The recipe for your first and last stock investment - The 5 Minute WrapUp by Equitymaster
Free Reports

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!

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.

--- Advertisement ---
Safe Stocks Are Seldom Available at a Huge Bargain...

The stock markets have crashed and a number of stocks have taken a beating.

The market seems to be very volatile and many stocks have taken big hits of late.

But the good thing about this is that you could grab the opportunity to buy some of the safest stocks at extremely attractive prices.

Now we don't want you to miss out on such an exciting opportunity, hence we've compiled a special report titled, "Time to Get Greedy About Safe Stocks?"

And in this report, we're also giving you details of 3 very good stocks you could buy immediately.

So make the most of this opportunity.

Just click here to know how you can get access to this FREE report...


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.

 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.

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.

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.

 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.

Today's Premium Edition.

Should you invest in IT stocks now?

Should investors take advantage of the correction in IT stocks?
Read On...Get Access

Recent Articles

Your Rescue Plan from the Cave of Poor Quality Stocks July 17, 2018
And there will be no getting trapped with Amtek, Vakrangee, or Manpasand like stocks.
The Top 3 Stocks in the Market Revealed by One Document July 16, 2018
How I side-stepped a big mistake made by a super investor.
Where Can You Find Safe Quality Stocks in This Market? July 13, 2018
Don't define quality by market capitalisation. Look for quality stocks across market caps instead.
How to Avoid a 90% Loss Suffered by This Super Investor July 12, 2018
Blindly following super investors is a dangerous game to play. Here's how you can avoid such mistakes.

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"


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.


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.

Equitymaster requests your view! Post a comment on "The recipe for your first and last stock investment". Click here!
Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group.

An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment opportunities across asset classes.

There are no outstanding litigations against the Company, it subsidiaries and its Directors.

For the terms and conditions for research reports click here.

Details of Associates are available here.

  1. Equitymaster has financial interest in Infosys and Wipro.
  2. Equitymaster and its Associates have financial interest in Tata Consultancy Services.
  3. Research Analyst or his/her relative have no financial interest in the subject companies.
  4. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report.
  5. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any other material conflict of interest at the time of publication of the research report.
  1. Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
  2. Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.
  3. Neither Equitymaster nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  4. Neither Equitymaster nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  5. Neither Equitymaster nor it's Associates have received any compensation or other benefits from the subject company or third party in connection with the research report.
  1. The Research Analyst has not served as an officer, director or employee of the subject company.
  2. Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.
Definitions of Terms Used:
  1. Buy recommendation: This means that the investor could consider buying the concerned stock at current market price keeping in mind the tenure and objective of the recommendation service.
  2. Hold recommendation: This means that the investor could consider holding on to the shares of the company until further update and not buy more of the stock at current market price.
  3. Buy at lower price: This means that the investor should wait for some correction in the market price so that the stock can be bought at more attractive valuations keeping in mind the tenure and the objective of the service.
  4. Sell recommendation: This means that the investor could consider selling the stock at current market price keeping in mind the objective of the recommendation service.
If you have any feedback or query or wish to report a matter, please do not hesitate to write to us.