Investment Beliefs

Compiled from my experiences and learning are these suggestions for those interested in mastering the art of equity research and fund management.


Disclaimer: Please remember, when you invest, they are your own decisions and none others', and hence the risk is completely yours.
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My first brush with stock market investment occurred in FY1989-90 When I was still an Engineering Student at Andhra University. After much pleading, my father had sent me ₹500 to buy a radio. I bought a second-hand radio and within weeks sold it to a classmate. I then invested ₹250 in public offering of shares of Nagarjuna Fertilizers and Chemicals Limited. It had not been a very thought-out decision and I was quite scared to tell my father what I had done with the money. It was only 6 months later, when the stock value grew and my money had grown nearly 4 times to ₹1100 that I gathered the courage to tell my father about it.

I was thrilled by that first success and have continued to observe the Indian Equity Markets for nearly three plus decades now. Interest in academics has lead me closer to understanding the Indian corporate world to some extent. I have also had the fortune of participating in the capital markets in various forms including day-trading, speculating, and long-term investing right from the times where the trading in exchanges used to be based on open outcry system instead of the current form of electronic trading (started c.1990).

Lately, I took a few sessions on managing personal finance in the Foundation Course at the LBSNAA for probationary IAS officers and other civil service officer friends on this topic. You can access the same here . Also, attached are two excel sheets to enable you to do the following: (a) An excel sheet for cash flow planning… year wise ; (b) An excel sheet for portfolio planning with retirement as an objective  (built with simple assumptions of real returns on various asset classes).

From my experiences and learning, my investment beliefs can be summarized briefly as:

 

SUGGESTIONS FOR LEARNERS

The following are a list of suggestions for those interested in learning the art of equity research and fund management:

(a) Liquidity is the single most important insurance to protect you from unforeseen financial downslides especially during volatile times and thus staying liquid whenever you perceive investment environment becoming highly volatile is a good idea.

(b) Whenever you make gains (from equity markets or otherwise) - please separate out the money to be paid for taxes immediately. Ignoring tax implications while making gains could later on lead to terrible liquidity crunch situations and negative fallouts [based on own failure to do so... in fact, I was in a soup :].

(c) There is no substitute to experience - hence, stop depending on mutual funds and suggestions from investment experts, etc. (especially those who come on the broader media... given probable agency issues i.e they are driven by their own self-agenda). Start investing your own money (whatever little) by using your own logic. You can always add to this the knowledge gained by learning from others experience (i.e., read lots of books and other materials written by experts who spent decades in the markets... instead of quickly following investment experts during a temporary bubble phase).

(d) Whenever you lose money - think over the issue and take a note of the reasons due to which you lost.

(e) Never invest money in businesses you do not understand - for example, [a] a complex manufacturing company with large number of subsidiaries; OR [b] a complicated investment company; OR [c] a information technology enterprise with a complicated business model (... I have lost money a couple of times).

(f) Avoid investment in companies with a shady management track record. The cues could come from many ways (for example, accounting jugglery done by the companies OR the political networking done to cover up a issue OR the public relations exercise taken up to cover up a wrong doing (could be social or environmental)).

(g) While doing analysis about a company, do make use of financial ratio analysis and cash flow statement analysis (i.e., most than just mere business analysis or following past track record). There are many good books available in this area. For beginners my book series Finance Made Easy  could serve as a good starting point and for people with a bit of experience Chapters 4 and 7 of my co-authored book titled Financial Accounting for Management  could be of good help.

(h) Please do not combine your other goals with financial goals. For example, if you are getting married to your office colleague with a purpose of ensuring tax benefits. It can lead to potential agency issues.

(i) Never give loans to friends/relatives with an objective of earning returns (or even ensure timely cash flows)

(j) Have patience (based on personal experience)

I have been associated in creating equity reports for the following companies:

      • Amit Spinning
      • Chambal Fertilizers
      • Dhandapani Finance
      • Eicher Motors
      • Hexaware Technologies
      • Jammu & Kashmir Bank
      • Linc Pen & Plastics
      • Madhya Pradesh Glychem
      • Noida Toll Bridge
      • Ramkrishna Forgings
      • Shree Rama Multi-tech
      • Wockhardt

On the personal front, list of significant value destroyers (in the past) includes:

EQUITY MARKETS

      • Alan Scott Industries
      • DIC India
      • Kaashyap Radiant Systems
      • Kilburn Chemicals
      • Maxwell Apparell
      • Mukta Arts
      • Nicholas Piramal
      • Tilaknagar Industries
      • Vijayeswari Textiles

F&O MARKETS

      • Infosys
      • Nifty
      • Reliance Power

COMMODITY MARKETS

  • Turmeric
  • Guar Seeds

On the personal front, list of significant value creators (in the past) includes:

EQUITY MARKETS

      • Blue Dart Express
      • Crest Communication
      • Global Board
      • Godavari Fertilizers Chemicals
      • Graphite India
      • Gujarat Heavy Chemicals
      • Hatsun Agro Products
      • Hinduja TMT
      • Lawreshwar Polymers
      • Mercator Lines
      • Nagarjuna Fertilizers Chemicals
      • Pioneer Distilleries
      • Satnam Overseas
      • Usha Martin
      • Vishnu Chemicals
      • Zicom Electronic Security Systems

F&O MARKETS

  • Reliance Industries
  • State Bank of India

In the context of everything I’ve said above, I must also mention another significant event that occurred in my life when I was a struggling PhD fellow at IIM-Calcutta. A kind elderly neighbour Shri Subodh Das had, with some curious conviction in my abilities, lent me ₹43,000 rupees. I was reluctant to accept the money but he insisted. My wife and I, bought a PC and printer with the money and set up a thesis and notes-printing shop at home itself. This was not a time when cyber cafes and printing shops were found at every corner. Within 2 months we earned back all the money invested! I was elated and promptly decided to return the money loaned to me. However, Uncle would not accept it. Instead he asked me to invest it on the stock market. I did so in his wife Smt. Nirmala Das’s name. In 1998, I invested the 43,000 in Blue Dart and Eicher Motors and by 2008 the money had grown to 1.8 crores! Some friends believe I have the Midas touch when it comes to stock picking. But that makes me wonder why I’ve never managed to create a similar portfolio for myself?! In this instance, I believe Fortune favoured him, who decided to help a man in need.