is a passive way of investing . Having a bunch of stocks in portfolio exactly mirroring a stock in an index is a passive way of investing. This can be done by purchasing stocks mirroring an index and tracking the weight and readjusting the portfolio whenever the constituents or weightage in the index changes. Better is to buy an Index fund. This ensures that you get returns close to index.

Example if you bought an index fund of sensex when sensex was at 10,000 , it would have appreciated 70% when sensex is around 17,000. ( Returns would be exactly similar to the index minus tracking error , of a fund or an investor).

If someone believes that actively choosing stocks from the wide range of stocks available, invests in them then it is active investing.

In India most equity funds are actively managed funds. The index funds generally involves a lesser cost. Actively managed funds have managed to beat indices (on an avg.) many a times, excepting 2005-07 period.

Investing in either of the type of funds should be made by an investor after understanding the nature of products clearly.It's also not a bad idea to diversify your investments between active and passive funds.

Tough times do not last.

These volatile times in the stock market may look turbulent for traders and short term investors, but for long term investors this should not be much of a botheration. With a favourable demographic profile and being a developing economy, India has great prospects of growth . Even if you consider all the negatives, a return of 12-15% per annum over next 10 years seems very much possible.

We should understand that time in the market is more important than timing the market. A regular and systematic investment will definitely help good returns over the long term.

Investing regularly for long run and not tracking the markets on a day to day basis would help your investments generate good returns and a good night's sleep too.

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Advance tax info

Advance tax collections is one of the clues to predict the results of the companies in advance.As per the above info ( source: the hindu businessline), CBI, L&T, BOI, SBI &ACC have paid advance taxes more when compared to last year.

SBI stock is one of my favourite and a real long term bet. L & T should also be a sound long term investment. Small lots of these can be accumulated , if one is looking at a 3-5 year investment horizon.

Free fall

Sensex and Nifty are having a free fall and there seems to be no end to it. There are a lot of questions in everybody' mind . What will be the direction of crude oil prices??...Will the oil prices ever fall... Are we in a recession??. How's the US slump or recession going to affect the emerging economies....

Experts who predicted the sensex to go to 25,000 by year end are revising targets to 12500.!!!

The P/E of NIFTy has almost fallen to 16. No doubt that this is a tough to digest phase for retail investor.

Time and patience cures everything . All the retail investor needs to do is continue to SIP in a proven diversified equity fund ...Sit back and relax. Money invested during these chaotic times may be yielding the highest returns. But there is a caveat...If you do not have a long time horizon for investment ( at least 5 years ) , debts may definitely be a safer option. Banks and NBFCs have significantly increased the deposit rates.

You may also park your funds in Debt funds and once you see a clear picture start an STP to an equity fund.

Time and patience cures everything. So, all the evils that the market see today should be cured someday or the other.

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Fall of stocks

With stocks falling for more than a week and a big fall yesterday, there is great panic.

There is no need to panic if you are a long term investor and have invested systematically in equity with long term goals.

This can also be a time to do prudent cost averaging n your stocks. Volatility is inherent to nature of stock investing and you have to live with it to make your gains.

Is it a good investment?

I get to see a lot of questions in website Q&A, forums, mails in the lines of..."I have invested Rs X in Y MF/ Z shares. is it a good investment??".

The immediate answer that comes to me is "Why did you invest if you were not aware of the consequences??". It is very important to understand where you are investing your money. At least a basic study or understanding is essential before you invest. There is no point going around for reassurance after you make the investment.

With the markets opening giving great returns in 2007 and IPOs also giving decent returns, there is mad rush for making 'Quick money' from the stock markets . People throw in their money without even thinking twice and blame stock markets on a dooms day.

So, understanding where your money goes and understanding the risk associated with your investment is very important before you throw your money in.

One more important thing is understanding the difference between investing and trading. Some people ask.." I have Rs X to spare for 2 months..which stock/ equity MF can I "INVEST" in??...

It's very important to understand that betting in your money for two months in equity is nothing less than gambling.

So always "Understand your investment"and enter for a "Long time horizon" to reap the benefits of stock markets.

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Is it the right time to enter the market

The most frequently asked question these days is " Sensex has crossed 20K , I have never invested in equity and will I get to gain if I enter the market now?. What are the investment options?"

Any day is a good day for a person to enter the market provided he understands that time in the market is more important than timing the market.

An SIP in a equity mutual fund running over a couple of years would be the best way for the retail investor to enter the market.

Always remember to invest only such money which you need not have immediately into stocks/Equity MF. i.e don't ever invest money that you would need in the short term into stocks(unless you are OK to play around with the associated high risks).

Understand Long term is at least 3-5 years and anything less than that can be termed as a short term investment for equity investment.

So, SIP your way to wealth.

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Index Funds

Index funds refer to equity funds that concentrate on a specific index such as Nifty, BSE. The key aim in investing in such index funds is to get returns that equal the returns of the index during a specific time period. The funds invest the money in stocks which are a part of the particular index. The ratio of money invested in various stocks is equal to the ratio of the shares in the index.

During any trading session, ETF index funds can be purchased and sold at the prevailing rates and so are similar to purchase and sale of shares. Demat account is compulsory for transacting in Exchange Traded Index funds ( ETFs). For non ETF index funds, demat account is not required and investment can be made with just a bank account as in case of normal MFs.

Tracking error is the differentiator when it comes choosing one index fund against the other. Tracking error is the extent to which the NAV of the index funds move in a manner that is inconsistent with the movements of their respective indices during a given period.

Average 1 year return from index funds as of 6th Dec 07 45.42%*

Returns proportionate to index

* returns data from valueresearchonline

Nifty and Sensex

Important difference between Nifty and Sensex is,

1) Nifty takes the full market cap of all of its 50 stock constituents and calculates weights accordingly.

2) Sensex Weights companies based on the free-float market capitalisation. Free-float is the shares not held by the promoters or institutions and hence, freely available for trade.

search terms:-

nifty vs sensex, nifty and sensex weights difference.

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SIP in a single stock?

Like SIP in a mutual fund , can one do a systematic investment in a single stock??...

It means allocating a month every month to purchase a particular stock. Say, on 1st on every month I would buy 2 shares of company X and accumulate it over a period of time. This is definitely a great idea. But SIP works better in case of a portfolio( read as collection of stocks or equity MF). This is because when you invest in a single stock, your risk return proportion is very high. But if you are thoroughly convinced about the growth prospects of a stock you can go ahead understanding the risk involved.

To understand this in a better perspective, someone who was buying Reliance stock every compared with someone who had been accumulating Infosys. Both of been accumulating blue chips , but you know the current scenario is not favouring IT stocks. Things may take a turn tomorrow. So, this kinds of risks / returns and your goals need to be understood before you start an SIP in a single stock.

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Not comfortable with equities/ equity MF

This week I happened to meet at least a few people who talked to me about the risks of stock market. One of them who spoke on these lines was an MBA (Finance). Even after talking with data, logic and information ( mostly provided on this blog), I couldn't see them impressed. I didn't press them too much because I am not an agent selling Mutual Funds :-).

When so many FIIs flock here ( including some of their pension funds), we are yet to get into a perfect equity investing cult in this country ( esp. the southern part of the country??).

The equity Mutual Fund penetration has been improving but has a long way to go. At the current 30-40% CAGR, MF can be a $10 trillion industry in few years to come. But still it would be only a part of the country's true savings potential.

Equity/ Equity MF investments definitely carry a risk along with them. But by intelligent means of investing and staying in the market for long run, one can definitely get better tax free returns when compared to debt investments.

My lesson from the interaction last week with the equity averse investors made realise...." People create their own destiny".

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Just a thought

I was chatting with my neighbour, a couple of days back. He is not an equity investor. He was telling that the bull run was not at all justified and the markets are highly overpriced. When there is no change in earnings of companies in the past three months, how can the market shoot the roof?.

Definitely a logical question!!. My neighbour had booked a flat in 2006 for a huge amount of money. The flat would have cost only half of it, had he booked it in 2005. I asked him , when the rent in the place has been stable ( similar to earnings of the shares), how can the market value of house double...( the appreciation he expected on his flat is not happening now..that's another story....).

He did'nt have any answer too. Stocks are definitely expensive now but the flats are more expensive at P/E's exceeding 200!!.

May be , stocks will be driven more by liquidity than the fundamentals like the real estate. So, retail investors should follow a systematic investment plan to overcome the bumpy rides. Don't stay away from equity, but take the SIP route to benefit from volatility....Enter equity only if you can stay for long in the market ...(> 5 years).

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