Stock pick review

If you had invested in any of the stock picks recommended on 22 April 2009

Your returns as of 06-12-09 would have been as follows against a market return of 53.41% during the same period

1. LIC housing finance - 183.19%

2. IFCI -114.19%

3. IOB - 78.79%

4. JSW steel - 224.3%

Recommendation for a 5 year hold modified - to initiate profit booking strategies at sensex levels around 20-21k.

Some technical buy rates

Given below are some of the technical buy rates for some scrips traded in the Indian markets. Not more than one fifth of capital should be committed in to technical buys. Split the amount intended for a single scrip in to five and make the first buy at the price given below.

LICHSGFIN - 690-700

SESAGOA - 270-275

IVRCLINFRA - 290-300

IOB - 90-100

For example say your total capital for equities in 5 lakhs. Then commit not more than one lakh for technical trading. If you are intending to buy LIC for 25000.00 in then buy 7 shares for 700 ie approximately Rs4200.00

My notes

Importance of technical analysis in a fundamental buy

Always remember that in a long term investment strategy, fundamentals determine the price range with in which a scrip is classified as buy or sell. But technicals determine the best point of time to execute this buy or sell decision whitin the stipulated range, so as to reap the maximum potential of the trading decision minimisng the loses.

Importance of Co-relation of technicals of a scrip and the index

Before making a technical buy on a fundamental stock always check whether the technicals of the stock co-incide with the technicals of the index.

Pit falls to be avoided

For a novice investor there are many grey areas in the field of equity investing. Many mistakes are identified only by experience but some if committed may be fatal and may lead to irreversible loss and misery. This section therefore warns the individual against some of the must-avoid errors

Error 1 Not having (Deviating from) a thoroughly tested plan

An investor should have a thoroughly tested plan before committing his capital to a scrip. The plan comprise of steps like defining the objective of investment, designing a procedure to identify a scrip, deciding on capital allocation for selected scrips, setting the buy and sell conditions and rates, etc.

But some times even seasoned investors are carried away by the pressure of their peers, broker or the market movement itself and act impulsively resulting in huge losses. It is important to stick to a thoroughly tested, self sufficient plan that has an answer to all market scenarios. 

There fore, have a detailed and flexible plan and stick to it resisting all pressure.

Error 2 Investing huge capital without proper experience

Imagine a first year medical student attempting a cardiac surgery - A fatal outcome is virtually guaranteed. In any field, expertise is gained through experience. So before any one attempts something big in the markets, it is necessary to gain sufficient expertise through first hand experience. Starting with a small capital is an important concept many ignore.

The maximum start up capital for a novice should be less than one lakh rupees. It is the learners responsibility to learn the basics thoroughly, test it with this capital and gain experience before he invests more, at least in the first two years of investing.

Stock Picks

This section identifies investment opportunities in specific stocks traded in the Indian stock market. This is merely an attempt to draw the attention of an individual towards a particular scrip. Deciding the entry and exit points, capital allocation etc. is the responsibility of individual investors and should be done in accordance with the principles of investment he/she is following.

My recommendations for a 5 year term as on 22-04-09 (See the blog periodically for sell recommendations if any; other wise the buy is for a 5 year term)

1. LIC Housing finance 

Any rate below 225 will be a good buy

Ideal average price: 180

2. IFCI 

Any rate below 20.50 would be a good buy

Ideal average price : 17.50

3. Indian Overseas Bank

Try buying below 55.00; 45.oo can provide and ideal margin of safety

4.  JSW steel

Buying below 240 would be a good price and the ideal average price will be 200.

The recent rally seems to be a bear market rally and the above buys could be made at dips.

Checklist before buying a scrip

This section includes a essential checklist that an investor should look in to before attempting a long term buy in order to ensure safety and descent returns on capital

The dictum in buying shares for long term investment is 

"GREAT COMPANIES AT GOOD PRICES"

Answer the following questions before buying a scrip!

Quality of the business

• Do you understand the kind of business the company is doing?
  
• Have you ever been to an outlet of the company (office, retail store etc.) ?
  
• Have you ever used a product the company sells?
  
• Is the company a consumer monopoly OR Is it the sort of a company you would first consider when you are planning to buy a product in its class?
  

Financial fundamentals

EPS 

• Is the EPS of the company consistently increasing over a period of at least 5 years?
  
• If yes what is the average yearly percentage rise in EPS over the last 5 years? 
  
• Is EPS/Share price an acceptable number in the context of valuing the company?
  

Valuation of a scrip

This section intends to help investors value a company so as to assess whether they are paying the right price for a stock

In contrast to a novice investor's thinking, the price of a share does not represent the actual value of a company. It represents, at every point of time, the market's shifting perception of a company's value. This perception being invariably clouded by the market emotions of greed and fear, rarely represent the actual value of a scrip.

The most important determinant of a company's value is its earnings. It is earnings, more than any other factor, that determines the direction of a company's share price in the long run. Earnings per share (EPS) therefore becomes one of the important parameters for an investor attempting to value a company. This EPS, in relation to the price of the scrip, gives the investor an idea of the price at which a scrip is worth buying.  

Useful resources

This section contains useful resources that would help individuals make better informed conclusions about fundamental and technical aspects of securities

Books

Investment

• Intelligent Investor (Benjamin Graham)
• Buffetology (Mary Buffet)
• How to pick stocks like Warren Buffet (Timothy Vick)
• Beating the street (Peter Lynch)

Technical

• Technical analysis of the financial markets (John J Murphy)

Websites

Given below are some of the websites that can be of help in analysing stocks. It is imperative that the information provided by a portal should be counter checked with other sources before decision making.

• http://www.nse-india.com/ - The official website of the national stock exchange. Click the site map tab from the home page to enumerate the information available. Historical stock prices and charts can be obtained from the equity tab in the home page; the information would be helpful in determining the price movement of a stock. Mock trading and maintaining a watch list of the desired stocks can be done by registering in the mynse section.

• http://marketinfo.livemint.com/ - An excellent site with essential company info for an amateur investor. Specially check out the charts section containing a handful of tools for technical analysis.

• http://www.coattailinvestor.com/ - There is always a lot to learn from the greatest in any field. Sign up for the news letter to obtain valuable information regarding the portfolio management strategies of one of the world's greatest investor - Warren Buffet.

• http://money.rediff.com/money/jsp/markets_home.jsp - Check out the stock picks section (only if you are a speculator). Eipe's rule - Picks with all analysts giving buy recommendations ("buy" not "hold") have high probability of short term gains. Always use strict stoploss for the same. Disclaimer: This is a high risk strategy and is not a sound investment principle

• http://www.moneycontrol.com/

• http://www.edelweiss.in/ - There are a lot of materials on this site which could aid in amateur investor research. Of particular significance is the stock screener option available (on signing up) in the in the data tools section under the markets tab. This can be of immense help in selecting scrips based on specific investment criteria.

Essential qualities

This section details the essential qualities an individual should possess as an equity manager.

1. Discipline

Of all the qualities required in handling equities the most important one is discipline. Be it investment or speculation, discipline is a must to prevent lethal losses and to make decent profits. Discipline is the shield that protects an individual from the dreadful market emotions of greed and fear.

2. Education

As for every profession, education is a must in this field too. Though markets teach a lot as time pass by, some lessons may be very painful or even lethal. It is a must that a market aspirant should have received some kind of a formal training at least for a period of 6 months before actually entering in to the arena. Books like Intelligent investor (Benjamin Graham), Buffetology (Mary Buffet), Technical analysis of the financial markets (John J Murphy) are some of the must reads which gives a broader picture of the market to novices.