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Tuesday, August 7, 2007

Something for the investors

Being a low risk operator, your leitmotif in life is to avoid anything hot. Touching anything hot will not only scald you but could well burn a hole in your pocket. Rumor mills in our bourses will always provide grist to the mill, but we suggest you not to get pounded inside it. Here it would be pertinent to talk about ''momentum investing'' or buying what is going up and thus, has the momentum. Simply put, it means ''join the gang''. If everybody thinks stock x is a good buy, then it has to go up because everybody will buy it. Yes, it works fine for a month or two. But the only problem is that you are likely to be one of the last people to join the herd and will not know when the momentum reverses. And then the herd becomes a stampede. So, stay away from ''hot stocks''.

Look at the management quality:-

Thou shall keep away from a company run by management with a track record of incessant wealth dilution or corporate mis-governance. It is all the more relevant in India as there have been numerous cases where fraudulent promoters have literally flown with cheap equity money. But how do you judge management quality? The best place of course is the annual report. A company''s attitude towards minority shareholders is important. And this is not reflected in discount coupons or soft drinks at Annual General Meetings. Good indicators to consider are level of disclosures in the annual report, levels of investments in group/ associate companies, etc. However, the only exception to this commandment you can make if you have a reliable report that the management is changing for good.

Do not buy stocks of the same feather:-

Putting one''s eggs in a single basket is na¿ve. So also keeping a large portfolio. This could turn unwieldy and is a sure recipe for below average returns. But how on earth would you chose stocks in a market with more than 6,000 scrips? Well, the choice will remain confined to those scrips, which are frequently traded. But then nowadays most IT and media stocks are well traded.IT and media stocks are well traded. So does that mean that one''s portfolio should contain only IT and media companies? Nah¿ To limit risks it is important that you don''t go gung-ho on some sectors as their fortunes change without taking your permission. You shall choose such scrips, which represent the broad spectrum of industries and confine your choice to those who are proven market leaders in their field of business. You buy businesses and companies. You do not buy the market or stock prices. An exception to the market leader rule can be made only if there is a big turnaround or restructuring story.

Strong industry and company position:-

You are known by the company you keep. Similarly, a company is known by the industry it is in. A company''s performance can be as good as the industry it is in. Look at what happened to a blue chip company like Telco in the last three years. It is the fifth largest manufacturer of commercial vehicles in the world. It is a market leader with 75% market share of the Indian commercial vehicles market. If just by looking at these figures, a fool had invested in the stock at Rs500 three years back, his capital would have eroded about 70-80%. What went wrong? The industry went into a recession. So even the best company in the sector turned in very poor performance. Hence, it is important to understand industry dynamics and industry prospects.

Positive cash flows:-

You shall invest only in companies that are expected to have a positive cash flow in the next 3 to 5 years. In other words, the companies that will have ''operating'' cash flows higher than their requirements for capital expenditure and investments, only merit a look. The important phrase is of course ''operating cash flows''. Operating cash flow is the profit after taxes (net profit) plus depreciation (a non-cash expense). It represents the money left with the company after meeting all its regular expenses and therefore belongs to the shareholders.

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This blog does not share personal information with third parties nor do we store any information about your visit to this blog other than to analyze and optimize your content and reading experience through the use of cookies.You can turn off the use of cookies at anytime by changing your specific browser settings.This privacy policy is subject to change without notice and was last updated on 20.3.2013. If you have any questions, feel free to contact me directly here: Investment in equity shares has its own risks.Sincere efforts have been made to present the right investment perspective.The information contained herein is based on analysis and up on sources that I consider reliable. I,however,do not vouch for the accuracy or the completeness thereof.This material is for personal information and am not responsible for any loss incurred based upon it & take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations above.The stock price projections shown are not necessarily indicative of future price performance.The information herein, together with all estimates and forecasts, can change without notice.

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