He is always on the lookout for good companies that are going through bad times. He believes that a stock could slip due to a sudden turn of events, which might be temporary in nature. If the company is on a solid footing, the share price will eventually bounce back.
"If the company's fundamentals are solid and the long-term prospects are good, I don't bother if the stock goes down 30%."
Fish in troubled waters
To earn rich rewards, buy solid companies when they are doing badly.
What would you do if you had shares of a company that was facing rough weather? The first reaction of most retail investors would be to dump these to avoid losses. But not every investor turns bearish at the same time. For every seller, there is a buyer.
For every bear who expects the stock to fall further, there is a bull waiting to grab the opportunity. Mumbai-based businessman Vijay Bambvani is one such bull, who is always on the lookout for good companies that are going through bad times. "I identify companies that have very good long-term prospects and start buying their shares whenever they are facing problems. I don't bother if the stock goes down by 30% because I am sure of its long-term potential," he adds.
Bambvani's contrarian approach has yielded good results in the past, especially during the stock market crash of 2008, when even blue chips fell to mouth-watering levels. As the 2008 downturn and the rebound in 2010 showed, investors should refrain from knee-jerk reactions to market volatility. In fact, the drop in price is often an opportunity to buy at a discount to the 'intrinsic value' of a stock.
It has made Warren Buffett one of the richest men in the world.
A caveat is needed here. Contrarian investing works well if you are buying a solid company. Picking an obscure small-cap share and then averaging out your purchase as it starts drifting down means you are digging a deeper hole for yourself.
For instance, the share price of Hindalco fell 80% from Rs 200 in January 2008 to around Rs 40 in October the same year. While Hindalco shares have bounced back to Rs 210, the shares of small-cap company Sujana Metal Products , which had fallen nearly 90% from Rs 50 to Rs 6.25 during the same period, are still languishing at Rs 10.50. So, pay attention to pedigree when you go shopping for shares at a discount.
His investing strategy is no different from that of a fund manager. He does not let market noise bother him, focuses on stocks with good fundamentals, and holds them for the long term.
"Selling my investments becomes an option only if I have to meet a financial goal."
Diversify and rule
Invest across sectors and asset classes to get the best results.
Three years ago, stock investors learnt what risk was all about. However, not all sectors fared badly during the downslide. Real estate stocks were down 70-80%, but pharma scrips dipped by only 10-15%. Some FMCG stocks actually rose during those gloomy days. The learning? If you had a diversified portfolio, you wouldn't have lost as much as someone with a focused exposure to a few stocks or a couple of sectors.
Sandipan Mallick understands this only too well. This is why the Mumbai-based marketing professional has diversified his investment across several mutual fund schemes. Even his direct investment in stocks is spread across 30-odd scrips, which spreads out the risk.
Mallick also believes in holding his investments for the long-term. "Selling becomes an option only if I have to meet a financial goal," he says. The only time he pulled out money from the market was for his sister's marriage.
Diversification and asset allocation go hand in hand. If you split investments across different asset classes, you can never go wrong. Just because one asset class is giving good returns, you should not ignore the others. For instance, banks are currently offering very attractive rates on fixed deposits, but this should not make an investor put more in debt than that demanded by his asset allocation.
Gold prices have rallied over the past two years, but experts say you should not invest more than 10-15% of your portfolio in the metal. Here again, Mallick has spread his investments across other asset classes as well to reduce the overall portfolio risk.
A caveat again. Your asset allocation should match your ability to take risk. What good would be an exposure to stocks and equity funds if it makes your Valium bill shoot up? Mumbai-based government employee Lakshmi R. is averse to taking any kind of risk with her money and, therefore, binges on fixed income instruments. "I realise that my investments won't grow as fast in bank deposits and PPF, so I save as much as I can," she says.
He invests in IPOs of good companies, but books partial profits on the listing day itself. Bhatia also believes in value investing and picks up fundamentally good companies whenever there is a dip in the markets.
"I sell only a part of my stock holdings. The balance shares are held for the long term to earn higher returns."
Book profits periodically
A spike in prices is an opportunity to sell a part of your holdings.
Profit booking has several names. The fund manager calls it rebalancing and justifies it as a crucial part of asset allocation. For the short-term trader, it is his bread and butter. But for Mumbai-based businessman Kanwal Bhatia, it is a time-tested strategy that has reaped good profits. Bhatia invests in IPOs of good companies, but sells part of the investment on the listing day itself.
"If the stocks are listed at an attractive premium to the issue price, I sell roughly half my holdings and book profits," he says. The balance shares are held for the long term.
Though he invests only in companies with good fundamentals, sometimes he does end up with lemons. The Reliance Power IPO was one such investment that went awry.
Bhatia offloaded half his shares on the listing day but held on to the balance in the hope of higher returns. "If the share has good fundamentals, it has to give me good returns too. I patiently wait for the price to go up," adds Bhatia. Unfortunately for him, the Reliance Power scrip never came close to its issue price, despite a bonus issue by the promoters. The shares were ultimately sold at a loss.
Bhatia also believes in value investing and picks up blue-chip shares when prices are low. He bought shares of Larsen & Toubro , State Bank of India and Tata Steel at rock-bottom prices during the mayhem of 2008. These shares have yielded him rich rewards in the past three years.
Though he gets very little time to research his stocks, Bhatia does check the basics, such as the PE ratio of a stock, before investing. His advice to small investors: stay away from penny stocks and don't invest merely on the basis of tips.
He set himself a target to save Rs 18-20 lakh to fund his education in a foreign university. Jain worked diligently towards that goal, shunning indulgences and saving as much as 40% of his income. In two years, he was able to rustle up Rs 25 lakh.
"I didn't buy a car even though many of my juniors drove to work. It did not feel good, but I knew it had to be done."
Define goals to achieve them
Set yourself a savings target and work towards it diligently.
No dining in classy joints, no exotic holidays, no investments in real estate, not even a car. One would have thought Surendra Jain was a monk instead of a senior associate in a global financial powerhouse. "I didn't buy a car even though many of my juniors drove to work.
It did not feel good but I knew it had to be done," he says. The austerity was part of an aggressive saving plan to fund his education in a foreign university. Jain, who was drawing a salary of Rs 90,000 a month, had got admission at the London Business School. His goal: save at least Rs 18-20 lakh for funding his course fee in 3-4 years.
Jain stayed away from investing in property because he didn't want to lock up resources in an illiquid asset. He also cut down on his lifestyle. "I used to spend almost Rs 10,000 a month on eating out, but I had to stop that as also junk plans for holidays to exotic places."
The savings intensified after he secured admission. "I saved my bonuses (Rs 3-6 lakh a year) and put away at least 40% of my income," he says. By the time his course began, Jain had saved Rs 25 lakh.
He used to let his money idle in the savings bank account. Five years ago, he started an SIP in a mutual fund on a colleague's advice. That investment has given him an annualised return of 16%.
"Keeping my savings in a bank wasn't a good idea. I realised this when inflation hit 9%."
Don't just save, invest
Go for products that match your time horizon and risk appetite.
The average Indian saves close to 34% of his income. The problem is, many just let this money idle in savings bank accounts. Till a few years ago, Mumbai-based finance professional Kaushal Shah was content with the 3.5% that his bank balance used to earn for him.
After a colleague explained to him the perils of inflation eroding the value of his money, he started searching for more lucrative options. "Keeping my savings in the bank was not a good idea. I realised this when inflation hit 9%," says Shah. His colleague introduced him to mutual funds and had him start an SIP in an equity scheme.
Nothing spectacular, just a modest Rs 1,000 flowing into a diversified equity fund every month. Today, that investment has grown to gargantuan proportions and has yielded him annualised returns of almost 16%.
These past few years have been a rich learning experience for Shah, turning him into a more informed investor who has diversified across asset classes. He has bought stocks directly as well as through mutual funds, and has invested in a range of fixed income instruments.
The man who used to put his entire savings in a bank now uses a liquid fund to take care of emergency needs because this money can be redeemed at short notice. The investment yields a higher return than that offered by his savings bank account.
Source : ET