Stock Market

Having the stock market meltdown at the hindsight, I get the feeling that its become a habit of everyone to expect our stocks to double in a short span of time and once the market is down, we start blaming others. Remember, we decide about investing at any point of time and responsibility of investing own money is entirely on the person who invests, irrespective of when he is investing.

Why should we not consider stock market investments like a long term investment like real estate and Gold. I will go to the benefits of having real estate and Gold Investments later but Stock Market Investment has created the greatest wealth for all the stalwarts in the market if they have focused without looking into the daily movements of the stock prices.

If you refer the Companies Act, you would find that you are having equal rights alongwith the directors of the company to question and direct the business of the company. Forget about how the big investors always try to manage the business as per their requirements and benefits. Bottomline is that you are a owner of the company and you have equal right to question the proceedings of the company whose stocks you own. As Kukkuji has been saying time and again, why do we not analyse enough before investing our hard earned money in any stocks. The fundamental basis of owning stock is owning the business.

Going back to other major investment avenues. First let me take the instance of Real Estate Investment. Yes, Real Estate Investment has provided better returns to Investors for the last two years. But think about a longer time frame. As per what analysis I have read, over a longer period of time it has provided the same return as the FD in the Bank @ 8 - 10 % p.a. But it always good to have some investment in Real Estate depending on what is your age.

I would provide a separate note on risk profiling where you would be able to decide how much you can invest in different avenues during your life time.

Another investment avenue is Gold which is considered to be the safest. All the federal reserves in the world hold the most Gold Asset in their portfolio. Gold has been one of the most inflation prone investment in the world. If the inflation goes beyond roof, Gold would be the only asset which can hold the purchasing power of an investor in such circumstances. As Indians we anyway invest in Gold during good occassions like festivals, marriages etc.

Coming to Stock Market investments in India, it has returned more than 15 % pa compounded return to investors based on the Sensex in the last 25 years. There are various aspects to look into while investing in stocks. Briefly, they are -

1) Management Integrity - I know its difficult for us to understand the integrity but few indicators are dividend distributions, commitment of top management, very low attrition of the top management, consistent perfomance over a medium term, transparency of the activities they are undertaking etc.

2) Consistent Performance - Past Performance is an indicator but not a guarantee of future performance. But past performance can provide a sense of consistency to the prospective investor.

3) Future Plan of the Company - Keep abreast of the future plan of the company. There are many companies from past which were great of the yesteryears but perished due to bad decisions or no decisions of where they want to be in the future. Few examples are Orkay, DCM etc.

4) Aggressiveness of the Management - In the period of Licence Raj, many of the companies used their clout with the power or unethical ways to survive and prosper. Today, India is open to the world and competition is all pervasive. Its the survival of the fittest and prosperity of the finest. This requires aggressive management of the company.

5) Macro economic indicator - Everyone was talking about infrastructure lack in India since 2003 when market started its bull run but no one had the vision to invest in infrastructure related companies those days. To indicate the potential of the sector, Satyam's Chairman, Mr. Ramalinga Raju also started invested in infrastructure Special Purpose Vehicles (SPVs) in the name of Maytas (reverse of Satyam) since late 2004.

6) Keep your eyes open - To understand this better, you need to read Peter Lynch's One Up on Wall Street. One example he provided in the book was when his wife came back from shopping in one of the shop owned/franchised by a listed company in US and mentioned that there was tremendous rush, he quickly pounded on the same and analysed the company and started accumulating the same. He also mentioned that he made good money on the stock.

7) Read, read and read - I know you would be doing that. Otherwise you would not be reading this article.

Well, it also requires that we as investors know about what is going on in the companies where we invest. This is required to churn your portfolio in regular interval to make sure that you change with the changing time.

It would be in the interest of investors to make sure that they do good analysis to convince their buys and have patience. This is especially important during such meltdown.

Note that I would equate the above philosophy with stocks to Mutual Funds too except for Debt Oriented Mutual Funds.