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Here's Why You Must Never Invest in the 'Stock Market'

Jun 16, 2016

In this issue:
» Top US tech firms swimming in cash
» Companies investors need to be wary about
» ...and more!
00.00
Rahul Shah, Co-Head of Research

We want to lose weight, get fit, and look fabulous. We know we need to follow a disciplined exercise regimen for that. We certainly plan to. We understand it's important...the right thing to do.

But we hardly ever end up doing it.

And that's just one of the long list of things we know we should do...intend to do...but seldom end up doing.

No surprise, this plays out for us in the world of investing too. Especially when investing in stocks.

We know that these are businesses we're investing in, and that's how we should look at them while making decisions. Investment is most intelligent when it is most businesslike, right? Of course that's how we plan to do it. But few actually end up doing it that way.

And the incessant noise of the stock market hardly helps. The constant stream of stock prices and the short-term thinking all around gets to the best of us. Despite our intentions, we end up behaving like punters, treating stocks like lottery tickets, and making decisions like we're at a gambling den. We set out to invest, but end up speculating.

But there's a trick to knowing when you're truly staying on that path, and when you're going astray. It's simple, but highly effective: Keep track of the language you use when you think about equity investing.

So for example, do you think of yourself as investing in 'the stock market'? Would you say you are a 'stock market investor'?

If you do, these are telltale signs that you're treating stocks not as your ownership stake in a tangible business but rather as intangible ticker symbols that you make money on when they go up and lose it when they fall.

Here's your antidote: In your language and your thoughts, forget the stock market exists at all. Forget the stock you're looking at even has a quote.

Think of yourself as buying an ownership stake in a private - not a listed - business. Do all your analysis on it from this perspective. Arrive at an independent value of what you think the business in this case would be worth to you.

Then, when all of this is done and over with, the stock price is the last and final thing you look at. If it's lower than what you just valued the business at, you buy. Otherwise, you don't. That's businesslike investing.

On the other hand, if you find yourself starting with a stock price chart, it's likely that you're once again getting stuck in the gap between what you set out to do and what you ended up doing.

Never invest in the 'stock market'. Only in the business.

What's your mantra for making sure that you walk the talk when it comes to businesslike investing? Let us know your comments or share your views in the Equitymaster Club.


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02:35 Chart of The Day

The news that's making headlines in the tech world these days is Microsoft's acquisition of professional networking giant Linkedin. And the buzz is not without reason. Microsoft has splashed out a whopping US$ 26.2 bn. The deal is only second in the list of biggest technology M&As of all times. However, if you doubt that Microsoft will have to huff and puff in order to fund the deal, today's chart of the day will certainly put the doubt to rest.

As the chart highlights, at more than US$ 100 billion, Microsoft's cash war chest is behind only Apple's amongst all US companies at the end of 2015. In fact, the list is dominated by tech giants with the multinational pharma giant Pfizer, the first non-tech company at number six. Here's another interesting stat. The top three cash rich US companies hold nearly a quarter of all the cash held by the country's non-financial corporations.

Indeed, no better proof than this one, of the observation made by Warren Buffett that the business world is divided into a tiny number of wonderful businesses - well worth investing in at a price - and a large number of bad or mediocre businesses that are not attractive as long term investments.

Top US Tech Firms are Swimming in Cash


03:55

A leading financial journalist is of the view that amongst all the reasons behind the Microsoft-Linkedin deal doing the rounds, there's one that hasn't been spoken about a lot.

That no one seems to be talking about Linkedin's struggling share price before the deal and its excessive reliance on stock based compensation has come as a bit of a surprise.

As is often the case with most upcoming tech companies, Linkedin employees were also paid largely in stock. And therefore, when the share price plummeted some 40% during the Feb of this year, a lot of employees saw their wealth taking a huge beating. And it doesn't take long to figure out that had the share price stayed low, people would have left in droves.

But why be so aggressive in giving out stock options to employees? One big reason was the company's insistence that stock options are non-cash in nature and therefore, shouldn't form a part of the company's P&L. This, at a time, when stock based compensation formed more than 90% of the company's operating income. However, is this a fair practice? We don't think so. The very name stock based compensation suggests that it is a compensation and if compensation, isn't an expense then what is it? And if expense shouldn't go into the P&L, where else should it go?

Therefore, investors need to be wary of such companies who dole out compensation by the millions but are hesitant to make it part of the P&L. After all, not every company can be expected to be taken over.

04:42

Benchmark indices were trading weak today what with the BSE Sensex lower by around 400 points at the time of writing. Similarly, Nifty was seen trading 124 points lower. BSE Mid and Small Cap indices were also down, losing 1% each. Amongst sectoral indices, telecom and banking stocks were out of favour the most.

04:56 Investment mantra of the day

'You don't need to be an expert in order to achieve satisfactory investment returns. But if you aren't, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don't swing for the fences. When promised quick profits, respond with a quick 'no.' - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst).

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1 Responses to "Here's Why You Must Never Invest in the 'Stock Market'"

vipul patel

Jun 18, 2016

sun pharma,traget 780 6 day.

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