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

11 comments:

siva August 27, 2011 at 2:10 AM  

Dear Mr.Kumaran,

While your opinion about current market situation could be real, the investment made by businessmen like Ambani and Maran could not be equated with small retail investors who do not have muscle power. I give below the recent development in Spicejet and how these persons could influence the company-

Low cost carrier SpiceJet today said it will issue over 3.59 crore shares to promoter Kalanithi Maran on preferential basis, amounting to around Rs 78 crore at the current market price.
In a filing to the Bombay Stock Exchange (BSE), Spicejet said, "The board of directors... has decided to issue 3,59,77,616 equity shares of face value Rs 10...to Kalanithi Maran, promoter of the company, on preferential basis".
SpiceJet scrip is trading at Rs 21.75 on the BSE, based on which the allotment works out to over Rs 78.25 crore. The company's share fell 4.19% in today's trading.
Kalanithi Maran, together with his firm Kal Airways, holds 38.16% stake in Spicejet. He took over as the company's chairman in November last year.
Last month, SpiceJet had said its promoter group firm Kal Airways has pledged 86.17% of its total holding in the company. It amounts to 33.27% of the outstanding shares of the company.
Kal Airways holds over 15.65 crore shares in SpiceJet

Many such things go unnoticed in India.

Kumaran August 27, 2011 at 11:19 AM  

Dear Siva,

I expected that someone would point out the muscle power. But it works only to a certain extent. If every big business man can change things by muscle power, no company would default or go bankrupt. Even after the Spicejet allocation of shares, still Kalanithi Maran's investment is down and thats the truth. I am just comparing the perspective here. Business men like him consider the investment as an ownership and they remain invested as long as they see hope in the company. But retail investors buy at higher price and panic sell at a lower price which is a double sucide in stock market.Also you have mentioned about pledging of shares which is not muscle power in any sense. Thats actually a worst thing that can happen to the company thorugh a promoter. If the Spicejet stock price goes below a certain level, then the pledged shares would be sold in the open market resulting in complete erosion of shareholder money. This has happened to many companies recently including GTL Limited, GTL Infra, and KS Oils. Why Azim Premji could not use muscle power to protect his investment in Subhiksha? Even Narayana Murthy invested Rs.300 crores in SKS Microfinance and his investment is down by 25% now. So I agree to a certain extent that big guys can use some muscle power to protect their investment but thats also to do with higher risk they are taking. One other valid argument that you can make is that they can survive even if they lose the entire investment and retail investor can't. Anyways, thanks for taking time to comment here.

Kumaran.

Anonymous,  August 30, 2011 at 1:40 AM  

Hi Kumaran,

A nice one i shud say considering the market conditions. But i have to admit that its very hard not to press panic button for retail investors. Take example of Lakshmi energy and foods. From around a year, its been hammered almost 90% and when such things happen and no bottom or upmove in visibility, its very hard to stay invested.
and BTW any idea why that stock is hammerred to an extent its today. I believe its unfair considering the valuations and the market share they have in non-basmati segment

Nannu,  August 30, 2011 at 2:17 AM  

Kumaran,

Nice article at a perfect time. I personally feel this is the right time to start buying, but investors should be willing to see their investment loose 20-40% because nobody knows what is the market bottom.

My stategy is as follows:
1)I have kept a fixed principle which I will be investing in instalments during this phase.
2)Every month I will buy mutual funds in SIP.

Hope this strategy works in 2-3 years time.

Regards,
Nannu

Hemanth August 30, 2011 at 6:17 AM  

Hi Sir

Am a regular reader of your blog. Can u please tell me were i can find the exact book value of the share like you told the current value of PFC is less than the book value... Thanks in advance

Navy Cut September 5, 2011 at 12:39 AM  

Hi
Nice analysis which put forths a point that retail investors see money as money and not as if they own the business.

I have a question regarding REC which has high operating profits but also has high debts which actually makes the interest payments higher. Is it recommended to buy a company with higher debts which might be quite a risk in case of any unprecedented event.

Anonymous,  September 10, 2011 at 2:06 AM  

Sir

Nice article indeed..
Keep the good wrk

Thank you
Venkat

karuppiah September 12, 2011 at 4:57 AM  

Thanks ofor the wonderful post!! On seeing the Sectorial breakup of Sensex picture in the front page I have a generic question. Why companies like IOC, BPCL, HP are not a part of SENSX 30?

Anonymous,  September 12, 2011 at 5:09 AM  

Can you please tell your view about Suzlon? It is trading at low valuation.

Anonymous,  October 18, 2011 at 1:02 AM  

Agree on this.. in general that the markets are at a generational low. With the S&P trading 12 times its earnings, this is the ideal time to get in. Markets seemed to have priced in recession while we continue to see better than anticipated economic numbers. Fears of China hard landing and Euro Zone debt crisis aside, markets should retrace around 1160 and shoot higher to around 1280-1300 levels atleast during the earnings season. Always pick quality growth stocks AAPL, CTSH,CMG,GOOG,FCX,IBM etc. With tight stop losses, retail investors must get in at extremely low RSI levels and can make a quick 10-20%. RSI must be used in conjunction with MACD and stochastics, while paying close attention to $VIX which signals the overall investor sentiment critical for making entry & exit points

KR November 7, 2011 at 5:43 AM  

Dear Mr.Kumaran,

I like ur articles and it is very useful. Can u give me a article like 'Session active stocks' please consider my request.... Thanks& Regards- Kamal

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