Penguin Guide to Winning on the Stock Market , livre ebook

Ashu Dutt

The Penguin Guide to Winning on the Stock Market
Contents
About the Author
Dedication
Preface
1. Introduction
2. Market Dynamics
3. Understanding Stock Markets
What Are Stock Markets All About?
The Stock Market Mechanism
What Decides the Price of a Stock?
Tools of the Trade
Market Talk
4. Indian Stock Markets
The Equitization of India
The Players
The Instruments
Market Mafia: Welcome to the Old Boys Club
5. Playing the Game
Does the Exchange Matter?
Don t Undertake the Journey without the Right Broker
Types of Brokers
Using the Internet to Invest
6. How to Beat the Market at its Own Game
Never Disregard Fundamentals
Understanding the Game Big Boys Play
Betting Against the Rule Makers
Identifying Emerging New Economy Players
There is No Substitute for Market Experience
Pay Attention to Trading Activity
Don t Ignore Market Signals
There is No One Way of Picking All Stocks
What to Do with Takeover Offers or Buyback Offers
Other Strategies to Keep Ahead of the Markets
7. Drawing Your Own Roadmap
Developing an Investment Philosophy
Steps to Building Your Stock Portfolio
Should the Stock be Holdable ?
Should You Buy Speculative Stocks?
Signals to Sell
What Kind of Stocks to Pick?
Picking Individual Stocks: A Checklist
Portfolio Makeups
Measuring the Performance of Your Holdings
8. Markets-Now and into the Future
Resource Guide
Follow Penguin
Copyright
PENGUIN BOOKS
THE PENGUIN GUIDE TO WINNING ON THE STOCK MARKET
Ashu Dutt is a director of SABe TV and heads a wealth management practice. His positions prior to joining SABe TV include CEO, Convergence at IndiaInfoline TV, head of business programming at Star News and CEO of Dutt Stock Broking Limited-India s first boutique wealth management firm. He has also been responsible for building up India s first online brokerage service- duttstock.com -and a personal finance website- indiafn.com .
Ashu Dutt holds a B.B.A. (Summa cum Laude) in Finance and Investments from Bernard M. Baruch College, City University of New York and an M.B.A. from Bernard M. Baruch College, City University of New York, New York. He is a Certified Public Accountant in the state of Maryland, USA.
Ashu Dutt is also author of The Penguin Guide to Personal Finance . He is working on a book on wealth management.
To my son, Anav
Preface
Just like the sights and smells of India, Indian stock markets are unique. But in spite of their size, no book has focussed on their inner workings. Most market bibles that are available tend to be about the developed markets of the West, specially those of the US.
I have been fortunate to see Indian markets as a broker, investment advisor and as a media person. It has given me a unique perspective of their inner workings and a keen understanding of how they have a recipe of their own. At the same time, my education and work experience in the US has enabled me to clearly see the differences between the US and Indian markets and develop a perspective of my own.
The purpose of this book is to get the reader acquainted with winning strategies. It is not meant to be a lesson in the nitty-gritty of market mechanics. Any finance textbook will give you such details. But since you cannot fight a battle if you don t know the battlefield, the competitors and their strategies, I thought it fit to show you how markets work and the rules of the game. This book should arm you with the tools and weapons you will need to navigate the stock market battlefield. It will also cut down your learning curve sharply as I have put together an experience that sometimes requires a lifetime to gain.
As I did in The Penguin Guide to Personal Finance , I have tried to keep my writing style casual and conversational. I hope you enjoy reading the book and accumulate wealth from its chapters on market wisdom.
I
Introduction
Risky. Volatile. Uncertain. A gamble. Stocks have been all this and more. Then why do you and so many others stack your financial portfolios with stocks? That s similar to asking why someone would start his own business instead of holding a steady job. The answer to both lies in the rewards and the adventure. Stocks present opportunities for exceptional returns if you do your homework well. The losses, of course, can be equally shocking.
Stocks are risky, volatile and uncertain when it comes to price. But they are not a gamble-there is a method in the madness. That is why stock pickers, who understand the rules of the game, can act with speed when the occasion demands. They know how to analyse news and understand the market dynamics well enough to invest in emerging opportunities.
Let s look at a common scenario. The BSE Sensex pushes itself into higher orbits in December, it looks weak in January and crashes in February. Investors pay vulgar amounts to buy stocks of companies whose business they don t even know enough about. Information technology stocks gain 15-20 times in price in just one year. Wipro s market capitalization jumps ahead of the likes of Hindustan Lever or, for that matter, Wipro s market capitalization adds up to 20 times that of even a giant like TELCO. And then, just as quickly, Wipro s stock loses half or more of its value, washing away some mindboggling amounts of investor wealth. Stock prices fall 50-80 per cent in just a month or two. What looks cheap, gets cheaper. Even bravehearts fear to tread in such buying territory. Doomsday seems close. Rumours spread faster than bushfire.
What kind of insanity is this? Is this Alice in Wonderland or is this for real? Is there any sense to what looks like nonsense? Are you buying into fundamental value or waiting for somebody foolish enough to pay you more than what you paid for already overpriced stocks?
The answers are as confusing as the questions and there is a little bit of sense and nonsense, sanity and insanity to what stock markets are up to, if you take a short-term view. And if you have been investing for any length of time, you know that these spikes and trenches are a short-term phenomenon. But if you pore over the history of stock markets you will realize that there hasn t been anything else that has produced more wealth than the stock markets in the long run.
Picking stocks is actually all about identifying opportunities before others do, using information before it becomes a commodity and putting your money where your mouth is. It requires guts to put money to back your convictions (convictions based on well-researched analysis and not just rumours, naturally). But when picking stocks, the speed with which you act is of the essence. You cannot wait for all information to be available. You will have to make decisions based on what information you can gather at any given point of time.
The bottom line is, you are in the stock markets for money, not glory. And the winner takes all. It may on occasion be luck, intuition or a gamble that has paid off rather than sound research. It does not matter, just as long as you get it right (and as long as you are not breaking the law).
II
Market Dynamics
Booms and busts have been part of the stock market ever since the market first appeared. It s a tale that repeats itself in a never-ending cycle. What no one knows for sure is the duration and timing of these boom and bust cycles.
But why do booms happen? A number of theories do the rounds to justify boom cycles. Here are a few:
The market is driven by excessive demand for quality stocks
As Indians see their disposable income and quantum of savings grow, and as they shift their investment preferences away from physical assets to financial assets, and even within financial assets to equities or equity-based investments like mutual funds, the market will continue to head higher as more money chases the same supply of quality stocks.
However, unless you are buying into an IPO (Initial Public Offer) or the company is buying back its shares, for every buyer there is a seller. That works fine till the time you find a buyer who is more optimistic than you at ever higher prices. If you happen to end up at the top of the optimism pyramid, there may be no more buyers at the price you wish to sell. That may become a reality if, for example, foreign institutional investors who hold large chunks of stock decide to dump the stocks of the company that you bought into, specially as local buying may not be enough to sustain or provide support to the stock s price.
The new economy changes the very assumptions on how fast profits can grow
There may be some validity to this theory. In the information technology economy, productivity of business has been growing exponentially. Moreover, Indian IT companies are getting recognized as not just cheap but also as quality suppliers of IT services globally. There is also the benefit of acquiring a minimum size to take up and execute large-sized projects or spending money on identifying new technologies.
The logic is sound, but at the end of the day just five to ten Indian companies will become dominant players and justify the valuations they are getting. For the rest, the only option may be to merge or just close down. And if software companies are reporting very high profits, either they are overcharging their clients or are relying on their monopoly status. Either way, new competitors will realize an opportunity, offer cheaper solutions to customers and either take the clients away from current market leaders or bring the profit margins down.
The new economy will benefit stocks of companies that capture markets first and establish a dominant position. So eight out of ten software companies that are doing well should fall by the wayside. Also, a new process or technology could make dinosaurs out of giants and send brand-new start-up stocks into gravity-defying rises.
Information technology or software stocks as they are generally called have completely outstri