Dear Reader,

In the stock market there is no rule without an exception, there are some principles that are tough to dispute. Here are 10 general principles to help investors get a better grasp of how to approach the market from a long-term view. Every point embodies some fundamental concept every investor should know.

1. Ride the winners not the losers

Time and time again, investors take profits by selling their appreciated investments, but they hold onto stocks that have declined in the hope of a rebound. If an investor doesn't know when it's time to let go of hopeless stocks, he or she can, in the worst-case scenario, see the stock sink to the point where it is almost worthless. Of course, the idea of holding onto high-quality investments while selling the poor ones is great in theory, but hard to put into practice. The following information might help:

Riding a Winner - The theory is that much of your overall success will be due to a small number of stocks in your portfolio that returned big. If you have a personal policy to sell after a stock has increased by a certain multiple - say three, for instance - you may never fully ride out a winner. No one in the history of investing with a "sell-after-I-have-tripled-my-money" mentality has ever had a tenbagger. Don't underestimate a stock that is performing well by sticking to some rigid personal rule - if you don't have a good understanding of the potential of your investments, your personal rules may end up being arbitrary and too limiting.

Selling a Loser - There is no guarantee that a stock will bounce back after a decline. While it's important not to underestimate good stocks, it's equally important to be realistic about investments that are performing badly. Recognizing your losers is hard because it's also an acknowledgment of your mistake. But it's important to be honest when you realize that a stock is not performing as well, as you expected it to. Don't be afraid to swallow your pride and move on before your losses become even greater.

In both cases, the point is to judge companies on their merits according to your research. In each situation, you still have to decide whether a price justifies future potential. Just remember not to let your fears limit your returns or inflate your losses.

2. Avoid chasing hot tips

Whether the tip comes from your brother, your cousin, your neighbour or even your broker, you shouldn't accept it as law. When you make an investment, it's important you know the reasons for doing so; get into the basics by doing research and analysis of any company before you even consider investing your hard-earned money. Relying on a tidbit of information from someone else is not only an attempt at taking the easy way out, it's also a type of gambling. Sure, with some luck, tips sometimes pan out but they will never make you an informed investor, which is what you need to be to be successful in the long run. Find out what you should pay attention to - and what you should ignore.

3. Don't sweat on the small stuff

As a long-term investor, you shouldn't panic when your investments experience short-term movements. When tracking the activities of your investments, you should look at the big picture. Remember to be confident in the quality of your investments rather than nervous about the inevitable volatility of the short term. Also, don't overemphasize the few bucks difference you might save from using a limit versus market order.

Active traders will use these day-to-day and even minute-to-minute fluctuations as a way to make gains. But the gains of a long-term investor come from a completely different market movement - the one that occurs over many years - so keep your focus on developing your overall investment philosophy by educating yourself.

4. Don't overemphasize the P/E ratio

Investors often place too much importance on the price-earnings ratio (P/E ratio). Because it is one key tool among many, using only this ratio to make buy or sell decisions is dangerous and ill-advised. The P/E ratio must be interpreted within a context, and it should be used in conjunction with other analytical processes. So, a low P/E ratio doesn't necessarily mean a security is undervalued, nor does a high P/E ratio necessarily mean a company is overvalued.  

5. Resist the lure of penny stocks

A common misconception is that there is less to lose in buying a low-priced stock. But whether you buy a Rs. 5 stock that plunges to Rs. 0 or a Rs. 75 stock that does the same, either way you've lost 100% of your initial investment. A lousy Rs. 5 company has just as much downside risk as a lousy Rs. 75 company. In fact, a penny stock is probably riskier than a company with a higher share price, which would have more regulations placed on it.

6. Pick a strategy and stick with it

Different people use different methods to pick stocks and fulfill investing goals. There are many ways to be successful and no one strategy is inherently better than any other. However, once you find your style, stick with it. An investor who flounders between different stock-picking strategies will probably experience the worst, rather than the best, of each. Constantly switching strategies effectively makes you a market timer, and this is definitely most investors should avoid. Take Warren Buffett's actions during the dotcom boom of the late '90s as an example. Buffett's value-oriented strategy had worked for him for decades, and - despite criticism from the media - it prevented him from getting sucked into tech startups that had no earnings and eventually crashed.

7. Focus on the future

The tough part about investing is that we are trying to make informed decisions based on things that have yet to happen. It's important to keep in mind that even though we use past data as an indication of things to come, it's what happens in the future that matters most.

A quote from Peter Lynch's book "One Up on Wall Street" (1990) about his experience with one of the stock he bought demonstrates this: "If I'd bothered to ask myself, 'How can this stock go any higher?' I would have never bought it as stock price already went up twenty fold. But I checked the fundamentals, realized that company was still cheap, bought the stock, and made seven fold after that." The point is to base a decision on future potential rather than on what has already happened in the past.

8. Adopt a long-term perspective.

Large short-term profits can often entice those who are new to the market. But adopting a long-term horizon and dismissing the "get in, get out and make a killing" mentality is a must for any investor. This doesn't mean that it's impossible to make money by actively trading in the short term. But, as we already mentioned, investing and trading are very different ways of making gains from the market. Trading involves very different risks that buy-and-hold investors don't experience. As such, active trading requires certain specialized skills.

Neither investing style is necessarily better than the other - both have their pros and cons. But active trading can be wrong for someone without the appropriate time, financial resources, education and desire.

9. Be open-minded

Many great companies are household names, but many good investments are not household names. Thousands of smaller companies have the potential to turn into the large blue chips of tomorrow. In fact, historically, small-caps have had greater returns than large-caps; over the decades.

This is not to suggest that you should devote your entire portfolio to small-cap stocks. Rather, understand that there are many great companies beyond those in the Small Cap Index, and that by neglecting all these lesser-known companies, you could also be neglecting some of the biggest gains. We have already experienced the multibagger returns from lesser known companies recommended under Hidden Gems service in past, our stock picks like Camlin Fine Sciences, TCPL Packaging, Kovai Medical, Wim Plast, Acrysil, Mayur Uniquoters, Balaji Amines, Rane Brake Linings etc have delivered returns in the range of 500% to 1800% over period of 2 to 5 years.

10. Don't miss to diversify your equity portfolio

Its always wise to have stocks from different sectors and Industries. Do not expose your self to many stocks from the same sector. Be it IT, Consumers, Finance, Infrastructure, Pharmaceutical or any other sector, you must have a proper mix of all with suitable allocation based on future outlook of that sector and industry. Most of the companies from capital goods and Infrastructure sector have not performed since last 6 to 7 years but private banking stocks, NBFCs, consumers and automobile companies stocks are making new all time highs. Hence, its important to stay diversified with your stock investments.

Wish you happy & safe Investing!

Regards,
Team - Saral Gyan.

We’ve all heard about the value of diversification in reducing risk in our portfolio, but be sure you understand that there are two types of diversification.

The purpose of diversification is to reduce volatility and improve overall performance. It works if you do diversification correctly.

The first type of diversification is the one most commonly understood as “don’t put all you eggs in one basket.”

This simply means don’t just own one or two stocks. One common way people get in trouble is owning too much of their employer’s stocks.

You may get a good deal on company stock and load up in your retirement fund and buy more for your investment fund because you believe in your company.

It may even seem disloyal not to buy lots of company stock. However, it is not in your best interest if most or your entire portfolio in your company’s stock.

To be truly diversified in your stock selection, you need to own stocks in different industries and in different size companies.

You want your investments spread over large, medium and small companies in a variety of industries. It is especially important to watch the relationship between the stocks so they are not all affected by the same economic factors.

For example, if all of the stocks you owned were extra sensitive to interest rates, then you would not be diversified. The stocks would move in correlation with the interest rates and each other.

Stocks that have a low degree of correlation don’t move as one unit and therefore are less likely to react the same way to bad economic news.

The lesson here for investors is that if a sector of the market is really hot, avoid the temptation to dump “all your eggs into one basket.” However, you should also be aware of those market or economic influences that may adversely affect a group of your stocks.

Don’t put all your eggs in one basket and don’t put all you baskets in the same wagon.

Another type of Diversification:

(Another type of diversification involves the other parts of your portfolio)

If you tie up all of your investments in stocks, no matter how uncorrelated, you are still not diversified in the sense of reducing risk and improving performance.

You need to also spread your investments over different asset classes such as bonds, cash, real estate, precious metals and other alternative investments.

Dear Reader,

Why is a stock that cost Rs. 50 cheaper than another stock priced at Rs. 10?

This question opens a point that often confuses beginning investors: The per-share price of a stock is thought to convey some sense of value relative to other stocks. Nothing could be farther from the truth.

In fact, except for its use in some calculations, the per-share price is virtually meaningless to investors doing fundamental analysis. If you follow the technical analysis route to stock selection, it’s a different story, but for now let’s stick with fundamental analysis.

The reason we aren’t concerned with per-share price is that it is always changing and, since each company has a different number of outstanding shares, it doesn’t give us a clue to the value of the company. For that number, we need the market capitalization or market cap number.

The market cap is found by multiplying the per-share price times the total number of outstanding shares. This number gives you the total value of the company or stated another way, what it would cost to buy the whole company on the open market.

Here’s an example:

Stock price: Rs. 50

Outstanding shares: 5 Crores 

Market cap: Rs. 50 x 50,000,000 = Rs. 250 Crores

To prove our opening sentence, look at this second example:

Stock price: Rs. 10

Outstanding shares: 30 Crores 

Market cap: Rs. 10 x 300,000,000 = Rs. 300 Crores

This is how you should look at these two companies for evaluation purposes. Their per-share prices tell you nothing by themselves.

What does market cap tell you?

First, it gives you a starting place for evaluation. When looking a stock, it should always be in a context. How does the company compare to others of a similar size in the same industry?

The market generally classifies stocks into three categories:

• Small Cap under Rs. 1000 Crores 

• Mid Cap Rs. 1000 - Rs. 10000 Crores

• Large Cap above Rs. 10000 Crores

Some analysts use different numbers and others add micro caps and mega caps, however the important point is to understand the value of comparing companies of similar size during your evaluation. You will also use market cap in your screens when looking for a certain size company to balance your portfolio. Don’t get hung up on the per-share price of a stock when making your evaluation. It really doesn't tell you much. Focus instead on the market cap to get a picture of the company’s value in the market place.

Dear Reader,

In the stock market there is no rule without an exception, there are some principles that are tough to dispute. Here are 10 general principles to help investors get a better grasp of how to approach the market from a long-term view. Every point embodies some fundamental concept every investor should know.

1. Ride the winners not the losers

Time and time again, investors take profits by selling their appreciated investments, but they hold onto stocks that have declined in the hope of a rebound. If an investor doesn't know when it's time to let go of hopeless stocks, he or she can, in the worst-case scenario, see the stock sink to the point where it is almost worthless. Of course, the idea of holding onto high-quality investments while selling the poor ones is great in theory, but hard to put into practice. The following information might help:

Riding a Winner - The theory is that much of your overall success will be due to a small number of stocks in your portfolio that returned big. If you have a personal policy to sell after a stock has increased by a certain multiple - say three, for instance - you may never fully ride out a winner. No one in the history of investing with a "sell-after-I-have-tripled-my-money" mentality has ever had a tenbagger. Don't underestimate a stock that is performing well by sticking to some rigid personal rule - if you don't have a good understanding of the potential of your investments, your personal rules may end up being arbitrary and too limiting.

Selling a Loser - There is no guarantee that a stock will bounce back after a decline. While it's important not to underestimate good stocks, it's equally important to be realistic about investments that are performing badly. Recognizing your losers is hard because it's also an acknowledgment of your mistake. But it's important to be honest when you realize that a stock is not performing as well, as you expected it to. Don't be afraid to swallow your pride and move on before your losses become even greater.

In both cases, the point is to judge companies on their merits according to your research. In each situation, you still have to decide whether a price justifies future potential. Just remember not to let your fears limit your returns or inflate your losses.

2. Avoid chasing hot tips

Whether the tip comes from your brother, your cousin, your neighbour or even your broker, you shouldn't accept it as law. When you make an investment, it's important you know the reasons for doing so; get into the basics by doing research and analysis of any company before you even consider investing your hard-earned money. Relying on a tidbit of information from someone else is not only an attempt at taking the easy way out, it's also a type of gambling. Sure, with some luck, tips sometimes pan out but they will never make you an informed investor, which is what you need to be to be successful in the long run. Find out what you should pay attention to - and what you should ignore.

3. Don't sweat on the small stuff

As a long-term investor, you shouldn't panic when your investments experience short-term movements. When tracking the activities of your investments, you should look at the big picture. Remember to be confident in the quality of your investments rather than nervous about the inevitable volatility of the short term. Also, don't overemphasize the few bucks difference you might save from using a limit versus market order.

Active traders will use these day-to-day and even minute-to-minute fluctuations as a way to make gains. But the gains of a long-term investor come from a completely different market movement - the one that occurs over many years - so keep your focus on developing your overall investment philosophy by educating yourself.

4. Don't overemphasize the P/E ratio

Investors often place too much importance on the price-earnings ratio (P/E ratio). Because it is one key tool among many, using only this ratio to make buy or sell decisions is dangerous and ill-advised. The P/E ratio must be interpreted within a context, and it should be used in conjunction with other analytical processes. So, a low P/E ratio doesn't necessarily mean a security is undervalued, nor does a high P/E ratio necessarily mean a company is overvalued.  

5. Resist the lure of penny stocks

A common misconception is that there is less to lose in buying a low-priced stock. But whether you buy a Rs. 5 stock that plunges to Rs. 0 or a Rs. 75 stock that does the same, either way you've lost 100% of your initial investment. A lousy Rs. 5 company has just as much downside risk as a lousy Rs. 75 company. In fact, a penny stock is probably riskier than a company with a higher share price, which would have more regulations placed on it.

6. Pick a strategy and stick with it

Different people use different methods to pick stocks and fulfill investing goals. There are many ways to be successful and no one strategy is inherently better than any other. However, once you find your style, stick with it. An investor who flounders between different stock-picking strategies will probably experience the worst, rather than the best, of each. Constantly switching strategies effectively makes you a market timer, and this is definitely most investors should avoid. Take Warren Buffett's actions during the dotcom boom of the late '90s as an example. Buffett's value-oriented strategy had worked for him for decades, and - despite criticism from the media - it prevented him from getting sucked into tech startups that had no earnings and eventually crashed.

7. Focus on the future

The tough part about investing is that we are trying to make informed decisions based on things that have yet to happen. It's important to keep in mind that even though we use past data as an indication of things to come, it's what happens in the future that matters most.

A quote from Peter Lynch's book "One Up on Wall Street" (1990) about his experience with one of the stock he bought demonstrates this: "If I'd bothered to ask myself, 'How can this stock go any higher?' I would have never bought it as stock price already went up twenty fold. But I checked the fundamentals, realized that company was still cheap, bought the stock, and made seven fold after that." The point is to base a decision on future potential rather than on what has already happened in the past.

8. Adopt a long-term perspective.

Large short-term profits can often entice those who are new to the market. But adopting a long-term horizon and dismissing the "get in, get out and make a killing" mentality is a must for any investor. This doesn't mean that it's impossible to make money by actively trading in the short term. But, as we already mentioned, investing and trading are very different ways of making gains from the market. Trading involves very different risks that buy-and-hold investors don't experience. As such, active trading requires certain specialized skills.

Neither investing style is necessarily better than the other - both have their pros and cons. But active trading can be wrong for someone without the appropriate time, financial resources, education and desire.

9. Be open-minded

Many great companies are household names, but many good investments are not household names. Thousands of smaller companies have the potential to turn into the large blue chips of tomorrow. In fact, historically, small-caps have had greater returns than large-caps; over the decades.

This is not to suggest that you should devote your entire portfolio to small-cap stocks. Rather, understand that there are many great companies beyond those in the Small Cap Index, and that by neglecting all these lesser-known companies, you could also be neglecting some of the biggest gains. We have already experienced the multibagger returns from lesser known companies recommended under Hidden Gems service in past, our stock picks like Camlin Fine Sciences, TCPL Packaging, Kovai Medical, Wim Plast, Acrysil, Mayur Uniquoters, Balaji Amines, Rane Brake Linings etc have delivered returns in the range of 500% to 1800% over period of 2 to 5 years.

10. Don't miss to diversify your equity portfolio

Its always wise to have stocks from different sectors and Industries. Do not expose your self to many stocks from the same sector. Be it IT, Consumers, Finance, Infrastructure, Pharmaceutical or any other sector, you must have a proper mix of all with suitable allocation based on future outlook of that sector and industry. Most of the companies from capital goods and Infrastructure sector have not performed since last 6 to 7 years but private banking stocks, NBFCs, consumers and automobile companies stocks are making new all time highs. Hence, its important to stay diversified with your stock investments.

Wish you happy & safe Investing!

Regards,
Team - Saral Gyan.

3 Stock Investing Mistakes & How you can Avoid them?

Mistake 1 – Not investing in stocks when market is down and quoting below long term average valuations.

This is a life-changing mistake though many do not realize. If an investor makes this first mistake, he/she is more likely to make the other two mistakes, no matter how much does one try to keep away from stocks.

In order to fulfill one’s basic needs and lead a healthy and wealthy life, an investor should invest his savings at lows and sell at highs and thus accumulate decent corpus over a period of time.

In the above case, investors make a mistake of extrapolating the short term downtrend and thus fall in the trap of believing that markets will fall indefinitely.

With the above psychology investors defer their investments, assuming they will get to know when the market will bottom out and start investing then.

End result - Investors get to know about market bottoms only in hindsight and thus miss out investing at market lows.

Mistake 2 – Not investing in stocks when market rebounds from lows and quoting at long term average valuations

This is another major mistake made by investors in their attempt to act smart. After missing out investing at very low market valuations (Investing mistake 1) in their attempt to time markets, investors miss out investing at very low valuations.

Later on, to their utter surprise they find markets already up 30-50% from the lows and individual stocks up by 50-100% in many cases, though still quoting at reasonable valuations.

At this point of time, the feeling of being left out starts creeping in and in order to avoid looking foolish, investors make a promise to themselves that they will invest in stocks in case the market retracts back to lows they witnessed some time back.

End result – Markets usually do not correct back to previous lows, though consolidate or correct marginally and thus an investor again misses out on buying stocks on reasonable valuations.

Mistake 3 – Investing in stocks when markets are at really high valuations with every Ram, Shyam & Ghanshyam discussing stocks

Not investing in stocks when market is at low or reasonable valuations, exposes one to opportunity cost and negative real returns (7-8% FD return against 8-9% inflation) in most of the other asset classes.

However, the biggest mistake an investor makes and which brings about absolute capital loss is when an investor takes a plunge into markets at really high valuations.

After missing out investing in the above two instances, 4-5 years down the line when markets have appreciated enormously, it catches the fancy of every investor on the street. By that time, stocks of good companies have usually appreciated by 5-10 times and even more.

The realization that they missed the bus hits them hard.

By then, the news flow is so good and the economy seems so resilient that investors convince themselves of the infallibility of the economy and the markets. Yes, in order to justify to themselves and cover up their foolishness of buying the stocks at high valuations and missing out when the valuations were low, they support their decision with positives about the economy.

Here again investors make a mistake of extrapolating the uptrend and thus fall in the trap of believing that markets will rise indefinitely.

With the above psychology, they invest in stocks at very high valuations, assuming they will be able to predict and exit at market peak.

End result - Investors get to know about market peak only in hindsight. Also, as per the famous adage, “Market goes up by stairs and comes down by lift”, investors witness value erosion on their respective investments and generate sub-standard returns on their investments for the next 3-4 years.

Since majority of the investors commit the above 3 mistakes, equities get a bad name, though we leave it to you to decide who is at fault.

If you have read this far, you may have already realized that by not buying stocks of good companies that are available at low valuations, you are committing Mistake 1 and thus very likely to commit Mistake 2 and Mistake 3 in the subsequent years. Simply speaking, it would be a loss of 5-7 good years for letting your wealth grow several folds and capital loss if you commit Mistake 3 at the end.

When it comes to investing in stocks, no one is perfect, including the Great Warren Buffett and everyone learns with experience, however one can always accelerate the process by learning from other’s experiences and mistakes. It’s great to learn from your mistakes, but it’s even better when you can learn from the mistakes of others.

Regards,

Team - Saral Gyan.