The Stocks Investment Site

Money for the Long Run: Learn About Online Trading

2005-08-02T10:38:00.000+05:30

When you're starting out in your career, it's smart to invest in your employer's 401(k) plan or a mutual fund.

Another option is to dabble in the stock market. Stephen Rapp, 23, of Avon, a recent graduate of Roberts Wesleyan College who works for Rochester Broadway Theatre League, has decided to take that gamble. And rather than doing business with a local financial firm, he's relying on E*Trade, an online discount brokerage firm, to make his trades at a significant cost savings.

The price of cutting costs

Online discount brokerage firms, such as E*Trade or Ameritrade, allow you to conduct business on the Web or over the phone using a toll-free number. You'll pay less in commission fees for trades than you would if you used a standard brokerage firm.

For example, Rapp pays a flat rate of $9.99 to make five to 49 trades per month. He'd pay a $50 minimum commission fee if he used a full-service firm to make such trades, says Antonio Porretta, 30, of Irondequoit, a financial adviser with Brighton Securities.

Low commissions are what attracted Rapp to E*Trade. While he's saving on fees, however, he doesn't have one-on-one contact with a personal financial adviser, which could cost him in the long run.

"A lot of people outside of our business think, 'You must hate service vehicles like E*Trade, because they're taking business' from us. But that's not necessarily the case," Porretta says. The financial adviser says his focus is more than just trades; he cares about creating client relationships.

"The No. 1 reason investors fail is emotion versus a rational decision. An adviser takes emotion out of the equation," he says.

While discount firms provide a lot of historical information about individual stocks, they won't guide you in making investment decisions. And although Rapp does a lot of research before ordering a trade, he admits to making some blunders.

"There are some stocks that I take a dive on, but I have to look at it as part of the learning process," he says.

Another tricky element of online trading is timing. Stock prices can shift while orders are being routed and change before transactions are final.

Is online trading for you?

Researchers have long studied investors' trading habits, and it seems that women do better using online firms than men.

"The assessment is that the men suffer from significantly more overconfidence than the women, provoking them to trade much more, burning up more in trading costs," says Dan Burnside, a certified financial planner and lecturer at the William E. Simon Graduate School of Business Administration at the University of Rochester.

Burnside adds that, in general, online investors tend to buy too few stocks, when experts say that diversification - buying a range of stocks, bonds and mutual funds and participating in a 401(k) plan - is the key to successful investing.

Remember, you can afford to take some risks and make mistakes when you're young, but, in the long run, your goal should be a portfolio packed with all kinds of investments.

Types of Trading

2005-07-28T17:15:00.000+05:30

Day Trading, Swing Trading, Position Trading, Online Trading

There are several types of trading styles that persons seeking to profit from short term trades in the market may wish to use. Here is a brief description of the most widely used short term trading styles.

Day Trading

Day traders buy and sell stocks throughout the day in the hope that the price of the stocks will fluctuate in value during the day, allowing them to earn quick profits. A day trader will hold a stock anywhere from a few seconds to a few hours, but will always sell all of those stocks before the close of each day. The day trader will therefore not own any positions at the close of any day, and there is overnight risk. The objective of day trading is to quickly get in and out of any particular stock for a profit anywhere from a few cents to several points per share on an intra-day basis.
Day trading can be further subdivided into a number of styles, including:

Scalpers: This style of day trading involves the rapid and repeated buying and selling of a large volume of stocks within seconds or minutes. The objective is to earn a small per share profit on each transaction while minimizing the risk.
Momentum Traders: This style of day trading involves identifying and trading stocks that are in a moving pattern during the day, in an attempt to buy such stocks at bottoms and sell at tops.

Swing Traders

The principal difference between day trading and swing trading is that swing traders will normally have a slightly longer time horizon than day traders for holding a position in a stock. As is the case with day traders, swing traders also attempt to predict the short term fluctuation in a stock's price. However, swing traders are willing to hold stocks for more than one day, if necessary, to give the stock price some time to move or to capture additional momentum in the stock's price. Swing traders will generally hold on to their stock positions anywhere from a few hours to several days.

Swing trading has the capability of providing higher returns than day trading. However, unlike day traders who liquidate their positions at the end of each day, swing traders assume overnight risk. There are some significant risks in carrying positions overnight. For example news events and earnings warnings announced after the closing bell can result in large, unexpected and possibly adverse changes to a stock's price.

Position Trading

Position trading is similar to swing trading, but with a longer time horizon. Position traders hold stocks for a time period anywhere from one day to several weeks or months. These traders seek to identify stocks where the technical trends suggest a possible large movement in price is likely to occur, but which may not be fully played out for several weeks or months.

Online Trading

Online trading is not really properly described as a trading style. Rather, online trading is simply a term that refers to the medium used to enter and execute trades. Online traders, which can include long term investors, as well as day, swing and position traders, use either an Internet connection or a direct access online trading platform to access and execute trades with Web based brokers.

Stockmarkets: What to look for?

2005-07-23T16:26:00.000+05:30

"Fools rush in where angels fear to tread," said Alexander Pope, the well-known eighteenth century English poet and writer. Well, we are certain that he was not referring to the stock markets when he said that, but the current market situation in India is not too different! With stock markets at unprecedented highs, much above what is warranted by fundamentals, it is only the 'fools' who would rush in to buy any stock at these levels. The 'fool' that we are referring to in this case implies the participant who is willing to pick up any kind of stock at such levels, giving least consideration to the inherent strength of the company and its future growth prospects and believing that 'the stock', like some other stocks will definitely give him bumper returns!

Now, we are not saying that one should totally avoid the stock markets at this juncture. What we are saying is that investors need to practice caution and more of it now than ever before. With valuations looking fairly stretched, there is every reason to be cautious. Just look at the factors driving the markets up - liquidity is sloshing around like never before, FIIs are pumping in hundreds of millions of dollars into the markets, even though stocks have run ahead of fundamentals (at last count, net FII investment in CY05 to date has crossed US$ 5 bn). Virtually all the indices, including mid and large-cap indices, have hit all-time highs. But none of this seems to be justified by fundamentals.

Now take a look at some factors that we need to be concerned about - like stocks, unfortunately, oil prices are also at record highs. The US property market 'bubble' could top out anytime, reducing the spending power of the debt-ridden US consumer, by far the strongest force driving the growth of the global economy on the demand side, the slow job growth and wage growth in the US economy relative to the increase in productivity, China's overheated economy due for a slowdown, risk of terrorist strikes, geopolitical issues and so on.

Therefore, given the above factors, if any of the above 'potential party-poopers' do materialize, India will surely be affected in some way or the other, as she becomes increasingly integrated with the global economy. So, what can an investor do in such 'bubbly' and 'frothy' times?

Investors, please consider!

Future growth prospects: For starters, one has to make sure that the company one is investing in has strong growth prospects. In a bull market such as ours at present, even the 'dud stocks' go up along with the real 'gems'. Therefore, in order to separate the wheat from the chaff, doing solid research on the target company is extremely vital. There is no substitute for this! The investor, before 'taking the plunge', must understand the fundamentals of the company, past performance and future growth prospects. Eventually, when markets do cool down and the smoke clears, it is only the 'gems' that will still remain standing!

Management quality: Management is of utmost importance while choosing a company to invest in. For example, in the software industry, which is highly dynamic and competition is on a global scale, the management's ability to think out of the box and come up with innovative solutions to critical business problems will help a company stand out. With the 'global delivery model' pioneered by the likes of Infosys and TCS, the software industry has literally changed the way business is done in the industry and has forced MNC IT majors to do likewise and change their methods to suit the new paradigm shift of global service delivery. With a solid management quality and track record in place, top-tier software majors appear set for strong business growth over the next few years. These are factors one must look for in other companies and sectors as well.

Cyclicality: Another factor that needs to be looked at closely is the cyclicality of the industry. For example, the steel industry is cyclical in nature. When demand soars, steel prices pick up due to lower supply and as capacities are added, demand is satiated and the gap between demand and supply is bridged, prices get back to the lower levels. The major factor that investors need to watch closely is the stage of the cycle. Of course, it is easier said than done, but one can observe broad global factors driving prices, such as a cutback in imports from China, a large increase in steel capacities in India and the trend of global steel prices to gauge the cycle. On the basis of this, one can come to a conclusion as to whether prices will remain strong or not and take a call on companies from this sector.

Valuations: Needless to say, in such a frothy market, where liquidity rather than fundamentals is the main driver of the upward movement in stock prices, valuations take centrestage while choosing a stock. One needs to be careful, particularly if one is considering an investment in mid-cap stocks. Once again, to reiterate the point, we are not saying that there is no stock worth buying in this space, just that caution needs to be the watchword during the process of stock selection. Compare current valuations with earnings growth and see whether the market price justifies the earnings growth, actual and expected. If medium-term earnings growth is already factored into the stock price, quite clearly, the risk-return ratio is skewed towards risk.

Free float: Another factor that needs to be considered is the 'free float' of the stock. As per the BSE, Free-float market capitalization is defined as 'that proportion of total shares issued by the company, which are readily available for trading in the market. It generally excludes promoters' holding, government holding, strategic holding and other locked-in shares, which will not come to the market for trading in the normal course.' The point to note is that, the higher the free float, the greater the stability and lesser the volatility of the shares, as a greater number of shares are traded by a wider audience of investors. It is also reflective of a more true process of price discovery, as a greater number of people get to express their views on the 'fair value' of the stock price, through buying and selling.

Conclusion
It has always been seen in the past that retail investors generally begin to participate at the fag end of any bull market. They buy at the highest prices and sell when the prices have fallen considerably. Thus, in order to ensure that investors do not make such a mistake, considering the points we have listed above is an extremely vital part of the investment decision. Thus, we reiterate that there is no substitute for doing thorough research about the company and sector before taking a decision. Happy and safe investing!

The Top 10 Tips for Successful Investing

2005-06-11T14:39:00.000+05:30

1. Start Early - the sooner you invest, the more time your money will have to grow. If you delay, you will almost certainly have to invest much more to achieve a similar result.

THE DIFFERENCE TIME CAN MAKE

If you started investing Rs 5,000 a month on your 40th birthday, in 20 years’ time you would have invested Rs 12 lakhs. Growing at an average of 7% a year, it would be worth Rs 25,52,994 when you reach 60. If you started investing ten years earlier, your Rs 5,000 each month would add up to Rs 18 lakhs over 30 years. Assuming the same average annual growth of 7%, you would have Rs 58,82,545 on your 60th birthday – more than double the amount you would have received if you’d started ten years later! The bottom line - your investments gain most from compounded interest when you have time on your side.

2. Keep some cash aside – it is always a good idea to have some money set aside in case
of emergencies. Enough to cover three months’ living expenses is often a rough guide to how much you need. And make sure you can withdraw it when you need to, without penalties.

WHY YOU MAY NEED YOUR MONEY AT SHORT NOTICE:

• making a major purchase
• taking an unplanned holiday
• for an emergency such as sudden hospitalization

3. Ask yourself how much risk you can take – there is no point having a stock market investment if you are going to lose sleep every time share prices go through a rough patch. It’s vital that you are realistic about your appetite for risk – an Investment Adviser may be able to help you decide how much risk you can tolerate.

"In many ways, the key organ for investing is the stomach, not the brain. What is your stomach going to do when an investment your brain selected declines for a year or two?"

4. Bear in mind that inflation will eat into your savings – returns on risk-free cash investments may sound respectable, but when you subtract the current rate of inflation you may not be so impressed. For significant long-term growth you need to make your money work harder.

INFLATION - THE TICKING TIME BOMB

If you have Rs 10,000 in a savings account earning 3% interest each year, in 20 years time, your savings would be worth Rs 18,061. That’s a return of just over 80%. However, if inflation is
about 7%, Rs 18,061 would only be worth Rs 4,668 in today’s terms!

5. Think carefully about how long you will be investing for – only look at the stock market if you are prepared to put your money away for five or ten years, or perhaps even longer. If you are likely to need your money any sooner, keep it in a lower-risk investment so there is less chance of a fall in value just before you make a withdrawal.

“If you’re going to need money within the near future to put a down payment on a house — the
stock market is not the place to be. You can flip a coin over where the market is headed over the
next year. But if you’re in the market for the long haul — five, ten or twenty years — then time
is on your side and you should stick to your longterm investment plan.”

6. Spread your money across a range of investments – it’s rarely a good idea to have all your eggs in one basket. Depending on your goals and attitude to risk, you will probably want
to spread your money across different types of investment – equities, bonds and cash. You may also want to diversify within each of these categories. An equity fund, for example, will invest your money in a variety of companies but you may want to ensure you have a range of industry sectors too.

ADVANTAGES AND DISADVANTAGES OF THE VARIOUS ASSET CLASSES

CASH – ADVANTAGES
• High security and liquid
• Interest will always be paid
CASH – DISADVANTAGES
• Interest rates vary
• Best rates often have restrictions
• May not beat inflation
BONDS – ADVANTAGES
• Fixed interest paid regularly
BONDS – DISADVANTAGES
• Bond issuer may default on interest payments
• Value of a bond may fluctuate
EQUITIES – ADVANTAGES
• Equities can increase significantly in value
• Can outperform other asset classes over the long term
EQUITIES – DISADVANTAGES
• Equities can also fall significantly in value
• Difficult to predict what will happen in the short term

7. Invest regularly – investing regularly can be a great way to build up a significant lump sum. You will also benefit from what is known as rupee cost averaging. This means that, if you are investing in a mutual fund, over the years, whether the market goes up or down, you will pay the average price for units.

8. Choose your funds carefully – you should select investments based on your personal
circumstances and goals. If you are investing in a mutual fund, don’t opt for the flavour of the month, unless you are sure it will be right for you in the future. Don’t assume all funds investing in Indian equities are the same – look at what a fund invests in and check if you are comfortable with its investment style and objectives.

9. Remember that time not timing is the key to successful investing – when planning an investment, it can be tempting to wait for the market to drop. But you run the risk of missing out on the rises that often occur in the early days of an upward trend. In Fidelity’s experience, even the experts cannot “time the market” consistently well. It is better to choose an investment that you feel confident about and take a long-term view, so that you have time to ride out any ups and downs.

10. Review your investments – a portfolio that is right for you at one point in your life may
not be quite so suitable a few years later. Your investments need to adapt to changes in your circumstances, such as getting married, having children or starting a business. It’s also a good idea to check that each of the funds in your portfolio is living up to your expectations. Talking to an Investment Adviser could help you decide whether you need to switch money between funds.

GETTING THE RIGHT MIX

For the greatest long-term growth potential you could invest all your money in equities. But this could be a high-risk strategy as the markets could dip just before you need the money. You may need to think about making changes to your portfolio over time. You could aim for strong growth in the early years, and then, lock in gains you may have made and move into lower-risk investments. As you get closer to needing your money, bonds and cash investments could be your emphasis.

How retail investors lose money

2005-06-10T11:09:00.000+05:30

The reason is simple - a retail investor is driven by greed or fear. Never logic.

Retail investors are always the last to enter a bull run
"Smart money" enters markets long time back when markets are at its bottoms, there is frustration all around and no one wants to discuss markets
When markets start booming and indices make new peaks, the retail investor "wakes" up. At this stage, he is still not sure and is a fence sitter.
Lastly, there is optimism all around. Every one is bullish and talking markets. Stocks which were never traded in a year, suddenly start moving and start reaching "new highs"
At this time, the retail investor starts buying as he does not want to miss out the "action"
The retail investor will display a marked preference for "low priced" stocks because these are "cheap". He will stay clear of index stocks as these are "expensive"
This is also the time when "smart money" starts moving out
When a correction happens, it is usually quite severe
The retail investor does one of two things. He either decides to wait (the optimism is still there) or he starts "averaging" his costs. Averaging is nothing but trying to "catch a falling knife"
At some time or the other, panic sets in. The retail investor will then sell off all holdings as a distress sale.
Sometimes the retail investor will do nothing but wait for the markets to rise
When the markets do rise, he will sell off all his holdings at the first available opportunity and thus miss out on the new bull run

Interesting facts you may not be aware of

About 80% of retail investors in public issues sell their allotments within a week of listing. No one will wait and let their investment appreciate
In a bull run, the retail investor is usually the first to sell off his holding. This investor seldom waits for the bull run to continue
Those who have never participated when the rally started will invariably jump in towards the end of the bull run
Whenever a fall happens, the retail investor is the first to buy as he does not want to "miss this chance" to buy a stock
Retail investors hate to take a loss. Circumstances eventually force them to take a bigger loss sometime or other
Lastly, retail investors rely on tips or broker advise and sometimes, company research when buying. This never works because the market has already discounted this news

Conclusion

Follow the trend for profitable investing

Creating a Financial Future - Putting Your Plan Into Action ( Part 1 )

2005-06-09T18:33:00.000+05:30

Putting the plan into action is what implementation is all about. It's one thing to have goals, but without concrete steps to achieve them, they remain dreams. The last column discussed measuring the money required for each of these goals. Now it’s time to figure out how we’re going to put that money together.

Of course, the first step is the obvious one. We must have a source of income. This could be a salary, an endowment, or even a loan (although we’d normally advise against that last option). One might consider multiple sources of income. This protects against undue dependence on one source.

Assuming that some income exists, we can begin to make plans for saving. Based upon our analysis, we can determine how much must be saved on a daily, weekly, monthly, or annual basis to reach our goals. We can then consider if it is possible to grow the money fast enough to reach our target date.

If, in the end, we find ourselves unable to save adequately for our goals, we must consider that the problem may not be in our plan, but in our income levels. Sometimes it’s simply a matter of recognizing that goals may be unattainable without adjusting income levels. This might involve second jobs, or side businesses, or rather may require stepping back from the current situation entirely, and increasing employability through education or training. Furthermore, it might suggest that new, creative ideas should be considered. Alternatively, it might simply involve selling off unproductive assets. Whatever the case may be, the income level is a crucial part of any financial strategy, and one often overlooked by investment professionals.

Finally, once the income levels and saving decisions have been established, we turn to the final component: the investment strategy. The final strategy may include many different types of investments, and use many different types of methods, but in the end, it should always be focused on the goals.

For example, if the goal is to purchase a house in 1 year, investing in stocks may not be the optimal strategy unless you intend to take a great deal of risk. On the other hand, if you plan to purchase a house when you have earned enough money, but plan to remain flexible regarding the specific time, stocks may be more viable.

This brings us to the consideration of asset types. This is one of the most critical decisions to make. There are at least a dozen different types of assets to choose from. Some of the most popular are:

- Stocks Mutual Funds Real Estate Limited Partnerships
- Art & Collectibles Gold/Commodities Bonds Insurance
- Businesses Derivatives

Of course, this list could go on, but we’ll focus on some of these. First, let’s dispose of the easy ones. Investing in a Business can be a great choice for someone with a solid business plan and sufficient time and capital to make it work. However, many businesses require a full-time commitment, and unless one is able to give up their regular income, it can be a problem. It is possible to start a business part-time, depending on the type, and this may be an option for some. Additionally, one could invest in someone else’s business, but here one must be concerned with issues of honesty, compatibility, and incentive. Finally, investing in a business carries with it liquidity problems, because one cannot always sell a business for what its worth without first locating an ideal buyer. Thus, if you’ve planned to sell at a certain date, in anticipation of reaching a goal, you may have trouble.

Limited Partnerships carry with them unnecessary problems, largely because there is not a great market for these either. Thus, even when they have value, one may not be able to sell them easily. In this way they resemble investing in small businesses, and carry the same risks.

Insurance truly should not be considered an investment, but I include it here because it is so often sold as an investment. In many ways, it can help one plan for tax considerations, but as a pure investment, it is a non-starter.

Art & Collectibles can sometimes increase in value over time, and for those with specialized knowledge in a certain area, it may be a wise speculation. However, much like running a business, it takes time and energy, and has liquidity problems. Still, these can be a small proportion of a portfolio for some investors.

Commodities are bulk holdings of any uniform item for which all have a uniform value. This would include oil, orange juice, coal, silver, or pork bellies. Gold is a commodity with unique qualities because of its long history of use as money and reputation as a dependable store of value. All commodities have fluctuating prices in common, and those who invest in commodities generally have an intimate knowledge of the market for that specific good. Over 90% of people who invest in commodities lose money, while the experts generally make a comfortable living. Investing in commodities can be extremely risky for those who do not have specialized knowledge.

The Benefits of Managed Futures

2005-06-07T18:45:00.000+05:30

Modern Portfolio Theory allows investors to estimate both the expected risk and returns, as measured statistically, for their investment portfolios. A portfolio's risk can be reduced and the expected rate of return increased, when assets with dissimilar price movements are combined. Diversification reduces risk only when assets are combined whose prices move inversely, or at different times, in relation to each other.

While the technical underpinnings of the Modern Portfolio Theory are complex, its conclusion is simple and easy to understand: A diversified portfolio, of uncorrelated asset classes, can provide the highest return with the least amount of volatility.

One of the most uncorrelated and independent investments as compared with stocks and bonds is professionally managed futures.

"Portfolios...including judicious investments...in leveraged managed futures accounts show substantially less risk at every possible level of expected return than portfolios of stocks alone"
Dr. John Lintner, Harvard University

The term managed futures represents an industry comprised of professional money managers known as commodity trading advisors (CTAs) who manage client assets on a discretionary basis, using global futures and options markets as an investment medium.

Managed futures, by their very nature, are a diversified investment opportunity and they provide direct exposure to international financial and non-finanancial asset sectors. Trading advisors have the ability to trade in over 150 different markets worldwide.

The benefits of managed futures within a well balanced portfolio include:
- opportunity to reduce portfolio volatility risk
- potential for enhanced portfolio returns
- ability to profit in any economic environment
- ease of global diversification

Learn The Tricks of The Traders

2005-06-02T19:29:00.000+05:30

ARE there bargains to be had in the stock market? Anyone who invests in shares would like to think so. Buy low, sell high is the ultimate goal of all investors. Not everyone, however, has the time or inclination to analyse every share they might buy. Nor do they have to. A number of Wall Street traders have long put their faith in simple axioms that can point to value in the market. They are so straightforward that anyone can do the same. The recently published Beyond the Random Walk: A Guide to Stock Market Anomalies and Low-Risk Investing by Vijay Singal, a professor at Virginia Tech, gathers many of these adages together. Savvy investors can significantly boost their profits by taking advantage of market inefficiencies, says Singal -and many Irish analysts agree with him. Here are seven indicators that can alert investors to the fact that the stock market is not always as efficient as it should be when it comes to reflecting the fair value of shares.

Index Changes

When firms are added or deleted from an index such as the S&P 500 or the FTSE 100, fund managers who track these indices are forced to buy the stocks being added and to sell those being dropped. Accordingly, the share price of firms being added usually rises, while that of firms being dropped usually declines. The rise or decline begins on the announcement date and continues until the effective date. A recent study showed that shares added to the S&P 500 rose by an average of 6.4% when changes to the index were announced, and had advanced another 3.7% by the time the changes were implemented. Those removed lost an average of 4.2% on announcement date and another 6.2% before the changes became effective. After this, however, new firms tended to give up some of their gains and deleted firms usually regained value. Savvy traders are wise to these trends and profit accordingly. Patrick Sexton, of Fexco Stockbrokers, says that firms being added are on a "strong upward trend anyway" and are likely to be good growth candidates, but the theory, he believes, may have become a victim of its own success. "Nowadays you have to move faster because people have seen the pattern. Look for stocks likely to be added and move in advance of the announcement."

Merger Arbitrage

It sounds posh, but it's pretty simple. When a merger or takeover is announced, the price of the company being acquired doesn't actually rise as high as the price being offered. Why? Because there is always a possibility the deal will fall through. Research shows, however, that the difference in price tends to be larger than it should be. Singal says investors can earn returns of 4%-10% by buying the target and shorting the acquiring company between the announcement and the closure of the deal. Shorting involves selling shares you don't own in the hope of buying them back at a lower price. Pramit Ghose, head of investment strategy at Bloxham Stockbrokers, says that merger arbitrage "generally works but may not be a worthwhile arbitrage for private investors as the percentage gains are too small". Spread-betters can circumvent this problem and make sizeable gains by gambling on small percentage moves in share prices. Option traders, who trade the right to buy or sell shares at a specific price during a set period of time, can do the same. Such activity is not for the faint of heart, however.

The Weekend Effect

History shows Friday to be the stock market's most positive day and Monday its worst. Therefore, Friday is the best day to sell, Monday to buy. Again, however, minute profit margins make this strategy more suitable for spread betters. Sexton has exploited the weekend effect in the past but warns investors of some obvious exceptions. "Don't try this on stocks tipped in the Sunday papers. They tend to be marked up come Monday morning," he says. It's also worth noting that when a downward Monday follows a downward Friday, it may be time to run for cover. Six out of seven times that this happens, shares will fall even further within five days.

Short-term Price Drift

Sometimes news or events that cause large changes in share prices take time to be properly priced in. Singal recommends buying shares that have gone up significantly and shorting stocks that have fallen noticeably before unwinding these positions over the next month. Singal's research shows that such a tactic can yield annual returns of 15%-36%. A good example of short-term price drift is Elan. In 2002, when the firm faced questions concerning its accounting procedures and its Alzheimer's drug, its share price suffered a sudden drop. As the market attempted to gauge the exact significance of these developments, the decline continued. By 2004, the company was able to release positive data on Tysabri, its multiple sclerosis drug. The share price immediately leapt, but continually updated analyst estimates and improved market sentiment meant the share price continued to rise. Of course, the stock recently capitulated once more, following the shock withdrawal of Tysabri from the market. Singal's theory would suggest that Elan shareholders will continue to suffer short-term pain, a viewpoint shared by Stuart Draper, head of research at Dolmen Butler Briscoe. "Elan will probably be significantly higher in a year's time but we are not recommending the stock to our clients," he said.

The December Effect

Shares that have done well in the January-November period are likely to continue on their merry way. Investors holding winners are loath to cash in, as this results in taxable capital gains. By waiting until January, these taxes can be postponed by almost a year as the CGT won't be due until the following October. With little selling pressure, it is easier for these stocks to continue appreciating. Sexton suggests that investors may profit further by postponing any planned sales until February. "Historically, December has been the second best month for the stock market. January is the top performer."

Stock Splits

These occur when a firm increases the number of shares it has. If you own 100 shares of XYZ at E20 per share and there is a 2-1 stock split, you would then own 200 shares worth E10 each. You might ask: isn't this irrelevant? Theoretically, yes. But although splits may not seem important, they tend to affect psychology. A lower share price can entice new investors, for example. Splits are usually undertaken by successful companies that have seen a rapid rise in their share price. Issuing a split draws attention to this success, generally resulting in increased buying. Announcement of a forthcoming split usually gives the stock an immediate boost. As the split date nears, the price is usually bid up further, before retreating after the split becomes effective. A stock split alone should never entice an investor into buying shares. Nevertheless, the odds of short-term gain invariably increase when a company declares an ensuing stock split. Draper sees splits as an excellent sentiment indicator that "usually, if not always, occurs in companies that are getting things right". Ghose says splits generally work and adds that "buying a stock just before it goes ex-dividend can also be profitable". There are a host of other stock market anomalies that the canny investor can exploit: the so-called Santa Claus rally that tends to cheer Wall Street at Christmas; the underperformance of the market in the summer months; and the usually stellar performance of the market on the day before St Patrick's Day.

5 common investment mistakes

2005-05-31T09:39:00.000+05:30

Retail investors tend to be burdened with information on how they should go about investing their monies. Distributors, agents and fund houses all play their part in “educating” investors on this front. Our experience with investors suggests that apart from the aforesaid, there is also a need for investors to be aware of a few common and frequently committed mistakes. We present a checklist of 5 common investment mistakes that investors need to steer clear of.

1. Not setting an investment objective
A large number of investors are habituated to carrying out their investment activity in a haphazard and sporadic manner. Very often they fail to set an investment objective which is a basic tenet of financial planning. Investors should adopt a more systematic approach to investing by creating distinct portfolios for all their needs i.e. short-term (planning for a vacation), medium-term (buying a car) and long-term (planning for retirement) needs respectively. Setting of investment objectives also incorporates a degree of discipline which is a vital ingredient for the success of any the investment activity.

2. Not doing your homework
Investing like any other serious activity needs a fair degree of preparation at the investors’ end. Investors need to gather information and acquaint themselves with all the options available to them. Investing in a given asset class (for example fixed deposits) simply because you have conventionally done so is inappropriate. Investors have a plethora of options ranging from mutual funds, fixed deposits, and bonds to small savings schemes to choose from. After getting the facts in place, investors should select instruments that are best equipped to fulfill their investment objectives.

3. Succumbing to the “noise”
Every time the equity markets hit a purple patch, investors come face-to-face with a lot of “noise”. Fund houses go on an IPO (Initial Public Offering) launch spree and distributors do their bit by convincing investors that the recently lunched scheme is the place to be. For example recent times have seen a surge in interest in funds of the flexi cap and mid cap variety. Investors tend to succumb to the noise and get invested simply because everyone else is doing so. The trouble is that investors could discard their pre-determined asset allocation and make investments contrary to their risk appetite.
Investors must exercise a lot of discretion and resist falling prey to the herd mentality, especially at a time when everyone around them is busy painting a rosy picture of the investment scenario.

4. Getting attached to investments
Investors must remember at all times that investments are a means to achieve ends (financial goals) and not goals by themselves. If investments have failed to perform their requisite task, then investors should be flexible enough to act on the same. Investors should never get attached to their investments and stubbornly cling on to them. Assess at regular intervals how well your investments have performed and initiate the necessary corrective measures.

5. Timing the markets
A large number of investors like to believe that they can time the markets; nothing could be farther from the truth. If this notion was correct, we would have experienced a surfeit of fund managers and investment gurus. Instead of trying to outsmart the markets and failing in the process, adopt a more scientific approach. Use the SIP (Systematic Investment Plan) route and invest regularly to benefit from the markets. Don’t try to beat the markets, join them instead

What Should Firms Do With 'Excess' Cash?

2005-05-27T11:33:00.000+05:30

Last week a high profile fund manager appeared on a business television program and explained his "value" screening methodology that has generated positive returns over the last five years.

His quantitative approach screens for companies with the "highest shareholder yield" for possible inclusion into the fund. High shareholder yield is basically the sum of dividend yield and the returns generated by an existing company share buy-back program. A technical study known as price momentum (which in this case is a simple three- and six-month rate of change) is also part of the screening process.

Companies who embrace a "high shareholder yield" strategy may be good for Wall Street, but in the long run it may be bad for Main Street.

International Business Machines Corp. (IBM) is a good case study on the topic of high shareholder yield.

Back in 1995, IBM (dubbed Big Blue) began what was to be a series of dividend increases and share buybacks. On Nov. 26, 1996, IBM's board of directors approved the company's purchase of an additional $3.5 billion of its own shares on the open market. That is addition to already having spent nearly $10 billion since January 1995 buying back its stock.

Some analysts questioned whether this was good or bad for the shareholders. Over the short term the answer is "yes" because the share price tripled over the next three years.

But a long-time IBM watcher and critic argued that those billions should have instead been spent on investing in new businesses to generate growth. Bob Djurdjevic, president of Annex Research, described the buybacks as little more than a bribe to Wall Street to keep a "buy" rating on the company's shares. In other words, with a major stock buyback scheme, investors could hardly lose on the investment.

Wall Street knew that IBM was willing to spend billions to buy the shares so it can pump up the price.

The reality is that paying dividends suggests the company must, at least, have "excess" cash on hand. Thus, the question boils down to what should a company do with its "excess" cash?

Such a company has two alternatives either invest the money in projects (internal expansion or acquisitions) or distribute it to shareholders. The choice between these two alternatives is simple if the company has good growth prospects then it should invest in these projects as they would create value to shareholders and to the local community as they expand their work force.

Otherwise, the company should distribute the "excess" cash to shareholders in the form of dividends.

Super-investor Warren Buffett has always said that Berkshire Hathaway Inc. would never pay a dividend as long as there is a promising way to put the cash to work. Buffett claims that, in the past, Berkshire has earned well over market rates on retained earnings, and under such circumstances distribution (dividends) would be contrary to the interests of the shareholders.

Our chart this week plots the monthly closes of Dow component IBM above a very long-term, 40-month moving average.

Note the booming "Wall Street" period of the late 1990s when the company used excess cash to shrink the stock float and inflate the earnings per share. Note the subsequent "Main Street" period of 2000 to date when "Big Blue" sold off divisions and "restructured" its workforce.

A few weeks ago, IBM said it's cutting up to 13,000 jobs, primarily in Europe, as part of a global cost-cutting plan. IBM recently closed a deal in which China's largest computer company acquired IBM's personal computer business.

IBM's troubles began in July of 1980 when IBM representatives met for the first time with Microsoft's Bill Gates to talk about writing an operating system for IBM's new hush-hush "personal" computer.

For its problems today, I could use a four-letter word DELL. Dell Inc. did spend $3 billion last year on stock buybacks, but paid no dividend. The company explains its dividend policy on its website, "We believe that our earnings are best utilized by investing in internal growth opportunities, such as new products, new customer segments and new geographic markets."

Last April, IBM shares plunged from $90 to $70 in just 14 days and on April 26, 2005, IBM directors tried to halt the big slide by adding another $0.02 to the company's dividend and authorizing $5 billion to buy back stock. Here is a suggestion for IBM. Lose the high shareholder yield schtick and grow the company. In the long run, Wall and Main Streets will be better off.

8 investing tips

2005-05-24T10:06:00.000+05:30

Equities: 8 investing tips

The stock market ‘meltdown’ witnessed since the start of 2005 (notwithstanding the recent marginal recovery) has once again brought to the forefront an inherent weakness existent in our markets. This is the fact that FIIs, indisputably and almost entirely, dominate the Indian stock market sentiments and consequently the market movements. In this article, we make an attempt to list down a few points that would aid an investor in mitigating the risks and curtailing the losses during times of volatility as large investors (read FIIs) enter and exit stocks. Read on

Manage greed/fear:This is an important point, which every investor must keep in mind owing to its great influencing ability in equity investment decisions. This point simply means that in a bull run - control the greed factor, which could entice you, the investor, to compromise with your investment principles. By this we mean that while an investor could get lured into investing in penny and small-cap stocks owing to their eye-popping returns, it must be noted that these stocks have the potential to wipe out almost the entire invested capital. Another way greed affects investor behaviour is when they buy/hold stocks above the price justified by its fundamentals. Similarly, in a vice-versa scenario (bear market), investors must control their fear when stock markets turn unfavourable and stock prices collapse. Panic selling would serve no purpose and if the company has strong fundamentals, the stock is more than likely to bounce back. It is apt to note here what Warren Buffet, the legendary investor, had to say when he was asked about his abstinence from the software sector during the tech boom, “It means we miss a lot of very big winners but it also means we have very few big losers…. We’re perfectly willing to trade away a big payoff for a certain payoff”.

Avoid trading/timing the market:This is one factor, which many experts/investors claim to have understood but are more often wrong than right. We believe that it is rather impossible to time the market on a day-to-day basis and by adopting such an approach, an investor would most probably be at the losers’ end at the end of the day. In fact, investors should take advantage of the huge volatility that is witnessed in the markets time and again. In Benjamin Graham’s (pioneer of value investing and the person who influenced Warren Buffet) words, “Basically, price fluctuations have only one significant meaning for the ‘true’ investor. They provide him an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times, he will do better if he forgets about the stock market”.

Avoid actions based on rumours/sentiments: Rumours are a part and parcel of stock markets, which do influence investor sentiments to some extent. However, investing on the basis of this could prove to be detrimental to an investors’ portfolio, as these largely originate from sources with vested interests, which more often than not, turn out to be false. This then leads to carnage in the related stock(s) leaving retail investors in the lurch. However, if we consider this from another point of view, when sentiments turn sour but fundamentals remain intact, investors could take the opportunity to build a fundamentally strong portfolio. This scenario is aptly described by Warren Buffet, “Be fearful when others are greedy and be greedy when others are fearful”.

Avoid emotional attachment/averaging: It is very much possible that the company you have invested in fails to perform as per your expectations. This consequently gets reflected on the stock price. However, in such a scenario, it would not be wise to continue to hold onto the stock/buy more at lower levels on the back of expectations that the company’s performance may improve for the better and the stock would provide an opportunity to exit at higher levels. Here it is advisable to switch to some other stock, which has promising prospects. In Warren Buffet’s words, “Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks”.

Avoid over-leveraging:This behaviour is typical in times of a bullrun when investors invest more than what they can manage with the hope of making smart returns on the borrowed money. Though this move may sound intelligent, it is smart only till the time markets display a unidirectional move (i.e. northwards). However, things take a scary turn when the markets reverse direction or move sideways for a long time. This is because it leads to additional margin calls by the lender, which might force the investor to book losses in order to meet the margin requirements. In a graver situation, a stock market fall could severely distort the asset allocation scenario of the investor putting his other finances at risk.

Keep Margin of Safety:In Benjamin Graham’s words, “For ordinary stocks, the margin of safety lies in an expected ‘earning power’ considerably above the interest rates on debt instruments”. However, having a stock with a high margin of safety is no guarantee that the investor would not face losses in the future. Businesses are subject to various internal and external risks, which may affect the earnings growth prospects of a company over the long-term. But if a portfolio of stocks is selected with adequate margin of safety, the chances of losses over the long term are minimised. He further points out, “while losing some money is an inevitable part of investing, to be an ‘intelligent investor,’ you must take responsibility for ensuring that you never lose most or all of your money.”

Follow research:The upswing in the stock markets attracts many retail investors into investing into equities. However, picking fundamentally strong stocks is not an easy task. In fact, it is even more difficult to identify a stock in a bullish market, when much of the positives are already factored into the stock price, making them an expensive buy. It is very important to understand here that owning a stock is in effect, owning a part of the company. Hence, a detailed and thorough research of the financial and business prospects of the company is a must. Given the fact that on most occasions, research is influenced by vested interests, the need of the hour is unbiased research. Information is power and investors need to understand that unless impartially represented (in the form of research) it could be misleading and detrimental in the long run.

Invest for the long-term: Short-term stock price movements are affected by various factors including rumours, sentiments, market perception, liquidity, etc, however, in the long-term, stock price tends to align themselves with its fundamentals. Here it must be noted what Benjamin Graham once said, “…in the short term, the market is a ‘voting’ machine (whereon countless individuals register choices that are product partly of reason and partly of emotion), however in the long-term, the market is a ‘weighing’ machine (on which the value of each issue (business) is recorded by an exact and impersonal mechanism).” Of course, it must be noted that the above list is not exhaustive and there may be many more points that an investor needs to understand and follow in order to be a successful investor. Further, the above points are not just a read but needs to be practiced on a consistent basis. While making wealth in the stock markets was never an effortless exercise, it becomes all the more difficult when stock markets/stock prices are at newer highs.