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The recipe for your first and last stock investment

May 26, 2015

In this issue:
» Why ignoring fundamentals while investing will lead to disaster
» Can pension money revive PSU stocks?
» Which sector is on top after one year of the Modi sarkar?
» Bonds may not be risk free!
» ...and more!


00:00
They say 'What is well begun is half done'. But as we know the opposite holds true too. And unfortunately for most stock investors in India, burning fingers in the first few trades has been the norm rather than the exception. Poor advice from brokers, acting on tips and inability to exit loss making trades has been their biggest undoing. So even though the BSE Sensex has gone from strength to strength over the decades, a miniscule portion of stock investors have actually made any money.

Now, we would like to assume that given the wider availability of information on companies, investors in India are getting smarter. But it takes just a few honest questions from first time investors to establish the fallacy of this assumption.

"Should I invest in Suzlon?" As per newspapers the stock will run up with Sun Pharma buying a stake in it"...was one such question recently put to me.

Apart from the fact that we have removed the stock of Suzlon from research coverage way back in 2008, my response to the query was not warranting a buy-sell view. It was meant to challenge the mindset of a new and gullible investor waiting to make the first investing mistake of his life. One that could potentially render his appetite for investing in stocks paralyzed for lifetime.

Now, for those of you who are not aware of Suzlon's chequered history of doing all what it takes to destroy shareholder wealth, here is a quick recap. Apart from the big promises in the blockbuster IPO, Suzlon was the poster boy of Indian stock markets at a time when green energy was hardly understood. The fact that it was a big player in a sun rise sector enticed investors. The fact that the company was able to raise cheap funds through the FCCB route to expand aggressively was an added positive.

What followed was bigger and bigger loans for irrational expansions. Suzlon acquired companies bigger than itself with no remorse for rising leverage. Meanwhile it launched new products to capture market share without improving quality of existing ones. Finally, overburdened with losses and huge debt, by 2010, the company managed to shave off 90% of the money investors had put in the stock during the IPO in 2005. If you are wondering if the company has seen better fortunes since then, Suzlon posted losses of Rs 47 bn, Rs 35 bn and Rs 18 bn respectively over the past three fiscals.

Coming to the role Sun Pharma has to play in the stake buying in Suzlon, there is none. It is the promoter of Sun Pharma, Dilip Shanghvi who has bought 23% stake in the company in personal capacity.

So there are two clear conclusions that one can make from the query on Suzlon. Apart from the fact that investing decisions are often based on negligible knowledge about fundamentals of companies, it is the greed of making quick returns that guides most investors. More often than not, such misguided attempts at investing leave new investors scarred for life.

Thus, if you need a readymade recipe for losing your invested capital in the very first trade, follow the tips for investing in turnaround loss-making companies offered by brokers and newspapers. But if you do not wish your first investment to become your final one, do make an attempt to understand what you are investing in.

How was your very first experience of investing in stocks? Let us know your comments or share your views in the Equitymaster Club.

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02:15
The luster of the promised 'Acche Din' has clearly not brushed off on the government's own 'family silver'. And the disinvestment programme is testimony to the fact that selling stakes in PSUs has been a compromise rather than value unlocking.

Why do we say this? Well, if you need to point out to one category of stocks that has particularly not done well in the stock market rally post elections in 2014, it is the PSUs. Three-fourths of the 60 public-sector unit (PSU) stocks have offered negative returns in the last one year. Against the BSE Sensex gain of around 12% YoY, the PSU index has lost 6%. You may recall that in the year leading up to the elections, the PSU Index had traded higher on hopes that a renewed focus on economic reforms. A year on, apart from select plays in the defense and oil and gas sectors, most other PSU companies have languished. And hence the disinvestment programmes have been based on rather subdued pricing for the PSUs.

Notwithstanding the sectoral hiccups and subdued fundamentals, the low valuations of some strong PSU companies do warrant some attention. More so because with a lot of pension money chasing the PSU stocks, the fortunes of these entities could change on the bourses. A big share of the National Pension System's funds exceeding Rs 800 bn might find its way to a new exchange traded fund of state-run companies. And that alone could offer a big boost to the valuations of PSUs. Having said that, investors must be careful before going after the gold rush in PSU stocks.

03:05
 Chart of the day
The Modi government has completed one year in office. At this time it's interesting to have a look at how the markets have performed over the last year. The BSE Sensex has delivered a fairly decent return of 11.8% YoY. Given the huge expectations from the government though, there would be quite a few disappointed folks we believe. To be fair, the BSE Mid Cap and BSE Small Cap indices have fared better, delivering 28.8% YoY and 26.7% YoY respectively. However, what does stand out is the sectoral returns.

Can Pharma continue to outperform?

Would you have guessed one year ago that pharma stocks were the best place to be? Given the expectations of reforms when the government was sworn in, would anyone have believed that sectors like metal, real estate, energy and power would be in the doldrums in a year's time? There is lesson to be learned here. Investing based on expectations of reforms is fraught with risk. Given that it is futile to predict sectoral performance, investors would be far better off adopting a bottom-up approach to stock picking based on company fundamentals.

04:05
Investing in bonds is considered to be safe (at least when compared to equities) and with good reason too. The chance of capital loss is low (especially when the issuer is a government or a company with good fundamentals. Think about it. If you hold a bond to maturity and are sure you will get your principal back, then you would believe that the only things to worry about are inflation and taxes. However, this is not always true. There is concentration risk to worry about.

Consider the western world where inflation is very low despite the best efforts of the central banks to print money. Investors in these countries bet on fixed income because they feel safe doing so. But are they? Yields are at record lows in these countries. The question arises if holding such low yielding paper for long periods of time is really risk free or not. Are bonds really risk free when interest rates rise and everyone rushes for the exit at the same time? As an article in the Financial Times clearly pointed out, a small rise in yields in Germany recently, caused panic as the fall in bond prices wiped out years of accrued interest income. Yet another systemic risk in the developed world to be concerned about, we believe.

04:40
Meanwhile, the Indian stock markets were trading in the red. The BSE Sensex was trading down 163 points (0.6%) at the time of writing. Auto and energy stocks were leading the losers. The midcap and small cap indices were also trading down about 0.1%. Asian indices ended mixed today with Hong Kong leading the gainers. European indices have opened on a negative note.

04:50
 Today's investing mantra
"The true investment objective of growth is not just to make gains but to avoid loss." - Philip Fisher

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee.

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Equitymaster requests your view! Post a comment on "The recipe for your first and last stock investment". Click here!

2 Responses to "The recipe for your first and last stock investment"

supriya

May 28, 2015

It was about 25 years back,when there was only BSE. The disastrous working of BSE floored lakhs of middle class investors.I lost plenty of money in stocks and went broke in less than 2 years time.

Like 

Rajeev Arora

May 27, 2015

I invested in Coal India in 2014 and 2015 based on your recommendations. What is your latest evaluation given the 'acche din' promise is yet to positively impact this PSU.

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Equitymaster requests your view! Post a comment on "The recipe for your first and last stock investment". Click here!
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