Lessons from Share Market.!

               

                        Many of us desire to make money from the stock markets, because it doesn't seem to take a lot of skill. After all, like a casino, all you need is one good trade. That's what we read about — the success stories of investing talk about how Warren Buffett bought into Coke, or Rakesh Jhunjhunwala bought Titan, or Paulson shorted sub-prime mortgages or such.

While these investors — and many others — have benefited from the huge success of a few stocks, there are thousands, even millions, of other investors who lost much of their money chasing performance. And not just speculating, but even with deep, well researched analysis. A stock that seemed like a steal three years ago is still a steal; they have higher profits, and a lower stock price. In another ten years, they might still have the same stock price. The "value trap" attracts people who think luck plays no role in investing, that all it takes is good analysis.  Value traps are lessons you don't learn about in books; real life teaches you instead.

I attended the School of Hard Knocks, and every time I think I'm close to graduating, I fail the next test. Here are four mistakes I've made and hopefully, learnt from.

Chasing Highs and Lows

What we like is to have "caught the low" — bought it when the stock was at the bottom. This is unlikely to happen — you may catch a bottom once or twice, but it's like a falling knife that'll slice through you. When Satyam fell rapidly from over 200 to 80 in December 2008, I had decided to pick up a few shares, assuming that it was just a "margin call" or something. The news about Mr. Raju's announcement waltzed in a few minutes later, that he had lied about the company's financials all along. I sold the stock — intra-day — at Rs. 65 or so. It still languishes around those levels three years later. What I thought was a "low" at Rs. 80 went all the way to Rs. 20.

I want to sell the highs too. I held a share called Reliance Petroleum Limited (RPL) which was bought in its IPO at Rs. 60. The stock went to Rs. 240 and I decided to sell. Yet, I felt those pangs of regret as the stock went to Rs. 300. Even with a very good profit — 300% in less than two years — I felt bad that I couldn't make some more?

For the record, I have picked highs and lows; I have bought at the high and sold at the low more often than the other way around.

The Desire to "know". 

A friend who had $1,000 in currency asked me if it was a good time to convert to rupees. I said I had no idea. He laughed, and asked me why I was in the finance business if I didn't know. But I honestly didn't know if:

a) He should care where the rupee or dollar would go, in a one-off transaction, not being a trader

b) The dollar would move further up — and therefore my friend could get a few more rupees for his dollars

c) Any prediction would be to simply assuage my friend's need for an answer.

We all wish we could know, which is why astrology is so popular. But we don't. The markets have asymmetrical information; different participants know different things. An investor may be aware of a problem that you and I don't — and if he sells heavily, the stock collapses; with the information we have, the stock looks attractive, but is it?

I've been trapped enough times thinking that I know more than the market — but more often than not, I've been the ignorant one. In the face of the knowledge that one doesn't really know, what's the right action? Not invest or trade? That would be pointless, because investing or trading, even with incomplete information, can lead to substantially higher returns.

The Revenge Trade

And just when I've admitted I was wrong, the stock stops falling and goes back up to new highs. This short-circuits my brain, and I feel like the universe has just conspired against me.

The desire for revenge has made me jump back into a stock, only to watch the temporary move reverse and again come back to hurt me. Usually, such a trade has no logic; it's just a strong feeling that losses in one stock must be recovered from the same stock.

The Perspective: Percentages and Absolutes

Consider the proposal where if you invest Rs. 20,000 in certain (80CCF) bonds, you don't get taxed on that amount. With all sorts of calculations, you hear that you're really investing Rs. 14,000 (since you would have paid Rs. 6,000 as tax on that money, in the highest marginal tax bracket) And then, you get back Rs. 26,000 in five years, making your return 13.2%.

While the 13% is attractive, the entire exercise allows you to earn Rs. 12,000 in five years (assuming the 6,000 in tax saving, and 6,000 in interest).That's Rs. 2,400 per year, or Rs. 200 per month. When you are earning more than Rs. 8 lakhs per year — that's at the highest tax bracket — the amount saved is significantly lower than the joy you feel by hearing "13%".

Absolutes and percentages both matter; when you get a high percentage return on a single trade, the school of hard knocks tells you to evaluate the overall return on your portfolio instead. You don't appreciate a car that has a great steering wheel if its engine misfires, its headlamps don't work and the seat is uncomfortable. You don't praise one good trade if you have three equal (or worse!) bad ones burning your portfolio.

Food for thought:- Perhaps you invested five years ago, when the India story was going strong and they told you, like they told me, that India was the next big thing. Five years have gone, India's GDP and per capita income have doubled, car sales have quadrupled, and yet, markets have returned a miserable 4% per annum, just about beating the savings deposit rate. India's stock market behaves very differently from the rest of India, we learn, as we pass through another year in the school of hard knocks.

Courtesy :- Deepak Shenoy, Co-founder of Market Vision.

Invest like how a girl does.!

Warren Buffet is undoubtedly the best man when it comes to making Investments. It is popularly said that his hands have a Midas touch and whichever investments he makes; it earns him a healthy profit. As per Forbes, Warren Buffet’s wealth has been estimated at a whopping 50 billion dollars (as of March 2011) and all of his wealth has been made through Investments.

But how does Warren Buffet do so? What is his Investment style that makes him unique and which no-one has been able to replicate since decades? A recent study conducted by LouAnn Lofton who studied the habits of the world’s most renowned investor has revealed that Warren Buffet’s investing style can be correlated to that of a woman. 'Yes, you read it right, Warren Buffet has a Feminine Investing Style.'

The Researcher of this study has also authored a book on this study by the name – ‘Warren Buffet Invests like a Girl’. By the way, some of the most interesting recent studies have just begun to uncover the role of testosterone in investing, risk taking and trading. You're not shocked to hear it has one, are you?

The key here is that women's trading hurt their performance less than men's, thanks to men's greater Overconfidence. The difference, then, is more related to temperament than it is to skill. You can be the smartest securities analyst around, but not having the correct mindset can absolutely sink you as an investor. All the know-how in the world can't correct for bad habits. Temperament matters, plain and simple.

How does the issue of overconfidence play into investing behavior and results? Well, because of their overconfidence, it was assumed correctly, as it turned out that men would trade more than women do. And what does more frequent trading do to your investment results? It drags them down, running up transaction costs and acting like the proverbial albatross on what might otherwise be smart investment decisions.

The Eight traits female investors share with Warren Buffett: 

1. Trade less than men do.

2. Exhibit less overconfidence: men think they know more than they do, while women are more likely to know what they don't know.

3. Shun risk more than male investors do.

4. Be less optimistic, and therefore more realistic, than their male counterparts.

5. Put in more time and effort researching possible investments, considering every angle and detail, as well as considering alternate points of view.

6. Be more immune to peer pressure and tend to make decisions the same way regardless of who's watching.

7. They learn from their mistakes, men don’t.

8. Have less testosterone than men do, making them less willing to take extreme risks, which, in turn, could lead to less extreme market cycles.

Food for thought:- Investing isn't a man's world anymore—and that's a good thing for individual portfolios, Dalal Street, and the world's financial system. "After all, the stock market is filled with individuals who know the price of everything, but the value of nothing."

Why one can't write off US..??

                          A recent report by Boston Consulting Group (BCG) put forth an argument that a certain economy could challenge China's status as the world's preferred manufacturing base by 2015. Can you guess which economy it can be? Alas, how much ever we may want, it is certainly not India. Instead, that economy is none other than the US. Surprising, isn't it? Even I was quite bewildered when i read this. And though it cannot be said with any certainty how things will turn out, it would be worth noting the arguments behind the view.

Let's first understand what led China into becoming the global manufacturing hub. There were three main reasons: Cheap labour, Cheap currency and Robust government initiatives to attract foreign capital. However, the Chinese Yuan has appreciated by about 20% against the US dollar over the last five years. During the same period, China's annual inflation has on an average been 1% higher than that of the US. What is also worth noting is the fact that between 2005 and 2010, pay and benefits surged by 19% annually for average Chinese factory workers.

Compare that with a modest rise of only 4% for US workers. By 2015, BCG estimates US manufacturing to be just as economical as Chinese for many goods made for North American consumers. In fact, after hitting a low of 8% in 2008, the US share of global exports has been on the rise. This means good news for the US dollar but bad news for emerging economies including India. Many believe that the Indian rupee has been beaten down mainly due to the Eurozone crisis and will regain lost ground once the crisis eases. However, if the US economy does make a comeback, and the Indian economy continues to suffer from a high current account deficit and high inflation, the rupee may remain depressed for much longer than we think it should.

US nominal GDP was nearly $14.5 trillion in 2010, approximately a quarter of nominal global GDP. The European Union has a larger collective economy, but is not a single nation. Its GDP at purchasing power parity was also the largest in the world, approximately a fifth of global GDP at purchasing power parity. The U.S. economy also maintains a very high level of output. I usually hate giving numbers in my blog but then sometimes I have too. Apologies pls.! In 2010, it had a per capita GDP (PPP) of $46,844, the 7th highest in the world. The U.S is the largest trading nation in the world. Its three largest trading partners of 2011 were Canada, China and Mexico. Remember pls.! May be asked in Tata Crucible Quiz.!! ah,Carry on.

The United States is home to 139 of the world's 500 largest companies, which is almost twice that of any other country. About 60% the global currency reserves has been invested in the United States dollar and only 24% in euro. The country is one of the world's largest and most influential financial markets. Foreign investments made in the United States total almost $2.4 trillion, which is more than twice that of any other country. American investments in foreign countries total over $3.3 trillion, which is almost twice that of any other country.

The labor market in the United States has attracted immigrants from all over the world and its net migration rate is among the highest in the world. The United States is one of the top-performing economies in studies such as the Ease of Doing Business Index, the Global Competitiveness Report. Last but not the least of all, nothing can beat US in terms of technology and Innovation. That's the sheer truth.

Food for thought:- Word of caution infact for some - According to the Tax Foundation’s Microsimulation Model, to erase the 2011 U.S. budget deficit, the U.S. Congress would have to multiply each tax rate by 2.4. Thus, the 10 percent rate would be 24 percent, the 15 percent rate would be 36 percent, and the 35 percent rate would have to be 85 percent. Total U.S. government debt is now up to 90 percent of gross domestic product. Still, one can't have the guts to write off US.