2012 Resolutions for Stock Market Investors !


Year 2011 is history now – I do not wish to start this post with its reference, but the year gone by was fraught with so much of pain and uncertainty, that it has become imperative for me to formulate an essay on top 2012 resolutions for the bruised investors so as to not burn their hands in the New Year or repeat their past mistakes.

In fact, this post is for me as much as it is for readers, because this post will serve as a ready reckoner when we venture into investing in 2012.

To start with, let me share a small lesson from my experience in investing in Indian markets. Just as they say, every bull market has a new hero to ride upon; no bear market scenario is ever similar in nature to its past phase. Every new recession is plagued with a new set of reasoning and ailments.

For instance, the 1997 Asia financial crisis started with collapse of Thai baht and deepened further to spread across Asia, whereas the 2008-recession was largely on account of liquidity crunch worldwide triggered by the US recession. And, now, we’re grinding through the Euro zone sovereign debt crisis.

Hence, it is not necessary that the symptoms and ailments of any two equity bear market scenarios will resemble each other. Yet, we can always take lessons from the same, as they come with a message that will serve some or the other good cause during the times of crisis.


Five 2012 Resolutions for Investors:

Repent by investing in leveraged business

Before 2008-recession, the stock prices of corporate firms were screened based on their future business prospects and order book size. However, after witnessing the liquidity crunch, market participants felt the need to evaluate stock prices based on additional parameters such as debt equity ratio and operating cash flows amongst others.

High debt levels means that a company has been aggressive in financing its growth, which could add volatility and additional interest costs on its heads. The bet over here is that the firm expects the returns from its businesses to be superior to overall expenses. But, if this equation gets screwed up, the company gets into trouble.

Lesson: Stretch your legs according to the length of the coverlet.

Markets are never too cheap

Yes, it sounds a bit upside down, as investors usually tend to value firms based on several fundamental valuation metrics. Though, this is not to betray those genuine valuation parameters. But, how often have you bought a stock thinking that the valuation is cheap; and it took further hair-cut of another 50% from those lucrative levels?

Frankly, this had happened to me few months back. I had bought shares of few mid-cap real estate firms, such as HDIL and Indiabulls Real Estate, thinking that their valuations have stooped to rock bottom levels, after witnessing a melt-down to a tenth of their previous bull market peaks.

But, now I realize that two best stocks to buy from the real estate sector are Godrej Properties and Oberoi Realty – both of which boast of very low or negligible debt on their books.

Lesson: Never rely on valuations alone, evaluate other parameters as well.

Trust on the Management quality

It might sound a bit theoretic to say that one ought to place trust on the management quality of a firm, but the fact remains that such companies get re-rated on the bourses sooner than others, if the administration enjoys higher trust seal amongst investors and other stakeholders.

Of course, management quality alone can not work wonders; it needs to be backed with sound business prospects and optimal debt size limit as well. But, you can rest assured that once the recession is over and the market is in the recovery mode, you will regain your lost investment value in the stock price of firm with good pedigree management.

Lesson: A tree grows with firm foundation and roots.

Hear others opinions, but keep your Mind Open

Stock market is a subjective game where different analysts ought to hold divergent views. Analysts are here to predict and guide us to the way forward, but no one is certain about the future. There is no harm in hearing patiently to every other analyst on the street, but keep your mind open to various possibilities of market movement rather than relying on any particular strong opinion.

Remember, in equity markets, there is a buyer for every seller out there (of course, until there is a downside circuit) in the middle. It means that every sale trade from a pessimistic seller is seen as an opportunity by an optimistic buyer at the other end.

Lesson: Take inputs from others, but calculate your own risks!

Don’t invest for Pleasure

Lastly, don’t invest in equity markets for the sake of pleasure, or just because markets have corrected steeply. First, evaluate your needs for investing, support your investments according to your risk profile and invest with a clear plan and time horizon to see your hard earned money work for you. For instance, a person of 75 year age should not invest in stock markets even if Sensex plunges to 8000-points, based on his risk profile and future needs.

Furthermore, if you are not an informed investor, better stay away from the vagaries of investing directly into markets. There are mutual funds with various themes which operate with the mandate to provide expertise at very reasonable costs for your hard earned money.

Lesson: Do not gamble with your hard earned money.

So, do you confide to adhere to any of the above 2012 resolutions? Let me know…

  1. Stocks Tips Intraday says

    In the past year, the Sensex has taken a wild ride, losing nearly 25%, and drumming out thousands of crore rupees worth of losses for investors; the rupee depreciated 18.5% against the dollar in 12 months, plunging from `44.71 at the beginning of 2011 to `52.96 now; the inflation surged to 10% in September before falling to 9.11% in November; the interest rates scurried up with an unseemly haste as the RBI tried to combat inflation; gold prices shot up to unnerving highs as global central banks acquired it and the rupee weakened; the IIP figures registered a negative growth of 5.1% in October; and the European debt crisis, along with high inflation and interest rates, threatened to unravel the domestic growth, with the GDP figures falling consistently in the past six quarters. It was a whorl of factors that conspired to crumble a sturdy economy which triggered the selloff in stock markets.
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  3. Altaf Rahman says

    You are right. There is nothing like Markets are cheap.
    I bought RelCap @ 320 thinking that it has fallen sufficiently. It has fallen another 25% from there to reach 240. Again I bought the same stock @ 235. Nothing that its a blue chip but I am betting on Govt allowing few private NBFCs to get banking licence soon and RelCap is the front running candidate.
    Why dont you write on what to invest in during the deep down times.
    Frustration like this will always be there when markets are falling. But if you look at the positive side, markets will never remain at bottom always. There will be a bounce back. All we need to do is keep faith in market dynamics and acumulate when the sotcks are low.
    If people are thinking of making money, these ar ethe golden chances. Every stock is going at dirt cheap prices.

    Just my two paisa :)

    1. Kishan Vasekar says

      Dear Altaf–
      Besides nothing comes cheap , Management Quality is of Utmost importance.Having worked with both Big Brothers, Mukesh and AnilBhais, I am probably better placed to
      say that —It is the Quality of Sr Management People who have left the Company in last 2 years is more critical than Who are still there. You can also find How Mnay Sr Executives are involved in Court cases and are in Tihar Jail .
      I would recommend you to invest in securities and look for 15 % return over 3 years.
      2012 may see some recovery from the pains and tragedies of 2011 and clarity will emerge in March 12. Please don’t be in hurry to invest in stock market. Thanks

      1. Altaf Rahman says

        Many thanks Kishan,
        Yes Management quality is very important. While buying RelCap, the idea at the back of my mind is this :
        Out of all ADAG group companies, Rel Cap is the only company without much negetive news. If you take RCom, there is lot of negetive news involving 3G scams etc. Rel Infra is involved in land aquisition issues, high interest issues which were acting in a negetive way. Rel power is having problems with coal connections and recent price hike and conditions by Indonesian govt has made RelPower a sell. Unless it commissions atleast one unit of any UMPPs, it has no realistic value of being in the portfolio. Where as RelCap is growing organically and is India’s largest MFI, into NBFC business, front runner for banking licence. Thats the reason I went into it. Otherwise, my advise to people is to keep away from ADAG stocks.
        Even for that matter, Mukhesh group is also a strict no no from short term view. Unless RIL shows some great news (like KG D6 Gas increment or good returns on its US CBM investments) it is a sell at the moment. RIIL is a non entity.
        Anyway thanks for your valuble comment. I will keep it in mind while going for my next buy into RelCap around 190-200 (if at all possible)

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