Investing Rules:

Discussion in 'Words of Wisdom' started by nkpanjiyar, Mar 17, 2005.

  1. nkpanjiyar

    nkpanjiyar Member

    Joined:
    Feb 2, 2005
    Messages:
    539
    Likes Received:
    14
    Trophy Points:
    18
    As the Indian stock markets move into uncharted waters, and stock prices move under a cloud of volatility, it is time for small investors to step back and take note of some of the key rules for safe and defensive investing. In these times, the rules spelt out by the legendary investor, Benjamin Graham, should come in handy for 'defensive' investors, or those who are risk averse in their investing habits. A defensive investor is one who generally places high emphasis on the safety of his capital through avoiding serious mistakes while making investment decisions. Also, a defensive investor is one who aims at freedom from effort and the need for making frequent decisions.

    In these volatile times, thus, such an investor should keep some benchmarks for himself while selecting his portfolio of stocks. Only this would be of help in his need for making less frequent decisions. These are some of the characteristics that a defensive investor should look at in a company, or the potential investment target(s).

    Adequate size of the enterprise: This is one of the most important factors while selecting a company for investment. Investors should note that small companies or those that are in the nascent stages of their development are more likely to have a volatile future than bigger corporations. While an aggressive investor would have interests in such small yet growing companies, this should not be a defensive investor's cup of tea. He should be content in having large and strong companies in his portfolio.

    Sufficiently strong and stable financial condition: A sufficiently strong financial condition of a company should be another top priority for defensive investors. They should make sure that their investment target (company) has a strong balance sheet and profit and loss account, and a very strong cash flow statement. This is because, more than book profits, it is the strong cash position that is of help for the company in times of pressure and uncertainty. Also, for a company to be a sound investment target, not only should it have a history of decent earnings growth, but also stability in the same. A company with a volatile earnings growth history is more likely to be a risky proposition.

    Dividend growth: A consistent dividend payment record is another indicator of the sound financial position of the company. While there might be instances when a growing company is ploughing back earnings towards future growth rather than paying large dividends, investors must see that there are no grave inconsistencies in dividend payments.

    Moderate P/E ratio: A moderate price-to-earnings ratio is a very useful indicator for a defensive investor. This is because a relatively lower P/E would save investors from paying a very high price that does not justify the value of an investment. Also, a history of moderate or less-volatile P/E's also helps the investors' cause. This is because a company that has had volatile P/E's in the past is a case of investors building up 'irrational expectations' of its growth.

    Apart from these performance parameters, Investors should also take note of the 'management quality' - its vision and the past track record. All said and done, while the rules mentioned above are benchmarks that every defensive investor needs to apply before making any investment decision, the fact that he should do his homework carefully should not lose relevance. This means that he should research well about the company's history, its business model and factors that are likely to affect its future performance. Also, the investor should have a long-term (more than 3 years) investment horizon for this maximises the chance of garnering adequate return on investments.

    cheers,
    nkpanjiyar
     
  2. birdeez

    birdeez New Member

    Joined:
    Jul 24, 2005
    Messages:
    8
    Likes Received:
    0
    Trophy Points:
    1
    Dear friend , I think we all make our investing rules as per our risk taking ability and since we all differ thats why the stock market has its ups and downs. Being cautious is ok but wont u be missing most action if u stayed at the sidelines??
     
  3. gubbi46

    gubbi46 New Member

    Joined:
    Sep 20, 2005
    Messages:
    4
    Likes Received:
    0
    Trophy Points:
    1
    After all it is hard earned money and may be lifetime savings.Equal caution need to be exercised by having a total picture of the investment target company,past track record,their new ambitions and venture into the profitable pastures the company is looking before putting our might and strengthening the company by our investments
     
  4. nkpanjiyar

    nkpanjiyar Member

    Joined:
    Feb 2, 2005
    Messages:
    539
    Likes Received:
    14
    Trophy Points:
    18
    Aptly said gubbi46.
    cheers,
    nkpanjiyar
     
  5. Smitha_Goutam

    Smitha_Goutam New Member

    Joined:
    Apr 1, 2006
    Messages:
    1
    Likes Received:
    0
    Trophy Points:
    1
    It all depends on the ability to take risk. if the person is ready to take risk he may get huge returns. Depends on person to person.
     
  6. aca_trader

    aca_trader Active Member

    Joined:
    Feb 3, 2006
    Messages:
    1,609
    Likes Received:
    16
    Trophy Points:
    38

    The issue should not be whether he is willing to undertake risk rather the prudent thing will be to check whether he has the ability to assume and manage the risk he is willing to take.

    Best Regards,
     
  7. Rajesh Hoskote

    Rajesh Hoskote New Member

    Joined:
    May 4, 2006
    Messages:
    1
    Likes Received:
    0
    Trophy Points:
    1
    Any amount of risk taking wothout adquate techincal analysis does not fetch anything. I have been so far benefitted by following some simple rules; which , I exercise come what may.
    1. Keep a target of 15-20% gain (statistically proven in Equity markets)
    2.Trade only in A-Group scrips
    3. Do sound analysis and study the company fundamentals prior to investing.
    4. Have a healthy portfolio dispersed evenly across all sectors.
    5. Be ready with your understanding of sectoral rise & fall; buy at dips and sell at rise.
     
  8. nkpanjiyar

    nkpanjiyar Member

    Joined:
    Feb 2, 2005
    Messages:
    539
    Likes Received:
    14
    Trophy Points:
    18
    9 commandments for Investors :

    9 commandments for Investors :

    Markets will test the patience of investors and the nerves of the traders. Prudential ICICI Mutual recommends that investors remember the following basic principles:

    1) Markets are neither cheap nor at bubble valuations. They are between fair value and expensive valuation.

    2) The valuations are supported by the optimism about sustained above average future growth and the continuous flow of cash from local as well as global investors.

    3) Markets will become volatile with the opposing forces of liquidity and valuation coming into play.

    4) Markets will reward investors and punish traders.

    5) It is difficult to predict the market except for the long run.

    6) Asset allocation (a fair balance between risky and non risky assets) is the key to withstanding market volatility

    7) Markets are unlikely to melt down like the TMT sector in the year 2000 as this time the doubt is with the valuations and not with the business model.

    8) You should be a buyer in the market if you are under-invested in equity and you should be a seller if you are over-invested in equity.

    9) Regular investment/systematic investment will be the most appropriate way to invest in the equity market.

    cheers,
    nkpanjiyar
     
  9. Agilent

    Agilent Member

    Joined:
    Nov 5, 2005
    Messages:
    825
    Likes Received:
    11
    Trophy Points:
    18
    Re: 9 commandments for Investors :

    NKP,
    Thanks for sharing that. I Have a problem with point no 8 above . Isn't that like saying :

    Eat when you are hungry , and stop when u are full

    Also I'm not sure most guys on this forum will like that bit about investing versus trading. So many here believe (and maybe correctly) that the trader need not bother which way the index is moving (except intra day) ... he /she can make money any day, by riding the wave

    AGILENT:cool:
     
  10. nkpanjiyar

    nkpanjiyar Member

    Joined:
    Feb 2, 2005
    Messages:
    539
    Likes Received:
    14
    Trophy Points:
    18
    Re: 9 commandments for Investors :

    Agilent, my friend you are true.

    To me for Investors, its Accumulate…Accumulate…..Accumulate. Don’t rush in to buy shares. Identify stocks with great growth potential, and start buying in small lots over period of next 3 months. It can be rewarding investments if India story remains intact. Get rid of penny stocks before you don’t find any buyer for them. Review all the stocks in your portfolio, and if you don’t find compelling reason, then dump them. Quality pays…… I am a core believer in long term investing albeit very conservatively.

    cheers,
    nkpanjiyar
     

Share This Page