How to ride the 13k+ Bull ?

The retail investor syndrome could burn your fingers; a long-term strategy could protect you

THE BENCHMARK BSE Sensex marched ahead of the 13,000-point mark last week, creating a reason for investors who stayed invested in the market to celebrate. But for those who missed the bus, it left a feeling of déjà vu. It reminded them of missing the bus once again the way they did when the Sensex was between 8,000 and 10,000 points, and later just before the July-September (Q2) results.
On both occasions they thought that the market was overheated and/or it was in for a major correction. The market thought otherwise. Just before Q2 results, a correction of at least 1,000-points was expected, and the investors were anxiously awaiting it before taking the plunge. However, they were let down by the healthy economy and industry growth figures that poured in.

Those who missed the bus are keeping their fingers crossed. The thought flitting across their minds is whether to now or not? The nightmare of May-June 2006 still haunts them. Hence, this is the time for investors to take stock of the equity market in order to evolve enduring strategies.Prime movers Foreign institutional investors are the prime movers of the market today. Even domestic institu tional investors like mutual funds have not participated in the rally, let alone the retail investor. FIIs have pumped in over Rs 18,000 crore ($4 billion) since the rally took its roots on June 14, 2006. In line with their thinking, they confined their investments to frontline stocks (mostly A-Group). FII enthusiasm was backed by higher availability of funds in international markets. But this could undergo a change.

Then, what is driving the psyche of the FIIs? Narayan Ramachandran, CEO, Morgan Stanley Investment Management India Ltd, says it is the cash flow growth (business growth and profitability) that has at tracted them, as they were not overtly concerned about valua tions at this moment.
S Mukherji, Managing Director and CEO of ICICI-Se curities, puts it simply: “India will continue to attract FII investments as long as the corporate performance is good.” Valuations If one has to go by the price earnings multiple (P/E), the market is no longer cheap. The Sensex was ruling at a P/E ratio of 24.02 on Friday last, while its broad-based counterpart BSE-500 had it at 22.51. Even the 271-stock BSE Midcap Index was, in fact, leading the Sensex at 24.71 per cent, according to Bloomberg data.
The P/E for the whole market is inching closer to 16 times (based on the trailing 15months earnings, instead of 12 months), which is billed as the optimum level. The threat increases as the P/E ratio gets closer to its 10-year peak of 21 times.

This brings India’s standing vis-à-vis other emerging markets into focus. On the attractiveness of India among emerging markets, Ramachandran added: “Our focus is on BRIC (Brazil, Russia, India and China) countries, and South Africa. But we see Brazil, Russia and Maxico more attractive in the longer term.” RI syndrome Retail investors, who take up stock market investments as a secondary occupation, should guard against greed and fear, the two factors that exert immense influence on them. They suffer from what is called ‘retail investor syndrome’. They wait until a visible signal about the market direction emerges before taking the plunge. Institutional investors sense this much ahead through research and take positions. By the time the rally peaks, small investors jump into the fray, taking the market to a new high. But profit booking by institutional players pulls the market down.
Having burnt their fingers, small investors may take a long time to shed their fears about the market. Another way in which they are sucked into the syndrome is when they join speculators in unwinding positions at the slightest fall in the market.

A few tips Fight RI syndrome by staying invested long term— three to five years—come what may. Do not make (one-time) bulk investments. Spread in vestments evenly and take the benefit of cost averag ing.
Do not take loans for in vesting in the stock market. Corrections are welcome and will be healthy, but waiting for correction at this junc ture may not be a prudent strategy.
Right stock-picking can ensure returns even during a market downturn, and the vice versa is also true.
The market has already discounted March 2008 earnings. This calls for caution in taking fresh positions.
The trend is moving towards specific stocks instead of identifying sunrise industries for investing. Do not take exposure to any stock unless you have studied it thoroughly.
Do not marry stocks. When price reaches your pre-set level based on personal study, get out.
There is a general tendency to pick up the stock that has a two-digit value. The danger is that such penny stocks with low free float are mostly the targets of manipulators.
Medium capitalised (mid-cap) stocks are no longer cheaper as was brought out by the P/E ratio analysis.
Keep in mind, liquidity of mid-cap stocks will dry up immediately on a market downturn along with losing prices rapidly.

Do not react to changes in indices. They do not represent your portfolio as the latter consists of specific stocks and not indices.
Read analysts’ comments of long-term prospects with a pinch of salt. The euphoria is usually based on the present perception of future events, which can change Stay invested to take advantage of 8 per cent plus economic growth.

EXPERTSPEAK ANALYSIS Corrections are welcome and will be healthy but waiting for a correction at this juncture may not be prudent. The GDP is growing by more than 8 per cent per annum as we have multiple advantages like low median age population, low cost labour. The biggest boost has been provided by the low-interest rate regime MOVERS & SHAKERS Sectors we bet on now are software, banking and auto ancillaries. CAUTION Preferably buy large cap stocks that are well researched and have high institutional holdings.
- Lalit Thakkar, DIRECTOR-RESEARCH, ANGEL BROKING ANALYSIS IT and banking stocks have performed well in the rally so far. Pharma and FMCG stocks also posted good results in Q2. MOVERS & SHAKERS Going forward, sector selection may not work well. One has to be stock-specific. We have identified RIL, M&M, Infosys and ICICI Bank as the best bets. ADVICE Do not leverage on credit At this level, investing via mutual funds is advisable Invest in such stocks about which you are well-informed - Amitabh Chakrabarthy, HEAD-RESEARCH OF THE PRIVILEGED CLIENT GROUP OF BRICS SECURITIES.

-BS Srinivasalu Reddy

Note : I found this article good for any prospective investor in stock market in India.

Source : Hindustan Times.

Evaluating a Company for Investment - II

P/E Ratio: Introduction

Chances are you've heard the term price/earnings ratio (P/E ratio) used before. When it comes to valuing stocks, the price/earnings ratio is one of the oldest and most frequently used metrics.
Although a simple indicator to calculate, the P/E is actually quite difficult to interpret. It can be extremely informative in some situations, while at other times it is next to meaningless. As a result, investors often misuse this term and place more value in the P/E than is warranted.

P/E Ratio: What Is It? P/E is short for the ratio of a company's share price to its per-share earnings. As the name implies, to calculate the P/E, you simply take the current stock price of a company and divide by its earnings per share (EPS):

P/E Ratio = ( Market Value per Share / Earnings per Share (EPS) )

Most of the time, the P/E is calculated using EPS from the last four quarters. This is also known as the trailing P/E. However, occasionally the EPS figure comes from estimated earnings expected over the next four quarters. This is known as the leading or projected P/E. A third variation that is also sometimes seen uses the EPS of the past two quarters and estimates of the next two quarters.

Companies that aren't profitable, and consequently have a negative EPS, pose a challenge when it comes to calculating their P/E. Opinions vary on how to deal with this. Some say there is a negative P/E, others give a P/E of 0, while most just say the P/E doesn't exist.

Historically, the average P/E ratio in the market has been around 15-25. This fluctuates significantly depending on economic conditions. The P/E can also vary widely between different companies and industries.

P/E Ratio: Using The P/E Ratio

Theoretically, a stock's P/E tells us how much investors are willing to pay per dollar of earnings. For this reason it's also called the "multiple" of a stock. In other words, a P/E ratio of 20 suggests that investors in the stock are willing to pay $20 for every $1 of earnings that the company generates. However, this is a far too simplistic way of viewing the P/E because it fails to take into account the company's growth prospects.

• Growth of Earnings
  
  Although the EPS figure in the P/E is usually based on earnings from the last four quarters, the P/E is more than a measure of a company's past performance. It also takes into account market expectations for a company's growth. Remember, stock prices reflect what investors think a company will be worth. Future growth is already accounted for in the stock price. As a result, a better way of interpreting the P/E ratio is as a reflection of the market's optimism concerning a company's growth prospects.
  
  
• Cheap or Expensive?
  
  The P/E ratio is a much better indicator of the value of a stock than the market price alone. For example, all things being equal, a $10 stock with a P/E of 75 is much more "expensive" than a $100 stock with a P/E of 20. That being said, there are limits to this form of analysis - you can't just compare the P/Es of two different companies to determine which is a better values
  

P/E Ratio: It's Not A Crystal Ball

What goes up ... well, sometimes it stays up for an awfully long time.

A common mistake among beginning investors is the short selling of stocks because they have a high P/E ratio. If you aren't familiar with short selling, it's an investing technique by which an investor can make money when a shorted security falls in value. (For more on this, check out the Short Selling tutorial.)

First of all, we believe that novice investors shouldn't be shorting. Secondly, you can get into a lot of trouble by valuing stocks using only simple indicators such as the P/E ratio. Although a high P/E ratio could mean that a stock is overvalued, there is no guarantee that it will come back down anytime soon. On the flip side, even if a stock is undervalued, it could take years for the market to value it in the proper way.

Security analysis requires a great deal more than understanding a few ratios. While the P/E is one part of the puzzle, it's definitely not a crystal ball.

Evaluating a Company for Investment - I

Earning Per Share - EPS

The portion of a company's profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company's profitability.

Calculated as:

EPS = (Net Income - Dividends on Preffered Stock) / Avg. Outstanding Shares

In the EPS calculation, it is more accurate to use a weighted-average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period.

Diluted EPS expands on the basic EPS by including the shares of convertibles or warrants outstanding in the outstanding shares number.

Earnings per share is generally considered to be the single most important variable in determining a share's price. It is also a major component of the price-to-earnings valuation ratio.

For example, assume that a company has a net income of $25 million. If the company paid out $1 million in preferred dividends and had 10 million shares for one half of the year and 15 million shares for the other half, the EPS would be $1.92 (24/12.5). First, the $1 million is deducted from the net income to get $24 million. Then a weighted average is taken to find the number of shares outstanding (0.5 x 10M+ 0.5 x 15M = 12.5M).

An important aspect of EPS that's often ignored is the capital that is required to generate the earnings (net income) in the calculation. Two companies could generate the same EPS number, but one could do so with less equity (investment) - that company would be more efficient at using its capital to generate income and, all other things being equal, would be a "better" company. Investors also need to be aware of earnings manipulation that will affect the quality of the earnings number. It is important not to rely on any one financial measure, but to use it in conjunction with statement analysis and other measures.

What to look for in a Company

"Politeness and consideration for others is like investing pennies and getting dollars back."
-Thomas Sowell (1930)

First-Class Management

• Proven Track Record.
• Significant Personal Ownership in Business.
• Intelligent Allocation of Capital.
• Smart Application of Technology to Improve Business and Lower Costs.
  

Strong Financial Condition & Satisfactory Profitability

• Strong Balance Sheet.
• Low Cost Structure.
• High After-Tax Returns on Capital.
• High Quality of Earnings.
  

Strong Competitive Positioning

• Non-Obsolescent Products / Services.
• Dominant or Growing Market Share.
• Participation in a Growing Market.
• Global Presence and Brand Names.

Golden Rules

"Practicing the Golden Rule is not a sacrifice; it is an investment"

Rule 1:

Don't buy unlisted Shares.

Rule 2:

Don't buy inactive Shares.

Rule 3:

Don't buy shares in closely held companies.

How to Trade?

"Why is the man (or woman) who invests all your money called a broker?"
George Carlin (1937 )

Step I - Apply for PAN

Yes, the government of India has made it mandatory for everyone to submit a PAN(Permanent Account Number), before investing into Shares. So, apply for it soon.

Click here to apply for PAN Card.

Step II - Select a Brokerage Firm

To buy or sell shares online, you need a reliable broker or sub-broker who will carry out the transactions in a successful way A good broker is one who makes it easier and profitable for you to trade on the Bourse. Therefore, it is a canny idea to put some time and effort, researching a broker for you.The broker is like a mediator between you and the Stock Market. These days a lot of brokerage firms also provide helpful tips on investing in the stocks. You can also ask your friends who can give you some advice on selecting a broker. Remember, that these brokers charge some brokerage, i.e, some amount of money on the value of your transactions. So, negotiate wisely. Another important factor is to check if the broker is registered with SEBI.
Some brokerage firms are listed below -

• Indiabulls
  
  
• ICICI Direct
  
  
• Indiainfoline
  
  
• Sharekhan.com
  
  
• Motilal Oswal Securitiies Ltd.
  
  
• Abhipra Capital Ltd.
  

Step III - Buying and Selling Shares

Next step is to open an account with your selected Brokerage firm. All transactions are done online these days. You are required to pay money to your broker immediately upon getting the contract note/confirmation for purchase/sale of shares. There different ways in which you can buy and sell shares online and it differs among different brokers. So please check with your broker. Generally, brokers come to your home and guide you through the entire process.