20 stock market Lessons from last 20 months

Tuesday, February 24, 2009

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Breaking News: Indian Government take some tax cut measures to reduce burden on
companies and consumers.

1. Cuts service tax to 10% from current 12%.

2. Cuts excise duty on Bulk Cement to 8%.

My comment: Is it stimulus package by Government? Poor Government! I don't know about its
efficacy to stimulate demand but it will help to increase fiscal deficit. Will this stimulus package
(!) and upcoming rate cut announcement help for short term rally?

Stock Market Musings:

I have been actively blogging on Stock Markets for last 20 months and learnt many investment
lessons in this journey. I am tracking stock markets since 1998 but what I learnt in the last 20
months is much more than what I learnt from 1998 to 2006. In this post, I am sharing some of
my experiences in Stock Markets.

20 Stock market lessons:

Note: I am sharing some of investment lessons mainly for the benefit of new investors.
Experienced investors may already knew all these things.

1. As long as earnings outlook and sentiment is good, valuations are insignificant and stocks can
reach new mad new highs. Valuations theories will not work.

As long as earnings outlook is bad, valuations are not important and stocks can reach any mad
new lows. Valuation theories will not work.

Why Stocks crash so heavily for small fall in earnings?


Example: Welspun Gujarat was trading at Rs 400 just 8 months back. But it is now trading
at 62. Why?

In May, 2008: EPS is 19 - P/E is 21= Price is 400.

In February, 2009: EPS is 15.2 - P/E is 4.1 = Price is 62.

Just 25% fall in earnings but stock crashed by 82%. Opposite will happen on upside in Bull
Market. Don't think that price will fall in the same ratio of earnings. Outlook towards
sector/company is very important.

Image courtesy: Wikimedia.

Lesson: Rakesh Jhunjhunwala my favorite investor and source of inspiration till 1 year back.
But I lost total trust on him after his recent interviews. He completely lost the way in 2008. In
stead of accepting failure and correct his way of thinking, he is now talking about 2012-14. Even
a new investor can tell about stock market bounce back by 2012.

But retail investors watch his interviews to get an idea about stock markets and escape from
serious losses. When Sensex was at 17,000, he talked about Sensex making new highs after 3-4
years. So, many innocent people who invested money at 20,000 levels kept their money in
markets in stead of minimising losses by exiting at that price.

Example: If you invested 5 lakhs when Sensex at 20,000. One investor exited with losses and
entered the market in SIP manner from 8,000 levels onwards while another investor still kept
their money. Compare their earnings in 2012. New stocks and sectors will lead next rally.

2. Global economies are now tightly integrated and global economic shocks will affect each and
everyone. De-coupling theory is the worst theory, I ever heard. Foreign funds play crucial role in
deciding market moments than mutual funds and LIC. Unstable investors like FIIs and traders
like Nirmal Kotecha are more influential in deciding stock moments than stable investors
like LIC and Rakesh Jhunjhunwala.

Image courtesy: Business Today, 2006.

Lesson: If Nirmal Kotecha has significant holding in your stock/company, your investment is
always at risk. He ruthlessly exits from that counter if he finds negative outlook for company.
SEL Manufacturing was trading at 600 just 6 months back. It is now trading at 52. That is
Nirmal Kotecha effect! Same happened to Pyramid Saimira investors.


3. Role of Sentiment or Psychology:

Price of large cap: Fundamentals+/- 20-30% sentiment

Price of Mid-cap: Fundamentals+/- 40-50% sentiment
Price of Small-cap: Fundamentals+/- 50-70% sentiment.

Price of a stock: Fundamentals+/-overall sentiment+/ sector sentiment. Sector sentiment is
especially very high for stocks in cyclical sectors like Real Estate.

Example: Unitech made small investors into millionaires and made many millionaires into small
investors. How?

Unitech stock price:

January, 2006: Rs 18
January, 2007: Rs 280
January, 2008: Rs 520
January, 2009: Rs 40

Chart courtesy: Business Week.
If you were a small investor and invested Rs 1 lakh in January, 2006 in Unitech
your investment value was Rs 4.5 crore by January, 2008.

If you are a millionaire and invested Rs 1 crore in January, 2008 in Unitech your
investment value is now Rs 5 lakh.

Unitech management has not done any frauds like Satyam Unitech counter was not operated by
people like Harshad Mehta. What changed the scenario is sentiment towards Real Estate sector
and huge debt.

Note: Sentiment and knowledge on economic cycles are very crucial for cyclic stocks.

But Hero Honda outperformed despite operating in bad sector due to exceptionally strong
fundamentals and thanks to outstanding management quality. Such exceptions are rare.

That is the effects of stock markets! New investors should always keep this in mind. Never
underestimate stock markets.

4. Understand economic cycles: Economy always operates in cycles especially sectors like
commodities, Auto and Real Estate will see massive swings according to business cycles. If you
are on the right side of the cycle, you will get exceptional returns. But you may suffer
serious losses if you are on the wrong side.

Example: SAIL was trading at Rs 5 when commodities are in downturn in previous bad
economic cycle. Just imagine the returns of those investors when cycle turned to positive in
2006.

5. Resistances and Supports: I am never a big fan of these Technicals. I dont know how stocks
will move upwards when economic fundamentals are weak. But these Technicals are extremely
helpful for Day traders. But I never gave much importance to these supports and resistances in
deciding target price.


Example: DLF was trading at 306 when I gave a target of 160. I gave a target 300-350 for
ICICI Bank when it was trading at 520. I gave those targets not basing on supports and
resistances. I analysed the pros and cons and used my experience to arrive at those prices. This
may not be a scientific chart based decision but I always stick to my experience, knowledge,
research and gut feeling in stead of wasting time on charts and other technicals.

6. Banking and Economy: Everyone in India was bullish on Banks in December basing on rate
cuts and domestic consumption. At that time, I heard 2 statements which impressed me very
much.

Corporation Bank M.D: I am not that much bullish on our banking sector prospects. We are
seeing decline in deposits means economy is slowing.

Shankar Sharma: Banking sector is always a reflection of economy. Banks will never perform
better in a slowing economy. NPAs and defaults are always concern in any economic slowdown.

Note: You need to have guts to comment against herds.

7. Stock Market Analysts:

Happiest moment in the life of many Indian Investors was most depressive period of my
"Blogging life". I wrote regularly about stock markets till October, 2007 but suddenly failed to
understand the situation and valuations. I stopped blogging in November and December, 2007 as
I couldnt understand the valuations and fundamentals of many Indian stocks once Sensex
crossed 18,000 levels. I stayed away from stock markets and blogging and lived in a depressive
environment. At that time, I thought it as my failure to predict "stock market rise".

In this meantime, Sensex crossed 20,000 and all were talking about Reliance Power and listing
of R-Power at 900 means P/E of more than 2,000 or infinity. Analysts were talking about Sensex
crossing 30,000 levels and legendary investors like Rakesh Jhunjhunwala gave 40,000 target for
Sensex in 3 years. Whenever I went to hotels or local shops in Ongole, all were talking about
Stocks and Sensex. Many women in my neighbourhood were actively doing day trading and
sharing their success stories. Many people started opening new Demat accounts to apply for
Reliance Power IPO. I failed to understand the market rise despite doing extensive research. My
irritation levels reached new peaks. Irritation was not due to jealousy but on "my inability to
understand the situation".

In this meantime, Sensex crossed 21,000 and some faithful readers mailed me to get my opinion
on stock markets. At that time, I was in a highly irritated state as I failed to find the logic behind
that mad rise. Fortunately, in stead of yielding to temptations, I struck to my belief and wrote
this post on Stock Market investment advice (my best post). I dont know how many readers
followed my advice and benefited from that article. But I will never forget that post in my life.
It gave me complete confidence in my abilities and knowledge. No looking back from that day
despite some occasional bad decisions.
8. Indian Government: Indian Government missed a historical opportunity in October, 2008.
When long term economic outlook was bad, our Government failed to read the situation despite
led by great economist Dr. Manmohan Singh. Government failed to take proactive measures due
to lack of vision. At that time, UPA leaders were in blind belief of 9% GDP growth rate. If
Government had taken decisions like stake sale in PSUs etc, by this time, India is in safe zone.

Indian Government failed to estimate the effects of fall in GDP, our dependence on Global
economy and underestimated the FII outflows and fall in tax collections. We are now suffering
from massive Fiscal deficit and Government is not even in a position to announce massive
stimulus package.


9. SEBI: Just see their order on disclosure of pledged shares. Even lay persons knew about
loopholes in that order. But our SEBI people are acting like blind people. When investor
community revolted against Satyam management, SEBI remained silent. In stead of proactively
enquiring about the Satyam-Maytas deal, they acted like Blind-Deaf-Dumb People until
Ramalinga Raju voluntarily came out to reveal his misdoings.

Lesson: Investors should take care of themselves. No one is there to save you.


10. Larsen and Toubro: This is one of the best companies in the world (not India) for long
term investment. Company even announced better than expected results in the most difficult
October-December quarter. But management decided to commit suicide by investing in Satyam
Computers. In a tight economy, management wasted money by investing Rs 700 crore in Satyam
Computers. In stead of tightly integrating its main business and use that money to get new
orders, it is now completely immersed in Satyam. Investors paid the price.

Lesson: Always track your investments even in good companies and exit when situation is
looking unpredictable. But dont exit when stock was corrected and included all the negatives.


11. Tata Motors: Absolute madness. If Tata likes Jaguar and Land Rover cars since his
childhood, he can buy 10 cars each but should not waste investors money in acquiring outdated
companies. It is difficult to believe that a man with Nano vision made this unbelievable
blunder. Investors paid the price. World is moving towards small cars and hybrid cars but
our Tata is moving towards Jaguars.

Lesson: Never fell in the trap of "Awards Mania". Promoters of Publicly listed companies
should always think and act according to the interests of ordinary investors (learn
from Late Dhirubhai Ambani).

12. Bharti Airtel and Reliance Communications: 6 months back, both companies were neck
and neck in acquiring new subscribers. Today, Airtel marched ahead with the help of strong
management but R-Com lost the way as our Ambani is busy with Amar Singh and Co. Investors
paid the price.


13. Hero Honda Vs Suzlon: Hero Honda is operating in bad sector and Suzlon is operating in
good sector. But what happened to their stocks is exactly opposite. Why?

Lesson: In Bull markets, investors give less importance to ethics and management quality. But In
troubled markets, companies with allegation scars like R-Com, Suzlon, DLF and JP Associates
will suffer massive falls.

14. Bharti Airtel, Infosys and Hero Honda: Lesson companies with strong management pool
attract the attention of investors in bear markets. But they may not give you exceptional returns if
markets make bounce back as they already factored most of the positives in their prices just like
FMCG Stocks.

Lesson: Promoters should have single minded focus when running a Company. I like Mukhesh
Ambani, Sunil Mittal, Munjals, Marans and Gautam Adani in that aspect.


15. Sugar Stocks: These companies gave negative returns in 2007 when markets are in Great
Bull Run but sugar stocks gave 50-100% returns when we are in worst ever bear markets.
Stocks in Cyclical sectors always give exceptional returns if you can able to pay your cards right.
I successfully predicted turn around in sugar sector in early 2008.

16. Market moments: They will not move according to proper script. 80-90% of time, stocks
will move either above or below the fundamental price according to market sentiment. 80% of
price moment occurs in just 20% of time means 80% of profits or losses occur in just 20%
of trading days. But Timing the markets is the most difficult aspect of Stock market
investments. It is very difficult to invest at "right price". Just look for "Margin of Safety".

17. Mid-Small caps: These companies will always give greater profits or losses than large caps.
So, 200-300% of profits or losses are rare in large cap stocks like RIL, Bharti Airtel and
Infosys but common in many small caps and mid caps. So, young risk bearing long term
investors should allocate more to small and mid-caps irrespective of short term losses but old age
investors or conservative investors should allocate less than 40% to such stocks.


18. Commodities: I successfully predicted stock market moments and sugar commodity moment
but miserably failed to predict commodity crash due to my blind belief in Jim Rogers at that
time. I believed in the After Olympics theory - economic activity will pickup in China
after Olympics. Rest is history. I learnt a lesson.

Lesson: I took an oath - I should Always believe in my research, gut feeling and knowledge
only.

19. Satyam Computers: I wrote enough about this company. But it also destroyed the wealth of
other Hyderabad based companies investors of the other Hyderabad based companies once
again understood the role of sentiment and trust. Same happened to ADAG stocks after the
debacle of Reliance Power IPO. Your wealth sometimes depends on your neighbour.
Difficult to believe but true.

20. Role of Politics in Stock Market moments:

A. ADAG Stocks: They gained when Samajwadi Party supported UPA Government and will
make new lows if Mayawati will become PM after Polls. But JP Associates will gain if
Mayawati plays crucial role at centre.

B. Stocks like GMR Infra, Lanco infra, Pennar Cements, Jindal, India Cements, Dalmia Cements
and GVK Power etc may make new lows if Congress Government fails to return to power at
both centre and state (Andhra Pradesh).

C. Stocks like Madhucon and Heritage Foods may gain if TDP returns to power in Andhra
Pradesh. Is it just sentiment or some thing more?

Important advice: Before entering or exiting any stock, think twice whether the price
already included either positive or negative news. Don't forget these words before making
any decision.

I shared some of my experiences in these unpredictable Stock Markets. Thanks to every reader,
investor and donor who helped and guided me in this "Blogging journey".

Significant decisions:

1. Standard and Poor downgraded India rating to Negative from stable on concerns of rising
Fiscal Deficit. It is expecting Fiscal Deficit at 11.1% - very high.

Statement of the Day:

1. Jim Rogers: I am not buying any shares. I failed to find any good investment opportunities
in Stocks anywhere in the world. Jim Rogers.

2. US Federal Reserve Chairman: US economy is now in "Severe contraction".

3. Microsoft CEO: All of our businesses would be affected by the current recession. Microsoft
shares are now trading at 1998 levels.


What is the Sensex target?

According to history, Sensex trades at a valuation of 8-9 at worst of times.

According to FY 2008-09 earnings: EPS of 840-860 8-9 = 6,720 7,740.
But Sensex generally trades at a valuation of 9-11 (7,740-9,460) in most of the times. But what is
worrying is the fact that bleak future earnings estimates means new lows are not ruled out.

Note: What is really worrying point is lack of major positive triggers till elections except rate
cuts? Collapse of European banking system and ongoing book inspection in American Banks are
serious negative triggers.

I recommend only opportunistic investments.

Economic Statistics:

1. Indian gaming industry is expected to grow at a CAGR of 33.3% by 2013. Mobile
gaming has better prospects.

Another site to get a daily snap shot of Stock Markets.

Pledging of shares by Promoters:

1. Cinemax promoters pledged 41% stake of the company.

2. Mangalore Chemicals (UB Group Company) promoters pledged 20% stake of the company.
What more left for Vijay Mallya?

3. Network 18 promoters pledged 32% stake in TV18.

4. Sterling Bio-Tech promoters pledged 13.5% stake of the company which is equal to 36.5% of
their stake.

5. Promoters of United Phosphorus pledged 5% stake of the company.

6. Promoters of Ucal Fuel Systems pledged 49% stake of the company.

Note: Promoters pledged shares worth Rs 50,000 crore. But SEBI remained silent. We dont
know whether promoters used that money to inflate stock prices in Bull Run or used that money
for company expansion or used it to buy a luxury yacht. When will SEBI wake up and ask
promoters and other big stake holders to reveal more details like purpose of pledging, date and
price of pledging and other details. Am I expecting too much from SEBI?

Note: Other promoters should learn from the promoters of Ganesh Housing. Just see how they
explained everything about their pledging of shares. Read their disclosure.


ICICI Bank Ltd extended a Term Loan for Company's SEZ project. As per the term sheet of
ICICI Bank Ltd the prime security for the term loan is the land of SEZ project. The market
value of SEZ land is about Rs 600 crores whereas a Company has obtained a loan of INR
32.53 crores from the said bank. The promoters of the Company have pledged 97,96,427
equity shares as security. Hence, in our opinion looking to the market value of SEZ land the
interest of shareholders of the Company is fully protected and the chances of bank invoking the
pledge are remote.

Stock Markets need more such promoters.

Good articles:

1. Huge concern about Wockhardt debt.

Recession news:

1. USA: Consumer confidence reached to lowest level since date collection was started in
1967. Home prices reached new lows.

2. Russia: Economy contracted by 2.4% in the last quarter means 8.8% year-on-year
decline. One wicket fell among the BRIC nations.

3. Japan: Government is planning to buy shares to stop the "Stock Market slide" in a
ndesperate measure. Japn contracted by 3.3% in the last quarter. Exports fell by 45% in
the last month. Companies will lay off more employees means further fall in consumption
means deepening Recession. When will this nasty cycle end? Unemployment rate reached
1967 levels and is expected to touch new highs in the coming months.

4. Hong Kong: Economy contracted by 2.5% in the last quarter. Analysts are expecting
3.4% contraction in 2009.


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Posted by Dr.Krishna at 3:37 PM
Labels: Indian Stock Market, Investment Strategy, Rakesh Jhunjhunwala, Stock Market, Stock
Market Analysis, Stock Market Guide, Stock Market Investment, Stock Market Tips
12 comments:
mohit February 25, 2009 12:25 AM
Excellent article Dr Krishna, By far the best.

Can you correct the link of article for billionaires..

Thanks
Rajeshpillai February 25, 2009 5:33 AM
Hi Dr Krishna,

You are really genius. Your predictions are almost true. Rather I should say always
true.You make small innocent investors to grab some knowledge on stock market and
safe guard their hard earned money. They could if they believe in your posts.

Btw do you have any research / comments /advice on Cals Refineries? or some penny
stocks for very small investors like us?
Your one word comment also put me on overwhelm.

Cheers!
Shabu's February 25, 2009 9:03 AM
Superb again Doctor! The Jan 18 post have to be an eye opener for all of our so called
market experts. I don't think, any of them made a statement in that way at the time. They
were blindly adding thousands to the then figure. The lakhs of investors lost their hard
earned mony by believing these people blindly and trapped forever, the significance of
your post is comes there. Go ahead with your gut feelings as it's worth has already proved
by the time.
Santhosh February 25, 2009 10:15 AM
WOW ! You have raised the bar that you have set for yourself with this post. To me this
is by far your best post. Way to go Doctor !

What I like the most about you is you accepting failures and treating it as a lesson . This
one quality in you will take you and your blog to greater heights !
Anand Reddy February 25, 2009 11:54 AM
Very informative article, after reading your blog when I read other articles like Business
magazines, business newspapers, it makes me to think on the topic very clearly in what
context the article will be benefit to the shares of that company.

Thanks for your effort and research!!
vv February 26, 2009 12:25 AM
Interesting Doctor....

Keep it up...
Mohamad Shaved February 26, 2009 10:17 AM
Dr Krishna,

Thanks for sharing such invaluable information with us.
People like you are very hard to find. May God bless you.
Kumaran February 26, 2009 7:15 PM
Very good article Dr Krishna.Nothing better than this.
Vishnu February 27, 2009 6:35 PM
Dr.Krishna, Its great article, thanks. Just like the pledged shares can you provide pointers
on where to look for stats when promoters increase their share holding. I know Havell's,
Optocircuits, Moserbaer hav recently increased their stake while large ones like Punj
Lloyd, GE Shipping, Tata power are pledging or not converting their warrants.
kakarla sai February 28, 2009 7:00 PM
hello Dr Krishna sir,
very good article sir.great work sir. these lessons are very useful to new investors like me.
thank u very much sir for providing these lessons. God bless u sir.
jamesvaikom March 1, 2009 11:39 AM
@vishnu
Check nseindia.com for checking share holding pattern of each quarter. Suppose if you
want to check share holding of punj lloyd check
http://www.nseindia.com/marketinfo/companyinfo/eod/shareholding.jsp?symbol=PUNJL
LOYD
jamesvaikom March 1, 2009 11:46 AM
@vishnu
If promoters buy, sell or pledge shares they disclose details. Check that in announcement
section in nseindia.com.
http://www.nseindia.com/marketinfo/companyinfo/eod/announcements.jsp?symbol=PUN
JLLOYD
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