Saturday, February 14, 2009

Income, Investment and Being Content

Stock market investors come from varied income strata and this piece of writing is to create a sense of balance when they opt for investments. I honestly do not have any data to back up my claims but in general I have a feeling, majority of the retail investors come to the stock market thinking that stock investment is as good as starting a business and it's a sure way to make money just because someone they know made windfall profit. But new investors have to be careful in their judgment as only few retail investors beat the market. You might argue that you could be one of those few. Of course you can if you have the requisite skills and I define it as vague as the stock market in the following few lines.

In my view, most people can make money in the bull market (If you happen to be the one who lost money in bull market, then do not ever come back to the stock market).

But the one who makes money in the bear market (If investment started at beginning of bear market) or the one who booked the profit exactly at 20000-21000 sensex levels or the one who at least minimized the loses (If investment started in the bull market but still holding into the bear market) is the one who can claim that they have the requisite skills to be in the stock business. If you think you do not fall in any of these three categories, please read further.

What is special in those few people who beat the market?

The few "market beaters" whom we are talking about, do it as a passion in addition to just investment. Their mind constantly tickles around stocks and news and they relate almost everything with stock market. They are fortunate to receive perfect information in an "imperfect market"(It has become these days). They put their brain on work rather than heart. They are the ones who would have happily remained in Titanic till it sank rather than fighting to get a place in the women's boat. They know how to find the anomalies in the company statements in addition to filtering out right information. They must surely have alternate sources of income which makes them not to fear about the loss and be greedy for more.

How the market works?

Of course we all know that stocks make money based on earnings, potential profits, macro economic outlook, company management and what not...But you still need a buyer and seller and that’s where my point originates. Your loss is someone's gain and vice versa. This is precisely the reason why stock market functions always and it will be there even if the sensex hits 1000. Because people are not content. One guy makes money and he returns to make more to lose some. The one who gained from him follows the same pattern and I am sure not many people ran away from stock market after investing once including me. Then comes the question of who should invest in the market and what income strata they should belong!

Income Strata and Investment options

Here I am not talking about people who have the above said skills and start investing with 25000 rupees even with Rs. 5000 /month job. I am talking about the people who does not belong to any of the categories I mentioned as requisite skills and invests mostly based on analyst and broker recommendations or peer pressure or own misplaced confidence. If you are someone like that (Many of them are), you have to be very careful about stock investments.

If your family income is less than Rs.5 Lakhs per year and your only ambition is to save for marriage or education, there are many other avenues including gold which provides capital safety which is the need of the hour rather than investing in stocks and mutual funds which are like Indian monsoon, which is never on time and either over flooded or inadequate. Invest in stocks only if you are not fortunate to invest in any other avenues like buying a piece of land or gold etc...For this income group, the opportunity cost is huge to get involved in stock investment. Never invest in a stock that has 10 year average PE ratio more than 20.

(Over flooded comment is to say that rich get richer)

If your family income is more than Rs.5 lakhs per year but less than Rs.15 Lakhs, then you can probably try but please prepare yourself at least 1 season to identify good magazines, articles, blogs, various information sources and read it regularly. This way, at least you can check if the analyst's recommendation has any valid point or not incase if you can’t decide on your own and rely on him to make the decision. But if you can buy a piece of land or build a house, do so first before coming to stock investments. But still if you want to try your hand in stock investments, then allot a specific amount for each month and do not invest more than that for at least 2 years. I know stock markets require timely investments and occasionally you might be tempted to breach your monthly amount but I suspect the potential of retail investors to time the market. Hence, be an apprentice till you become confident about your skills. Most likely than not, you might pick up few skills in 2 years time and you can take it from there. Invest in stocks that have paid dividends without fail.

If your family income is more than Rs.15 lakh, then you probably do not need any explanation here. That does not mean you are a great investor, but I just think that you have the ability to bounce back financially even if you lose all in one year. But you have to be careful about mental aspect. If you are the one who broods over the loss all the time, then you please buy a good lock to protect your money.

Why you should not rely only on analyst?

In the market, I am not saying all the analysts are bad. But I am just saying that even the good one can't be always right. Some might have high stakes on their recommendation. Good recommendation or bad recommendation, still they make money. You might raise a question that if an analyst is bad, how he can stand in the industry? The answer is not many people remember that even for a month and also the open instinct that he might be right this time. For example, Anand Rathi securities was involved in insider trading and scams etc...and even it was barred for 2 years from the BSE. But they are back in the business and people do business with them. I am sure there will be people to do business with Katen Parekh and Ramalinga Raju if they start a Broking company. So, read the analyst recommendations but you verify his claims with your own research.

Being Content

Do not try to emulate Warren Buffet or Rakesh. Here is why. Many people think that Warren Buffet has generated 21.9 % return since 1965 through stocks. That’s not true. He made that possible through "investments" rather than only stocks. His company Berkshire Hathaway has more than 50 fully owned private subsidiaries and few of them are well known insurance companies including Geico. If you want to know what I am talking about, please go to this link.

So, many of his businesses make huge profits and that’s the reason even when Bank of America is trading at $6 (He has 0.7% of his portfolio), he is sitting on $30 billion cash and reports 21.9 % return since 1965. He is just not making it only through stocks. But no one can question his financial wisdom and skills. There is simply no one to match. Hence, you have to be content with your situation. Do not be greedy to take all the money in the market. There is enough for everyone over time. You have to focus on what you do rather then what others do. Sometimes you have to focus on actions rather than results and sometimes you have to concentrate on actions as well as results. Failure happens and if you are the one who lost money, here is the way to come out of it. Look back not just look ahead. If you look back, you might get to know that the stock market has corrected many a times before and it has comeback even more strongly. If you just look ahead, then you will not buy when you need to buy and sometimes you will invest more to get back what you have lost and in the process, you will be left with nothing. So, being content with your life and profits will reduce your worries and you will be happy one day that you have not indulged in extravagant things.

Lastly, I conclude by saying one important thing. You might lose money in stock market but that’s not the end. Never suspect you abilities on other avenues. You have to stand up and prove the world that you have it in you to be successful in life rather than taking any wrong decisions. If you are successful in stock investments, then expand your skills on other businesses as well, so that you can hedge yourself against any unwanted market situations. Please remember long term success involves short term failures as well. For example, Rakesh might be worth 5000 crores in 2020 but still he has lost half of his portfolio in this market crash.

Kumaran Seenivasan.


sharetipsinfo May 14, 2009 at 1:22 AM  

During elections time stock market act very weird. One has to be very careful while doing trading and investments in Indian stock market .

If you have any doubt please feel free to contact us.



This is a blog about stock market investments, investment strategies, and related topics. Any statement made in this blog is merely an expression of concerned authors opinion, and in no case should it be interpreted as an investment advice to buy stocks, sell stocks, or for that matter advice for any other issues be it money related or not. By using this blog you agree to (i) not take any investment decision, or any other important decisions based on any information, opinion, suggestion or experience mentioned or presented in this blog (ii) verify any information mentioned here, independently from your own reliable sources (for e.g. a registered investment advisor) and thereby check for possible inaccuracies. This blog is to create investment wisdom among general population and the authors are not responsible for
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