- Always deal with the market intermediaries registered with SEBI / Exchanges
- Give clear and unambiguous instructions to your broker / agent / depository participant
- Always insist on contract notes from your broker. In case of doubt of the transactions,
verify the genuineness of the same on the Exchange website.
- Always settle the dues through the normal banking channels with the market intermediaries
- Before placing an order with the market intermediaries please check about the credentials
of the companies, its management, its fundaments a recent announcements made by
them and various other disclosures made under various regulations. The sources of
information are the websites Exchanges and companies, databases of data vendor,
business magazines etc.
- Adopt trading/ investment strategies commensurate with your risk bearing capacity
as all investments carry risk, the degree of which vari according to the investment
- Please carry out due -diligence before registering as client with any intermediary.
Further, the investors are requested to carefully read and understand the contents
stated in the Risk Disclosure Document, which forms part of investor registration
requirement for dealing through brokers in Stock market.
- Be cautions about stocks, which show a sudden spurt in price or trading activity,
especially low price stocks.
- Please be informed that there are no guaranteed returns on investment in stock markets.
- Don’t deal with unregistered brokers / sub-brokers, intermediaries
- Don’t deal based on rumors generally called 'tips'
- Don’t fall prey to promises of guaranteed returns.
- Don’t get misled by companies showing approvals / registrations from Government
agencies as the approvals could be for certain other purposes a not for the securities
you are buying.
- Don’t leave the custody of your Demat Transaction slip book in the hands of any
- Don’t blindly follow media reports on corporate developments, as
they could be misleading.
- Don’t get carried away with onslaught of advertisements about the financial performance
of companies in print and electronic media.
- Don’t blindly imitate investment decisions of others who may have profited from
their investment decisions
EVALUATING & BUYING A STOCK
In assessing investments in stock, investor should consider the stock's valuation,
strategy, and plans for diversification and appetite for risk.
Stocks are evaluated in many ways. The most basic measure of a stock's worth involves
that company's earnings. When you buy a stock, you're acquiring a piece of the company,
so profitability is an important consideration. Imagine buying a Hotel. Before deciding
how much to spend, you want to know how much money that hotel makes. If it makes
a lot, you'll have to pay more to acquire it. Now imagine dividing the hotel into
a thousand ownership pieces. These pieces are similar to stock shares, in the sense
that you are acquiring a piece of the business, rather than the whole thing.
The business can pay you for your ownership stake in several ways. It can give you
a portion of the profits, which for shareholders comes in the form of a yearly or
periodic dividend (Marico pays dividend every quarter). It can continue to expand
the business, reinvesting money earned to increase profitability & raise the overall
value of the business. In such cases, a more valuable business makes each piece,
or share, of the business more valuable. In such a scenario, the more valuable share
merits a higher price, giving the share's owner capital appreciation, also known
as a rising stock price.
Not every company pays a hefty dividend. In fact, many fast-growing companies prefer
to reinvest their cash rather than pay a hefty dividend (Blue Dart is a classical
Example). Large, steadier companies are more likely to pay a dividend than are their
smaller, more volatile counterparts.
The most common measure for stocks is the price to earnings ratio, known as the
P/E. This measure, available in stock tables, takes the share price and divides
it by a company's annual net income. So a stock trading for Rs20 and boasting annual
net income of Rs 2 a share would have a price/earnings ratio, or P/E, of 10. Market
experts disagree about what constitutes a cheap or expensive stock. Historically,
stocks have averaged a P/E in the 14-15, though in recent years, the market P/E
has been higher, often nearer to 20. As a general rule of thumb, stocks with P/Es
higher than the broader market P/E (Sensex/ Nifty) are considered expensive, while
stocks with a below-market P/E are considered cheaper.
But P/E’s aren't a perfect measure. A company that is small and growing fast may
have a very high P/E, because it may earn little but has a high stock price. If
the company can maintain a strong growth rate & rapidly increase its earnings, a
stock that looks expensive on a P/E basis can quickly seem like a bargain. Conversely,
a company may have a low P/E because its stock has been beaten in anticipation of
poor future earnings. Thus, what looks like a "cheap" stock may be cheap because
most people have decided that it's a bad investment. Such a temptingly low P/E related
to a bad company is called a "value trap."
Other popular measures include the dividend yield, price-to-book and, sometimes,
price-to-sales. These are simple ratios that examine the stock price against the
second figure, and these measures can also be easily found by studying stock tables.
Investors seeking better value seek out stocks paying higher yields than the overall
market, but that's just one consideration for an investor when deciding whether
or not to purchase a stock.
Picking stocks is much like evaluating any business or company you might consider
buying. After all, when you buy a stock, you're essentially purchasing a stake in
After you have spot a stock now let’s discuss how to Buy a Stock
Investors buy and trade stock through brokers.
You can set up an account by filling KYC Form & depositing margin in the form of
cash/ stocks in a brokerage account. You can trade online or off line by calling
brokerage dealing room on the phone. . The broker executes the trade on the behalf.
In turn, he or she earns a commission, normally several cents per share. If you
prefer buying and selling stocks online broker will provide you with necessary software,
logging ID & Password.
After selecting the stocks that you want to purchase, you can either make a "market
order" or a "limit order." A market order is one in which you request a stock purchase
at the prevailing market price. A limit order is when you request to buy a stock
at a limited price. For example, if you want to buy stock in ABC at Rs 60 a share,
and the stock is currently trading at Rs 63, then the broker would wait to acquire
the shares until the price meets your limit.
While purchasing stocks through a broker has its advantages, there are other ways
to buy stock. You can purchase stocks directly through the company via Initial Public
Issue (IPO) or via Follow up Public Issue (FPO).
TRADERS FAIL BECAUSE OF INADEQUATE TRADING SYSTEMS.
Traders fail, regardless of age, race, gender or nationality due to inability to
accept failure along the way as a constant companion in our everyday lives & learning
Lets discuss the work of the late, great Dr. W. Edward Deming, who is the father
of Total Quality Management, commonly known as TQM. His story is quite interesting,
and it actually has a lot to do with how to trade well.
Since American industry spurned many of Dr. Deming ideas, he went to Japan shortly
after World War II to help with early planning for the 1951 Japanese Census. Deming’s
expertise and his involvement in Japanese society, is largely responsible for why
so many high quality consumer products come from Japan even to this day. In turn,
Japanese society holds Dr. W. Edward Deming in the highest regard. Deming’s portrait
hangs in the lobby at Toyota headquarters to this day, and it’s actually larger
than the picture of Toyota’s founder.
So why do people fail? According to Deming, it’s not
because people don’t try hard enough or don’t want to succeed.
People fail because they use inadequate systems. In other words, when traders fail,
it’s primarily because they follow faulty trading systems—or they follow no system
So what is the right system to follow as a trader? To answer this question, we offer
you what the trader who broke the all-time real-money profit record in the 1984
United States Trading Championship offered. He revealed that a successful trader
needs 5 essentials:
- A Method
You must have a definable method which should be thought out to the extent that
if someone asks how you make decisions to trade, you can quickly & easily explain.
Even more important, if the same question is asked again in 6 months, your answer
will be the same. This is not to say that the method cannot be altered or improved;
it must, however, be developed as a totality before it is implemented.
- The Discipline to Follow Your Method
‘Discipline to follow the method’ is so widely understood that it almost sounds
like a cliché. Nevertheless, it is such an important cliché that it cannot be ignored.
Without discipline, you really have no method in the first place. And this is precisely
why many consistently successful traders have military experience—the epitome of
It takes experience to succeed. Many advocate “paper trading” as a learning tool.
Paper trading is useful for testing methodologies, but it has no real value in learning
about trading. In fact, it can be detrimental, because it imbibes the novice with
a false sense of security. “Knowing” that he has successfully paper-traded during
the past six months, the novice believes that the next six months trading with real
money will be no different. In fact, nothing could be farther from the truth. Why?
Because the markets are not merely an intellectual exercise, they are an emotional
one as well. Think about it, just because you are mechanically inclined and like
to drive fast doesn’t mean you have the necessary skills to drive F 1 car.
- The Mental Fortitude to Accept that Losses Are Part of the Game
The biggest obstacle is failing to recognize that losses are part of the game, and,
further, that they must be accommodated. The perfect trading system that allows
for only gains does not exist. Expecting, or even hoping for, perfection is a guarantee
of failure. Trading is akin to batting in cricket. A player scoring 50 is good.
A player hitting 100 is great. But even the great player fails to hit 50 half of
the time. Remember, you don’t have to be perfect to win in the markets. Practically
speaking, this is why you also need an objective money management system.
- The Mental Fortitude to Accept Huge Gains
To win the game, make sure that you understand why you’re in it. The big moves in
markets come only a couple of time in a year. Those are the ones that will pay you
for all the work, fear, sweat and aggravation of the previous 11 months or even
11 years. Don’t miss them for reasons other than those required by your objectively
defined method. Don’t let yourself unconsciously define your normal range of profit
and loss. If you do, when the big trade finally comes along, you will lack the self-esteem
to take all it promises. By doing so, you abandon both method and discipline.
HOW TO HANDLE FALLING STOCK PRICES
Lets approach how to handle a tumbling stock price. Should you cut your losses,
buy more or sit on your hands nervously & do nothing? There are some techniques
to help you with your thinking, emotions & help to arrive at a conclusion.
Unfortunately, there is no never-fail formulas. There are, however, some basic principles
that we can look to for guidance.
First of all, you should be looking to sell (or not buy) shares that look expensive
& aiming to buy shares that look cheap. The direction in which a share price has
recently travelled is not in itself an indicator of this.
When to hold
You should always maintain a sensibly diversified portfolio so that your fortunes
are not too closely tied to a few holdings.
If a share falls & you keep adding large chunks, then it might end up accounting
for too much of your portfolio. That's not a happy situation even if you think it's
the cheapest share on the market. Do not average a falling stock. It's worth noting
that all of this has just as much relevance if a stock in your portfolio has gone
up in price, or even if it hasn't moved at all. What matters is the relationship
between the price & the underlying value, subject to diversification. Putting this
all together, we can get an idea of what to do in certain situations.
If a share has fallen by, say, 20%, but you estimate that its underlying value has
fallen by less, or grown, then it makes more sense to at least consider buying more
(subject to keeping sensibly diversified).
Time to sell
If a share has fallen by a certain amount but you estimate that its underlying value
has fallen by more, then you certainly shouldn't be buying more. That would just
compound the original mistake. Instead, you'd want to face up to the mistake & think
If a share has fallen & you estimate that its underlying value has fallen by a similar
amount, then you'd sit on your hands & do nothing.
To avoid too much expensive trading, this should probably be your starting point.
To either buy more or sell, your views should be very strongly held.
It can sometimes help to imagine that you don't actually own your downtrodden shareholding,
but instead have its value in cash. If that was the case, would you use the cash
to buy those shares at the current price or invest in something else?
If you find you get a definite no, then it might be time to sell. If you get a definite
yes, then you'd think of buying more.
If you get a maybe, then you're probably in the area where the transaction & tax
costs of taking any action would outweigh any potential benefits. In this case,
it's usually best to sit on your hands & hold on to your shares.
It's never easy to deal with a falling share price & there are no clear-cut rules
to follow. But this approach, used advisedly, can be a useful way of addressing
the issue. We hope it helps.
GOLDEN RULES FOR BURNING MONEY
Here we explain the classic investment mistakes that, you should avoid at all costs,
to become a successful investor. Investing successfully poses many challenges. Here
we explain some of the methods that can help you to rise to avoid these mistakes
but first, a mention of a tool 'invert, always invert', from mathematician Carl
Jacobi. This tool ask you to Instead of looking at how to make money, we're going
to look at great ways to burn it. That way you can aim to minimise your
mistakes-a vital part of investing successfully.
So here are, classic investment mistakes guaranteed to ensure pathetic performance.
- Trade fast
Charlie Munger, Warren Buffett's business partner, often refers to the huge mathematical
advantages of 'doing nothing' to your portfolio. Someone who 'turns over' (buys
& sells) all the stocks in their portfolio several times a year is at least a few
percent behind , even with internet brokerage rates as low as 0.3%.
There's also an important, but less measurable, benefit to taking a longer-term
approach. It makes you think long & hard about which stocks to include in your portfolio.
When you are considering buying a stock for 5 years or more, you tend to pick quality
businesses. & that can only be a good thing.
So, if your intention is to lose money, trade fast.
- Follow the mainstream media
Most people aren't resistant to popular views aired in the media. Charlie Munger
refers to a condition known as 'incentive-caused bias' & it explains the functioning
of media quite nicely. There's a widely held belief, & it may be correct, although
declining newspaper circulations suggest otherwise, that emotional, confrontational,
dramatic coverage sells more papers than rational, factual reporting. Hence the
tendency to induce panic in investors when calmness would better serve their interests.
But incentive-caused bias doesn't just affect the media. Just look at how honest
managing directors can first convince themselves, then their board, then their shareholders,
how an offshore acquisition or hostile takeover will be great for everyone, especially
themselves. Generous options packages offer a fitting explanation for many examples
of corporate foolishness.
To lose money, avert your eyes from a factual assessment of a situation & bury yourself
in the opinions & arguments of those with a vested interest in convincing you of
the veracity of their own opinion.
- Follow 'hot stocks or sector' There is a human condition known as 'social
proof'. The evolution of the human, & sheep, was greatly assisted by a tendency
to follow the crowd-safety in numbers & all that. In the mania of the dot com boom,
millions of investor with the fear of standing apart from the crowd, played a huge
role in fuelling the mania. Following the stock market crowd can be a costly mistake.
As Buffett says, 'you pay a very high price in the stock market for a cheery consensus.'
That's why you should be excited when others are depressed & fearful when others
If you're intent on seeing your net worth dwindle, follow hot stocks & sectors.
- Beat yourself up over lost opportunities
In an imperfect activity like investing, mistakes are absolutely inevitable. But,
odd as it may sound, sometimes even when you're right, you're wrong. To call tech
stocks overvalued in late ninties was undoubtedly correct. But for the next few
months, as speculators pushed prices higher still, it sure didn't feel correct.
It's a fact of life that someone will always be getting rich a little quicker than
you are. But then again, they may become poor just as quickly by adopting the same
If you take the conservative decision not to invest in a stock, & it goes up anyway,
don't crib. Just be patient-other opportunities are often just around the corner.
But if you are interested in blowing your capital, now's a good time to capitulate
& buy at these higher prices.
- Buy cyclical stocks at the top There is a natural human tendency to extrapolate
recent events. So when a cyclical stock like a steel company or property developer
has a few tough years, investors tend to make the assumption that the bad times
will last indefinitely. This can sometimes offer good opportunities for the canny
investor, as it was seen in Tata Steel & TELCO.
In the same way, when these stocks show a few years of good results, thanks, for
example, to strong Chinese metal demand, a booming property market or some other
factor, the market tends to extrapolate the good times. It's the same mistake made
at different ends of the cycle. Just at the peak of a cycle, investors can confuse
a cyclical stock with a growth stock & bid the shares up, perhaps to a very high
PE Ratio. But when earnings are at a peak, that's exactly when cyclical stocks should
be selling on a low PE Ratio. When earnings fall, as they inevitably do with a cyclical
downturn, the shares come crashing down. Farmers-who are used to the feast/famine
cycle of a life on the land-seem less susceptible to this folly than most.
- Follow overly acquisitive management
More companies are ruined by bad management than by bad economies. We'd most definitely
agree. Overly acquisitive managements-those hell-bent on growth, seemingly at any
cost, are especially prone to getting into trouble. Acquisitions often involve large
amounts of debt which thereby increase risk. As interest rates rise, for example,
a growing portion of cash flow has to be diverted to service debt rather than deployed
in the business or paid out as dividends. Secondly, acquisitive managements, often
suffering from delusions of grandeur, can overstretch themselves. And finally, acquisitions
tend to cloud the company's financial accounts. This can fool bankers & shareholders
for a while but by the time the gravity of a tough situation comes to light, it's
too late. Backing such management is almost bound to help lighten your purse.
- Invest in rapidly expanding financial institutions
Depending on the riskiness of the borrower, a financial institution might make a
'spread' or 'margin' on loans of anything from 1-5% per annum. But when a loan goes
bad, it can lose 100%. It's a risk that must be managed very, very carefully. Warren
Buffett once remarked that a bad bank manger can flush all your equity down the
toilet in your lunch hour. Watching accounting ratios won't always save you either.
In banking, growth can actually be used to hide bad loans temporarily (as, perhaps,
we are about to see). A bank that is experiencing a high rate of loan delinquencies
can easily halve that rate temporarily by writing new loans & doubling the size
of its loan book-after all, a new loan takes time before it can go bad. But hastily
made new loans are likely to be of poorer quality than existing ones.
If you want to burn money, put it on fast-growing financial institutions.
- Work to the 'greater fool' theory ( Financial Music Chair) >
Some investors seem happy to buy expensive stocks, knowing full well they're overvalued,
because they feel confident that someone else will come along & pay an even higher
price. That's what happened in the dot com boom & it's what seems to be happening
in the current commodity boom. It's financial musical chairs for suckers & is likely
to end up costing many investors a bundle.
- Buy 'Chest Beaters' companies rather than 'doer' companies
'Chest Beaters' companies are those that are going to do this & that. Such unproven
companies, & their attendant management teams, are a great way to lose capital.
But even well-established companies can be 'Chest Beaters' companies. Management
will explain away the poor performance of the last few years & concentrate on what
it will do in the future. Chances are it will be putting on a similar show a few
years down the track. While those sticking with proven companies & managements should
do well, if you're aiming to lose money, buy 'Chest Beaters' companies.
PHASES OF A TRADER’S EDUCATION: PSYCHOLOGY, MONEY MANAGEMENT, METHOD
Aspiring traders typically go through three phases in this order:
- Methodology—The first phase is that all-too-familiar quest for unearthing
- a trading system that never fails. After spending thousands of bucks on books,
seminars and trading systems, the aspiring trader eventually realizes that no such
- Money Management—So, after getting frustrated with wasting time and money,
the up-and-coming trader begins to understand the need for money management, risking
only a small percentage of a portfolio on a given trade versus too large a bet.
- Psychology—The third phase is realizing how important psychology is—not only
personal psychology but also the psychology of crowds.
But it would be better to go through these phases in the opposite direction. Aspiring
traders should begin their journey at phase three and work backward.
The first step in becoming a consistently successful trader is to understand
how psychology plays out in your own make-up and in the way the crowd reacts to
changes in the markets. The reason for this is that a trader must realize that once
he makes a trade, logic no longer applies as emotions of fear & greed take
precedence—fear of losing money and greed for more money.
Once the aspiring trader understands this psychology, it’s easier to understand
why it’s important to have a defined investment methodology and, more importantly,
the discipline to follow it. New traders must realize that once they join a crowd,
they lose their individuality. Worse yet, crowd psychology impairs their
judgment, because crowds are wrong more often than not, typically selling at market
bottoms and buying at market tops.
Moving onto Step two, after the aspiring trader understands a bit of psychology,
he or she can focus on money management. Money management is an important subject
and deserves much more than just a few sentences. Even so, there are two issues
that are critical to grasp: (1) risk in terms of individual trades and (2) risk
as a percentage of account size.
When sizing up a trading opportunity, the rule-of-thumb I go by is 3:1. That is,
if risk on a given trading opportunity is Rs 5000, then the profit objective for
that trade should equal Rs 15000, or more. With regard to risk as a percentage of
account size, you can follow the same guidelines that many professional money managers
use—1%-3% of the account per position. If your trading account is Rs 100,000, then
you should risk no more than Rs 3,000 on a single position. Following this guideline
not only helps to contain losses if one’s trade decision is incorrect, but it also
insures longevity. It’s one thing to have a winning quarter; the real trick is to
have a winning quarter next year and the year after.
When aspiring traders grasp the importance of psychology and money management, they
should then move to step three—determining their methodology, a defined and
unwavering way of examining price action. A very common method of determining price
action is via technical analysis ( Wave Principle/ Candlestick charts/ Dow Theory,
cycles). Whatever you choose to use, it should be simple. In fact, it should be
simple enough to put on the back of a business card, because, like an appliance,
the fewer parts it has, the less likely it is to break down.
The price-to-earnings ratio (PER), is an important concept to understand to value
a company. Doing so will help you get more from your investments.
PER is exactly what its name suggests: a ratio of the price of a stock to the earnings
it makes. A simple analogy is rental property. If you own a property worth Rs 2,00,000
and it earns Rs 10,000 a year in rent, the rental yield is 5% (Rs 10,000 divided
by Rs 2,00,000). This calculation for yield divides rent (the E) by the value of
the property (the P).
If we take the opposite, that is P divided by E, we get a multiple of 20 times (Rs
2,00,000 divided by Rs 10,000). Thus, the PER is the opposite of the rental yield.
If the same property had a rental income of Rs 15,000, the rental yield would be
7.5% and the PER would be 13.
Market expectations You can use the PER to compare different
investments. For example, if property A yields 5% (PER of 20) & property B yields
7.5% (PER of 13) then property B is cheaper, everything else being equal. But if
the rent on property A was likely to grow more quickly than the rent on property
B, then everything else would not be equal. In this case, property A might be better
value despite its higher PER. It all depends, of course, on how quickly the rent
is going to grow
Turning to companies, we can compare the PERs of CDE (currently 22) and WXY
(currently 24) to see which is cheaper on the face of it (CDE), and from which,
therefore, the market is expecting more growth (WXY). . From the formula, it’s easy
to identify the two components of the PER, the ‘price’ or ‘P’ & ‘earnings’ or ‘E’.
This is where things start to get a little complicated, because there are as many
different ways of calculating a PER as there are different ways of calculating earnings.
We can start by defining a basic PER—the one you’re most likely to see in a newspaper—as
the current share price (P) divided by last year’s reported earnings per share (E).
(Earnings per share being the net profit after tax divided by the number of shares
on issue.) We call this a basic PER.
A common variation to this ratio is the ‘adjusted’ or ‘normalized’ PER. It adjusts
the E to take account of one-off profits & losses (such as ‘abnormal other income’
and ‘write downs’). This is done to try and produce a figure for E which is a more
accurate estimate of a company’s sustainable level of profit.
ABC CORPORATION- PER CALCULATION
PAT (Rs 000)
PAT on Sale of Property
No of Equity (000)
Equity Price (Rs)
A recent example is ABC Corporation’s reported net profit of Rs 1.58 Cr.
This figure included a net profit of Rs 025 Cr from the sale of a company’s property
(one time affair). An adjusted PER would subtract this to get an adjusted net profit
of Rs 1.33 Cr, which can then be divided by the number of shares to get a figure
for adjusted earnings per share of 20 paise. You can then divide the share price
by this number to give the adjusted PER. As you can see from the table, at today’s
share price of RS 3.60, these adjustments shift ABC’s PER up from 15.2 to 18.
The PER you read in the newspaper is often unadjusted, and it should always be treated
with caution. In fact, anything you read in the newspaper should be considered a
guide not a exact figure. If you see a PER that seems unusually low, don’t just
assume that the company is cheap: it may be calculated on profits which are unlikely
to recur in future periods. But you might have discovered a stock worthy of further
Forecasting the future
The other main variation is the ‘forward’ or ‘prospective’ PER. This is a PER based
on a future estimate of earnings. For example, a ‘one-year forward PER’ would use
the current share price as P and an estimate of earnings per share for the 2011
You can see this forward PER in action in various research reports. These reports
may show three or four years of previous financials (marked A for actual) and an
estimate for the current financial year (marked as E for estimate) as well as future
2-3 years. We invest in a company to participate in its future earnings, so the
future PER is very relevant. But it’s worth remembering that forecasting company
earnings is a bit like forecasting the weather—you can get it right as often as
you like, but it’s the times you get it wrong that you really notice.
So the first rule is to be aware of what kind of PER you’re dealing with—historic
basic PER, adjusted PER or forward PER. The three often tell very different stories.
The other important thing to recognise is that the PER is just a guide to value,
not a valuation in itself. Just as you wouldn’t expect to get the whole story by
reading only one chapter of a book, don’t expect too much from the PER.
f you think a low PER means 'cheap' and a high one means 'expensive', be careful.
It ain't always so. From the beginning of our investing lives, we’re taught
that a low PER means a stock is cheap, while a high PER means it’s expensive. Indeed
this is a deeply held general belief.
But there are many areas where deceptively low PERs can spell trouble for unwary
investors. We’ll look at several sectors that are particularly prone to these low
PER ‘value traps’. Accounting standards should ensure a company’s profit reflects
economic reality, right? Well, in some case nothing could be further from the truth.
Some companies revalue its investments every year to fair value, taking the change
to the income statement which can make for some extraordinary results.
This is like you, as a home owner, reporting the change in value of your house in
your tax return each year, even though you haven’t actually received or paid out
any money in respect of it. So, if your salary in 2004 was Rs 100,000, and you reckoned
your house had risen in value by Rs 100,000, then you would have reported taxable
income of Rs 200,000, even though the only cash you received was your salary. But
in 2005, if your salary stayed the same but your house fell in value by Rs 150,000,
then you’d have actually reported a loss.
So what should you use instead? As is so often the case, the trick is to focus on
the cash flow. Using net operating cash flow, for example, generates far less impressive
By now, we hope you’re getting the idea: it’s important to understand just what
drives a business’s reported revenue and profit. Cyclical businesses, whether they
be heavy industrials like TATA Steel are type of company where the PER must be used
with extreme care. These businesses tend to have high profits, and therefore low
PERs, just when conditions are at their most buoyant. In these cases, the PER is
often at its lowest point at the time a stock is most overvalued.
So, as you can see, there are plenty of cases where the PER is potentially very
misleading. You need to think about the underlying business, and where the profits
are coming from, to ensure you avoid these traps.
20 FORGOTTEN LESSONS OF 2008 BY SETH KLARMAN
Investing great Seth Klarman* describes 20 lessons, from the (2008) financial crisis
in excerpt from his annual letter, "were either never learned or else were immediately
forgotten by most market participants."
One might have expected that the near-death experience of most investors in 2008
would generate valuable lessons for the future. Memories of tough times of Great
Depression affected investor’s behavior for more than a generation, leading to limited
risk taking & a sustainable base for healthy growth. Yet one year after the 2008
collapse, investors have returned to shockingly speculative behavior.
Below, we highlight the lessons that we believe could & should have been learned
from the turmoil of 2008. Some of them are unique to the 2008 melt- down; others,
which could have been drawn from general market observation over the past several
decades, were certainly reinforced in 2008. Shockingly, all of these lessons were
immediately forgotten by most market participants.
20 INVESTMENT LESSONS OF 2008
- Things that have never happened before are bound to occur with some regularity.
You must always be prepared for the unexpected, including sudden, sharp downward
swings in markets & the economy. Whatever adverse scenario you can contemplate,
reality can be far worse.
- When excesses such as lax lending standards
become widespread & persist for some time, people are drawn into a false sense of
security, creating a very dangerous situation. In some cases, excesses migrate beyond
borders, raising the ante for investors & governments. These excesses will eventually
end, triggering a crisis. Correlations between asset classes may be surprisingly
high when leverage rapidly unwinds.
- Nowhere does it say that investors should
strive to make every last dollar of potential profit; consideration of risk
must never take a backseat. Conservative positioning entering a crisis is crucial:
it enables one to maintain long-term oriented, clear thinking, and to focus on new
opportunities while others are distracted or even forced to sell. Portfolio hedges
must be in place before a crisis hits. One cannot reliably or affordably increase
or replace hedges that are rolling off during a financial crisis.
- Risk is not inherent in an investment; it is always relative to the price paid.
Uncertainty is not the same as risk. Indeed, when great uncertainty – such as in
the fall of 2008 – drives securities prices to especially low levels, they often
become less risky investments.
- Do not trust financial market risk models.
Reality is always too complex to be accurately modeled. Attention to risk must be
a 24/7/365 obsession, with people – not computers – assessing & reassessing the
risk environment in real time. Despite the predilection the financial markets using
sophisticated mathematics, the markets are governed by behavioral science, not physical
- Do not accept principal risk while investing short-term cash:
the greedy effort to earn a few extra basis points of yield inevitably leads to
the incurrence of greater risk, which increases the likelihood of losses & severe
illiquidity at precisely the moment when cash is needed to cover expenses.
The latest trade of a security creates a dangerous illusion that its market price
approximates its true value. This mirage is especially dangerous during periods
of market exuberance & should always be considered with skepticism.
- A broad
& flexible investment approach is essential during a crisis. Opportunities can
be vast, ephemeral, & dispersed through various sectors & markets. Rigid views can
be an enormous disadvantage at such times.
- You must buy on the way down.
There is far more volume on the way down than on the way back up, & far less competition
among buyers. It is almost always better to be too early than too late, but you
must be prepared for price markdowns on what you buy.
- Financial innovation
can be highly dangerous, though almost no one will tell you this. New financial
products are typically created for sunny days & are almost never stress-tested for
- Ratings agencies are highly conflicted, unimaginative dupes. They are blissfully
unaware of adverse selection & moral hazard. Investors should never trust them.
Be sure that you are well compensated for illiquidity – especially illiquidity
without control – because it can create particularly high opportunity costs.
At equal returns, public investments are generally superior to private investments
not only because they are more liquid but also because amidst distress, public markets
are more likely than private ones to offer attractive opportunities to average down.
Beware leverage in all its forms. Borrowers must always remember that capital
markets can be extremely fickle, & that it is never safe to assume a maturing loan
can be rolled over. Even if you are unleveraged, the leverage employed by others
can drive dramatic price & valuation swings; sudden unavailability of leverage in
the economy may trigger an economic downturn.
- Many leveraged buyout (LBOs)
are man-made disasters. When the price paid is excessive, the equity portion
of an LBO is really an out-of-the-money call option.
- Financial stocks are particularly risky. Banking, in particular, is a highly
lever- aged, extremely competitive, & challenging business. A major European bank
recently announced the goal of achieving a 20% return on equity (ROE). What the
bank will do if it cannot get to 20%? Leverage up? Hold riskier assets? Ignore the
risk? For a major financial institution to have a ROE goal is to court disaster.
Having clients with a long-term orientation is crucial & important for an
- When a government official says a problem has been "contained,"
pay no attention.
- The government cannot with- stand much pain in the
economy or the financial markets. Bailouts & rescues are likely to occur. The
government will take enormous risks in such interventions, especially if the expenses
can be conveniently deferred to the future.
- Almost no one will accept responsibility for his role in precipitating a crisis:
not leveraged speculators, not willfully blind leaders of financial institutions,
and certainly not regulators, government officials, ratings agencies or politicians.
To effectively implement investment lessons requires a disciplined, often contrary,
and long-term-oriented investment approach. It requires a resolute focus on risk
aversion rather than maximizing immediate returns, as well as an understanding of
history, a sense of financial market cycles, and, at times, extraordinary patience.
* Seth Klarman is a leading value investor & President
of The Baupost Group, a Boston (USA)-based private investment partnership which
manages over $7bn in assets on behalf of private families and institutions. Founded
in 1983, the firm has achieved investment returns of 20% compounded annually. The
firm invests in equities, debt, private equity and real estate. Mr. Klarman is notable
for his willingness to hold significant amounts of cash in his investment portfolios,
sometimes in excess of 50% of the total. In 1991, Mr, Klarman authored Margin of
Safety, Risk Averse Investing Strategies for the Thoughtful Investor, which since
has become a value investing classic (Now out of print). Before founding Baupost,
Mr. Klarman previously worked for Max Heine and Michael Price of Mutual Shares.
He is a graduate of Cornell University & Harvard Business School.
LEARN TO LOVE STOCK MARKET FALLS
Since most investor are net buyers of stocks throughout their lives, which means
that market falls should be welcomed rather than an opportunity to shed tear. You
could be forgiven for thinking that there had been some major crisis in the stock
market as there's been talk of crashes, collapses & crunches by well-known analyst/
The truth is that fear & panic get people's attention & the media is well aware
of it. But it's at times like this that investors need to stand back from the crowd
& make a cold assessment of what's going on. No doubt some companies are affected
by such prediction, but some have, &/or will generate enough earnings they need
for their future investing plans & have little to fear from a crisis, which might
in fact help them take market share from competitors. Yet these companies have been
getting cheaper along with everything else & we've been licking our lips.
Canny investor welcome bigger falls as investing opportunities.
If all things being equal, you'll do better from stocks if you buy them cheaply.
But what people forget is that for most of their lives, they're net buyers, or at
least holders, of stocks. & the ideal situation is to reach retirement with enough
in your DEMAT account that you never have to become a net seller. So for most people,
for most of their lives, stock market falls are good things.
Price & value
The crucial point to understand is that the price of a stock & its value are two
different things. The market sets the former & we try to estimate the latter. To
make our life easier, avoid poorly managed, debt-laden or cyclical businesses where
predictability is poor, & we look for a margin of safety to protect us against an
error of judgment – the more uncertain we are about a company's value, the greater
the margin of safety we require.
Most of the time, price is pretty close to value. But sometimes it gets out of bound,
& occasionally gives us a decent margin of safety. It's these situations that present
the greatest opportunities for canny investors & the greatest dangers for those
who succumb to understandable but irrational mood swings. Preparedness makes all
Imagine you're researching a company, XYZ, which operates in a predictable industry,
has decent management & pays no dividends. It reinvests all its profits, meaning
that returns are entirely in the form of capital growth. You've done the work, &
are as comfortable as you can be that XYZ will grow earnings per share (EPS) at
10% per year, from the current level of Rs 1.00, with very little chance of variability.
Deeming XYZ have all the right stuff, you buy the stock for Rs 15 – a price-to-earnings
ratio of 15. If your estimate of earnings growth is accurate, then EPS will grow
from Rs1 to Rs 2.59 over the next decade. If the market is still happy to pay a
PE of 15 at that point, then the stock will trade at around Rs 39 & you'll have
achieved an annual return of 10%, in line with the earnings growth.
The stock market & future is always uncertain
Of course, the stock might trade lower in a pessimistic market after 10 year, giving
you a lower annual return (but an underpriced stock that's likely to do well in
future years). Alternatively, it might trade higher, giving you a larger annual
return (but an overpriced stock that you might choose to sell).
What happens in the stock market over the next week, month or year doesn't make
a lick of difference as to how the market will view XYZ in ten years' time.
So let's say that shortly after purchasing ABC for Rs15, the market tanks & XYZ
is down to Rs 8 - a 'loss' of almost 50%. The emotional investor gets the chance
to do some real & permanent damage here. Avoid this at all cost.
Assuming that XYZ is still as likely as ever to grow its EPS at 10% per year & after
10 years clock EPS of Rs 2.59 & a stock price of Rs 38.85, your forecast of its
future is unchanged, & your expected return from yesterday's investment is unchanged
at 10% per year. You won't get that return if you sell out now. But if you do nothing
but hold, your eventual wealth will be just as great as if the share price followed
a straight line from Rs15 to RS 39 over the course of a decade.
But wait there's more If you have some spare cash, though, you can actually
improve your position, by going against the crowd & buying more shares in XYZ at
Rs 8. At that price, your additional investment will compound at 17% per year until
the shares trade at RTs 39 after 10 years, pulling up your average return. So the
market tumble has actually provided an opportunity.
Of course, the real world isn't so easy. Market crashes can hurt the economy, affecting
company profits in the short & medium term. & the ten year value of XYZ will swing
based on both the mood of the markets then, & the company's growth in the intervening
years. But that's the case regardless of whether stocks are cheap or expensive today.
Which brings us back to the fact that the less we pay for our stocks, the greater
the bargains they’ll prove to be?
So remember that when the market takes a tumble, it's just changing the price that
it's setting for stocks. The value of those stocks, all things being equal, will
remain the same. You don't have to sell your stocks, but you can choose to buy,
if you have the spare cash & have done proper research & can find something undervalued.
Viewed like this, market crashes won't do any harm to long-term investors, but actually
offer you the chance to compound your money at a greater rate.
There are great chances to risk losing money once we start spending too much time
worrying about missed opportunities. A process of reflection is important, but more
attention should be focused on mistaken purchases rather than regretted non-purchases.
Mistakes are costly facts. Missed opportunities, however, are winners you've selected
after the fact which have come from a pool of potential investments that also included
many also-rans and disasters avoided.
There might be a useful analogy in a book called Unweaving the Rainbow, by Richard
Dawkins. He talks about the strategies available to an animal with high metabolism,
such as a small bird, which needs to find food 'alarmingly often in order to stay
alive'. He asks us to imagine that bird 'cruising around a wood, looking for prey.
It is surrounded by twigs, a very few of which might be edible (well camouflaged)
caterpillars.' The bird could successfully distinguish between twigs and caterpillars
'if it approached the twig really close and subjected it to a minute, concentrated
examination in good light.'
Survival of the most efficient: So what strategy would that bird employ to keep
its tummy full? Dawkins says that the bird cannot scan each twig with the 'equivalent
of a magnifying glass' or else it would starve before locating its first caterpillar.
'Efficient searching demands a faster, more cursory
and rapid scanning' even though this process inevitably means missing many caterpillars.
The bird has to find the right balance: 'too cursory and it will never find anything.
Too detailed and it will detect every caterpillar it looks at, but it will look
at too few, and starve.'
Do you see the parallel for investors? If you substitute 'investor' for the small
bird; 'successful stock market purchase' for a caterpillar; 'poor investment' for
wasting time on a twig; and 'maximizing returns' in place of maximizing calories,
then the analogy explains my suspicion quite effectively. To the extent that this
analogy is accurate, optimal investment returns will come from a strategy that leaves
plenty of tasty opportunities untouched. There's just no point complaining over
missed caterpillars, or stock market opportunities. Dawkins explains that the 'parts
of our brains responsible for doing intuitive statistics are still back in the stone
age'. Apparently, in most situations humans display a tendency towards making more
false positive errors (also called 'type 1' errors, like buying a stock that turns
out to be a dud) than false negative errors (such 'type 2' errors such as missing
a good opportunity). And when hindsight bias causes us to regret the latter form
of error, it further encourages more of the former type that we're already predisposed
to. In other words, fear of missing out on the next TCS may lead an investor towards
the next Austral Coke.
Dawkins' theory theory explains why humans have evolved this way.
But for us, the key lesson is that successful investors have inevitably found a
way to recalibrate this bias. They are, almost to a rule, more concerned with avoiding
mistakes than they are with grasping every opportunity that comes their way. Some
investors even actively embrace missed opportunities, finding it the most effective
way to reduce false positive ones (poor purchases). For example, we don't at all
regret missing the run up in Tata Steel's share price from under RS 150 to more
than Rs 500 in just less than a year – not because we dislike making money but because
we feel it could too easily have gone the other way (as the share price has more
Results are driven by what you actually do, rather than what you don't do. If you're
only interested in the biggest, juiciest, most certain caterpillars, then missing
others isn't a cause for concern. So don't unduly stress over missed opportunities,
just go out and try to spot more. But then take a much closer look before you bite.
SIGNS YOUR STOCK WILL DOUBLE
Everyone loves the idea of buying stocks that double in price in 3-5 years timeframe.
Here we discuss how to spot them.
Where do you look to find stocks with a reasonable chance of doubling over a reasonable
period? Having pondered over this issue for a long time, some common themes have
emerged. We think they offer some good pointers to individual stock picking and
our general approach to investment.
- Out of favour. This is value investor's most financially rewarding situation—a
stock that's out of favour &, with any luck, even hated. Many of most lucrative
investments have risen from the depths of despair. Take Satyam for example, which
dropped like a dead cat to less than Rs 30. Its woes included a change of Management,
CEO and an inquiry into its financial bungling etc. All these events pushed the
price down markedly, but it recovered as Tech Mahindra steps in. Please remember
such events in the past in Global Trust Bank resulted in complete evaporation of
OWNER MANAGER EFFECT
- Hidden progress. Often a business's progress will take some time before revealing
itself in the financial statements. Yes Bank couldn't do a thing right for a while
initial phase but an astute understanding of the bank's lucrative business model
revealed it contained significant underlying growth.
- New technology. In certain industries companies can generate significant
cost savings by introducing new technology thereby improving operating margins.
Investment in R&D. The benefits of undertaking research and development and
investing in specialist skills can take years to manifest themselves. Best companies
to buy are those investing heavily in R&D today to provide the profits of the future
like SPARC & Piramal Life Sciences.
- Industry tailwinds. The emergence
of China and India as rapidly industrialising nations has added significantly to
world demand for oil, placing those with production capacity in a sweet spot. It
has benefited immensely metal & petroleum companies globally.
- Changes in
industry structure. In a similar vein, changes to an industry's structure or
the number of competitors can provide opportunities for the remaining businesses.
MICO never allowed any competitor manufacturing Diesel Valves in India to gain any
ground. They bought majority of their competitors & consolidated their position.
- Owner-managers. Most successful companies are run by business builders with
their own money. And then there are the company-men with long and successful track
records like Infosys, Larsen & Toubro, ITC. Time and again, the stocks which double
do so because the company has exceptional management.
- Insider buying. While a strong leader with a vested interest in performance
is a big positive, so is evidence that directors are buying the stock for their
own portfolios. In fact, it's such a strong signal that you should always look for.
Financial strength. Flimsy balance sheets indicate weakness and invite disaster.
Instead, the strong financial position of a company which operates in a very cyclical
industry, for example, allows it to withstand the pressure of lean years and prosper
in the fat ones.
- Unrecognised by the market. Finally, look for quality
companies that are simply un-recognised. With more than 6000 listed stocks, there
will always be opportunities for investors to discover rough diamonds thought to
be coal by others.
It's that simple. But it isn't really is it? Without genuinely independent thinking
and a thorough understanding of the facts as you see them, even finding appropriate
stocks is difficult, let alone having the courage to take advantage of opportunities
when they present themselves.
But that's what value investing is all about. Which is why the purpose of this article
is to help you uncover opportunities and to inculcate the kind of thinking that
will allow you to act with confidence when you find them. You have to be ruthless
about your own research & spend your time, but success is all the sweeter when your
homework uncovers one of these gems.
ATTENDING AGM IS PART OF YOUR RESEARCH
Favorite time of year, for many investor residing in Mumbai is Monsoon season which
is annual general meeting (AGM) season. If you’re new to investing, or looking to
become a little more proactive with your investments, here’s a quick rundown of
what it’s all about attending an AGM.
You’ve read the annual report but queries remain. Why not attend AGM?
AGM are usually the only opportunity each year to listen to, and question, the senior
management & directors of companies in which you own shares. They’re also very useful
for getting a feel for management of those companies you are considering investing
in. While the clichés often flow just as easily as in the annual report, you at
least get a chance to read their body language and guess if they’re confabulating.
Having your say
AGM also gives shareholders a chance to vote on important issues, like directors’
appointments and salaries, executive options packages, issue of Rights/Bonus shares
and Change in Auditors.
Not that you have to show up to have your say. You can vote via snail mail or by
appointing any other person as your proxy allowing him to vote as he pleases, or
instruct them on how you wish to vote on each issue. You can issue proxy in favor
of the current management if you are satisfied with them.
Assuming you want to turn up yourself, you’ll need to take along your credentials,
or simply identify yourself as a shareholder when registering outside the meeting.
Non-shareholders are normally not allowed to attend.
The formal part of the meeting usually includes a speech by the chairman and managing
director, giving a brief run-down of the last year’s performance and current operating
conditions. It’s a great opportunity to see who’s reading what the PR department
gave them, and who’s speaking with passion about a business they understand intimately.
At some of the better AGMs, opportunity is also given to divisional heads and second-tier
management to talk about other aspects of the business. This indicates an open and
trusting management style, as well as a desire to educate shareholders about the
Once the voting is over, often without so much as a modicum of resistance to management’s
plans, the floor is usually then thrown open to shareholders, allowing those who
normally couldn’t command management’s attention to have their say or ask a few
questions. It can be quite tedious when the proceedings are hijacked by special
interest groups or professional grumblers. And sometimes the repetition of questions
can get downright annoying. But it’s usually worth sticking around for a pearl of
wisdom or two, and it can also be revealing about the character of management, given
that answering questions can’t be done from a prompt.
Annual meeting time is your one chance to hold directors to account, and score some
free tea and Gift to boot. We suggest you make full use of the opportunity.
SETH KLARMAN COMMENTS ON MONEY MANAGEMENT & APPROACH
A speech was given by Seth Klarman at the Columbia Business School in 2006. Klarman's
hedge fund, the Baupost Group has done over 20% a year since he founded the firm
in 1983, with only one down year. This is one of the best speeches. Klarman discusses
his thoughts on the investment, why he doesn't go short & why he uses derivatives.
HOW BAUPOST INVESTS
- Rule #1: Don't lose money. Rule #2: Never forget Rule #1.
always looks for catalysts in its investments. If you find a stock trading for
50% of what you think it's worth, you want there to be something that will trigger
it to reach fair value.
- Baupost will always sell an investment as soon as it nears their estimate of
fair value. Baupost has analysts focused around the type of opportunity; Baupost
has a spinoff analyst, index fund deletion analyst, post bankruptcy analyst, distressed
debt analyst & an analyst looking at companies that are depressed because of a bad
- Baupost looks at every merger, rights offering, privatization of government
business, spinoff, major share repurchase Dutch auction tender, thrift conversion
or anything else that could cause mispricing.
- Post-bankruptcy situations are a good place to look for bargains because
people avoid them & don't understand them. A lot of good things can happen in bankruptcy
such as terminate overpriced contracts or leases, shed extraneous business units
or, deal with union problems or settle contingent liabilities; all under the protection
of bankruptcy court. Then all the debt holders have equity & they will want to sell.
- Baupost doesn't go short because, unlike going long when you can take advantage
of a drop in the value of an undervalued security by just buying more, if you're
short, even though you may be right that it's worth less than the trading price
you can still go broke. Its way more risky & you can lose to infinity. Think tech
stocks - if you shorted them in '97, '98 or even '99 you would have been killed.
It works for a while, and then the market goes berserk & you get killed.
- Baupost uses hedges to reduce risk. For example, they use derivatives to
hedge the interest rate risk in their real estate holdings.
- Baupost constantly reassess to find new information, if they've overlooked
something or if something has changed.
- Klarman said he would rather hold treasury bills than invest in many of the
hedge funds. If stocks do 10% & hedge fund charges 3% in fees, you've only got 7%
left, plus it's leveraged, holds illiquid securities, etc. He would prefer rather
get 4.5% risk free.
- Value investing is risk aversion.
BAUPOST'S 3 INVESTMENT PRINCIPLES:
- Focus on risk before return. This is why Baupost has so much cash (around
45%). If they could find undervalued investments, they would put all their money
to work tomorrow. If they had to they would have no problem holding 100% cash. People
fail to have sell discipline because they can't hold cash.
- Focus on absolute returns. Institutions focus on relative returns but Baupost
doesn't as Klarman can't imagine writing a letter to clients saying "we performed
well during the year, the market was down 25% & we were down only 20%"; also clients
will pull money out at the wrong time & it has a strong psychological effect.
- Only focus on bottom-up investing. He has views on the macro but doesn't
think he has an edge in that type of investing. Klarman said that it's really hard
to turn a macro idea into an investment.
Gamblers go to Casinos not to stock or commodity exchanges.
All unproven, spontaneous actions in trading are just like pure gambling. Any attempt
to trade without a system & analysis is exactly like a card game/ roulette. Games
are fun except when you are losing real money.
Never Invest without doing proper research & basic home
work as 90% of beginners fail because of lack of knowledge & discipline. Remaining
10% had been sharpening & shaping their skills throughout their trading life.
Go with the Trend. Trend is your friend. Trade with
the trend & you will maximize your chances to succeed. Trading against the trend
won't 'kill' a trader, but will definitely require more stress, nerves, & sharp
skills to reach trading goals.
Always Pay Attention to the Time Frame Higher than the One in which
you’ve Chosen to Trade.This gives the bigger picture of market movements
& helps to define the trend. For example, when trading in a 5 minute time frame,
pay attention to the 15 minute chart. When trading on an hourly basis, pay attention
to the daily & weekly price movements.
Never Risk More than 2-3% of your Total Trading Account.
One important difference between a successful & an unsuccessful trader is that the
first is able to survive under unfavorable conditions on the market, while an unsuccessful
trader will blow away his entire account after 5-10 consecutive unprofitable trades.
Manage Money Efficiently. Even with the same trading
system, two traders can get opposite results. The difference is in the money management
approach. To understand money management, you must understand that losing 50% of
your total account requires making 100% returns from the rest of your money just
to restore the original balance.
No Emotion, Trade Calmly. Don't try to compensate after
losing a trade. Don't be greedy by adding lots of positions when winning. Overreaction
blocks clear thinking & as a result will cloud judgment. Overtrading can shake your
money management & dramatically increase trading risks.
Choose the Time Frame that is Right for You. Choosing
wisely means that you are comfortable, and have enough time to analyze the market,
place & close orders. Some people can't wait a few hours for the price to make a
move, they like action. Alternatively, for others, 10-15 minutes is too little time
to make the right decision.
Not Trading or Standing on the side is Also a Position.
When in doubt - stay out & don't trade. Saving capital is a better choice than risking
& losing money.
'Keep it simple & stupid' - Applies to Indicators, Signals
& Trading Strategies. Too much information will create a controversial picture of
where to trade & when not to. To avoid lots of confusion, create a simple but working
method of trading.
Never Add Positions to a Losing Trade. Only Add Positions
When the Trade has proven to be Profitable. Don't allow a couple of losing trades
in a row to become a snowball of losing trades. When it is obviously not a good
day, turn the trading off. Often not trading for one day can help to break a chain
of consecutive losses. Overcompensating can often make things worse.
Let your Profits Run. Let your position stay open for
as long as the market wishes to reward you & for this, traders need a good exit
strategy; otherwise they risk losing all profits back. Running two or more open
trade’s gives an option to close some positions earlier & leave others open.
Cut your Losses Short. It's better to finish an unprofitable
trade quickly than wait for the situation to get worse. Don't put a stop loss too
far - it's your money at risk. Better calculate the best spot to enter when a potential
loss would be minimized.
Trade in Respect to their Active Market Hours. Learn
about overlapping market hours. When two markets like MCX & COMEX are operating
at the same time, the highest volume is conducted. This offer liquidity & volatility.
At these time trader can successfully trade.
Choose the Right Day to Trade. Some traders don’t trade
on Mondays, when the market has recently awakened & is taking first 'probation steps'
to form a new trend. They also avoid trading on Friday afternoons, during the huge
volume of closing trades. Some traders don’t trade during first 30 minutes.
A golden rule of trading:'Always trade what you see,
not what you would like to see.'
Always Ask for Someone Else's Advice about How & When to Trade:
In other words, choose to rely on live trading signals from successful traders,
make sure you do it right. If you use such signals to discover how other traders
do analysis, you are on the right track & soon you'll be able to do analysis yourself.
Highly Leveraged Account Calls for Caution.Leverage
will give a trader more financial gear to trade, but for inexperienced traders,
any leverage involves additional risks & can be disastrous.
To be a successful trader, you don't need to win every trade, you
also don't become rich on one trade, you need to be profitable in the long run.
There is No Such Thing as a Secret Approach to Understanding the
Market. Take the time to develop a solid trading system & find out that
the secret to trading success lies in hard work & constant learning.
Knowledge is Power. When starting out trading, it is
essential to understand the basics of market in order to make the most of investments.
For a trader, the potential is in the volatility, not in its tranquility.
Trading Long Term - Many traders will place very tight
orders to take very small profits. This is not a sustainable approach because although
you may be profitable in the short run, you risk losing in the longer term as you
have to recover the difference between the bid & the ask price before making any
Over-Cautious Trading -Trader who places tight stop
losses are likely to doom. You have to give your position a fair chance to demonstrate
its ability to produce.
Trade with Independence - If you are new, you will either
decide to trade on your own or to have a broker trade it for you. But your risk
of losing increases exponentially if you interfere with what your broker is doing
on your behalf or seeks advice from too many sources.
Watch margins Margins are one of the biggest advantages
in trading as it allows you to trade amounts far larger than the total of your deposits.
However, it can also be dangerous as it can appeal to the greed factor that destroys
many traders. The best guideline is to increase your leverage in line with your
experience & success.
Trade with Strategy - A strategy details the approach
you are going to take, which areas you are going to trade & how you will manage
your risk. Without a strategy, you will lose money.
The only Way is Up/Down -There are many systems which
analyze past trends, but none that can accurately predict the future. But if you
acknowledge to yourself that all that is happening at any time is that the market
is simply moving, you'll be amazed at how hard it is to blame anyone else.
Trade on the News - Most of the really big market moves
occur around news time. Trading volume is high & the moves are significant; this
means there is no better time to trade than when news is released. This is when
the big players adjust their positions & prices change resulting in a serious money
Exit Trades -If a trade is not working out for you,
get out. Don't compound your mistake by staying in & hoping for a reversal. If you're
in a winning trade, don't talk yourself out of the position because you're bored
or want to relieve stress.
Don't Trade too Short-Term - If you are aiming to make
few paisa profit, don't undertake the trade. It should be at least 4 times of the
ask bid spread.
Keep it Simple -The most successful traders keep their
trading simple. They don't analyse all day or research historical trends & their
results are excellent.
Tops & Bottoms - There are no real 'bargains' in trading.
Trade in the direction the price is going in & your results will be almost guaranteed
Don't Ignore the Technical Analysis - Understanding
whether the market is over-extended long or short is a key indicator of price action.
Spikes occur in the market when it is moving all one way.
Avoid Emotional Trading - Without a proper strategy,
your trades essentially are thoughts only & thoughts are emotions & a very poor
foundation for trading. When most of us are upset & emotional, we don't tend to
make the wisest decisions. Don't let your emotions ruin your trading.
Trade with Confidence-Confidence comes from successful
trading. If you lose money early in your trading career it shatters your confidence;
the trick is to learn the business before you trade. Remember, knowledge is power.
Take it like a Man - If you decide to ride a loss, you
are displaying stupidity. It takes guts to accept your loss & wait for tomorrow
to try again. Sticking to a bad position ruins lots of traders - permanently. One
good trade will not make you a trading success
Focus- Fantasizing about possible profits & then 'spending'
them before you have realized them is no good. Focus on your current position(s)
& place reasonable stop losses at the time you do the trade. Then sit back & enjoy
Stick to the Strategy - When you make money on a well
thought-out strategic trade, don't go & lose half of it next time on a fancy; stick
to your strategy & invest profits on the next trade that matches your long-term
Trade Today - Most successful day traders are highly
focused on what's happening in the short-term, not what may happen over the next
month. If you're trading with 3% stops, focus on what's happening today as the market
will probably move too quickly to consider the long-term future.
The Clues are in the Details - Consider individual trade
details; analyse cause of your losses. Generally, traders that make money without
suffering significant daily losses have the best chance of sustaining positive performance
in the long term.
Trade for the Right Reasons - Don't trade if you are
bored, unsure or reacting on a whim. The reason that you are bored in the first
place is probably because there is no trade to make. If you are unsure, it's probably
because you can't see the trade to make, so don't make one.
Zen is the Way to Trade - Even when you have taken a
position in the markets, you should try & think as you would if you hadn't taken
one. This level of detachment is essential if you want to retain your clarity of
mind & avoid succumbing to emotional impulses & therefore increasing the likelihood
of incurring losses.
Trade with Determination - Once you have decided to
place a trade, stick to it & let it run its course. This means that if your stop
loss is close to being triggered, let it trigger. If you move your stop midway through
a trade's life, you are more than likely to suffer worse moves against you.
Choose the Right Broker - A lot of brokers are in business
only to make money from yours. Get an unbiased opinion before you choose your broker.
Don't Be Too Bullish -Being too bullish can be fatal
for long-term success. Learn more about trading the markets. Stay modest.
Interpret News Yourself - Learn to read the source documents
of news & events - don't rely on the interpretations of news media or others.