Stock markets: Has history taught you anything?

Equities/stocks/mutual funds are meant to be the highest return avenue. But then, how come it
does not actually end up being so for most of us?

Many of us have seen good returns, but mostly on paper only (and not as money in our pockets!).
During market volatility, there is always a lot of news flying around and a lot of views expressed.

Consider these, for instance.

The Sensex could touch 14,000 levels or even 12,000 levels

Well, probably the same people, when the index was at 20,000, were most likely suggesting
levels of 25,000!

Similarly at negatives, there would be a lot of views that the market would go down lower. Many
investors do not make money in stocks because of two key factors: fear and greed. Our view is
that an investor who is able to overcome these critical factors and is able to take a rational
decision will be able to generate good long term returns.

Empirically, for centuries, equities have generated the highest return among all asset classes
across markets.

History teaches us a lot

This is what Wall Street's legendary investor Warren Buffett -- regarded as one of the world's
greatest stock market investor, and CEO of Berkshire Hathaway -- has to say about the Internet
bubble: "The world went mad. What we learn from history is that people don't learn from history."
With an estimated net worth of US$62 billion, he was ranked by Forbes as the richest person in
the world as of March 5, 2008.

Let us look at what has happened in the past. Let us look at one of the worst ever falls that has
happened. That too of a sectoral fund through the great dot com bust. Industry majors like Wipro
[Get Quote] and Infosys [Get Quote] saw substantial falls. You can only imagine what must have
happened to the second rung stocks in the sector.
The SIP returns of a technology fund like Birla Sun Life went down from Rs 10 NAV all the way
down to Rs 2.52 on October 10, 2001. This was reflected in the lows that all the technology funds
saw.

• 10 stocks to make young investors crorepatis

On the other hand, for someone who invested at that point, the value went up four times when it
hit the face value of Rs 10 from its low price.

Learnings:

~ Even though one had started investing at the market peak, the SIP approach has given good
returns
~ Someone who invested at the bottom has seen over 8-time appreciation from the low as per
their NAV price on February 29
~ Avoid sectoral funds except in sectors like infrastructure where one may want to take a 5 year
bet
~ Stay diversified

Trying to time the market -- a common mistake

How many of you have kept price targets for your stocks portfolio and seen it falling just before
you wanted to sell? A mistake that can be easily avoided! In expectation of falls to 12,000 and
14,000 levels, you hold back switches to equity, and may end up missing an opportunity.
Learnings:

~ Phase your switches back to equity and continue to invest at every fall. While 12,000 could
happen, you should not miss out an opportunity even if it does not. Hence you should switch and
invest some money now and if the markets fall further, you could switch more. When markets
have fallen, about 7000 points, it is definitely a great time to buy

• Market crash: A quick guide for young investors

~ 'Buy low, sell high' is easier said than done. Don't do the opposite as investors normally do as a
result of their 'fear and greed'. Think about it logically and overcome the fear: the odds are very
much in favour of an uptrend, after a fall. It may take a year or two but these are the investments
that will do the best

Long term equity investing is the real wealth creator

As you would see from the SIP returns table, someone who invested on a monthly basis a sum of
Rs 10,000 per month invested a value of Rs 12 lakhs; and at the end of Feb '08 has had a value
of Rs 94 lakh to Rs 1.3 crores in good funds despite the market fall. (The Sensex was at 17,578
on February 29, 2008, the date of valuation of the mutual funds above).

Learnings:

~ Sleep over the bad times, continue to invest and invest long term (about 2 years) if you want to
really build wealth. If this is what a person had done in the past 10 years, s/he would have
become a crorepati in this period by investing only Rs 10,000 per month
~ While returns may not be sustained in the future, the market volatility would actually help
enhance returns for the long term for an investor who is logical and disciplined on his investments

The bigger picture

After every large falls, the upside is higher than the downside from. While markets could fall
further, in the long term it would even out. This is what you can do now:

~ Use diversified investments; preferably mutual funds that help you manage risk very well
through systematic investments
~ If you have not already diversified do so at the earliest!
~ If you have a balance of debt and equity, you should be switching a part of the debt portfolio
into equity. This is the time you should be taking a higher level of risk, even if it means that you
temporarily have a higher equity composition versus what you desire. Spread it out over a period,
and keep money for further falls

• Don't get foxed by returns on your investments

~ Invest more aggressively and on big falls you could even make lump sum investments in
addition to the systematic investments
~ Don't miss your SIPs at this time. These are likely to give you the best returns. The returns may
not look good now, but they are precisely done so that you get the advantage of the market falls
~ And if you are completely invested into equities and have not yet exited, sleep through the
volatility. If you have used well diversified investments, you have nothing to worry in an economy
like India
And above all it is important to consciously overcome fear and greed and take a rational decision.

10 stocks to make young investors crorepatis

It fell like the proverbial house of cards.

The 30-stock benchmark of the Indian stock exchange, the Sensex, recorded its biggest crash on
January 21. The index closed the day at 17,605 points, down a precipitous 1,400 points.

While the event is likely to send shudders down the spines of investors across all age groups for
the young brave hearts amongst you we have got ten stock picks that can make you millionaires.

The caveat, however, is that you need to hold them for a long period: ten years if you can to reap
the benefits of picking stocks that will create value for you.

We asked brokerage house K R Choksey Shares and Securities to hone in on ten stocks that will
create value for investors in the long run. Gaurang Shah, vice president, equity research at K R
Choksey Shares and Securities came up with these ten gems for long term investors just a few
days before January 21. Over to him.

Here are our top picks which have the potential to be multibaggers ( a stock that grows manifold
over a period of time) if held with an investment horizon of ten years: Large caps are selected
because of their proven track record and ability to grab mega opportunities through their financial
strength. Mid caps if the management has the vision and management band width to scale up
rapidly to become large caps.

They are grouped under the following themes:

Commodities:

~ Reliance Industries [Get Quote] (Perennially evergreen company)

~ Reliance Petroleum [Get Quote] (Largest refinery with very high Nelson complexity index that
will lead to highest gross refining margins, GRMs)

~ Gujarat NRE Coke [Get Quote] (integration from coking coal to coke)

~ Tata Steel [Get Quote] (formerly Tisco; lowest cost producer of steel plus large value addition
through Corus acquisition)

~ Hindalco [Get Quote] (lowest cost producer of aluminium plus large value addition through
Novelis Fusion Technology)

• Market crash: A quick guide for young investors

~ Sterlite Industries (commodity powerhouse at a time when globally commodities are in a super
cycle)

~ Sesa Goa [Get Quote] (largest reserves of iron ore in private sector)
I am including many stocks in this sector since global commodities will be on the upswing for the
next 5 years.

Telecom

~ RCom (marketing aggressiveness plus financial engineering plus political acumen)

Auto

~ Tata Motors [Get Quote] (from world's cheapest car to luxury Jaguar to SUV Landrover to trucks
-- will be in global top five in 5 years)

Finance

~ ICICI Bank [Get Quote] (proactive, aggressive fund raising and lending taking full advantage of
slow decision making at PSU banks)

• Making money vs creating wealth in stocks

~ Reliance Capital [Get Quote] (straddling all areas of non-banking financial services)

Infrastructure

~ L&T (another evergreen company -- value unlocking through listing of subsidiaries, very strong
core business)

~ Patel Engineering [Get Quote] (strong position in high margin high technology construction
sector, real estate development)

Pharma

~ Glenmark [Get Quote] (innovator, outlicensor of drugs in fast growing therapeutic areas like
lifestyle diseases)

~ Cipla (innovator copier -- low cost supplier of essential medicines people can't do without)

Realty

~ DLF (proxy for the Indian real estate sector)

~ Unitech (number 2 and tries harder than number 1)

~ Sobha Developers [Get Quote] (fully integrated real estate contractor who graduated to property
developer status)

Market crash: A quick guide for young investors

If you are young and restless and into the stock markets then this is for you.
For the Indian stock markets are caught in a whirlwind and you might need a straw to hold on to
something. Some words of wisdom, some nuggets that may help you to relax, howsoever often
you may have heard them before.

Waking up this morning would you have imagined the 30-stock benchmark index, the Sensex,
would crash by more than 1,500 points after noon?

The US markets seemed a bit stable with the Dow Jones down by about 0.5 per cent. The Indian
stocks too had been on a downslide since January 15. However, the shock and awe that the
Sensex witnessed today must have made a few of the weak-hearted amongst you stop and take
heed.

Weak-hearted we all are but if you also have some patience -- considering your age -- here's
what you should keep in mind to weather stock market turbulences.

1. Start nibbling in

If you believe in India's growth story every steep fall should be seen as a buying opportunity. If
you haven't yet entered the market but want to then tighten your belts. Market crash like the one
today is an ideal time to buy. However, since these are very tumultuous times don't put all your
eggs in one basket.

That is, if you have Rs 100 to invest then put only Rs 25 or even less during such crashes. If you
have heart for some risk then put Rs 25 out of that Rs 100 today and keep the rest for later.
However, do this only if you are willing to stake your money for at least five-seven years. The
long-term stock market story in India still looks positive.

2. Don't panic

If you are already invested in the market and are sitting on huge losses, don't panic. The macro
economic story in India led by the consumption, infrastructure and engineering sectors still have
chances to remain insulated from what's happening in the US markets. This because many
believe that the US recession is responsible for the current weakness across global markets.

If the US can't buy our goods, no problem. India and Indians have the purchasing capacity
believe some experts, who say that the US recession will not have a huge impact on the Indian
growth story.

• Make money with shares

Moreover, India's demographics, skewed heavily in favour of the young, will help India overcome
external pressures in the long run. Young Indians like you are spending more on their daily needs
thereby increasing the consumption demand.

So if you are a brave heart and believe that there are bound to be minor hiccups along the way
this is your time. Add more and good quality stocks to your portfolio.

3. Avoid averaging

If you are a short-term trader and think that you can buy more of the same stocks to average your
buying price then you may be in for a rough ride. Nobody knows for sure about which direction
the markets will take in the weeks ahead.
Any bad news coming from global giants like the US, Europe and China can only have multiplier
effects. If the markets were to tank further your losses are likely to increase manifold. So book
your losses and get out of the market.

However, if you want to invest with a long-term perspective start nibbling in on good quality
stocks.

4. Don't go by tips

If you are young and eager to make money then you are an ideal target for those who give stock
tips. They will start flying thick and fast from tomorrow. Or may have started doing rounds even
today for all we know. Some of your friends will ask you to buy stocks; some other will advise you
to sell them.

• Greed = Loss at the stock market

Agreed you will find a lot many stocks at prices far lower than what they were a fortnight ago.
Check for their credentials. For this is the time when gullible investors go for the bait thrown by
stock market manipulators. Don't buy any stock merely because a broker or a market punter
advised you to.

Similarly, there will be a host of technical advisors jostling for your attention. "This particular stock
looks weak on the charts. Traders can make some profits by selling them now and buying the
same at lower levels with strict stop losses." Shun the thought. For you never know when the
markets will bounce back.

Bottom line: don't trade on tips. Better still don't trade at all. Go for long-term investments. For the
time being forget what Lord Maynard Keynes said: "In the long-term we are all dead."

God knows what will happen in the long-term but in the current scenario if you were to act on tips
then you will only be responsible for your own ruin.

5. Mutual funds are your best friends

In such times let experts manage your money if you find stock markets to be a hot potato. Put
your money in mutual funds for the mutual fund manager is a market expert and is assisted by a
big team of market specialists. A decision made by a team of experts will help you make far
greater profits than what you will try to do on your own.

The stock market hammering of the last few days should be taken as an opportunity to buy into
good diversified equity funds. For, they put their money into the markets irrespective of any
sector, theme, or market cap limitation.

When the markets will bounce back they will have a far higher chance of appreciating faster than
any other type of mutual funds.

6. Don't try to time the markets

As an individual you are in no way going to buy when the market falls and sell when the market
rises. Believe in investing money into stocks or mutual funds' systematic investment plans, SIPs,
regularly. This is the only key to avoid getting ruined in the stock markets.
 • Want to bid for shares? Read this first

The stock market crashes -- like the one witnessed today -- get evened out by long-term gains.
For instance, those who had been regularly investing from the time markets crashed steeply
during the May 2006 crash would not feel bothered about the crash today.

The market had crashed to some 12,000 points then from about 16,000 levels in just a month's
time. Today even after the crash the market was trading at 17,000 plus levels.

Remember that age is on your side. If you are in your early, mid or late twenties then this is the
right time for you to put your money in stock markets. Historically, stock market gains have
outweighed gains from other asset classes over 10-year, 15-year and 20-year time horizons.

Who knows, by the time you are in your 40s or 50s, twenty years from this day, you might look
back at this crash as your first stepping stone towards building wealth for yourself and your
family.

Don't get foxed by returns on your investments

Do you remember the price you paid to buy one kilo of onions in 2007? And do you know the
price of the same one kilo of onions in 2008? If you find out that one kilo of onions in 2008 is
costing you more than what you paid in 2007 then you can easily blame it on inflation.

While generally speaking inflation means a general rise in the level of prices the textbook
definition says inflation reflects the situation where the demand for goods far exceeds the supply
of goods.

In short, inflation reduces the effectiveness of money as the medium of exchange. High inflation
means it becomes difficult to place a value to goods because the value of money is falling.

That is what you could buy for Rs 100 today you will have to pay Rs 103 for the same if inflation
increases at the rate of 3 per cent. This might sound small right now but after certain years this is
capable of eroding your capital.

Especially for retirees who have invested in fixed deposits or debt products which gave them
yields (profit after tax) of about 15 per cent a few years back. Any increase in inflation reduces
their yields to that extent.

Inflation does not only affect the purchasing power of your money but also reduces the effective
rate of return on your investments.

Inflation pinches...

Now let's get straight to the point as to how it affects your investments. The end product of your
investment will not have the same purchasing power as it holds today. But how do we arrive at
that calculation.

There are lots of articles on inflation but very few explain how to calculate it. Hence, let us
concentrate more on this as it is the main crux of this article. Also let us see its effect on your
investments.
What you as investors need to calculate is the Real Rate of Return.

Normally investors look at the nominal rate of return. Nominal interest rate tells you how fast your
investment grows. The real rate of return gives you the growth in the purchasing power, which is
what should actually matter to you and me.

Let us take an example to understand this concept.

Say an investment is earning 8 per cent per year for you. If you have invested Rs 1,000 then at
the end of the year you will have Rs 1,080. This means that your investment has grown by Rs 80
-- the interest earned at 8 per cent on your capital of Rs 1,000.

The real rate of return can be calculated using the formula below:

[(1+ Rate of Return) / (1+ Rate of Inflation)] - 1 (Read 1+ Rate of Return divided by 1 + Rate of
Inflation less 1)

For example let us assume the rate of return at 8 per cent and the rate of inflation at 3 per cent.

Then the real rate of return will be [{(1+8 per cent) / (1+3 per cent)} � 1]* 100 = 4.85 per cent.

In the above example, though you have earned Rs 80 on an investment of Rs 1,000, at the end of
the year your investment will actually be worth Rs 1048.50 only.

Thus, inflation not only erodes your interest but the principal amount too. This is without
considering the effect of taxes. Unless your investment is in tax free instrument we have to take
into account the tax implications. Hence, the return should not only be adjusted for inflation but
also for taxes.

• Why you should invest in gold

In the above example, the return is Rs 80 for one year. Taking 3 per cent as inflation the principal
with interest is worth Rs 1,048.50 only in today's terms and not Rs 1,080 as expected.

If the interest earned is taxable then from Rs 80 earned you deduct the tax to be paid to reach at
the actual return or yield or profit after tax.

Assuming you fall into the 30 per cent tax bracket, you end up paying Rs 24 as tax (Have not
taken into account education and secondary education cess for simplicity purpose).

So from Rs 80 earned first you pay Rs 24 as tax which gets your interest down to Rs 56. Now
your investment is worth Rs 1,056 on which you calculate inflation at 3 percent. It is then worth
Rs 1,025 as of today which is only 2.5 per cent earned on your investment instead of the 8 per
cent that investors normally believe.

Though the figures do sound depressing the actual impact on your portfolio depends on the type
of your investment.

Equity

If you are investing in equities or equity oriented mutual funds, you may not have to worry about
inflation.
Because in the long run the company's earnings increase at the same pace as that of inflation.
The only hitch is, in times of high inflation the company's earnings might seem very attractive but
inflation might be the real factor behind the good results.

Again, to get good earnings and to beat volatility an investment in equity is only advisable if you
are in for a long term.

Debt

Fixed income investors (like investments in fixed deposits) are the hardest hit. Unlike in the past
in today's time debt investment do not yield more than 8 to 9 per cent. If you take inflation into
account then the real rate of return falls considerably.

• 8 evergreen money tips for YOU

The interests earned from most of the debt products are taxable. From the above example the
post tax and inflation-adjusted return of 8 per cent gives a return of 2.5 per cent only.

Gold

You might be wondering why I have mentioned gold. India has the highest consumption of gold
globally. Initially or in fact even today investors buy gold to beat inflation. Gone are the days of
1970s or 80s when prices of gold would respond to an increase in inflation.

With the relaxation in regulation since 1990 gold prices have now aligned with international prices
and have trailed behind inflation.

That is the rate of increase in prices of gold is not equal to the rate of increase in inflation or the
former increases at a slower rate than the latter.

Worries for the elderly

Inflation generally causes the maximum anxiety for retirees. While it is also not advisable to
completely invest in equity It is always better to spread your investments.

You have to plan your investments to beat inflation. This can be done by calculating the Present
Value of your investment.

Say your investment is going to yield you a return of Rs 10 lakhs at the end of 10 years. So what
we need to find is what would be the worth of that Rs 10 lakh in today's time. With this you can
also determine the extent of fall in the purchasing power of money. It helps you to determine if it
would be enough to sustain your current life style.

Assuming the inflation rate to be 3 per cent the present value (PV) can be calculated as follows:

PV = Future Value * 1 / Rate of Inflation^ Number of Years

In the above example, the PV of Rs 10 lakhs would be Rs 10,00,000 * (1/3)^ 10 = Rs 7,44,094

This is useful especially when you are expecting the returns from your traditional insurance plans
or any other products which gives you a lump sum return after a long time period.
 • Six tax facts on your home loan!

Hence it is always advisable to start saving from a very young age. It does not have to be a
significant amount. You can start with as low as Rs 100 per month and increase it as and when
possible.

For long term goals you can opt for systematic investment plans (SIPs) in equity oriented mutual
funds or if you can follow your investments in stock market then invest in blue chip companies. By
investing in debt products it is difficult, though, to beat inflation but in the short term you cannot
avoid them.

The effects of inflation is relatively less in short run as compared to the long run. For short term
you can invest in debt products that help you beat inflation like investing in short term liquid funds
or in fixed maturity plans rather then going for fixed deposits.

Though every one knows about inflation what matters is how many of you actually take it into
account while calculating your returns. Inflation plays an important part in deciding investments so
do not forget this vital factor while deciding to invest.