Saturday, August 27, 2011

What Should Retail Investors do?

It has been more than a month since I posted in the blog. Oh boy I did not utter anything, otherwise whatever I wrote would have gone wrong. Markets have brought back the 2008 ghosts to remind us that the western debt will continue to haunt our life time. Only strong willed investors can survive these situations and emerge stronger than before. The rules are simple but very difficult to follow and with little bit of understanding, anyone can make up their mind to stay invested and buy more while the market continues to fall.

It’s true that the market has fallen and the portfolio of retail investors are down by 30% minimum. But some experts and analysts are trying to act very smart that they have predicted this long back. Actually it is not. The investments went down not only to retail investors but also the big businessmen like Mukesh Ambani and Kalanithi Maran. I will attempt to compare the real life investments made by Ambani and Maran recently and how we can learn from this to remain calm and come back stronger.

Investment by Mukesh Ambani - EIH Limited (Operates Oberoi Hotels)


Exactly in August 2010, Mukesh Ambani bought 5.54 crore shares (14.12% stake) in EIH Limited for 1,021 crore rupees that is to Rs. 184 per share. Immediately after he bought this stake, EIH announced the rights issue of 5 shares for every 11 shares held at Rs.65 per share. So, Ambani was eligible for additional 2.52 crore shares taking his investment to 1183 crores. The final price per share comes out to be Rs. 146 per share.

EIH Limited is trading at Rs.86 now (August 26, 2011) and his investment in down by 41%. Do you think a businessman like Ambani did not do his due diligence before investing? Of course he did. But the truth is, no matter who you are and how you analyze, uncertainty and stock market are inseparable. People often argue that some guys make money irrespective of the market. If that is true, why did great investors like Raj Rajaratnam (Founder of Galleon Group) and Rajat Gupta (Former Managing Director of McKinsey) were involved in insider trading? I agree some guys make money irrespective of the market, but only with the help of unscrupulous practices.

So the point I am making here is, you can be Ambani and still will not be able to predict what’s going to happen in the market. Do you think Ambani would have bought EIH Shares at Rs.146 if he knew market would fall? If he knew then, he would have of course waited for the market fall and bought the same stake for less than 800 Crores and might have saved 500 crores in the process. But what’s the lesson here? Even though his investment has declined in value, he remains calm and does not panic and sell. Once the market reverses the trend, he not only gets back his investment but generates decent return over investment as well. All he does is to remain invested and ride out the volatility. Why can’t a retail investor do the same thing? It is possible if you stop looking at your portfolio every day.

Investment by Kalanithi Maran – Spicejet Limited

Kalanithi Maran entered into an agreement in June 2010 to buy 37.75% stake in Spicejet Airlines at Rs.47.25 per share (16% discount to the market price of Rs.56 at that time) spending 940 crore rupees. He would not have bought it at that price, had he predicted the Western Debt problems or Inflation and interest rate issues in India or Market fall around the world. He invested as he honestly thought that it was a good investment at that point of time because 10 years down the line most of the people would be using Airlines for travel in India.

But Spicejet is trading at Rs.21 now and his investment is down by 55% in one year (His 940 Crore investment is worth 423 Crore now). But he does not react to these developments and remains invested. So retail investors also can remain invested during the market turmoil and can get back the money when the situation becomes normal as long as investment is in decent companies. If you happen to be very unlucky, then you can also lose money just like how Azim Premji lost Rs.230 crores in Subhiksha Retail.

Market Scenario as of August 26, 2011

I posted an article titled “2011 – Year of Opportunity or Disaster” on March 19, 2011 and suggested to keep accumulating stocks throughout this down turn. Market has become far more attractive now and this is definitely a great opportunity for the people who have missed out in 2008 – 2009 market crash. Forget about where SENSEX is trading now. Experts can say whatever they want (14 times EPS or 12 times EPS etc.). SENSEX is at 16000 because of few stocks that are trading at high valuations even now. But most of the midcaps are trading at life times lows or 52 week lows.

If you are not buying now and wait for bottom fishing, you will get only poor quality fish later on. Good stocks move up faster than others when the market recovers. Look at the following stocks for example. Most of them are trading at attractive valuations and can be bought now and can be accumulated at every fall for sure. But patience is the key here. One should not panic if the stock price goes down from your purchase price. Believe in your investment and keep averaging the good stocks. We need to take calculated risk in order to be successful in anything let alone the stock market.

Power Finance Corporation (Rs.133) – Trading at less than Book Value

Dhanlaxmi Bank (Rs.68) – Less than Book Value

Allahabad Bank (Rs.168) – One of the PSU Banks that came up with very good June 2011 quarter results, but trading at less than Book Value.

Rural Electrification Corporation (Rs.166) – Attractive valuation

United Phosphorus (Rs. 135)

ICICI Bank (Rs.820)

Axis Bank (Rs.999)

State Bank of India (Rs.1880) or Union Bank of India (Rs. 231) or Bank of India (Rs. 297)


GVK Power and Infrastructure (Rs.16)

Hindalco (Rs.140)

Jindal Steel & Power (Rs.462)

GIC Housing Finance (Rs.85) – Dividend itself 6% at current market price.

HCL Technologies (Rs.362)

Ess Dee Aluminium (Rs. 205)


I have just given few examples. You can pick any of the front line stocks now and you will get good returns in next 3 years time.

Conclusion:

Stocks are available at very good valuation and investors who follow the disciplined investment process can reap rich rewards in next few years time. All you need to do is the following.

Select good stocks.

Don’t chase Multibaggers. Because, off late most of the so called “multibagger” candidates are involved in unscrupulous practices. Example: Educomp, KS Oils, IRB Infrastructure


Keep buying in batches

Don’t panic if the stock price goes below the purchase price

Follow the principle of rupee cost averaging

Believe in your investment


Kumaran Seenivasan

www.stockanalysisonline.com

Read more...

Disclaimer

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
any decisions that you make based on the information provided here.
Creative Commons License
Stock Analysis Online by Kumaran Seenivasan is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 2.5 India License.
Based on a work at www.stockanalysisonline.com.

  © Blogger templates The Professional Template by Ourblogtemplates.com 2008

Back to TOP