How an amateur can make intelligent investment?

Why this many people lose in market? One obvious reason for that is people seems to be more comfortable in investing in business they are entirely ignorant about. Decision of investing in a particular industry should not be based upon speculation or some ones’ recommendation as long as one can’t see which business company is in.

An individual, who decides to invest on his own, should not listen to the professionals or hot tips, pick of the week etc from the brokerage firms. He should rather invest in the companies whose business he could understand. There is no more scarcity of information about the financial strength and business opportunities for the companies. A personal visit to the factory outlet of Arvind mills – “MegaMart” could give an idea of the business model of the outlets. A further observation and basic calculation about the contribution of the revenue from MegaMart to the Arvind mills can suggest if the recent decision of Arvind mills to come with another 1500 outlets will be a success or not. Another example could be Future Group. Anyone who has visited Big Bazaar and Food Bazaar can experience the operation of the firm and decide whether to invest in such a firm or not. For such an open industry one does not need to seek suggestion of a broker. You know it before the market gets to know it. But how about financial institutions like IFCI, Reliance Capital, India Bulls etc.? These are all public companies and the balance sheets as well as income statements for different periods are publicly available. In a country like India, which has got maximum number of news channels with 3-4 channels dedicated solely to business, it is no more a challenge to get the up-to-date news about any happening in the economy and market.

Before starting investment, the individual should analyse ones’ trust on the economy, the growth, the future prospect and the rampant impact of economic changes on behaviour of market. For example, before investing in infrastructure industry, one will have to understand that the infrastructure industry is closely coupled with the growth trend of the country. One will also have to do self analysis to see how much of risk he is comfortable with, whether he is a short term investor or a long term investor, and how will he react to the sudden, unexpected and severe drops in the prices. The potential market victims are those who invest everything out available with them when market is at its all time high and abandons all hope & reason when market is down and sells out at loss. Almost all of us read the same news paper, listen to the same channels and economists, it is personal preparation as well as knowledge & research that distinguish the successful investors from the chronic losers. Investor should only invest what you could afford to lose without that loss having any effect on daily life in the foreseeable future.

No one can predict market and anticipate recession; hence it is prudent to look for profitable companies with strong fundamentals available at attractive price.

BSNL may sell stocks worth $10billion (Rs 40,000 crores) through India's biggest IPO

Indian Government announced on monday that it may sell $10 billion(Rs. 40,000 crores) stake in BSNL, one of the India's biggest telecom company. This will be done through initial public offering (IPO) of shares and fund will be used for expansions plans. BSNL will be the second biggest telecom company in Asia after China Telecom by market capitalization.

The IPO will value the BSNL at Rs 400,000 crore, much ahead of Bharti Airtel, the country’s No.1 company whose market capitalization is Rs. 172,179 crores (January 14, 2007). BSNL will also become the India's second biggest listed company after Reliance Industries Limited(RIL) which has market capitalization of about Rs 448,193 crore.

On Tuesday India's biggest IPO so far will be opened for subscription. A $3 billion (Rs 11,700 crore) IPO by Reliance Power will break the previous best record of 9,190 crores by the real estate major DLF Ltd.

Correlation of Sensex and Nifty

How much correlated are Sensex and Nifty? Lets look at the graphs of the two indices for last five years:Analyzing the data for last five years using regression shows a high correlation between them. Lets look at the picture for last one year.

Based on the past data, one can easily conclude that Sensex and Nifty are highly correlated indices.

Finding Beta of a stock

Beta is a measure of the systematic risk pertaining to a security. It is an estimate of the returns on a stock when the market changes by a unit percentage. A beta of 1 means that the stock is in perfect correlation with the market, if the market moves up by 1% the particular stock will also move up by 1% and vice-versa. There are many ways to estimate beta the most common one being using the historical data. Since beta estimates the returns using historical beta may not always yield the exact future returns, but most of the times they explain the trend.

Historical beta is calculated by regression of the stock return and market return for a particular time period unit. This may be daily, weekly, fortnightly, monthly, or quarterly depending upon the available data, accuracy required and relevance. The market returns are measured by taking the returns of some index which takes the representation of almost all the sectors of the market.

Lets find beta for State Bank of India (SBI). We have taken the returns on weekly basis and market as CNX-500. The data for the last five years up to December 15, 2007 have been plotted below.

Regression analysis yields the slope of the line as 1.156 which is beta.

The historical price movement of SBI and CNX till December 2007 is shown below.

What is BSE Sensex? What constitutes Sensex?

SENSEX (Sensitive Index) is the India's most popular stock market index developed by Bombay Stock Exchange (BSE) in 1986. SENSEX has 30 constituent stocks representing a sample of large, liquid and representative companies. The base year of SENSEX is 1978-79 and the base value is 100.

The Index was initially calculated based on the "Full Market Capitalization" methodology but was shifted to the free-float methodology with effect from September 1, 2003. The level of index at any point of time reflects the Free-float market value of 30 component stocks relative to a base period.

The selection of constituents in SENSEX is based on several factors including the listed history, trading frequency, rank based on market capitalization and liquidity, industry representation, etc.

The index is reviewed every quarter and in the case of a revision in the Index constituents, the announcement of the change is made at least six weeks in advance of the actual change.

The present constituents of SENSEX are:

Name	Industry
ACC Ltd.	Cement
Ambuja Cements Ltd.	Cement
Bajaj Auto Ltd.	Automobile - 2/3 wheeler
Bharat Heavy Electricals Ltd.	Electrical Equipment
Bharti Airtel Ltd.	Telecommunication
Cipla Ltd.	Pharmaceuticals
DLF Ltd.	Construction
Grasim Industries Ltd.	Cement
HDFC	Finance - Housing
HDFC Bank Ltd.	Banking
Hindalco Industries Ltd.	Aluminium
Hindustan Unilever Ltd.	Diversified
ICICI Bank Ltd.	Banking
Infosys Technologies Ltd.	Softwares
ITC Ltd.	Diversified
Larsen & Toubro Limited	Engineering
Mahindra & Mahindra Ltd.	Automobiles - 4 wheelers
Maruti Suzuki India Ltd.	Automobiles - 4 wheelers
NTPC Ltd.	Power
ONGC Ltd.	Oil Exploration/Production
Ranbaxy Laboratories Ltd.	Pharmaceuticals
Reliance Communications Limited	Telecommunication
Reliance Energy Ltd.	Power
Reliance Industries Ltd.	Diversified
Satyam Computer Services Ltd.	Softwares
State Bank of India	Banking
Tata Consultancy Services Limited	Softwares
Tata Motors Ltd.	Automobiles - 4 wheelers
Tata Steel Ltd.	Steel
Wipro Ltd.	Softwares

The weightage and market capitalization of the constituents of Nifty as on 11 January 2008 are shown below:

Name	Free-Float Market Capitalization (Rs. Crores)	Weight in Sensex (%)
ACC Ltd.	10,105.36	0.72
Ambuja Cements Ltd.	12,685.74	0.9
Bajaj Auto Ltd.	16,555.77	1.17
Bharat Heavy Electricals Ltd.	64,149.25	4.55
Bharti Airtel Ltd.	41,721.91	2.96
Cipla Ltd.	10,316.99	0.73
DLF Ltd.	30,585.98	2.17
Grasim Industries Ltd.	23,225.91	1.65
HDFC	72,575.42	5.15
HDFC Bank Ltd.	49,869.91	3.54
Hindalco Industries Ltd.	17,386.76	1.23
Hindustan Unilever Ltd.	24,753.83	1.75
ICICI Bank Ltd.	157,659.91	11.18
Infosys Technologies Ltd.	76,723.99	5.44
ITC Ltd.	58,650.90	4.16
Larsen & Toubro Limited	109,360.09	7.75
Mahindra & Mahindra Ltd.	15,231.08	1.08
Maruti Suzuki India Ltd.	12,982.17	0.92
NTPC Ltd.	33,678.60	2.39
ONGC Ltd.	55,905.85	3.96
Ranbaxy Laboratories Ltd.	10,326.60	0.73
Reliance Communications Limited	57,241.77	4.06
Reliance Energy Ltd.	37,925.18	2.69
Reliance Industries Ltd.	227,361.54	16.12
Satyam Computer Services Ltd.	26,113.26	1.85
State Bank of India	57,722.49	4.09
Tata Consultancy Services Limited	24,197.37	1.72
Tata Motors Ltd.	17,635.05	1.25
Tata Steel Ltd.	43,674.83	3.1
Wipro Ltd.	14,190.08	1.01
TOTAL	1,410,513.59	100%

A man called Peter Lynch!!

Wall Street stock investor Peter Lynch is one of the greatest investor of history. He managed the Fidelity Magellan Fund from 1977 to 1990, during which period he beat the S&P 500 index benchmark in 11 of those 13 years, achieving an annual average return of 29%. The fund grew from $20 million in 1977 to $14 billion in 1990. The little known “Fidelity Magellan Fund” became the best performer mutual fund over that period. A $1000 invested in Magellan in 1977 became $21000 by 1990, when Peter Lynch retired after thirteen years.

Often called as a “chameleon”, Peter Lynch adapted to whatever investment style work in that time. The investment Guru says that the ability to think like an amateur has helped him to adapt right kind of strategy. He uses a common –sense approach to investment. Find out the whole story behind the company before buying the stock; then keep following the story after buying the stock. He says, “Don’t sell the stock if the ‘story’ is still good, whether the market is up or down.” In picking stocks Peter Lynch stuck to what he knew or could easily understand. He only invested for the long run and paid little attention to short-term market fluctuations.

Lynch consistently applied set of eight fundamental principles to his stock selection process. According to an article by Kaushal Majmudar, a CFA at Ridgewood Group, Lynch mentions about his checklist at conference in New York in 2005.

Know what you own.

It's futile to predict the economy and interest rates.

You have plenty of time to identify and recognize exceptional companies.

Avoid long shots.

Good management is very important - buy good businesses.

Be flexible and humble, and learn from mistakes.

Before you make a purchase, you should be able to explain why you're buying.

There's always something to worry about.

He is also famous for his books co-authored with John Rothchild on stock picking, “One Up to Wall Street” (1989), “Beating The Street” (1993) and “Learn to Earn” (1996) considered mandatory reading for any investor.

Presently (2007) he is serving as vice-chairman of Fidelity's investment adviser, Fidelity Management & Research Co. He is also involved in many philanthropic work since his retirement.

Some of his famous quotes are:

The Key to making money in stocks is not to get scared out of them.

I think you have to learn that there’s a company behind every stock, and that there’s only one reason why the stocks go up. Companies go from doing poorly to doing g well or small companies grow to large companies.

In this business if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten.

Go for a business that any idiot can run – because sooner or later, any idiot probably is going to run it.

Warren Buffett : greatest investor

Warren Edward Buffett is unarguably one of the most successful investors of all time. He is a firm believer of the value investing.

Buffett is the third richest person in the world as per the Forbes magazine ranking of September, 2007. His wealth is estimated to be more than $52 billion. Some people call him "Sage of Omaha" or "Oracle of Omaha".

During his Masters degree in economics at Columbia University he studied under Benjamin Graham, the value investor guru. Two other famous value investors - Walter Schloss and Irving Kahn also studied during the same time under Graham.

He is perhaps the biggest financial donator and has committed more than $25 billion. Much of it will be going to the Bill and Melinda Gates Foundation. The foundation is formed by his friend and the world’s richest person Bill Gates.

Recently people started losing faith in Buffett & value investing because of the dot-com bubble and Buffett’s decision to be away from the information technology stocks. His conservative investing style made him miss a big opportunity. But the dot-com crash once again proved that Buffett's strategies are best in long term.

Some of the famous quotes from Mr. Buffett are presented below.

His views on investing:

If you have a harem of 40 women, you never get to know any of them very well.

You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.

Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.

The critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price.

Risk can be greatly reduced by concentrating on only a few holdings.

Be fearful when others are greedy and greedy only when others are fearful.

It is optimism that is the enemy of the rational buyer.

An investor should ordinarily hold a small piece of an outstanding business with the same tenacity that an owner would exhibit if he owned all of that business.

His views on people:

In evaluating people, you look for three qualities: integrity, intelligence, and energy. If you don't have the first, the other two will kill you.

200 billion dollar firms of India

According to an article in Economic Times, the number of firms having market capitalization of more than 1 billion dollar have crossed the two hundred mark in November 2007. Last year in April 2006 India had 100 firms with billion dollar plus market capitalization. The significant increase in the number of billion dollar firms is due to the bull run in the Indian stock market. The Sensex, 30 stock index, of Bombay Stock Exchange(BSE) of India has grown by more than 50% in a period of last one year. FII's contribution in this bull run is dominant like any other emerging markets. With a high growth rate of 9% the India Inc. is attracting lot of investment esp. in the stock markets.

Reliance Industries Ltd., India's largest listed company, has market capitalization of 3804 billion INR ($96.3 billion) as of 22 Nov, 2007. There is still a long way to go to catchup with the global giants.

Read more on this at Economic Times.

Top 10 stock markets by capitalization

The top 10 biggest stock markets in the world when ranked on the basis of the market capitalization of all the shares of the domestic companies is:

Market Capitalization in trillion US Dollars:

Rank	Stock Exchange	Oct-07	End 2006	End 2005
1	NYSE Group	16.3	15.4	13.6
2	Tokyo SE	4.6	4.6	4.6
3	Nasdaq	4.4	3.9	3.6
4	London SE	4.2	3.8	3.1
5	Hong Kong Exchanges	3.0	1.7	1.1
6	Deutsche Börse	2.1	1.6	1.2
7	BME Spanish Exchanges	1.8	1.3	1.0
8	Australian SE	1.5	1.1	0.8
9	Swiss Exchange	1.3	1.2	0.9
10	Borsa Italiana	1.1	1.0	0.8

Source of Data : World Federation of Exchanges

Chuck Price, CEO of Citigroup, is expected to resign

Citigroup's CEO, Charles O. (Chuck) Prince III, is reported to be planning to step down as Citigroup’s chairman and chief executive. (Source: Wall Street Journal).

Citigroup, the world's largest banking organization, has reported its third quarter earnings plunge by 57% due to writing down of sub-prime mortgage. Citigroup has seen a hit of $2.2 billion due to mortgage-backed securities (MBS) and credit trading. Further write-downs are not ruled out. Citigroup’s shares have crash down by about a quarter of its value since it reported decline in earnings last month. Citigroup is no longer world’s biggest bank by market capitalization. China’s ICBC has overtaken Citigroup in the rankings.

Earlier this week CEO and chairman of Merrill Lynch, Stan O’Neal, had resigned following his company’s $7.9 billion write-down due to sub-prime crisis. Bear Stearns CEO James Cayne is also facing scrutiny criticism of his leadership.

Most US banks have taken colossal hits from risky mortgage securities in the third-quarter of 2007. Merrill Lynch topping the list with $7.9 billion write-downs; UBS is second with write-downs of $3.4 billion. Fourth-quarter results may also get battered by recession in the U.S. housing and mortgage markets. According to some analysts Citigroup may have to suffer another $4 billion of write-downs in the fourth quarter.

Market Capitalization of India and China

India’s stock market index, Sensex, has doubled in two years; China's stock market's index Shanghai Stock Exchange (SSE) has nearly tripled in last 10 months (since the beginning of this year).

P/E ratio of Indian stocks averages 25 while that of China is about 50.

China’s market capitalization $3.5 trillion is more than double of India’s $ 1.6 trillion.

China has five companies in the world’s top 10 companies by market capitalization while Indian companies are yet to enter the list. India’s biggest company by market capitalization, Reliance Industries Limited has recently crossed the $100b mark.

Industrial and Commercial Bank of China (ICBC) has replaced Citigroup from the top position in the banking sector. Three of the world’s top six banks are from China. These are ICBC, China Construction Bank and Bank of China. Chinese companies are now the world’s leader by market capitalizations in banking (ICBC), insurance (China Life Insurance), telecoms (China Mobile) and airlines (Air China).

Similar kind of trend was seen in 20^th century when US companies replaced European companies in the list of world’s top companies by market capitalization.