Crash, boom, bang!

It has been a while since I posted. Just like our stock market, I crashed! The reason being the market itself. I spent few days finding out the possible reasons and how worse it could get and guess what, I am still as optimistic as ever.

The sensex is down more than 5000 points compared to the highest level it attained towards the end of 2007. Evidently it is a big blow to the traders, investors, funds, IPO’s and most of all to the tempo in the country. The Finance Minister has been trying hard to keep the optimism levels from going down far too much by assuring that our growth rate for the coming FY08-09 is posed at a very promising rate of 8.75% (There has been many statements with a different rate each time, but this one seems to be the final projection).

Now, what really happened?
Recession in the US which is caused by words declared as used the most number of times last year – “subprime crisis”, lies at the root of the problems. In simple terms, ‘subprime’ means loan given to a person who is not eligible for it, because of his low creditworthiness, income or any other unhealthy financial situation. Ironically these loans are given to the same person at a rate higher than the market(reasoning- risk involved). Since US real estate valuations were blown out of proportion and were simply not affordable by subprimes, there developed a crisis. This in turn created lot of pressure in the banking industry that indulged in a lot of subprime borrowing and did not have enough funds to lend to businesses and other consumers who needed them for growth. So slowly the economy began to dip and then crashed. Businesses didnt do well and large number of employees were laid off. Incomes and consumer demand fell and since many countries in the world depend a lot upon the US, exports being the main share of their GDP, those economies also crashed. India was among the least affected as our exports to the US are comparatively less.

There is a reason why our stock market took some time to take the hit. Towards the end of 07, there was a lot of optimism in the our market due to large purchases by institutional buyers, foreign investors, excellent performances by some large cap and mid cap companies, promises and prospects reflected by the Government and a lot of hype. This lead to an illogical overvaluation of stock prices; illogical because they were high not as a result of the company doing well but as a result of speculation. It was like a bubble that had to burst at some point in time. After the Subprime, lot of American investors started pulling away their investments from other countries. This, in hand with the rising oil prices and blow to the software industry, in terms of declining projects, employee lay off and rupee value appreciation paved way to a much needed correction.

This is more or less like a world correction and a lot of people including me are still optimistic because our nation has all eyes focussed on development and stability. This is an opportunity to buy shares of promising companies.
Corrections like these are just nature’s way of telling us not to get carried away but to focus and do things the right way!

(to read more about subprime crisis check http://en.wikipedia.org/wiki/Subprime_Crisis )

 

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PC, our phenomenal FM

 I am so glad my friend Suchitra and I have these discussions outside work; discussions about work itself, friends, fun, nations-economies-investments-shares(in our own sweet way), cricket, movies, family and recipes. We agree, disagree, exchange online articles and videos and at the end of the day, its interesting because our chat history turns out to be truly historical !!

Today’s chat history was a milestone because we had this heated discussion about India and America, our economies, politics, culture and almost every other broad aspect we could think of(rather, using every keyword we have come across in our textbooks(i of course used google too)). It got really interesting because we were mostly disagreeing with each other and in the meantime many points came up. And while exchanging all the heat, cold and warmth Suchitra sent me this youtube link – an hour long interview of our Finance Minister, Mr. P Chidambaram by an American interviewer, Charlie Rose interview taken circa 2005.

Its been 6 hours since we ended our discussion and I have already watched this interview thrice, and i wholeheartedly feel it is a must watch for everyone. One hour of time spent on this interview is totally worth it, and i have two points to justify this. But first, watch the interview –

You would probably have guessed by now

point 1 – PC’s communication skills, articulation, confidence, eloquence and clarity

point 2 – the magnitude of content, simplification of economics, relativity of issues, representation of facts and reality

I found it phenomenal! Didnt you?

Stock Picking

I had mentioned ‘Technical analysis’ (and my ignorance about it) in my previous post and had promised to do some reading and get back on the topic in my next post.

 

Today, I’m happy that I finally could comprehend the funda in my very first attempt, and sad to think that I couldn’t grasp it during college, in spite of reading multiple times, from multiple books, sitting in multiple locations, both with and without my spectacles.

 

But before we jump into the meaning, let’s understand the context.

If you had Rs.10000 to invest in shares and more than 6000 stocks to choose from, how would you go about it? Let’s look at certain thoughts that would hover while you try to make the right decision –

  

• Why am I looking at this option?
• What is the kind of growth in value I am looking at?
• Am I interested in short term or long term investment in shares?
• Do I have the time or patience for day trading?
• Do I want the facility of ‘no tax on long term capital gains’?
• Am I going to keep in pace with the news that affect my stocks?

  

A person who has no clue as to what is happening in the economy/market/country/world would want to take a look at it before he looks at his investment options. From what I found, literally everything around us has an implication in the stock market. So, keeping oneself reasonably in pace with it becomes necessary for making the right choices.

  

From an economy point of view, taking a look at indices like –

·     growth rate – will tell us whether there is optimism and opportunity in the economy

·     gdp – can tell us what the percentage of income contributed by each sector of our economy is

·     inflation rate – tells us how high the money supply in the economy is
similarly, bank rates, interest rates etc.

 

From a political point of view, budget allocations, government policies, coalitions, foreign policy, support to industry etc.
From an industry point of view, supply and demand levels, tax benefits, raw materials and work force supply, performance of related industries, etc.
From a company point of view, financial position, competitors, marketing strategies, funds available, staff motivation, performance etc.
 

 

Once you have a decent idea about these, you will be in a position to ‘relate’. When it comes to economy and investments, it is very important to be able to relate data to deduce informed opinions. ‘To relate’ would mean – to make out what pattern/news around the globe, in the economy, government, industry, competitor or people can affect a given stock. This is called fundamental analysis.

 

While many people think that fundamental analysis is sufficient to find out if a stock is worth buying, there is another school of thought that believes that whatever conclusion one has made out of a fundamental analysis is already reflected in the price of stock. This school of thought proposes to consider the actual price behaviour of the stock. That is, no matter how many highs and lows a stock price has, it will still follow a particular trend; and this trend helps determine whether the stock will do well in the future. This is called technical analysis.

 

Still confused? I guess this chart will make it clearer –

 

  

While the small dips and rises represent the stock price’s reaction to market news, the overall trend which is in an upward direction, shows that the stock is bound to do well and people would want to buy more shares of this company. The time period on the x axis of the graph can be minutes, hours, days or even years.

While some analysts use technical methods to make decisions others depend on economic factors only; still others use a combination of both.

 

My stock market crush

If only I knew, that two years later I would be betting on shares, I would certainly have worked harder on my finance papers in college.

The subject was so interesting, that I looked forward to enrolling for the paper and paid perfect attention in the first few classes. Then one day, came along Chapter 5 – Technical Analysis. I never understood the funda of doing a technical analysis on a stock to find out whether it was worth buying. After all, I was nothing but an average commerce student and anything technical or anything that captured the interest of my engineering background classmates was (bound to be) scary for the likes of me. I think it is from that point on, that I lost total focus on learning further, because all of it went way beyond my highest level of understanding. I spent the rest of my classes looking at the cardio-scan like graphs, wondering how many more classes were left for the course to end.

I always had a fascination for stock markets, but my afore mentioned lack of academic confidence pulled me away from it. Thanks to sufficient enthusiasm from my present boss and more than enough pushing from my better half, I decided to take a look at it once again. This time, the hard way.

Practical experience seemed much better.  But slowly, I felt the need to look at some theory and realized that academics is nothing but a compilation of practical knowledge. I started out learning about some basic terms that are used in the trade; things like stock, shares, quote, scrips, broker, gain, loss, market, sensex, nifty, bulls, bears, booking, sell, buy, short sell, limit order and so on. Then I moved on to understanding how a transaction takes place, who are the people involved, how are all the money and shares transferred, etc. Gradually, I got this idea of playing a virtual game of investment before taking the plunge. I registered at www.moneybhai.moneycontrol.com, in which, as a user I am virtually allotted a total corpus of 25lacs and allowed to trade on real stocks during the market hours. I played this for a couple of months; it was turning out to be a good experience, because, I knew I had to keep pace with what’s happening from the economy, market, industry and company points of view. The motivation was to be the top gainer and get a Rs.10,000 cash prize, but the actual reward is that it has kept my tempo going. It gave me the confidence to venture into the real market.
I no longer look at moneybhai, but since then, I’ve made it a point to keep myself fairly updated with what’s happening around me.

(Frankly, I still don’t know what technical analysis precisely means 🙂 but I vow to find out and write about it in my next article.) 

 

India Inc

india_inc.gif

Of late, India Inc has been the focus of world attention. After 60 years of independence, we can now look back and say we are on the right track to growth and development. Optimism is such, that any derailment is now out of question.

Each decade our economy has been going through significant changes. For almost 2 decades after independence, the primary sector, ie agriculture, forestery, mining etc., contributed most to our GDP. Slowly, in the 80’s investment started catching up and focus was laid on infrastructure initiatives like dams, power supply, irrigation, roads etc. When household savings reached a limit where it couldnt grow more, the Goverment started borrowing loans from foreign banks and establishments.  A balance of payments issue in that period, led the government  to liberalise and open up the economy.

The 90s saw a significant rise of the middle class, leading to more demand for consumer durables which in turn mobilised the growth of industry. Goverment’s loosened foreign policy, small scale initiatives, aides to industry resulted in more small businesses to sprout, generated jobs and therefore pushed demand. During this period the household savings and investments also grew. Growth rate charts showed a uniform upward trend. Education was starting to gain its much needed attention, many top class institutions sprung and the number of people graduating each year increased to new levels. Lot of stress was being given to job oriented and professional courses.

By the late 90s, growing skilled workforce, the arrival of the internet and liberalisation of the economy led to the IT boom in the country.  Revenues rocketed, capital flowed in from all sides, middleclass grew richer and thereby savings and investment increased manifold. Household investors who earlier preferred fixed income investment avenues, started looking at new, ripe opportunities like stock markets and mutual funds. This boosted industry further. The political scenario had also started becoming favourable and all parties started realising that an investment and infrastructure based campaign would any day win more votes.

The growth for 2008-09 is projected at 10%. There is lot of optimism in the country and abroad. Foreign institutional investors and NRIs have been showing lot of confidence in our future and are keeping the flow of funds perinnial. It looks like people have realised that somewhere we were lagging behind and its now time to pull up our socks and get to work! Chak de India!!