Imagine buying a stock at Rs 100, probably on the suggestion of a friend, neighbor, aunt, girlfriend, hoping to double, triple your money, touching the lunar surface in no time…

And then,

80,70,50,25,10,5 …..What the hell is happening? You question all deities you pray to as to why this is happening to you. And the final stage: investor and advisor resort to desperate measures as panic sets in quick and fast.

Sitting in front of their computer screens pressing that F5 key again and again believing against hope, hoping against hope, investors dig for some divine intervention that will move their stocks price up. The friend’s stock is up; the aunt’s stock is up, while our pal is still pressing that Refresh button hoping to make a killing. Let’s put him out of his misery, what?

It’s not going to happen.

It’s never going to happen

Unless you realize that you have made a wrong stock pick without knowing if that company makes pajamas or refines crude oil.

In times like these, when 15000 levels on the BSE Sensex seems folklore, your broker is pressing you to put money in a new rising star company, which might be a shooting star very soon. You don’t know. Fact is, nobody does. In markets like these, you don’t know what stock to buy at what levels because the benchmark index is at 9-10 PE on FY09 earning (PE is prices to earning ratio, which gauges how expensive it is to buy index stocks in comparison to other markets in the world, on the basis of earning). The best option is to be sold and stay put. The advisories and advocates of the stock markets burp out levels at which you should buy, hold, go long, go short,  specific stocks,… They are as clueless as you are as soon as one variable changes, be it interest rates, earnings of the company, and so on.

The Indian economy is not running away anywhere. Neither is the stock market. Having grown by near 9% average for the last 5 years in a row to reach $1 trillion in GDP (It’s about $700 billion now, due to FII money exit and rupee devaluation), the economy cannot and will not sink like the Titanic. It has a mass of over 1.3 billion people and with 240 million households, demand surely exists - for consumer durable and FMCG companies, for roads, bridges, dams, power, and what not. So consumption spending is surely there. What is missing is investment spending; this will take sometime from an individual’s point of view as the current interest regime is too high.

All the above-mentioned demand areas requires $100 billion of investments annually for the next 5 years. Let’s say FIIs might be able to pullout about $20 billion ($12 billion has already been pulled out this year so far). The numbers are still more than sufficiently optimistic to drive our economic growth.

To fuel all this government will surely relax investment norms in key critical sectors like railways, telecom, banking, airlines. So our growth story is still visible and we will surely see a ray of light at the end of the tunnel.

So all investors, new or old! Stop pressing that Refresh button and dig in a little deeper when you invest.

The author is working as Research Associate at Padmakshi Financial Services Ltd.

In my last article I had mentioned that there are several methods, or styles, to investing profitably in the equity markets.

Let me start with suggesting that you, the potential investor, spend some time analysing your investments. If one were to assume that your money is indeed “hard earned”, would it not be unfortunate if is easily lost?

Most professional advisors compare their performance to benchmarks, which are indices. For example, if a fund generated returns of 20%, while its benchmark’s returns were 15%, this “outperformance” of the index by 5% is called an ‘Alpha’. This is a good measure to evaluate fund performance, provided the benchmark is reliable. If reliable, it would be a good measure to evaluate even personal portfolios returns.

The BSE Sensitivity Index of 30 shares is the most popular Indian stock market index. If one were to track this over 5 year periods, starting in 1992 (this is the year of the infamous Harshad Mehta boom, which is a relevant beginning simply because this is the first time there was retail participation in the capital markets), we would find that pre-2003 (the start of the latest boom), the index returned less than bank FDs. Even if we go from 1992 to the current date, the index returns are disappointing. This should indicate that equities are a poor long term investment, but are actually among the best options!

In fact, a well diversified portfolio, built over time and given a few years, at reasonable valuations (PE of close to 10, certainly lower than the Sensex’s long term average of 14 times) will outperform the benchmark or almost any other investment. The great Warren Buffet, however, considers that “wide diversification is only required when investors do not understand what they are doing”. If you know, and you need to know, why you make an investment, you should also have guts to invest plenty in it. Again, quoting Mr. Buffet, “Why not invest your assets in the companies you really like? As Mae West said, “Too much of a good thing can be wonderful.””

Diversification or concentration of portfolios can be achieved through investments in mutual funds. Concentration is through sectoral or thematic funds. Concentration is good only if you are an expert and can time your entry and, more importantly, your exits. Avoid being carried away by the noise. Most fund managers consider themselves to be God’s Greatest Gift to Investments (GGGI) in a bull market. However, when they crash with the markets they are quick to point to outperformance, if any, on the index, i.e. “The index has fallen 30%, but I have been brilliant and have lost only 25% of your money”. I have not met any investor who hands out money to be lost, whatever the market conditions. My advice is to ignore the froth from the fund managers, or brokers. If you are convinced the market is cheap, put in all your money. In an uncertain market do an SIP. But when the market seems overvalued sell. (By the way, have you ever heard a fund manager advice you to sell, or redeem your units in a bull market?) A crash always follows a euphoric bubble. Cash is supreme in bad times. It is a good feeling, and also very profitable to buy when the market is down 70%!!

Is this a good time to invest? Yes and no. An important lesson from Joseph Kennedy, almost a century old, is to sell when the shoe-shine boy gives stock tips. I believe this is true today. When the taxi driver is thrilled to take you to the share bazaar and asks for stock tips en route, the stranger at the party gives you sure shot stock bets and the daily newspaper has headlines of the local housewives club betting their grocery money on stocks – GET OUT. This is the best signal to sell your shares.

And buying? This would be when that party animal with best buys stops partying, the Big Bull has jumped off the 13th Floor and there is a funereal feeling at Dalal Street. Buy when the mention of a good company has people grit their teeth and give you dirty looks. And, of course, the index has a low, mouth watering PE!

One of my own gurus told me never to confuse the market with stocks. “The market is irrelevant”, he said, “buy the right stocks and you will always make money.” If you have his stock picking skills, which I do not, this article is not for you. If you are one of the simple folk, hoping to beat inflation and make a little money on your savings, the market at over 18 PE all this week (18.80 on Nifty on September 4, 2008) remains expensive. Look then for gems that might become multi-baggers.

Otherwise hang on to your precious cash. A better day to buy will dawn, when PEs are closer to 10 than 20. Get into SIP mode then. Market corrections can be both deep and long. Losing opportunity (interest cost of your money) is about as unfortunate as losing capital.

Naveen Fernandes is a Certified Financial Planner and Vice-president, Orbis Financial Corporation Ltd, Mumbai. Orbis Financial is a SEBI-approved custodian.

During a stint at a financial planning company, a gentleman asked to be guided on goal planning. I asked him to list down all his goals and to prioritize them. To my surprise he placed buying a Honda Accord above his child’s education. I asked him if he was sure of what he was doing. He replied that it would be a matter of around Rs. 5 lakh for the kid’s education – a sum that he could easily manage in the next ten-twelve years (his son was around 5 at the time). So I asked him if he had accounted for inflation. To which query he replied that the difference would hardly be enough to make it that big a deal. I showed him some simple spreadsheet calculations and he was quickly surprised to know that Rs. 5 lakh at present, adjusted for inflation at 5%, would amount to Rs. 11 lakh 16 years. At an average inflation rate of 8%, the amount would grow to Rs. 17 lakh.

He reprioritized. Quickly.

Children’s education is becoming more and more challenging as the years go by. Hence it should be the most integral part of financial planning. It should be at the top of any list of goals while preparing a financial plan. The earlier you start, the better it will be. Luckily for the above-mentioned gentleman, he realized it very early, rejigged his priorities and started planning accordingly.

There are two main pillars when we talk about children’s education.

The first is life insurance cover for the earning parent (or parents).

The question arises as to why this insurance is so important. In the event of any mishap and the parent (s) passing away, it would become very difficult for the child to get the otherwise promised good education. The life insurance payout can then help to keep the child’s educational aims intact. In this regard, a pure protection term insurance policy would meet the needs.

The parent (s) could, in addition, opt for personal accident cover. As the name implies, the risk of death by accident is covered here. Again, this is to ensure that the child’s education does not suffer if any of the parents pass on before their time in unfortunate circumstances.

The second pillar is investment. That is, investing present available funds in such a manner that will allow parents to provide the best education for their children.

You should start investing early to take advantage of the power of compounding. To state an example, let’s assume the cost of an MBA for your kid after 15 years is going to be around Rs. 10 lakh. At the 8% rate of return provided by the Provident Fund (PF), you will need to start putting aside an amount of Rs. 37,000 every year to meet this goal. Investing that same sum in equities would fetch much better returns. This could be done directly, via mutual funds, or using the portfolio management services (PMS) route.

To corroborate this, let’s take the performance of the Bombay Stock Exchange (BSE) Sensex, a benchmark index of the Indian equity market. In 1992, it stood at 1957 at trading close, 01 January 1992. At trading close, 31 December 2007, the BSE Sensex stood at 20286 – a 936% jump. This is way better than anything a PF would give you.

Here are some interesting numbers - where you had to put away Rs. 37,000 every year at 8% in the PF to get your child that MBA, you would only have to invest Rs. 27,000 in equities every year at a 12% rate of return. And if the rate of return is raised to 17% per annum, your annual invested amount reduces to just Rs. 17,000.

The biggest dream of any parent is to see his/her children doing well in their lives. To achieve that goal, one needs to plan accordingly. The earlier one plans the better the plan will work out.

Like a drunkard who is wandering alone on the street trying to find a foot hold for his slippery feet, the Indian markets are no less choppy since the first month of the New Year ended the 3 year bull run party. When the 100 year old BSE Sensex hit 21113.13 on January 9th 2008 India was been viewed from Dalal Street to Wall Street as someone who has just driven at 100mph from 17000 to 21000 ,and with 25000 in touching distance. Anticipation seldom turns into reality, come 16th July 2008 BSE Sensex was 12514 a yearly low and 40% down from the top. With IPOs claiming to be multi-billion dollar projects in next five, ten and fifteen years and garnering over Rs 700000 crores, peons, school children, taxi drivers, the what nots, and the who’s who of the Indian economy wanted to apply. The only companies who would have made money would have been paper manufacturers, while Mother Nature was at receiving end for all the paper required to make 200-page red herring prospectuses (RHP).

With equity as an asset class going for a long random walk into oblivion, foreign institutional investors (FIIs), the usual market makers, who had put in close to $17 billion for the FY07, now, in the first six months of the CY08, have pulled out close to $7 billion. Usually bad follows bad but evil follows worse; the American housing bubble woes relentlessly made lives of economists, governors of central banks and heads of states lose sleep over deepening credit crises. The U.S. of A, which prides itself as John Rambo in the Middle East and central banker to the world, has already lost $500 billion in asset write-downs. Simply put, the things that were not affordable were made affordable to people who could not afford them; in other words, the houses for which the loans were taken turned bad value as borrowers defaulted and the subsequent MBSs (mortgage-backed securities) and ABSs (asset-back securities) markets who leverage themselves over these loans also defaulted. Then, with home loan default rising, interest rates rising, and slowing consumer demand, the unfaultable investment banks of Wall Street were getting jittery over their exposure to complex derivates products. Ultimately $500 billion in assets were written down on Wall Street with repercussions felt across the globe.

The regular oil and inflation shock has started to generate fewer tremors as their pace of growth has come off recently. Oil in last couple of weeks has been hovering at sub $110 levels and domestic WPI inflation at sub 13% levels. The booming GDP growth made India hit the $1 trillion economy club, with fiscal year 2007-2008 hitting 9.1% growth. Certainly now with the equity markets off hugely, capital expenditure for India Inc has become a huge question - rising interest costs will make longer-term capital intensive projects in the infrastructure space unviable. The IPO market, also the primary market to raise equity, has also dried up as investors have lost confidence to invest in new unlisted companies.

Estimates of $350-$400 billion have been made for lessening India’s infrastructure woes, and the bill is to be footed via the PPP (public private partnership) route. What remains to be seen is whether the big boys of India Inc ready to participate and does the FDI still hold India in high regard. The nuclear deal has been signed, which comes as a good sign for an energy-hungry country which according to government estimates will require an installed capacity of over 200,000 MW by 2012 to meet its electricity demand, 60 percent more than what the country currently has. India envisages providing electricity to all households including 234 million families living below the poverty line and electrifying around 115,000 villages by 2009.

Certainly all this looks a daunting task to accomplish and only strong jolt of foreign capital flows, relaxed government policies, and wish to take India global with domestic companies a lot of dope is required to put India back on track.

Anurag Sharma is a Research Associate at Padmakshi Financials Services Limited.