Prakash Kumar

Stock market is for people who can add and subtract a bit and knows simple fact that to buy for Re 1/- and to sell the same for Re 1.1/- is profit and no more. Beyond this knowledge the basic requisite to be a smart investor is to have a conviction, luck, guts and sense of fun.

Market goes up and down in a cyclical turn and with each point move on the index, there are opinions and rationale. There are advice of entry and exit given from practically everyone under the sky. Investor with limited resources at the end of it – is back to square one, when it comes to making an investment decision, let alone a smart one.

Gravity and time are two life long tested truth. Gravity pulls everything down and time does change. Both these facets are critical in understanding dynamics of stock market. Without reading too much into valuations, ratios and number – a mere run up is a recipe of correction, and deep dive is recipe for bounce back. To put it in perspective – this is typically what “technical analysis” to layman is and exactly what the charters do to make a living.

An average investor can hardly make any senses of these cardiogram type graphs and in hindsight it is better not to read too much into it. Experience tells that at same level, two chart pundits have diverse opinion by reading the same chart for the same stock. Mathematically, if opinion was a direct co-relation of chart current position then the diverse surmise does not make any sense. However, these charts at best are heuristics with lot of assumptions.

Fundamental analysis of stock is more of a ratio analysis – P/E, P/B, Valuations, Margins, EPS etc. However, in the same market profitable companies stocks are also selling at P/E <1 and >>50 as well. Difficult to thus draw a consensus on the right P/E or P/B or for that matter any ratio for a particular counter. While common sense says P/E <2-3 is an undervalued and >>25 is over valued situation – but the over valued situation might instead be a great investing opportunity in existing business environment. Generally speaking, buying on attractive valuation (say P/E 10) gives upward room for price growth, where another buyer will still find it good to buy (at P/E 15), thus giving a 50% return. One can’t be so sure when the buying P/E is 25. Of course there are some major’s scripts, where P/E does not seem to matter.

Sectoral analysis gives a macro level view of health of a sector purely in terms of Demand- Supply. It is too subjective and decision making is complicated by reading too much into it. Generally, sectoral analysis turns out to be a zero sum game. Equal number of ayes and nays just complicate the scene and more over in a particular sector there are flyers and laggards and sectoral analysis tend to show a level playing field which is an unlikely scenario.

Goodwill, management and news are the best indicators of making an investment move. Generally, these three parameters have stood all tests of gravity and time. Few things which are important here are that all these parameters are stock specific and investor can do a world of good – if he/she relies on these aspects more than anything else. A blue chip company rich in the first two parameter (goodwill and management) potentially has a very good chance that in 12-18 months, they could appreciate rapidly as they have the ability to create news.

Gone are the days when investment horizons and trading windows used to be long. Today even a month series is a long time. Volleys and bouncers are too frequent off late, and thus it is imperative to have a short sightedness in terms of making investment decision. Buy on momentum and sell on momentum have converged as the bet trading window in equities and commodities.