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ver wondered why it is said that the casino business never sees red ink?
That's because they make a fortune on gamblers.
Sure, you may make a killing sitting at the table. But, chances are, you will leave empty-handed because you are sure to gamble away all your profits.
Simply put, that is called greed.
Ditto at a bull market.
The savvy investor makes a fortune selling his stocks at a good price at the right time. Not so for a 'greedy' investor who ends up with 'junk paper' in the end.
Keep them happy!
Says world-renowned investor Sir John Templeton, who lent his name to the Templeton Group.
What he meant was buy them (stocks) when everyone wants to sell, and sell them when everyone wants to buy.
In my 15-plus years of investing, I have followed this rule with great discipline and succeeded most of the time.
I began investing in the 2001 bear market. After September 11, when the markets dipped, I bought all the stocks I wanted to own.
I took the opportunity to buy Tata Chemicals at Rs 45, Mahindra & Mahindra at Rs 90, ABB at Rs 180, Siemens at Rs 225, Kotak at Rs 40, TISCO at Rs 115, Old JVSL at Rs 3, and so on.
During this bull run, I was on a selling spree. I kept them happy and was pretty smug after I made money.
In my opinion, there are five rules to investing.
1. Invest in learning
Before you invest in stocks, get your hands on some good reading material. Read the financial dailies and magazines. Surf the Internet and watch CNBC channel.
I spend at least four to five hours daily just reading, listening to the news, reading e-mails and research reports from various brokers. But, hey, that is my job!
2. Look behind the scenes
Look behind what is apparent. It is like looking at a James Bond movie and thinking the hero leads the show, ignoring the doubles, stuntmen, and the entire production and camera crew that go into this movie.
When the talk is about a real estate boom or a retail boom, with malls and department stores sprouting all over the country, look behind the scenes. This will definitely impact the ceramics industry, sanitary suppliers and the glass industry, to name a few. Look for companies in these areas.
Similarly, when talking about textile and auto part exports, look at ports, shipping companies, packaging companies and logistics companies.
When the buzz is about medicines, think about the companies that prepare capsules, like Bharti, Natural Caps and, now, India Gelatin, who makes the gelatin required for the capsules.
3. Dividend is the key
If a company pays dividend regularly, it is a sign that it has a good balance sheet. Look for such finds, and check the dividend history over the last five years. Of these, pick the ones that have a higher dividend yield as compared to a one or two-year bank fixed deposit.
Buy them and hold on to them. Remember, every dog has its day. Soon, this company will be noticed.
When I bought Bhartiya International for a little over Rs 20 in 2001, it was giving a dividend yield of 6% to 8%. Now, I can safely take a 300% appreciation if I sell the shares.
Ditto in the case of other companies like Rasoi, Srinivasa Hatcheries, Garware Wall, Cosmo Films, Nilkamal and Raj Plastics.
4. Welcome trouble
No one wants to invest in 'trouble' companies. But, sometimes, they make for great opportunities.
The key is to locate the source of the problem. And then judge whether it is a one-time occurence or, possibly, a lifetime one.
For instance, not getting gas for production is not a lifetime trouble for Regency Ceramics. It can be resolved quickly, enabling the company to bounce back.
5. Invest in Penny Stocks
If you like to play penny stocks, don't invest blindly. These are stocks that are really cheap, but risky, too.
Be selective. Look at the sector as a whole and see by how much the price of the leading stocks have moved. Now look for penny stocks in that sector which are yet to climb upward.
But, again, follow some rules. The companies must have good earnings (revenue).
Find out why they are still not the market favourites. Do they have low profit margins? Are their profits being cut because they are paying back loans at a high interest rate? Do they have a lot of loans to service?
Over time, the profit margins will increase if there is a price hike. Or once their debt is cleared, their profits will shoot up.
Take, for instance, steel and cement stocks.
I bought Jindal Vijaynagar & Steel (now Jindal Steels) on September 12, 2001, which was available at around Rs 2.50 and Rs 3.50. I sold at the start of 2005 for a little more than Rs 15.
On the same day, Mangalam Cement was available in the Rs 3.50 to Rs 5.50 range, and is now around Rs 75.
I picked up JCT (textile stock) in 2002 for around Rs 3 and the stock is currently trading at around Rs 15.
These three stocks are classic examples of well managed companies incurring losses due to high interest charges and low profit margins.
Once these sectors bounced back, they began to reduce their debt by refinancing at lower interest rates.
What do you do now?
I am personally convinced that it is too late in this bull market to really reap gains.
Don't get swayed by predictions that the market can go much higher from here to 7500+. That is being greedy.
Following Sir John Templeton's golden rule, I am currently not buying but selling my stocks. After all, to make a profit, you have to sell.
And, with the money I earn, I am parking it in fixed return investments. When the market crashes, I shall wait for the opportunity to pick up all those goodies again.
Remember, patience is the key.
The author works as a portfolio assistant of a global equity research group for an internationally renowned mutual fund company. If you would like to send him your comments or share an investing experience, we would love to hear from you.
Illustration: Uttam Ghosh
Note: These views and the strategy mentioned reflect the author's personal convictions. They are not a sure-fire way to make money in the market.