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Buy companies, not stocks!

May 19, 2005

The Indian stock market regulator, Securities and Exchange Board of India (SEBI), recently cracked its whip against a foreign brokerage house recently, putting under scanner its conduct on the Black Monday - May 17, 2004. While the move is righteous, there are certain lessons you, the investor, can take home from this episode. In any market, there are the big participants that really set the tone for that market and largely call the shots. And then there are the small participants (retail investors). While the number of small participants is higher, their collective value in the trade of that market is lesser than the big participants. So obviously, some big participants dominate the proceedings and work the system to their advantage.

So, what has this got to do with your investing decision and what does it tell you? For one, because of the systems under which any market operates, knowledge is critical. And obviously, big participants with stronger resource base and infrastructure have the knowledge edge.

In that case, is investing in stock markets not a losing proposition for the smaller investors? We think not, if certain discipline is followed. For one, it is the knowledge that gives the edge, and nobody has a copyright over it. You, the small investor, can build on your own knowledge by researching on the companies you buy and sell. And above all, take responsibility for your own decisions. By this, we mean that do not buy or sell or heresy or rumours, for it is not known whose hands you will be playing into.

Look at the management vision for the companies you wish to buy into. Please note, we have said 'companies' and not stocks to buy into. We are sure, even companies would want to have a larger, more loyal, retail investor base, as compared to the finicky Foreign Institutional Investors (FIIs) and institutions that sell the 'stock' the minute the EPS is short by even 10%.

Look at equity markets as partnership with India Inc. Take a long-term view, research and buy into the company you like. If your target price is achieved earlier, be disciplined and exit. Market shocks will keep streaming in as years go by. Make sure you are not caught on the wrong side by ensuring you buy fundamentally strong companies, who shake off May 17 like disasters and recover quickly, for their inherent value is strong.

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