How to Trade Using Risk-Reward-Ratio?

The market has a mind of its own. Which direction will it take in the future is unknown. Unknown not only to you, not only to me, but also to the best of analysts and astrologers. Yet you see the market full of such people who are trying to predict the markets, including yours truly. The reason why they are doing it is because it works, it actually works. But if you expect that you will get a positive result 100% of the times, then that is the biggest mistake you will be making. Technical Analysis, or for that matter, any technique, works most of the time but never 100% of the time. And that is the first and foremost thing that you and I need to understand.

Read the Full Post Here

An Elliott Wave Analysis of the Markets

Some of my readers, sure, would be waiting for this post. I can say this because I had done an Elliott Wave Analysis of the markets once before and that post was a massive hit with my readers. A similar attempt is being made now on the current chart of Nifty. But a disclaimer goes with this post and that is that I'm not an expert on the Elliott Wave Principle. I have a little knowledge about it and I'm taking a risk of trying and numbering the waves with this little knowledge, a process which can even prove the best in the field wrong (at times). I would also advise my readers not to give too much of weightage to this post as the market may prove me wrong. But it still might turn out to be useful to read, in case my numbering turns out to be correct.

Read the Full Post Here

How To Get STAGGERING Returns?

Nifty went up for the second successive day today closing 25 points in the green. As mentioned yesterday, there are signs visible that we may not go down further and that the trend might reverse from the bottom made yesterday. Though, a pullback to 5630 was expected even in case of a bearish trend but the fact that it made a high of 5650 and that it even closed above that level of 5630 (closed at 5645 today) makes it look like the trend may have reversed now. If I have any short positions, I should be closing them now and start buying in small quantities. A confirmation that we are in an uptrend will come when the Nifty closes above 5730. We should be looking to fully invest our money at that stage.

A lot of people ask me what stocks have I invested in personally. Well, I do have some holdings but I prefer to put my money where I see good returns. And I find that in commodities. Technical Analysis and your discipline put to work together on leveraged products works wonders. I know some of you would be going - "Oh, Commodities. They are so risky!" Well, I'll explain why people call it risky. Let's take the case of Gold, where the minimum we can buy is 1 kg. and in multiples of that. Gold costing 31000 per 10 grams today means that one kilogram of Gold would cost Rs.31 lakhs. Now that doesn't mean that one has to pay Rs.31 lakhs to buy a kg. of Gold. In derivatives, whether stocks, commodities or currencies, one just has to pay a margin amount. Let's assume that there is a margin of 5% on Gold. In that case one would have to pay Rs.1.55 lakhs to take the position. Lets assume that a week after buying Gold goes up to 31500, thus gaining Rs.500 per 10 grams. That would mean a total profit of Rs.50,000 on a kilogram of Gold. Since the price of a kg. of Gold was Rs.31 lakhs, it translates into a return of 1.62% on the product. But when it comes to return on investment (since you had invested only Rs.1,55,000) it gives you a return of 32.26%. A very good return on investment, indeed.

Now, Gold could very well have gone DOWN by Rs.500 which would have meant that you would have lost 32.26% of your money and would have been left with only Rs.1,05,000. Though, the loss on Gold was only 1.62% but you lost 32% of your money. That can be quite costly and quite risky when you put your entire savings to do that. And for the majority of the people, 1.5 lakhs is like their entire savings. But, unlike stocks, there are mini and micro lots available too. For example, Gold Guinea is a lot size of only 8 grams, which means the total product value is Rs.24,800 and a 5% margin on that would be only Rs.1,240 and a Rs.500 drop in the price of Gold would mean you would have lost Rs.400/- only. Still a 32% loss on investment but a lot more affordable.

This is where Technical Analysis comes in handy. It ensures, in most cases (if you have good knowledge and experience), that about 70% of your trades turn out to be profitable. And if your rules are good - meaning if you maintain a risk reward ratio of 1:2, which means that for every rupee that is at risk, you are expecting a return of Rs.2 then it means that if you take 1 trade a day, it is about 20 trades a month. A 70% ratio would mean 14 of your trades would work out to be profitable and only 6 to be loss making. A loss of 30% on the losing trades would mean a 180% loss but on the remaining 14 trades you make a profit of 420% meaning a total profit of 240% per month. Of course, you don't gain so heavily because usually I look for about a movement of half a percent (instead of the 1.62% taken in this example) to book my profits. That would still mean a 7% profit on 14 winning trades and 1.5% loss on the 6 losing trades meaning a net profit of about 5% every month or a 60% return per annum.

With a little more risk and some luck, it could go up to as high as 8-10% every month. Isn't that good? I would say, it's awesome. And that's where I invest most of my money. I know there is a lot of number crunching in this post and this may even sound confusing to some. But I'm there to help. Do drop me a mail or leave a comment below to let me know that you need help and we'll talk. Yes, I can manage your money on your behalf and we can work out an arrangement. Yes, I know, you will be missing out on the fun and the kick that you get from trading but ultimately, you will be getting what you desire most - MONEY.

Please do subscribe to my posts, so that all posts are delivered free to your inbox and you don't miss any useful analysis of the markets in the future.

Happy Investing!!!

Read the Full Post Here

Core Portfolio vs. Trading Portfolio

It was the time, many years ago, when I met a friend and asked him whether he owned stocks of XYZ company, which was quite in the news those days. And his reply, somehow, stumped me. It was a reply, which I didn't completely understand that time, but once I did, it carried a lot of meaning. His simple reply was that he had it in his trading portfolio but not in his core portfolio. And I didn't know what he meant. And when I asked him, he told me.

He told me that one should always have two portfolios. One - the core portfolio, the one which one should never touch and two - the trading portfolio, which requires your constant monitoring and modifications. This is what he meant. He said the market consists of all kinds of companies, some which are fundamentally very good, some which are fundamentally very bad and the inbetweens. Some companies are always in the news, maybe for the right or perhaps the wrong reasons and such companies always attract a lot of speculative interest. Such speculative interest brings in a lot of volatility and some good opportunities to make money.

Even though the opportunity to make money may exist in the short term but it may not be a very good company to hold for a longer term. And the stocks of those companies which you do not intend to hold for long should be disposed off as soon as your trading objective is fulfilled. Some people may have a trading objective of a 1% return in a day while others may have an objective of 5% in a week and still others who have an objective of earning 10% return in 2-3 weeks. And that's exactly how long these people should retain their stock. As soon as they get their desired return they should sell out and book their profits.

Of course, like the biggest traders and investors, you too may get caught on the wrong foot sometimes. You may have bought shares of XYZ hoping to get a return of 5%. The stock did go up 2% after you bought but then fell back down. You being a wise and a "patient" investor know that it will give you a profit if you hold on to it long enough. Two years down the line, your investment is down 50% and the stock has just become a part of your "core portfolio" and probably, it's always going to remain there even if the company goes bust. Don't you think that had it been a part of your trading portfolio, you would have got rid of it when it went 3% or 4% or 5% below your buying price? You probably would have.

That is the problem with most of the people who lose money. Their portfolio consists of shares that were "once in the news" but are down in the dumps today, it consists of shares they are "stuck" with and most of them do not have any shares which should really have been invested in. At the beginning of the millennium, when dotcom companies were the flavour of the season and when Microsoft was going great guns, the great investor, Warren Buffett was asked if he had invested in Microsoft. And his reply was that he didn't invest in shares of companies having a business he doesn't understand. And since he did not understand computers, he never invested in Microsoft. That doesn't mean that he did not make money from Microsoft. He did because it was part of his trading portfolio and it was in whenever it was in the news and out whenever his trading objective was fulfilled.

Remember, to make a company a part of your core portfolio, you must understand why it must be held for long term. You must understand the reasons and the logic behind your investment and only then should you make it a part of your core portfolio. And to make it a part of your trading portfolio, you don't need to understand anything. All you have to do is to dispose it off after your desired return has been achieved. A trading portfolio needs to be looked at daily or twice a week, but a core portfolio needs to be invested into and forgotten for the next 3-5 years. Unless, of course, something drastically goes wrong with the company that you have to dispose it off otherwise.

I hope I have been able to convey to you the difference between a core portfolio and a trading portfolio. In case you still have a question, why wait? Just go below this post and leave a question in the comment box and I'll answer it right there.


Please do subscribe to my posts, so that all posts are delivered free to your inbox and you don't miss any useful analysis of the markets in the future.
Happy Investing!!!

Read the Full Post Here

Webinar on MACD

This is the third of the series of my webinars. The first webinar was about moving averages and trendlines, the second was about Fibonacci numbers and Fibonacci ratios and this one is about the MACD. To view the old webinars, just go below this post and under the section "Other Posts That May Interest You", click on the posts given under the subsection webinars. In case you have any questions about the topic after you see the webinar, feel free to post your questions under the comments section below and I'll make it a point to come back to you as soon as possible.



Please do subscribe to my posts, so that all posts are delivered free to your inbox and you don't miss any useful analysis of the markets in the future.

Happy Investing!!!

Read the Full Post Here

Stocks Rally: Am I Missing The Bus?

Stocks in the Indian markets rallied for a fifth day in a row today. And this rally today was to be expected after our government won the trust vote in the parliament yesterday. This was to be expected because the Government's win would mean that the nuclear deal will go through (if the NSG and the AIEA do not object). This was good news for the markets because of which the Nifty opened above 4400 and finally ended the day at a high with a gain of 236 points.

I was out today and have just come back home and it is late at night so I won't go into the analysis of charts today. But before I finish, I would like to add one more thing here. A lot of my readers would be thinking that if the stocks continue to rally like this and this does turn out to be a bull market then, surely, they will miss the bus if they do not 'jump in' now. Well, as mentioned yesterday, I would say that this does not seem to be a bull market because the symptoms are not such. But the market can prove us wrong too. It surely can, but even if this is the beginning of a new bull market, this will also have to go through the customary corrections. And it will give us a lot of opportunity to enter. Today's close means that the market has risen 17.3% in just a matter of five days. And that is a big rise in a bear market and a correction has to come in sooner or later. It is just that we are not getting any negative news to trigger a correction. American markets are flat today, European markets closed with gains between a percent and a half to two percent and the Asian markets were also well in the green earlier this morning. Crude continues its downward journey and is now trading at $124.50.

My point is that new bull markets take time to build up whereas it is generally the bear market rallies which are sharp and give us a sense of hope. My point is that a market which has risen 17% in five days would be quick to fall at the first sign of a negative news. A correction of Fibonacci 61.8% can safely be assumed and if we assume today's high to be the high of this rally then that means a pullback to 4060 is possible. Even if it does not fall to that level, I would be more comfortable buying after the pullback is over than now (even if I have to buy a few points higher than what it is today).

Those who think they will 'miss the bus' need not worry because the markets would definitely see a pullback. One must exercise caution when 'jumping in moving buses' because it can lead to accidents and injury. It is wise to 'jump in' when the 'bus slows down' and I am waiting for just that time.

Please do subscribe to my posts, so that all posts are delivered free to your inbox and you don't miss any useful analysis of the markets in the future.

Happy Investing!!!

Read the Full Post Here

Fibonacci Time Zones on Nifty

I’ve written a number of posts about the Fibonacci Series and the importance of Fibonacci numbers in the stock markets including a webinar on the Fibonacci sequence. A few of such posts have been listed near the end of this post.

The Fibonacci Series was given by an Italian Mathematician by the name of Leonardo of Pisa (1170-1250AD), who was also known as Leonardo Pisano, Leonardo Bonacci, Leonardo Fibonacci or simply Fibonacci. A very interesting story is attached to why he was called Fibonacci. Leonardo’s father Guglielmo was nicknamed Bonaccio (meaning ‘good-natured’ or ‘simple’) by his friends and Leonardo was called filius bonacci (which means son of Bonaccio) which was later nicknamed Fibonacci.

The Fibonacci Series is a series of numbers which starts from 0 and 1 and each of the succeeding numbers in the series is derived by adding the previous two numbers in the series. So it goes as 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377 and so on. Each number is 1.618 times its previous number, 2.618 times the number before that and 4.236 times the number before that. Similarly, each number is 0.618 times its next number, 0.382 times the number after that and 0.236 times the number after that.

Fibonacci is present everywhere in nature and this video very well describes it. Needless to say, even the stock markets rely heavily on it. Elliott Wave Principle says that markets move in a direction in a series of 8 waves out of which 5 waves are in the direction of the trend and 3 move counter to the trend. Interestingly, all three numbers 3, 5 and 8 are Fibonacci numbers. It is a known principle that when markets retrace a particular move, they generally find support/resistance at Fibonacci ratios which is why the ratios 23.6%, 38.2%, 61.8%, 161.8%, 261.8% and 423.6% hold a lot of importance. A lot of material can be found on various Fibonacci techniques used in the stock markets such as the Fibonacci retracements, Fibonacci Arcs, Fibonacci Fan Lines etc. However, I am concentrating today’s discussion on the Fibonacci Time Zones. According to the Investopedia, the Fibonacci numbers play an important role in determining relative areas where the prices of financial assets experience large price moves or change direction. There are various examples which show that markets show a high range candle or change direction on the 3rd day, 5th day, 8th day, 13th day, 21st day, 34th day, 55th day and so on. Today’s discussion, however, won’t delve into high range candles but will only concentrate on change of direction.

Before I go deeper into the subject, I would very quickly like to emphasize how the Fibonacci numbers affect the markets naturally. A week consists of 5 trading days (a Fibonacci number), a month consists of 21 or 22 trading days (21, again being a Fibonacci number) and a year consists of 245-250 trading days (being very close to the 233 Fibonacci number). Interestingly, a year has 52 weeks (very close to the 55 Fibonacci number) and 8 weeks consist of 56 days (close to the 55 Fibonacci) and 8 months consist of 240 days which again is quite close to the 233 Fibonacci mark. So, Fibonacci occurs naturally. Nobody had any real intention of making the markets respond to Fibonacci numbers but they naturally do.

I have the weekly chart of the Nifty above, and on it I have drawn vertical lines where a significant market top or a market bottom was formed. Then I have calculated the distance between the top and the next or the previous bottoms and written the number of weeks taken to reach the next low/high. As can be seen from the numbers the market has been consistently making use of Fibonacci numbers like 3, 5, 8, 21 (on some occasions it has deviated to 20 or 22 also) and 34 (though, on one occasion it took 35 weeks) to turn around right from the low formed in May 2003 till Jan 2008. Another interesting thing to note is that the bull market that started in May 2003 and ended in Jan 2008 has taken a total of 55 months, 55 again being a Fibonacci number. Interestingly, the turnaround that happened in Jan 2008 and which has been continuing till now has now completed 24 weeks and is now in the 6th month which has decisively crossed the 21 number mark and the Fibonacci number 5. It means that the markets may not turn around till 34 weeks or 8 months are completed or if things do turn out to be very bad then maybe 55 weeks or 13 months. But we should be looking at the last week of August very carefully as a possible turnaround time because that is when the markets would have completed 34 weeks of a downtrend.

But what about the downside? How low can go the markets go? Let us make use of the Fibonacci retracements this time. The Nifty made significant lows of 599.51 in March 1993, 800 in Nov 1998 and 920 in April 2003 and a significant high of 6357.10 in January 2008 (I can’t help noticing that these are spaced more or less 5 years apart, 5 again being a Fibonacci number). Calculating the 38.2% retracement levels from these different lows to the same high of 6357, we get the support levels of 4280, 4234 and 4157. These are some of the levels where the markets should eventually find support.

I heard an analyst speaking on TV a few days back who was saying that after a long bull market a correction in price as well as time is required. He was saying that we may have seen two thirds or more of the price wise correction but have seen only a third of the pain. He said that in the weeks to come, the price may not fall too much but a lot of pain will be there, which is imminent if the markets were near the support and the bulls and the bears continue to fight near a particular level trying to decide what an appropriate bottom for the market is. Even after the bottom is formed, the pain will not be over since, then the market could go into a long period of consolidation and base building before a significant recovery in price is seen. If this were to be true, we may see a bottom being formed in the last week of August 2008 but a significant price increase (maybe a breakthrough above 4700 or maybe 5000) may not be seen for the rest of the year.

We have tried and have made an effort to analyse what the market may do but, ultimately, the markets have a mind of their own and can prove us wrong anytime. We have to be quick and humble enough to accept our mistakes and change our stance if the markets were to prove us wrong. On the other hand, if the market does move according to our wishes then we know the price levels and the approximate time where we can be more careful and decide whether the market has a mind of proving us right or not. As I said, technical analysis is all about the probability of profitability.

Please do subscribe to my posts, so that all posts are delivered free to your inbox and you don't miss any useful analysis of the markets in the future.

Happy Investing!!!

Read the Full Post Here

Retirement Planning

I feel childhood is the best period which you can go through during your life. You are just born and everybody comes and meets you, play with you, entertain you (or probably you entertain them), give you toffees, candies, cookies, toys and everything that you love. The only problem with childhood is that you don’t remember that period of your life when you grow up. By the time you are big enough to know what’s happening around you, you start going to school and just when you were beginning to enjoy that period you get increasingly heavier doses of homework that it leaves you little time to play. But that is still better as compared to your adult life since you can play an hour or two a day whereas in adulthood you don’t even get time to that.

The second best period of life comes when you go to college. That is the age when you have friends with you, you are big enough to venture out alone with your friends and are not under the constant watch of your parents’ eyes. Once you finish college and start working, life is all downhill. Sure, there are milestones which you enjoy like your first salary, your first music system, your first …. oops, I mean, your marriage and your first child, your dream vacation, your dream house, your 60th birthday and then your retirement. That is the time when you think that you are free from all responsibilities and that you will live life king size. But how often does it happen? Did you know that 60% of the people endure retirement rather than enjoy it? And that is because they don’t plan their retirement well.

One has to plan for one’s retirement early in life and the more you delay the planning, the more you will suffer in your old age. Things are becoming costly. Inflation, which was just between 3-4% a few of months back, is now well over 8%. You can see the price of petrol. I remember the cheapest petrol that I have purchased was Rs.21/- per litre. Now it is touching Rs.46/- (in Delhi. In Mumbai it is past Rs.48/-). Let us just do a simple calculation. You want to buy a LCD TV which costs between Rs.30000 to well over a lakh. Let us assume you plan to buy a Rs.35000/- LCD TV but then you think it is better to buy it when you retire rather than now. And you save Rs.25000/- now thinking that the LCD would probably cost Rs.80000/- by the time you retire and during the same time, your investment of Rs.20000 would also probably fetch you Rs.80000/- and you would be able to buy it. Let us say your retirement is 30 years away. But can you guess what would be the cost of the LCD 30 years from now assuming an inflation of 5%? It will be almost Rs.152,000/- and Rs.246,400/- 40 years from now.

You spend Rs.40000/- a month now and you think after retirement you would reduce your monthly expenditure to Rs.20000/- and for 20 years after retirement you would probably need Rs.50,00,000/- at today’s prices and probably Rs.80,00,000/- assuming inflation. If your retirement is 40 years away, you would need Rs.65000/- a month to buy what costs Rs.20000 today, assuming only 3% inflation. And to sustain through the 20 years after retirement you would need a corpus of Rs.2.1 crores. Do you ever do the calculations and plan how to meet the shortfall.

It is better to start saving early. I would say, as early as today. Every day of delay costs you. I read a very nice article by Mr. Gaurav Mashruwala, a Certified Financial Planner, who says that Vikram started investing Rs.10000/- every month in an instrument giving 8% guaranteed returns per annum in Jan 1991 while his friend Rohit started investing the same amount in the same instrument in Jan 1992, exactly one year later. In Jan 2001 when they saw their corpus, Vikram had built a corpus of Rs.18,29,460/- while Rohit had only Rs.15,74,295/-. His one year delay cost him Rs.2,55,165/- whereas his investment was only Rs.1,20,000/- less than that of Vikram.

That does not sound too grave a mistake. Let us take another example. Let’s say there is a girl who is 21 years old who started investing in a retirement plan that gives her 10% return per annum. She invests Rs.10000/- every month till the age of 36. At 36, she stops investing and lets her money lie in the retirement fund till the age of 60. Her friend, who is a boy, started working at the same age as her but then he first bought a music system, then a bike and then a car. He started investing at the age of 35, which means 14 years later. To make up for the delay he starts investing Rs.25000/- every month and he continues his investment till the age of 55. At 55, he stops investing and leaves the money in the retirement fund till the age of 60. By this time the girl has invested Rs.19.2 lakhs while the boy has invested Rs.63 lakhs. Who do you retires with more money? Well, the girl retires with Rs.4.67 crores while the boy gets only Rs.3.4 crores.

That’s what an early start can do for you and that’s how grave a mistake you can make by delaying your investments. So, start investing now. It is not advisable to waste even a day to invest.

Happy Investing!!!

As mentioned, I am currently out of town and there will be no newsletter for Monday. I'll try and post a newsletter for Tuesday on Monday night. Else it will be Tuesday night for Wednesday.

Read the Full Post Here

The Probability of Profitability

Let us understand technical analysis in a different way today. We always knew that technical analysis is the study of charts and trying to predict the future. But does it work? Is it accurate? How often does it work? What is the probability of making a profit every time? What is the probability of being profitable after a year? Well, we have all the answers here. Come, let us understand probability in very simple terms.

We all have been studying since grade 6 that probability means the likelihood or chance of an event happening or not happening. We all know the example of the flipping of a coin and throwing a dice or drawing a card. For those who don’t know, here it is. When we flip a coin, only two possible things can happen. Either we get a heads or a tail. Since there is one chance of getting a heads out of 2 outcomes, the probability is ½ or 0.5. Similarly the probability of getting a six on the throw of a dice is 1/6 or 0.1667, the probability of drawing a card of hearts from a pack of cards is 13/52 or 0.25 and the probability of drawing an ace is 4/52 or 0.0769.

But, have we ever thought what is the probability of making a profit if we pick up a stock at random? Let us see what the possible outcomes are when we buy a stock. It can either go up or come down. Which means the probability of making a profit is ½ or 0.5 or 50%, which is a very high probability. Then why do we do so much of research and ask people to give us tips or spend hours looking at charts? Just for a simple reason that we want to increase our probability of making a profit to 0.7-0.8 or 70-80%. But, does it help us? Are we able to increase our profits? Actually speaking, no. Believe me, we are still better off picking up stocks at random and let the probability remain at 50%. I will give you a very simple formula. You pick up any stock at random, have a well-defined exit strategy and an equally well defined profit booking strategy. Let us say that our rules are that we will pick up a stock at random and book a profit if the price goes up by 10% and keep a stop loss 5% below our purchase price. Believe me, with such a strategy, you will never never make a loss.

Is the above system acceptable? It is not very difficult to follow. All we have to do is to book our profits and losses as defined by our rules. I am sure, we can all follow these simple set of rules to make profits. But, before you go ahead and implement it, let us talk about the drawbacks also. Over the years that I have been involved in the stock markets, I have not only studied technical analysis, I have studied human psychology too (as it works in the stock markets). I have learnt that the drawbacks lie in your mind. Firstly, you will never be able to come to terms with the fact that you have made money. You will always be thinking that it was this system that made money. The thrill of investing in the stock markets will be missing because the decisions are automatic and not your own. Secondly, you will be tempted to book profits at 9% (or lower) instead of 10% while when it comes to executing your stop losses, you will be reluctant to do so even at 8%. Thirdly, the returns are too low – only 2.5% on your total investment. You get more in a savings account. And last, the system will work well in bull markets and will be terrible in bear markets. God save you from the bear markets if you follow this system.

So, is fundamental option the best option? Well, it does help. But it has its own drawbacks. Fundamental analysis tells you whether to buy or not to buy a stock. But it has no clearly defined entry and exit strategies. So, you may never know when to book profits and when to cut your losses. The human psychology is such that it forces you to take your profits quickly before your profits turn into losses. And if you are in a loss, you will keep riding your losses because you are thinking that you had done proper research and that sooner or later the price should follow the fundamentals, so you keep holding on to your losing positions. No doubt, on some stocks you can get profits many times your investment but in some you could lose a lot too.

That leaves us with technical analysis. Technical analysis has well defined entry and exit levels and with proper discipline you can continue to ride your profits and cut your losses early and you can make a lot of money. But like any other method, this has its own set of drawbacks. The hit rate is not very good. If you choose 10 stocks, it is likely that only 3 or 4 calls out of those 10 will come out to be correct. But the advantage is that those 3 or 4 calls give you enough profits to cover not only all your losses from the remaining 6-7 calls but also gives you enough profits to give you a good return. Many technical analysts keep trying to develop methods which will give maximum profits. I am currently developing a system which will give me small profits but the hit rate would be between 85-90%. The details of the system are ready and I am currently testing it with my own money to fine tune it a little and it can then be given to a few selected subscribers who are disciplined enough to follow it and once they have also tested it for sometime and some more fine tuning is done, it can be shared with all others. This system, for convenience sake, shall be referred to as 'System A' from now on.

We should consider our trading to be a business. The objective of any business is to make money and that’s what will be the objective of our business. Like in any other business you will have some centers which will be your profit centers (which give you lots of profits) and some as your cost centers (which earn no profits but only cost you money). The objective is to maximize the profits from your profit centers and minimize the costs in your cost centres. Similarly, in this trading business there will be some stocks which will give you a lot of profits and some which will only give you losses. So, as long as you maximize the profits and minimize the losses, you will end up in a profit. And that is what technical analysis helps us achieve. Helps us to ride our profits and minimize our losses.

We have learnt today that there are many methods which help us to make profits. But all of them have their own advantages and disadvantages. Within Technical Analysis (which I consider to be the best, though this is a debatable topic) too, there are many methods but the Dow Theory is the oldest and the easiest method of technical analysis. According to Martin Pring, as mentioned on buddycom, if an investor had invested $44 in the Dow in 1897 and liquidated his position after 93 years in Jan 1990 (pure buy and hold strategy, as happens in fundamental analysis), he would have got $2,500 after 93 years i.e. 56.82 times his investment, while another investor who invested and liquidated at the same times and who sold on every sell signal and bought on every buy signal would have got $51,268, a whopping 1165.18 times of his initial investment. That is the power of technical analysis and that shows how our probability of profitability increases with technical analysis. And technical analysis requires only one skill. Discipline.

Read the Full Post Here

Webinar on Fibonacci Series

After the terrific response that I got to my first webinar, I have produced another one and this one is on Fibonacci retracements or the Fibonacci Series. Fibonacci series is a series of numbers obtained by adding the previous two numbers in the series. Surprisingly, Fibonacci numbers or ratios are used everywhere, intentionally, unintentionally or just naturally. It is there in the pattern in which plants grow, the numbers in which rabbits or bees reproduce, our human body, architecture, music, stock markets, astronomy, just about anywhere. You can see about it in this short video before you view my webinar.

Please leave your comments on the webinar and whether you would like more webinars to be put up in the future or are text newsletters just fine?

Read the Full Post Here

Mutual Funds - Do's and Don'ts

In the past few weeks I have written two posts on mutual funds, namely “Mutual Funds – What Are They?” and “Mutual Funds - Part II”. After those two posts I felt as if there was still a lot more that regular investors need to know about mutual funds. And that is why I am here. I will be writing about some things that an investor should remember/know before investing in a fund. Also, I notice, that there are a lot of myths associated with mutual funds which I would like to clear here.

Things to Remember

Diversify: Remember to diversify your portfolio. Invest in 3-4 different funds out of which at least 60-70% of your money is in well diversified funds. DO NOT put all your eggs in one basket. Do not invest all your money in only sectoral/thematic funds.

Portfolio of the Fund: Before investing your money, see the portfolio of the fund you are investing in. Make sure that about 80% of the fund’s total corpus is invested in fundamentally strong blue chip companies and only about 20% is invested in opportunistic/risky stocks. Once you have examined the portfolio, you should have conviction in it. Growth can sometimes be painfully slow but over the longer term, blue chips are more likely to outperform than any other class of stocks. All information about mutual funds is available on the internet and a screenshot of the portfolio finder section on one such site is given here.

Past Performance: While past performance is no guarantee to future performance, it acts as a good indication. A fund which has consistently performed well in the past is also likely to do so in the future. Odd spikes like an annualized return of 70% in 15 days or 30 days is not a very reliable indicator but a return of 30% annualized in a period of 3 or 5 years is usually a good indication. Invest your money in funds showing good consistent growth rates. A screenshot to check the past performance is shown here. Also important to look at is the rating of the fund given by various rating agencies.

Choose Undervalued Funds: Mutual Funds can also be overvalued or undervalued and NAV is not the deciding factor. A fund may have an NAV of 20 and still be overvalued as compared to another fund which may have an NAV of 200 and be undervalued. The important factor is the Price to Earnings (P/E) of the fund. Funds also have P/Es and a fund with a lower P/E will be considered as undervalued as compared to a fund with a higher P/E. Compare the fund’s P/E with the P/E of the benchmark index, namely Sensex or the Nifty. P/E of a fund is nothing but the weighted average of the P/Es of all individual stocks in the fund’s portfolio. If you go to this site you can see various attributes, of any mutual fund in India, like the rating of the fund, fund facts, NAV, risk and return and the portfolio of the fund. The P/E of the fund can be found in the portfolio section, as can be seen in the screenshot with the portfolio write-up.

Monitor Your Performance: Once you have done the above things and have invested the money into mutual funds of your choice, just sit back and relax. All you have to do is to come out of your slumber at least once a month and see the performance of your funds. If your funds are not giving you any returns or have returns much lower than the broader market then it may be time to change your fund. A good way of comparing the returns of your fund is to compare it with the returns of the Nifty or the Sensex (if your fund is an equity fund).


Some Common Myths

Dividends Give Extra Money: All dividends are tax free. So, all the money that you get from dividends is tax free. That is good, but then why do I say that dividends giving extra money is a myth? Let us understand with a simple example. I have invested Rs.20000/- in a fund at an NAV of Rs.150/- and the fund has now declared a dividend of 20%. Since the dividend is on the face value, which happens to be Rs.10/-, I would get a dividend of Rs.2/- per unit. I had only 133.3333 units with me (20000/150) and I would get a cheque of Rs.266.67 as dividend, which works out as 1.33% of Rs.20000/-. At the same time the NAV would also come down by Rs.2/-. So, effectively I’m withdrawing a small amount from my own funds, contrary to the notion that I had that I was getting something extra. I can’t put these Rs.267/- to any productive use. Had I left them in the mutual fund and withdrawn after 20 years, they probably would have become Rs.10000/- which would both be substantial and at the same time could be put to some productive use too. Some people instead opt for dividend reinvestment option so that the dividend amount can be used to purchase additional units in the same fund so that the money remains in the fund. But on this purchase you have to pay an entry load of 2.25% again thus paying Rs.3.55 as charges. So you end up withdrawing Rs.266.67 and reinvest only Rs.263.12. In my opinion, it is anyday better to let your money stay invested in the growth option.

NAV is Immaterial: A lot of people I have come across prefer to invest in funds whose NAV is lower, rather than investing in high NAV mutual funds. That is a myth. They do not want to invest in a scheme having a history of 8 years and whose NAV is Rs.200/- per unit but they don’t mind investing in a similar scheme with a similar portfolio having an NAV of Rs.25/- per unit with negligible history. The NAV, as mentioned in the earlier post, is calculated as the Sum of the Value of all stocks held by the fund and then divided by the total number of units issued by the fund. Thus, two fund schemes having exactly the same portfolio with equal weights will deliver exactly the same return. Let us assume that both the schemes talked about above earn a return of 28% in two years. And if Rs.20000/- were invested in both today then we would be issued 100 units in the first scheme and 800 units in the second. The NAV of both schemes 2 years hence would be 256 and 32 respectively. The value of the first scheme would be Rs.25,600/- (100*256) two years from now and the value of the second scheme would be …. Any guesses??? Yes, Rs.25,600/-.

NFOs Give Better Returns: NFOs mean New Fund Offers. All NFOs are priced at Rs.10/- and that is an arbitrary figure. They could have very well priced it at Rs.1/- or Rs.100/- or Rs.1000/- and it would have made no difference to them. As mentioned in the point above, the NAV does not matter but it is the performance of the fund over a period of time that matters. And why would anyone want to invest in a fund with no history rather than in a fund having an excellent three year track record? In the 1980s and early 1990s, all shares in the equity markets were also issued at Rs.10/- or Rs.100/- depending on the book value of the shares. Irregular pricing (at discount or premium) or via the book building route was not there. So, it used to make sense in those days to buy shares in the Initial Public Offer (IPOs) at Rs.10/- and sell it in the markets when they listed for Rs.50/-. Nowadays, most IPOs are so heavily overpriced that it does not make sense to invest in them at all. Holders of Reliance Power IPO shares would vouch for it. These days almost 90% of the IPOs do trade below their issue price within 6 months of listing. An NFO at Rs.10/- is neither overvalued nor undervalued. In fact it has no value at all till the time the NFO closes and it constructs a portfolio. This is exactly the reason why the NAV is declared 30 days after the NFO closes, because till that time there is no portfolio, hence no change in value and hence no NAV. It is a total myth that at Rs.10/- the NFO is highly undervalued.

Timing the Market Can Save Money: This is, probably, the biggest myth of all times. It is impossible to time the markets. You may be successful in catching the exact highs or the lows one or two times but will be wrong in the remaining 8-9 times. If you have conviction that markets will do well in the next two years then today is the time to invest. The key point is the ‘time in the market’, not ‘timing the market’. This article will help you more to understand about investing for the long term. And since timing the markets is impossible, the best route to invest at the cheapest rates is to continue investing small amounts for a longer time, in short – follow the SIP route.

I hope that clears all doubts regarding mutual funds. In case you still have any questions, you can post them in the comments section and I’ll answer them there. And if there are too many questions, I’ll probably write another post answering all the questions.

More tomorrow.

Read the Full Post Here

Mutual Funds: Part II

Last week I had written a post on mutual funds titled "Mutual Funds: What They Are?" Since that post had become very lengthy I had promised to add more to it. So, here I am.

Types of Mutual Funds

There are, essentially, and broadly, the following types of mutual funds:

1. Debt Funds
2. Equity Funds
3. Balanced Funds

Debt Funds: Debt Funds are those which invest a major portion of their corpus in government securities, bonds having varying durations, company fixed deposits and call and money markets. Between 90 to 95% of the total corpus is invested into such instruments. Since these are considered as safe instruments, therefore, the returns from such funds are also low but capital, in most cases, is protected, unless the investor stays invested in them for a very short period of time and there have been violent interest rate fluctuations in that period. One can expect a return of about 8-10% from such funds. One should stay invested in such funds for a minimum of 1 year for capital protection.

Equity Funds: Equity Funds invest a major portion (80% and above) in direct equities. Since the equity class is considered to be risky and returns are highly volatile, only those should invest who have the risk appetite to pass through volatile phases. There is a possibility that some investors may lose a part of their capital if they stay invested for a short period of time or if they invest in a bear market. To reap maximum benefits of an equity fund, one should plan to stay invested for a minimum of 4-5 years. One should expect a return of 18-20% from such funds.

Balanced Funds: As the name suggests, such funds invest about 50-60% of their total corpus in debt instruments and the remaining in equity instruments. This is done to reap advantages of both types of funds and to better the return as compared to debt funds and to reduce the risk which is there in classic equity funds. To lower the risk, one has to compromise on the returns, which are usually between 12-15% in such funds.

Loads

To run a Mutual Fund, there are costs and these costs are ultimately recovered from the investors in the form of loads. While most of the debt funds are no load funds, most equity funds have entry loads. In general, all equity funds charge an entry load of 2.25 to 2.5% while debt funds do not charge any. Both equity and debt funds are exit loaded on an early exit. While an equity fund charges 1% load on an exit within 6 months, a debt fund charges 0.5%. Debt funds are load free after 6 months whereas equity funds charge 0.5% if withdrawn between 6 and 12 months.

What Funds to Invest In?

Each investor has to see her own risk appetite. If you are the kind of person who would not like to take any risk whatsoever, then debt funds are the right choice. A person with a high risk appetite can go in for equity funds for higher returns while one can follow the ‘middle of the road’ approach by choosing balanced funds.

Equity funds come in different styles like thematic funds, sectoral funds, funds based on market capitalization etc. An investor should choose to invest a major portion of her portfolio in funds which are ‘evergreen’ like large cap funds or blue chip funds or well diversified funds. A part of the portfolio can go into other funds to take advantage of the ‘flavour of the season’. Keep your funds portfolio well diversified to reduce risk and get reasonable returns. Divide your money into 3-4 different funds but not so many that it becomes difficult to keep a track.

Today there are various funds like mid cap funds, small cap funds, power sector funds, media funds, banking funds, infrastructure funds and various others. All these concentrate on stocks of a particular sector or a particular capitalization and leave a lot to be desired from the power of diversification.

SIP is the Way to Go

Since timing the markets is a futile game (as one can never be right all the time), the best way to invest is to invest systematically. SIP is an acronym for Systematic Investment Plan. Under this plan, you set aside a particular amount (which could be as low as Rs.500/- with no upper limit) every month for investment in a fund. That amount is used by the fund to allot units to you based on the NAV of that day.

As an example, let us say you invest Rs.2000/- every month on the 15th. On 15th of last month, the NAV was Rs.20/- so you were allotted 100 units. On 15th of this month, with the improvement in the markets, the NAV increased to Rs.25/-, thus allotting you only 80 units. Then we witness a heavy crash and on 15th of next month the NAV falls to Rs.16/- which would then allot you 125 units. This means that you are buying lesser units when the price goes up and buying more when the price is low, thus decreasing the average price of holding. This way you acquire a total of 305 units for Rs.6000/- thus bringing your average to Rs.19.67/-. Alternatively, if you were buying 100 units each time, you would have spent Rs.6100/- and still bought only 300 units giving you an average cost of Rs.20.33 per unit. Thus, SIP helps you in bringing your average lower, which is also known as Rupee Cost Averaging.

Another advantage of SIPs is that you automatically save a small amount every month rather than a lumpsum every year. It will be easier for you to save Rs.5000/- every month rather than Rs.60000/- every year.

You can read more about SIPs on this page.

There is still a lot I need to talk about mutual funds but I guess I need one more post for that. Will upload it sometime next week.

Read the Full Post Here

Mutual Funds: What Are They?

Do you invest in mutual funds? If you do, you know what they are and what they can do for you. If you don’t know about them, it is high time you should. This post gives you from the most basic to the technical aspects of a mutual fund.

Who Needs Mutual Funds?

With the markets rising, as they have in the past four years, everybody wants to take advantage of the markets. There are two or three options available. The first one, but not the easiest, is that you get yourself registered with some broker, set aside some money for buying stocks and you’re on. But most people, with long working hours and stressful jobs do not have the time to monitor markets and that makes one lose a lot of opportunities.

Some people do not have the knowledge or the aptitude for stocks but still want to take advantage of it. The most convenient option for them is to give the money to a friend or an Uncle to invest on their behalf. But these friends or Uncles are sometimes scared to invest on your behalf because they don’t want to ride the guilt of you losing money if one of their decisions went wrong. Alternatively, even if they don’t feel scared or guilty and some of their decisions do go wrong, which inevitably will (because nobody is perfect), you won’t hold them in very high esteem.

The third option, and undebatably the best for such people, is to invest their money with a mutual fund. That way even if the mutual fund loses you money, the only loss of relationship you have is that you won’t invest money in that mutual fund anymore. As it is, you have a lot of other options available.

The third problem that usually comes is that you do not have enough money to properly diversify your portfolio and we all know the advantages of diversification to get good low risk returns. To properly diversify her portfolio, the investor would need to invest at least Rs.2-3 lakhs.

What Is A Mutual Fund?

Let us understand this with a very simple example. Suppose there are 10 investors, each with a capital of Rs.50,000/- to invest. None of them has a big enough capital to properly diversify their portfolio. So, they make a syndicate and invest jointly because then the combined portfolio of Rs.5 lakhs can be well diversified. But the problems that usually come with such a syndicate is that you can never trust the person completely who is in charge of all the funds. Secondly, you will always feel cheated or will always suspect the division of the profits, specially, if the investment amount of each investor is different.

So, they appoint a person who they all trust, and who has the knowledge of the markets and they pay him to invest on their behalf, and who divides the profits equally and fairly among all investors after deducting his own expenses for the time and the effort he has to put in. That, in a way, is a small mutual fund.

But Mutual Funds AMCs (Asset Management Companies) have thousands of investors and have crores of rupees to invest. That gives the fund manager control over his investments and can stay invested in stocks for a longer duration (assuming that not all investors will withdraw funds at the same time). The fund manager has a full research team backing him and he himself is knowledgeable about the markets and the AMC ensures that all profits are divided equally among all investors.

How Are The Profits Divided?

On each day, except Saturdays, Sundays and holidays, a Net Asset Value (NAV) is calculated which is nothing but the value of all the securities held by the mutual fund in its portfolio. Any investor who invests into a mutual fund is allotted units. The number of units to be allotted is calculated by dividing the amount invested by the NAV of that day. For example, if an investor is investing Rs.50,000/- in a mutual fund and the NAV on that day is Rs.150/- then she would be allotted 333.3333 units (50000/150). Unlike shares, where only whole numbers can be purchased, units can be allotted in decimals too.

Since the NAV is calculated on each day, any investor entering on any day can be allotted the exact number of units based on the value of the portfolio on that day. Similarly, any investor exiting on any day can be given the money as per the value of the portfolio on the day of exit. The amount to be paid to this investor is calculated by multiplying the NAV of that day with the number of units held by him. So, in the above example, if our investor decides to exit on a day when the NAV is Rs.200/-, she would be given a cheque of Rs.66,666/67- (333.33333 x 200), thus making a profit of Rs.16,666/67- in the transaction.

NAV Calculation

A very simple example of calculation of NAV. Suppose I have a mutual fund in which 100 people have invested (each investing Rs.10000/-), which gives me a total corpus of Rs.10 lakhs. I allot a total of 1 lakh units, each unit at Rs.10/-. Next day I go out into the market and buy shares worth Rs.9.5 lakhs and keep Rs.50000/- as cash. Suppose the value of the shares after 10 days is Rs.10 lakhs (which has since increased from Rs.9.5 lakhs). Now, the total value of my portfolio is Rs.10 lakhs in shares and Rs.50000/- in cash, thus making Rs.10.5 lakhs. Dividing this by 1 lakh (the total number of units issued) I get an NAV of Rs.10/50- per unit after 10 days.

There is a lot more to know about mutual funds but, I suppose, this post is going to become very lengthy if I delve any deeper into it. I will write another post about mutual funds in the days to come, which will talk about what types of mutual funds are there, what are the costs, what mutual funds to buy and some common mistakes people make when investing in mutual funds.

Update: This article was also published on the business and investing page of Reuters.

Read the Full Post Here

Understanding Price to Earnings (P/E)

We have just seen a bear market and will now, hopefully, see the beginning of a bull market. But was it really a bear market that we have just seen? Practically speaking, a bear market is one which makes people lose a lot of money and makes people lose confidence in the markets. That has happened, so yes, this was a bear market. Technically speaking, a bear market is one which makes a pattern of lower highs and lower lows. So, while a pattern of lower highs and lower lows is visible on the daily charts, it is still not there on the weekly charts. So, we can say that, technically, we are still in a bull market.

When a bull market starts, blue chips are the first ones to go up. After a while the blue chips become expensive and then the midcaps improve and finally, when even the midcaps become expensive the demand increases for small caps. But why does this happen? Just because a blue chip or a mid cap stock has gone up, would you buy a small cap? The reason most people give is that they are better off buying a larger quantity of the small caps rather than a small quantity of a blue chip.

Let’s say you are of the view that software stocks will do well and want to invest in some software stocks. If you have Rs.20000 to invest, would you rather buy 12 shares of Infosys at 1650, which is giving you over 20% growth, or would you prefer to buy 150 shares of Ramco Systems, which is a loss making company for the last five years, at the price of Rs.136/-? Are you more comfortable buying a quality stock which is expensive or would you rather buy a loss making company which is cheaply available? Would you rather buy a Sony Television for Rs.25000/- or would you buy 5 televisions assembled by your next door neighbour for Rs.5000/- each?

Well, when you want to make money, you have to buy quality stocks. Even 12 shares of Infosys are more likely to deliver better profits than 150 or 200 shares of a company which has been making only losses since the last five years. Does that mean that you have no choice? In fact, you do have choice. When you are selecting a stock first zero in on to the sector/industry you want to invest in. Once you have decided the sector, look at the top 10 companies in that sector. Look at their last five years profit statements. If they have been giving good returns consistently in the last five years, then buy the cheapest of the lot. But how do you decide which is cheapest? The price? No, by way of price, company X may be cheapest of the top ten. But that still may not be the cheapest. The cheapest is which has the lowest Price to Earnings Ratio (P/E). We work on the assumption that similar companies in the same industry should have a similar price to earnings multiple. P/E is the current traded price divided by its Earnings Per Share (EPS). EPS is calculated by taking the profit before interest, depreciation and taxes and dividing it by the total number of equity shares issued.



Let us understand this more deeply. Let us say there are two companies A and B. For convenience sake, let us keep the numbers small and easy to understand. Let’s say A is a large company and has made a profit of Rs.1000/- this year while B is a slightly smaller company and has made a profit of Rs.800/-. Let us say company A has issued 1000 shares and B has issued 400 equity shares. So, the EPS of company A will be Rs.1/- per share (1000/1000) while that of company B will be Rs.2/- per share (800/400). This means that company B is making a profit of Rs.2/- on every share while company A is making only Rs.1/- on every share. So, while company A is making more profits on the whole, it is making lesser profits on each share issued.

Let us look at the price in the markets. Company A is trading at a price of Rs.40/- per share, company B is trading at Rs.50/-. Let’s calculate the P/E now. Company A has a P/E of 40x (40/1) while B has a P/E of 25x (50/2). So while company A may be larger and is making more profits in money terms its price is 40 times its earnings while company B’s price is only 25 times the earnings. This shows that even though the price of A is cheaper, company B is cheaper in terms of P/E. So, from this example, it is clear that it makes more sense to buy company B rather than company A.

So, that is all about EPS and P/E. While I have made every effort to make it as simple as possible, I know a lot of the readers will find some grey areas in this article. I encourage you to please post your comments by clicking on the comments button below in case you still have any doubts regarding these terms.

Happy investing!!!

Read the Full Post Here

Greed And Fear: When to Use Them

Greed and Fear are two emotions which you should concentrate on eliminating when you are trading in stocks. These are your worst enemies. If not eliminate them, at least use them at the right time. Warren Buffett once said that we should be greedy when others are fearful and fearful when others are greedy. Everybody, or rather most, displayed greed in the year that went by and I was fearful all that time. Fearful enough not to invest any fresh money into the markets but not fearful enough to liquidate my portfolio. I did some portfolio churning but seeing the value of my current portfolio, it seems that wasn’t enough.

I know of an investor who had invested about Rs.15 lakhs (Rs.1.5 million) in the markets (mostly in equity based mutual funds) and had made a profit of more than Rs.5 lakhs. He wanted to buy a car out of those profits (after already having purchased a refrigerator and an LCD TV). His wife had asked him to take out his profits and buy a Maruti Suzuki Esteem or a Swift but he wanted to stay invested in the markets for some more time and then buy a Honda City after his profits increased to Rs.8 lakhs. Perfect example of greed. It was greed that ‘killed’ him. Today, he cannot even afford to buy the Tata Nano (the one lakh car) out of his profits. Thankfully, unlike most people, his capital is safe but all the profits are gone.



Most of us, me included, have seen our portfolio values reduced by 40 to 50%, and some even more. We have lost our confidence in the markets. We have learnt the hard way that markets can never give us anything but can only take. Whatever the markets give us is taken back by them and in much larger proportions. We have understood that we can never be successful in the markets. We are fearful. All of us. No, not all of us but most of us. Because I am not. I am being greedy these days. Being greedy because everyone else is fearful. This is the time to pump in additional capital in the markets.

In the market only those make money who are smart. The rest always lose money. The smart people buy when the markets are down, when there is a lot of panic. And they sell when there is a lot of hype, lot of greed, lot of expectations. They are the contrarions. The ones who do opposite of what the others do. And it is the contrarions who make money.

I once had the pleasure of meeting Mr. Madhusudan Kela, the head of equities of Reliance Mutual Fund, at a seminar to be followed by dinner. After the seminar when everybody assembled for dinner and went straight for the soups and salads, Mr. Kela made his way towards the desserts counter. When asked why he was starting with desserts, he came out with the reply, “Being a contrarion has just become a habit for me.”



Just last fortnight I was talking to a client who was asking for advice on what to do. And I told him that since the markets were in a panic now, it seemed to be the time to invest some additional money. He was scared of what would happen if the markets were to go down further. And I told him what I write in my newsletter. That we can never hope to catch the bottom. The best we can do is to buy close to the bottom. We can invest in times of panic and maintain the last bottom as the stop loss. We only lose a little that way. But we make it all up when the markets start going up.

The most common excuse for people at such times is that there is no money to invest because they did not get a chance to liquidate their portfolio when the market was at a high. I understand that. I have been in the same boat. But invest whatever you can invest in these difficult times. This is the money that will actually make money for you. It is today’s greed that you exhibit that will give you the confidence to be fearful when you see greed all around you.

As mentioned in earlier newsletters, we are inviting our esteemed readers to send in their contributions in the form of articles to be published on this page. Take this opportunity to voice your opinions to the world about the financial situation today, the markets in general or anything remotely connected to the markets. Please e-mail your articles and don’t forget to mention your name and location so that you are given due credit for the article that is published.

Happy investing!!!

Read the Full Post Here

Renewable Energy: Stocks of the Future

Update: This article was also published on the business and investing page of Reuters.

It was another day for the Nifty within the range. Volatility of the Nifty is now very low. Now the range is only 120 points wide between 4680 and 4800. We should see a breakout soon enough. A breakout out of this contracting rectangle should take the Nifty back within the broader range of 4620-4950. A move outside this broader range will give us a real movement. There is no use of making predictions about the direction of the breakout. The market will tell us which side it will break out towards. We shall position ourselves to buy in case of a breakout on the upper side.

Since the long term trend of the Nifty remains up, we should plan to buy on every dip. A dip is a rare occasion in a bull market. Luckily, we are getting these opportunities every third day now.

Yesterday, we had discussed that the fundamentals of the economy are still strong and that the markets have essentially crashed because of low liquidity, heavy speculation and problems in the USA and not because of any fundamental reasons of our country. And as the problems in the USA settle down, we should see some recovery in our markets too.

Today we shall discuss about the energy sector. Let’s start with oil. We know that oil is present only in limited quantity and there are only finite sources of oil available. There are sources which tell us that the production of oil has already peaked out or is likely to peak out in this decade. And also that for the last several years the world oil consumption has been more than the oil production and the demand is still growing. With growing demand (approximately at the rate of 1.4% per annum) and reduced production, we are eating into our reserves and according to the NATIONAL CENTER FOR POLICY ANALYSIS (NCPA) the oil available shall only last till the year 2056, but with better conservation and the use of substitutes we may actually scrape through to the year 2100.

To protect our future generations from going back into the stone age, we shall have to look for alternative sources of energy. A lot of countries are now taking steps to shift to alternative sources so that we could reduce the consumption of oil and make it last longer. Warren Buffett once said that If a business does well, the stock eventually follows. Alternative energy is one of those concepts which will continue to do well, at least in our lifetime. So, it may make sense to buy stocks which are into renewable energy like Suzlon (wind power), NTPC (thermal power), JP Hydro (Hydro and thermal power), Neyveli Lignites, Webel SL (Solar energy) etc. Buy them today and hold for long term. Your children could become crorepatis with these stocks some day.

As mentioned in earlier newsletters, we are inviting our esteemed readers to send in their contributions in the form of articles to be published on this page. Take this opportunity to voice your opinions to the world about the article today, the markets in general or anything remotely connected to the markets. Please e-mail your articles and don’t forget to mention your name and location so that you are given due credit for the article that is published.

Happy investing!!!

Read the Full Post Here

Simple Rules for Analysing Stock Charts

Some people have started becoming bullish now. Fundamental analysts have started saying that markets are fairly valued now and valuations have now reached at 2004 levels. But there are still many who continue to be bearish and say that the worst is still not yet over and there may be a retest of last week’s lows. I personally feel that after such a deep correction, the confidence of a lot of people has been shaken up and it will take time to build up that kind of confidence again. So we may just consolidate between 4500 and 5500 (Nifty) for sometime. The markets do go up now but with low volumes and there is a lot of selling coming in at higher levels. This is what happened yesterday. The markets did go up but with dry volumes. There was no strength in the move as far as the volumes are concerned. We can expect the volumes to increase once the crucial level between 5500-5600 is crossed.

Generally, those who have lost the confidence in the markets (because of the recent fall) do not enter at these levels. They keep waiting till the markets improve and till they feel that nothing could go wrong now. And then they enter. In fact that is the time to sell. The correct time to buy is now. Invest when the markets are beaten down, when the valuations are low and when there is panic in the markets. Be a contrarion to the general public. That is the way to make money.

My technical software is not working today and there are no charts to see and analyse and give my inputs for Monday. However, for all of you who want to learn to look at charts, I’ve consolidated a few simple rules which anybody could apply.

Though, you really do not need a charting software (there are so many charts available online) but you do need to study them. Apply a few simple rules and you are ready to go. But there will be some people who would like to buy a software and study everything in detail. Whenever you buy a charting software, it will come equipped with all the technical analysis tools and indicators. Many of you would have gone through some technical analysis books and would be raring to have a go at analyzing charts with one indicator, and another, and another and yet another.

Well, that is the first step to go the wrong way. The most important rule to remember while analyzing charts is that you have to keep them simple. Remember: “Too much of analysis leads to paralysis.” The best way to study charts is to apply only one or two rules/indicators or at the most three. My personal favorites are trendlines, RSI and MACD.

For those who just want to do it as fun and learn without any real investment in a software, here are a few simple rules you can apply.

Dow Theory: This theory was given by Mr. Charles Dow in 1931. He was the man who started it all. He used to say that stock prices move in trends and one should buy when the trend is up and sell when the trend is down. His definition of an uptrend was when the price made a higher low and then a higher high. Similarly, a lower high and a lower low signified the beginning of a downtrend. This theory can be applied to charts of all time frames.

Trendlines: Trendlines are those lines which connect at least 3 lows or at least three highs. An uptrending line should be drawn by connecting the lows and a downtrending line should connect the highs. The signal that one gets from trendlines is the breakthrough of prices. When prices penetrate an uptrend line, it is time to sell and when they go through a downtrend line, it is time to buy.

Moving Averages: Moving averages, in short, are moving trendlines. You simply calculate the average of the closing prices of the last x days (depends on what period you want to choose. Most common are 10, 21, 50, 100 and 200) and that is the value of the moving average for the last day. And you will be surprised to see how regularly prices find support/resistance at these levels.

For more indicators, it will become too complicated to calculate yourself and it would be best to buy a charting software and then we can probably hold a meeting/seminar and go into the details of analyzing charts. But one should remember that there is no such thing as a PERFECT INDICATOR. It does not exist. But it does not mean that indicators don’t work. All indicators are good and all indicators give very good signals. You just have to be consistent using them.

I hope this article was of some help to all of you. Do leave a comment in case you would like more such articles on a regular basis. Also leave a comment if you don’t like the article and would prefer not to be disturbed with such topics which don’t have any recommendations.

Happy investing!!! Read the Full Post Here