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ON COMPREHENSIVE STUDY ON ACTIVE v/s NON-ACTIVE DISTRIBUTORS RELIANCE CAPITAL ASSET MANAGEMENT LIMITED, MEERUT

In the partial fulfillment of the award of degree of Masters of Business Administration Batch 2008-10
Under the Supervision of:Dr. Hemant Yadav [Sr. Faculty of Marketing] Submitted by:Husnealam BBA VIth SEM

Forte Institute of Technology Green Park, Mawana Road, Meerut Affiliated to U.P. Tech. University, Lucknow

DECLARATION
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I Husnealam Roll no. 9422545, a student of BBA-VIth semester of FORTE INSTITUTE OF TECHNOLOGY, Meerut hereby declares that the project report titled “COMPREHENSIVE STUDY ON ACTIVE v/s NON-ACTIVE DISTRIBUTION AT RELIANCE CAPITAL ASSET MANAGEMENT LIMITED, Meerut” is my original work and the same has not been submitted for the award of any other diploma or degree.

Husnealam BBA-VIth SEM Roll no.9422545

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ANKNOWLEDGEMENT
It is my duty with sincerity to acknowledge the person who have helped me directly and indirectly. A large number of individuals contributed in this project. I am thankful to all of them for their help and encouragement. I have gratefulness Mr. Dhananjay Singh ( Cluster Manager ) for very kindly accepting me as summer trainee in his organization. I owe a special dept to my supervisor Mr. Abhimanu Kumar ( Sales ) of Reliance for being an excellent co-ordination and for helping me and guiding me for each and every step. Without whose help this task would have been impossible to achieve. I am highly obliged to Pro. Ashok Gupta ( Head, Department of Business Administration ) for providing me excellent guide and support for this project.

PREFACE
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4 . The object of the study during the training was to know the marketing mix strategies adopted by the company and effectiveness of those strategies. This project will help to face such challenging market situation. plans and consumer satisfaction. The work was very interesting. I completed my summer training from RELIANCE MUTUAL FUNDS and worked on the topic “COMPREHENSIVE STUDY ON ACTIVE v/s NON-ACTIVE DISTRIBUTORS”.21st Century is the century of the management. Every aspect of life needs proper management. Business depends on good marketing strategies. To complete the BBA Programme. Now consumer may regards as the king of the market. as it has given me real exposure of market of Mutual Funds. And all the market and all the market strategies are around the consumer.

History of Mutual funds 5 .

In 1976. 6 . Mutual funds are now popular in employer-sponsored defined contribution retirement plans (401k). Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934. The idea of pooling money together for investing purposes started in Europe in the mid-1800s.S. In response to the stock market crash. On March 21st. Bogle opened the first retail index fund called the First Index Investment Trust.S. These laws require that a fund be registered with the SEC and provide prospective investors with a prospectus. known for ease-of-use. The SEC (U.000 in assets (with around 200 shareholders).Discover the Origins of Mutual Fund Investing When three Boston securities executives pooled their money together in 1924 to create the first mutual fund. With renewed confidence in the stock market. One of the largest contributors of mutual fund growth was Individual Retirement Account (IRA) provisions made in 1981. was created in 1893 for the faculty and staff of Harvard University. 1924 the first official mutual fund was born. The first pooled fund in the U. there are over 10. By the end of the 1960s there were around 270 funds with $48 billion in assets. Mutual funds are very popular today. It was called the Massachusetts Investors Trust.000 mutual funds in the U.S. John C. the Massachusetts Investors Trust grew from $50. allowing individuals (including those already in corporate pension plans) to contribute $2. The stock market crash of 1929 slowed the growth of mutual funds.000 in assets in 1924 to $392. Securities and Exchange Commission) helped create the Investment Company Act of 1940 which provides the guidelines that all funds must comply with today. mutual funds began to blossom. In contrast. they had no idea how popular mutual funds would become. After one year. It is now called the Vanguard 500 Index fund and in November of 2000 it became the largest mutual fund ever with $100 billion in assets. IRAs and Roth IRAs. liquidity.000 a year. today totaling around $7 trillion (with approximately 83 million individual investors) according to the Investment Company Institute. and unique diversification capabilities.

The total NFO collection was Rs 17.337 crore. The AMC has many firsts to its credit among sector funds: Banking. On the debt side. It’s the performance of these two funds in 2002 and 2003 that made the fund house a hit with investors. the AMC has rapidly increased its AUM. five of the equity launches lost money.488 crore. the firm’s culture places a premium on running a big fund. The fund house started with the launch of two equity funds–Reliance Vision and Reliance Growth. Reliance Equity Advantage fund created history by mopping up Rs 2. In three years (February 2005 – January 2008).346 crore. MUTUAL FUND 7 .521 crore and Reliance Natural Resources Rs 4. The fund house leveraged this along with the Reliance brand to gain investors’ attention. Reliance Diversified Power Sector manages Rs 4. power. Ever since its start in 1995.000 crore to Rs 11. having a huge asset-base may not be an advantage in every situation.700 crore in its NFO in 2007. low expense ratio funds like Reliance Short Term and Reliance Liquid Treasury. the fund house has good.960 crore which is now down by more than Rs 6. From being India’s largest private sector mutual fund in 2006 it went to being the largest mutual fund by 2007. And. is huge with Rs 4. This year Reliance Natural Resources Retail mopped up Rs 5.Reliance Mutual has a history of letting its funds get bloated in terms of AUM. However. Reliance has managed to garner huge amount of assets because it actively pursues NFOs.660 crore. The large size of its funds have sometimes worked against it. And managing investor expectations will not be easy either. Its mid-cap offering. Reliance Growth. media and entertainment. it does have a huge choice in the types of funds with some good performers. Though the fund house barely has a presence in the hybrid category. This year it came out with a Natural Resource Fund.

but if you purchased a few mutual funds you could be done in a few hours because mutual funds automatically diversify in a predetermined category of investments (i.growth companies. Comprehensive source of information on mutual funds industry in India. Mutual Funds MutualFundsIndia. Diversification Diversification is the idea of spreading out your money across many different types of investments. international small companies). When you invest in a mutual fund. When one investment is down another might be up. By pooling money together in a mutual fund. you are buying shares (or portions) of the mutual fund and become a shareholder of the fund. Information available on performance. The mutual fund will have a fund manager who is responsible for investing the pooled money into specific securities (usually stocks or bonds).A mutual fund is simply a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. Beyond that. Mutual funds are set up to buy many stocks (even hundreds or thousands). lowgrade corporate bonds. then adding bonds. Mutual funds are one of the best investments ever created because they are very cost efficient and very easy to invest in (you don't have to figure out which stocks or bonds to buy). If you would like to know the history of mutual Fund. complete mutual magazine fund 8 on mutual funds new industry offers. Choosing to diversify your investment holdings reduces your risk tremendously. and so on. . .e. On the next page. I clearly explain how diversification works using a "Wheel of Fortune" concept.com latest NAVs . then international. It could take you weeks to buy all these investments. you can diversify even more by purchasing different kinds of stocks. But the biggest advantage to mutual funds is diversification. The most basic level of diversification is to buy multiple stocks rather than just one stock.

com WHAT IS A MUTUAL FUND? Absolute beginners guide to using mutual funds for investing. 9 .mutualfundsindia.www.

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is one of the fastest growing mutual funds in the country.252 Crores and an investor base of over 72. RMF offers investors a well-rounded portfolio of products to meet varying investor requirements and has presence in 118 cities across the country. which holds 93.Reliance Mutual Fund (RMF) is one of India’s leading Mutual Funds.amfiindia." Reliance Capital Ltd.37% of the paid-up capital of RCAM.com/ Reliance Mutual Fund.40 Lacs. with Average Assets Under Management (AAUM) of Rs. a part of the Reliance . "Reliance Mutual Fund schemes are managed by Reliance Capital Asset Management Limited. Reliance Mutual Fund constantly endeavors to launch innovative products and customer service initiatives to increase value to investors. the balance paid up capital being held by minority shareholders. 1. (AAUM and investor count as of November 2009) AAUM Source : http://www.22.. is one of India’s leading and fastest growing private sector financial services companies.Anil Dhirubhai Ambani Group. and ranks among the top 3 private sector financial services and banking 11 . a subsidiary of Reliance Capital Limited.

Reliance Capital Ltd. All dividend distributions are subject to the availability of distributable surplus in the Scheme. The NAV of the Scheme may be affected. the NAV of the Units issued under the Scheme can go up or down depending on the factors and forces affecting the capital markets. Limited Investment Manager: Reliance Capital Asset Management Limited Statutory Details: The Sponsor. private equity and proprietary investments. in terms of net worth. the Trustee and the Investment Manager are incorporated under the Companies Act 1956. settlement periods and transfer procedures. though it has every intention of doing so. The Sponsor is not responsible or liable for any loss resulting from the operation of the Scheme beyond their initial contribution of Rs. For details of scheme features and for scheme specific risk factors. stock broking and other financial services. The Mutual Fund is not assuring that it will make periodical dividend distributions. As with any investment in securities. Please read the Statement of Additional Information and Scheme Information Document carefully before 12 . by changes in the market conditions. interalia. trading volumes. has interests in asset management. life and general insurance. Past performance of the Sponsor/AMC/Mutual Fund is not indicative of the future performance of the Scheme.1 lakh towards the setting up of the Mutual Fund and such other accretions and additions to the corpus. Sponsor: Reliance Capital Limited Trustee: Reliance Capital Trustee Co.companies. please refer to the Scheme Information Document. interest rates. Risk Factors: Mutual Funds and securities investments are subject to market risks and there is no assurance or guarantee that the objectives of the Scheme will be achieved.

13 .investing ABSTRACT Indian Stock market has undergone tremendous changes over the years. The methodology used was data collection using Schedule.. Investment in Stocks has become a major alternative among Investors. The project has been carried out to understand investor’s perception about stock market in the context of their trading preference. The area of survey was restricted to people residing in NCR and investors associated with Relegare limited.. The target customers were Investors who are trading in the stock market. explore investor’s risk perception & satisfaction of the services obtained.

07-15 • SWOT Analysis of Religare Securities Limited Chapter 02 Investing In Share Market • 16-37 Determine Your Risk Tolerance • How Should I Monitor My Investment? • How to Avoid Problems Chapter 03 Myths & Realities in Stock Market 37-47 • Types of Myths & Realities in Stock Market Chapter 04 Findings` 69 • Mistake #1: Not having an exit plan before buying • Mistake #2: Plunging too much into a stock all at once 14 48- .Vision and Mission 07 Chapter 01 Company Profile………………….

15 .• Mistake #3: Failing to cut losses • Mistake #4: Selling to soon • Mistake #5: Choosing stocks that are in a downtrend • Mistake #6: Adding to a losing position • Mistake #7: Falling in love with a stock • Mistake #8: Trying to “Get Even” with a Stock Chapter 05 Recommendations Chapter 06 Conclusion Questionnaire Bibliography 70-82 82-83 85 88 VISION: The vision of Reliance securities limited is:- “Providing integrated financial care driven by the relationship of trust and confidence”.

MISSION: The mission of Reliance securities is as under:- “To be India's first Multinational providing complete financial services solution across the globe”. 16 .

Religare Finvest Limited. Corporate Finance. the company started its Endeavour in the financial market. Religare Commodities Limited and Religare Insurance Advisory Services Limited provides integrated financial solutions to its corporate. Plus. there’s a lot more to come your way.Religare is driven by ethical and dynamic process for wealth creation. Religare Enterprises Limited (A Ranbaxy Promoter Group Company) through Religare Securities Limited. Portfolio Management Services. Equity & Commodity Broking. Religare is proud of being a truly professional financial service provider managed by a highly skilled team. Insurance and Mutual Funds. retail and wealth management clients. Based on this. It provides various financial services which include Investment Banking. Today. Religare operations are managed by more than 2000 highly skilled professionals who subscribe to Religare philosophy 17 . who have proven track record in their respective domains.

its target is to have 350 branches and 1000 business partners in 300 cities of India and more than 7 International offices by the end of 2006. Reliance Enterprises Limited group comprises of Reliance Securities Limited. Today.and are spread across its country wide branches. Reliance Finvest Limited and Reliance Insurance Advisory Limited which deal in equity. Reliance Commodities Limited. It not only executes trades for its clients but also provide them critical and timely investment advice. it has a growing network of more than 150 branches and more than 300 business partners spread across more than 180 cities in India and a fully operational international office at London. Unlike a traditional broking firm. Mutual Fund Reliance Securities Limited Reliance commodities limited 18 Reliance finvest Reliance Insurance advisory limited . The growing list of financial institutions with which Religare is empanelled as an approved broker is a reflection of the high level service standard maintained by the company. commodity and financial services business. However. Religare group works on the philosophy of partnering for wealth creation.

RFL is primarily engaged in the business of providing finance against securities in the secondary market. Institutional Equity Brokerage & Research. Depository Services. ♦ Reliance finvest: Reliance Finvest Limited (RFL). which is an online facility also. RFL has delivered the most competitive products and services. constantly changing dynamic business environment. Portfolio Management Services. In a fast paced. Investment Banking and Corporate Finance. RCL provides platform to both agro and non-agro commodity traders to derive the actual price of the commodity and also to trade and hedge actively in the growing commodity trading market in India. ♦ Reliance commodities limited : Reliance is a member of NCDEX and MCX and provides platform for trading in commodities. a Non Banking Finance Company (NBFC) is aggressively making a name in the financial services arena in India. It also provides finance for application in Initial Public Offers to non-retail clients in the primary market.♦ Reliance Securities Limited : RSL is one of the leading broking houses of India and are dealing into Equity Broking. RFL 19 .

consequently. We also cater individuals with a complete suite of insurance solutions. we will be offering value based customized solutions to cover all risks which their business is exposed to. Financial planning is incomplete without protective measure i. providing our clients risk transfer solutions on life and non-life sides. we would deal in both insurance and reinsurance. both life and general to mitigate risks to life and assets through our existing network of over 150 branches – expected to reach 250 by the end of this year!. We aim to have a wide reach with our services – literally! That’s why we are catering the insurance requirements of both retail and corporate segments with products of all the insurance companies on life and non-life side. ♦ Relegate insurance advisory limited: Relegate has been taking care of financial services for long but there was a missing link. RFL is also planning to initiate personal loan portfolio as fund based activity and mutual fund distribution as fee based activities.e. Relegate is soon coming up with Relegate Insurance Advisory Services Limited.providing our valued clients insurance services across India.is also planning to initiate personal loan portfolio as fund based activity and mutual fund distribution as fee based activities. there is more in store. Our clients will be supported by an operations team equipped with the best of technology support.  20 . His service will take benefit of Reliance vast business empire spread throughout the country -. For corporate clients. Still. structured products to take care of event of things that may go wrong. As composite insurance broker.

The directors of Relegate securities limited are as Chairman Mr. Harpal Singh Managing Director Mr. So there is a good foundation of Relegate securities limited.MANAGEMENT OF RELIANCE SECURITIES LIMITED: A Relegate security limited which was previously known as fortis securities limited is from the Ranbaxy promoter’s group. Sunil Godhwani Director 21 .

Shivinder Mohan Singh 22 . Vinay Kumar Kaul Director Mr.Mr. Malvinder Mohan Singh Director Mr.

What are their myths and what actually the stock market is? I also came to know about other brokers and what clients perceive Relegate against those brokers. I was given several tasks and targets which I finished successfully.It was very pleasant working with Relegate securities limited. Not only this. 23 . During my tenure I also got chance to survey what people think about the stock market. according to which I have analyzed the people’s myths on stock market which is there in later part of this report. It was a good exposure. I had to sell Mutual funds also to them. I had given them questionnaires to fill which comprise few general questions and few questions regarding market. I had to go individually to every client and explain all the details of market and convince them to enter in stock market by opening D-Mat and Trading account with the Relegate. My work profile was to create new clients and develop their business in market when it was booming and declining in the month of May and June respectively.

♦ Service is good but not in Time. ♦ Frauds and scams in market ♦ Fluctuations in the market. 24 . OPPORTUNITY ♦ Stock market is the easiest way to earn Money which can be cashed among new investors. ♦ Strategy of personal attention to every Client. ♦ Good research and analysis team. ♦ Integration with IT not Satisfactory.SWOT ANALYSIS OF RELIGARE SECURITIES LIMITED STRENGTHS ♦ Strong back up of promoter company Ranbaxy. ♦ Enough population is still untouched Which might prove a good market. ♦ Strict regulation by SEBI. ♦ User friendly system. ♦ Transparency in cost and brokerage They charge. ♦ Late in launching of New Products. WEAKNESS ♦ Change of name gives bad Impression to clients. ♦ People are now attracted to share Market. ♦ Minimum brokerage in the market. THREATS ♦ Existing good players in the Market.

20 Total Doc. In-house Push ICICI INDIA BULLS 5 paise. No Cash + haircut on (cash) + 100% times cash & B. . Trading 3 times lacs a day cash & value of B. Yes for Selling in Restricted Scripts.Features Transaction Engine Quotes update Relegate Securities Ltd. Investment security. Exposure 780 scripts Limited 25 for Times C. Trading 5 times Cash C. 3 times security Margin 10 security. Trading Rs. 250 Rs.170 DP Rs.940 2-3 Days 10 Days 10 Days in A. AMC Rs. Cash A. for upto 6 (cash) for volumes 15 Exposure only Cash + 100% trading.5000 to be B. of shares.Charges Rs. 750 1. Min Rs. Margin delivery. 2. 4. 3. Trading 5 times in the trading cash & value of A/c. B. Investment in A. Registration Charges Doc. cash & value of share delivery.250 DP Rs. Margin value of share Trading 3 Exposure Limit for intraday.500 Registration 1 Day A.com Outsourced (FT) Push Direct Outsourced Outsourced (FT) (FT) Push Push technology Registration Demat opening charge Rs. share for delivery. Negotiate share intraday.

Against Share Carry Forward Facility NSE+BSE Scrips Yes No No No 26 .

Of course. Since the aura of being an investment wizard is simply a way for him to gain affirmation from others. the company's management. He may also see it as entertainment. These range all the way from the money objective. he never gets any better at his investing. in reality there are myriad reasons why we try our hand at stocks. One way in which our friend Mr. In reality. To admit he has been doing something wrong.to appear wise to others. or stock manipulators. etc.like respect. He mostly does it as a way to garner the admiration of others. The ego-driven Investor The ego-driven investor sees investing as something exciting. even to him. he most likely does not really make too much money in the stock market. While ‘to make money' is likely the obvious reason. is more than his sensitive ego can take. He can't ask anyone what he may have done wrong. He is constantly talking about this or that great deal. From a practical standpoint. Only misers want money alone. we are all a mixture of these reasons and more. he really doesn't care too much whether the results are there as long as he can still stay in the game and keep talking about his smart deals at cocktail parties. He simply blames the loss on his broker. since to admit he's made a mistake to someone else goes directly against the grain of his objectives . to wanting to feel good about ourselves. Ego deals with losses is by stubbornly holding on to his losing 27 . Before you embark on any investment approach it is best to search yourself to see which elements are present in yourself and attempt to root out the attributes of the ego-driven investor and bolster the characteristics of the results-oriented investor. he conveniently forgets the bad ones and keeps turning over in his mind his best deals and how smart he must be. it is necessary to ferret out the real reasons why we are investing in the first place.To do this effectively. a fact which he hides from the outside world by any means possible. and when you think about it. to garnering the respect of others. money is usually the means for achieving something else . He certainly never does a post-mortem on any of his losing trades to figure out just why they were losers. imagining that others will stand in awe of his prowess and immense wisdom. These are at least as strong as the money factor. Worst of all for the ego-driven type.

Even when he does get lucky and happens to stumble into a winner. Really. But that's OK. The real tragedy is owed to the fact that since he blames others for all of his problems. he dearly loves to buy stocks that are in a downtrend because there is a chance that he will be the one who will buy the stock at its low for the year. but there is no way he can ever make a decent profit. even if it could increase another 1.and a winning company is more likely to keep on winning than a losing company is. The idea that someone else was "smarter" than him and bought at a lower price is more than he can bear thinking about.he really has lost money -whether or not he admits it or not. Will they ever be impressed! Thus. He has plenty to talk about at parties. he will never get any better. that is. he bails out faithfully. he is too busy trying to make his results better. it is against his nature 28 . Of course. as these deals are unknown to anyone in his circle of friends. he hasn't really lost anything. The results-oriented Investor The results-oriented investor seldom talks with others about his investment results. Imagine what bragging rights that would give him! Of course. the ego-driven investor's strategy is complete: he always holds onto his losing stocks and when something starts to go right. though: he now has a profit that can be exaggerated the next time he sees his friends. Ego is his own worst enemy. He waits until the stock hits a new high for the year and then promptly sells out to lock in his profit. most of the time he buys these types of stocks and they just keep going down. so why sell? Never mind that his broker sends him statements every month telling him that his account value has dwindled . Mr. On the other hand. He is never too proud to buy a stock that is making new highs. realizing that those who are buying the stock most likely know far more than he does . That's OK by Mr. no matter how bad they get. The fact that someone else was smarter and bought at a lower price does not worry him. He reasons that until he sells. The ego-driven investor doesn't enjoy buying a stock that has already doubled in value. Ego.trades. down. this stock was in an uptrend and keeps right on sailing far above where he exited. In this way he assures himself that he can never really redeploy what's left of his capital into something more promising. The prospect of that unlikely but alluring "buying the bottom" scenario keeps him coming back for more losses. down.000% from there.

your “liabilities” or debts. He does not mind selling a stock after it has retreated 50% in value. and eventually figures out the fallacies in his thinking and/or system. He even keeps a notebook on each loss and records what he could have done better. and a journey to financial security is no different. You can never take a journey without knowing where you’re starting from. One big difference between the results-oriented investor and the egoist is what he does with losses. While Mr. he holds on. the results-oriented chap studies in great detail how his loss occurred. when a stock stumbles badly enough that his predetermined plan says it is time to exit. Don't forget why one is investing: To make money.” And on the other side list what you owe other people. list what you own. Make A Financial Plan Figuring Out Your Finances Sit down and take an honest look at your entire financial situation. letting the stock continue to do well for him. since his concern is not in selling the top but rather in letting his winning positions run their course. Therefore he always gets better and better at what he is doing. These are your “assets. if being patient through price corrections is what allows him to capture the occasional 1000% gain. You’ll need to figure out on paper your current situation— what you own and what you owe. He follows his plan for buying and selling whether that means selling at a gain or at a loss. one should find another pastime.even to have such a thought occur to him. Subtract your liabilities from your assets. He compares his performance against others' performance only as a means of learning and getting better. You’ll be creating a “net worth statement. he acts in an unhesitating manner. When the results-oriented investor finds himself with a stock that is zooming ahead. Ego blames others and learns nothing. He is far too focused on trying to pick stocks that are performing well to entertain these types of thoughts.” On one side of the page. you have a 29 . Conversely. If one has any other reason for investing. If your assets are larger than your liabilities. He also never sells a stock as it is making a new high.

These plans will typically not only automatically deduct money from your paycheck. is to participate in an employer sponsored retirement plan such as a 401(k). If your liabilities are greater than your assets. If you follow a plan to get into a positive position. it’s offering “free money. and then your monthly expenses. or 457(b). in many plans the employer matches some or all of your contribution. you will be surprised how small everyday expenses that you can do without add up over a year. but will immediately reduce the taxes you are paying. Many people find it easier to pay themselves first if they allow their bank to automatically remove money from their paycheck and deposit it into a savings or investment account. you have a “negative” net worth. Don’t be discouraged if you have a negative net worth. and never have money to save or invest. When your employer does that. Write down what you and others in your family earn. for tax purposes. What are you paying yourself every month? Many people get into the habit of saving and investing by following this advice: always pay yourself or your family first. you’ll increase the chances of being able to stick to your plan and to realize your goals. Additionally.” If you are spending all your income. 403(b).“positive” net worth. “But I Spend Everything I Make. you’re doing the right thing KNOW YOUR INCOME AND EXPENSES The next step is to keep track of your income and your expenses for every month. You’ll want to update your “net worth statement” every year to keep track of how you are doing. Likely even better. you’ll need to look for ways to cut back on your expenses. Small Savings Add Up to Big Money How much does a cup of coffee cost you? 30 .” Any time you have automatic deductions made from your paycheck or bank account. Include a category for savings and investing. When you watch where you spend your money.

If you buy on impulse. and by the end of 30 years.Would you believe Rs465. make a rule that you’ll always wait 24 hours to buy anything.577.84 by the end of 5 years. and put it into a savings account or investment that earns 5% a year. If a small cup of coffee can make such a huge difference. Over time. But how "safe" is a savings account if you leave all your money there for a long time.” With compound interest.50. start looking at how you could make your money grow if you decided to spend less on other things and save those extra rupees. Most smart investors put enough money in a savings product to cover an emergency. you earn interest on the money you save and on the interest that money earns. Your money is paid a low wage as it works for you. to Rs1. even a small amount saved can add up to big money. That’s the power of “compounding.00 (an awfully good price for a decent cup of coffee.00 for just one year. You may lose your desire to buy it after a day. nowadays).84? Or more? If you buy a cup of coffee every day for Rs1. But there's a tradeoff for security and ready availability. that adds up to Rs365. If you are willing to watch what you spend and look for little ways to save on a regular schedule. And try emptying your pockets and wallet of spare change at the end of each day. checking accounts.00 a year. and certificates of deposit. You’ll be surprised how quickly those nickels and dimes add up! Determine Your Risk Tolerance Savings Your "savings" are usually put into the safest places or products that allow you access to your money at any time. Examples include savings accounts. If you saved that Rs365. Some make sure they have up to 6 months of their income in savings so that they know it will absolutely be there for them when they need it. you can make money grow. You just did it with one cup of coffee. and the 31 . it would grow to Rs465. like sudden unemployment.

It’s important that you go into any investment in stocks. But years later when you withdraw that rupee plus the interest you earned. That’s true even if you purchase your investments through a bank. But what about risk? All investments involve taking on risk. the long term does sometimes take a rather long. but look to investing so they can earn more over long periods of time. “Don’t put all your eggs in one basket." you have a greater chance of losing your money than when you "save.” can be neatly summed up as. Those who invested all of their money in the stock market at its peak in 1929 (before the stock market crash) would wait over 20 years to see the stock market return to the same level. long time to play out. That is why many people put some of their money in savings. you also have the opportunity to earn more money than when you save. You could lose your "principal." In mutual funds. and other similar investments are not federally insured. Investing When you "invest.interest it earns doesn't keep up with inflation? Let’s say you save a rupee when it can buy a loaf of bread. called “diversification. Investors best protect themselves against risk by spreading their money among various investments." which is the amount you've invested. While over the long term the stock market has historically provided around 10% annual returns (closer to 6% or 7% “real” returns when you subtract for the effects of inflation). but taking on unnecessary risk is often avoidable. as the lower cost of stocks in the 1930s made for some hefty gains for those who bought and held over the course of the next twenty years or more. those that kept adding money to the market throughout that time would have done very well for themselves. bonds or mutual funds with a full understanding that you could lose some or all of your money in any one investment. This strategy. say three years or longer. the greater the potential rewards in investing. However. the other investments will more than make up for those losses. it might only be able to buy half a loaf. But when you invest.” Investors also protect 32 . hoping that if one investment loses money. Diversification It is true that the greater the risk.

Risk Tolerance What are the best saving and investing products for you? The answer depends on when you will need the money. bond mutual funds. you don't want to choose risky investments. if you are saving for retirement. consider carefully all your options and think about what diversification strategy makes sense for you. Diversification can’t guarantee that your investments won’t suffer if the market drops. you want to make sure that you can wait and sell at the best possible time.themselves from the risk of investing all their money at the wrong time (think 1929) by following a consistent pattern of adding new money to their investments over long periods of time. your money will grow too slowly—or given inflation or taxes. money market funds. because when it's time to sell. certificates of deposit. On the other hand. you should know that a vast array of investment products exists—including stocks and stock mutual funds. While the SEC cannot recommend any particular investment product. corporate and municipal bonds. But it can improve the chances that you won’t lose money. For instance. it won’t be as much as if you weren’t diversified. or that if you do. five years or less. if you are saving for a short-term goal. you may have to take a loss. you may want to consider riskier investment products. your goals. you may lose the purchasing power of your money. and if you will be able to sleep at night if you purchase a risky investment where you could lose your principal. Once you’ve saved money for investing. Since investments often move up and down in value rapidly. Investment Products: 33 . and you have 35 years before you retire. knowing that if you stick to only the "savings" products or to less risky investment products. A frequent mistake people make is putting money they will not need for a very long time in investments that pay a low amount of interest.

And you think the company will be able to honor its promise to you on the bonds because it has been in business for many years and doesn’t look like it could go bankrupt. The following example shows you how stocks and bonds differ. With the bonds. plus it has typically paid stockholders a dividend of 3% from its profits each year. plus pay you interest twice a year at the rate of 8% a year. or you do it yourself. you’re convinced it’s a solid company that will sell many more cars in the years ahead. If you buy the stock. The company has a long history of making cars and you know that its stock has gone up in price by an average of 9% a year. After your research. You either have an investment professional investigate the company and read as much as possible about it. If you buy the bonds. you take on the risk of potentially losing a portion or all of your initial investment if the company does poorly or the stock market drops in value. The automobile company offers both stocks and bonds.Your Choices • • Mutual Funds Stock Market Stocks and Bonds Many companies offer investors the opportunity to buy either stocks or bonds. you become an “owner” of the company. you will get your money back plus the 8% interest a year. Everyone you know is buying one of its cars. 34 . You wrestle with the decision. and your friends report that the company’s cars rarely break down and run well for years. Let’s say you believe that a company that makes automobiles may be a good investment. the company agrees to pay you back your initial investment in ten years. But you also may see the stock increase in value beyond what you could earn from the bonds. If you buy the stock.

You take your time and make a careful decision. You’ll keep a close eye on the company and keep the stock as long as the company keeps selling a quality car that consumers want to drive. Mutual Funds Because it is sometimes hard for investors to become experts on various businesses—for example. many investors choose to invest in mutual funds. or telephone companies—investors often depend on professionals who are trained to investigate companies and recommend companies that are likely to succeed. Even small fees can and do add up and eat into a significant chunk of the returns a mutual fund is likely to produce. and those fees in part pay the salaries and expenses of the professionals who manage the fund. Investors can buy shares of the fund. the fund’s investment adviser will pick the stocks or bonds of companies and put them into a fund. what are the best steel. Investors may typically pay a fee when they buy or sell their shares in the fund.” In a managed mutual fund. If two funds are similar in every way except that one charges a higher fee than the other. so you need to look carefully at how much a fund costs and think about how much it will cost you over the amount of time you plan to own its shares. and their shares rise or fall in value as the values of the stocks and bonds in the fund rise and fall. automobile. after investigating the prospects of many companies. you’ll make more money by choosing the fund with the lower annual costs. Only time will tell if you made the right choice. and it can make an acceptable profit from its sales. 35 . What is a mutual fund? A mutual fund is a pool of money run by a professional or group of professionals called the “investment adviser. Since it takes work to pick the stocks or bonds of the companies that have the best chance to do well in the future.

Mutual funds that trade quickly in and out of stocks will have what is known as “high turnover. index funds involve risk. and so shows the same returns as an index minus.” While selling a stock that has moved up in price does lock in a profit for the fund. can be quite striking. The differences between what a fund is reportedly earning. An index fund seeks to equal the returns of a major stock index.Mutual Funds without Active Management One way that investors can obtain for themselves nearly the full returns of the market is to invest in an “index fund. enjoyed higher returns than the average managed mutual fund.and after-tax returns. or any investment returns. The SEC requires all mutual funds to show both their before. know the effect that taxes can have on what actually ends up in your pocket. Watch "Turnover" to Avoid Paying Excess Taxes To maximize your mutual fund returns. an index fund tracks the holdings of a chosen index. which are paid by the mutual fund shareholders. Historical data shows that index funds have. the Wilshire 5000.” This is a mutual fund that does not attempt to pick and choose stocks of individual companies based upon the research of the mutual fund managers or to try to time the market’s movements. the annual fees involved in running the fund. or the Russell 3000. like any investment. and what a fund is earning after taxes are paid on the dividends and capital gains. Turnover in a fund creates taxable capital gains. this is a profit for which taxes have to be paid. How to Pick a Financial Professional 36 . such as the Standard & Poor 500. Through computer programmed buying and selling. be sure to check out these historical returns in the mutual fund prospectus to see what kind of taxes you might be likely to incur. But. of course. primarily because of their lower fees. If you plan to hold mutual funds in a taxable account. The fees for index mutual funds generally are much lower than the fees for managed mutual funds.

Investment professionals offer a variety of services at a variety of prices. They may charge you a fee for the plan. Part 1 has information about the adviser's business and whether they've had problems with regulators or clients. an accountant. assessing every aspect of your financial life and developing a detailed strategy for meeting your financial goals. People or firms that get paid to give advice about investing in securities generally must register with either the SEC or the state securities agency where they have their principal place of business. called the "Form ADV. including brokerages. Part 2 outlines the adviser's services. It pays to comparison shop. banks. a percentage of your assets that they manage.Are you the type of person who will read as much as possible about potential investments and ask questions about them? If so. Investment Advisers and Financial Planners Some financial planners and investment advisers offer a complete financial plan. or other professional to help you make investment decisions. You can also hire a broker. or a combination of these. and insurance companies. You can get investment advice from most financial institutions that sell investments. But if you’re busy with your job. If they are working for you. and strategies. or receive commissions from the companies whose products you buy. Remember. or feel you don’t know enough about investing on your own. you can read their registration forms. Professional financial advisers do not perform their services as an act of charity. maybe you don’t need investment advice. then you may need professional investment advice. mutual funds. or other responsibilities. an investment adviser. You should know exactly what services you are getting and how much they will cost. a financial planner. To find out about advisers and whether they are properly registered. there is no such thing as a free lunch. your children. fees." The Form ADV has two parts. they are getting paid for their 37 .

Try to get several recommendations. While taking into account your overall financial goals. And if the fee is quoted to you as a percentage. bonds. After all. But. A discount brokerage charges lower fees and commissions for its services than what you’d pay at a full-service brokerage. make sure that you understand what that translates to in rupees. it’s your money. brokers generally do not give you a detailed financial plan. Brokers Brokers make recommendations about specific investments like stocks. Make sure you get along. Brokerages vary widely in the quantity and quality of the services they provide for customers. Others are small and may specialize in promoting investments in unproven and very risky companies. and are prepared to service almost any kind of financial transaction you may need. you can ask either your state securities regulator or the NASD to provide you with 38 . The best way to choose an investment professional is to start by asking your friends and colleagues who they recommend. A full-service brokerage costs more. Brokers are generally paid commissions when you buy or sell securities through them.efforts. or mutual funds. You’ll want to find out if a broker is properly licensed in your state and if they have had run-ins with regulators or received serious complaints from investors. Make sure you understand each other. You'll also want to know about the brokers' educational backgrounds and where they've worked before their current jobs. And there’s everything else in between. and then meet with potential advisers face-to-face. in all cases. But generally you have to research and choose investments by yourself. Some have large research staffs. you should always feel free to ask questions about how and how much your adviser is being paid. To get this information. large national operations. If they sell you mutual funds make sure to ask questions about what fees are included in the mutual fund purchase. Some of their fees are easier to see immediately than are others. but the higher fees and commissions pay for a broker’s investment advice based on that firm’s research.

including your income. Be honest. especially when it comes to investor complaints. whether in person or online. Your state securities regulator may provide more information from the CRD than NASD. Discretionary authority allows your broker to invest your money without consulting you about the price. Opening a Brokerage Account When you open a brokerage account. and the firms they work for. Ask for a copy of any account documentation prepared for you by your broker. so you may want to check with them first. The new account agreement requires that you make three critical decisions: 1. Who will make the final decisions about what you buy and sell in your account? You will have the final say on investment decisions unless you give “discretionary authority” to your broker. which is a computerized database that contains information about most brokers. that’s a very bad sign. You should carefully review all the information in this agreement because it determines your legal rights regarding your account. investment experience. net worth. Do not sign the new account agreement unless you thoroughly understand it and agree with the terms and conditions it imposes on you. If a broker tries to sell you an investment before asking you these questions. The broker relies on this information to determine which investments will best meet your investment goals and tolerance for risk. Do not rely on statements about your account that are not in this agreement. Do not give discretionary authority to your broker without seriously 39 .information from the CRD. The broker should ask you about your investment goals and personal financial situation. It signals that the broker has a greater interest in earning a commission than recommending an investment to you that meets your needs. the type of security. their representatives. and when to buy or sell. the amount. you will typically be asked to sign a new account agreement. and how much risk you are willing to take on.

But if you open a “margin” account. you can buy securities by borrowing money from your broker for a portion of the purchase price. and what happens in the worst case scenario before you agree to buy on margin. when you buy stocks on margin you can be faced with paying back the entire margin loan all at once if the price of the stock drops suddenly and dramatically. When opening a new account. to cover any shortfall resulting from a decline in the value of your securities. Unlike other loans. The firm has the authority to immediately sell any security in your account. How much risk should you assume? In a new account agreement. 3.considering the risks involved in turning control over your money to another person. experience and investment goals.” “growth. You may owe a substantial amount of money even after your securities are sold. Be sure that the investment products recommended to you reflect the category of risk you have selected.” Be certain that you fully understand the distinctions among these terms. Be aware of the risks involved with buying stocks on margin. Make sure you understand how a margin account works. that allow you to pay back a fixed amount every month. like for a car or a home. without notice to you. 2. you must specify your overall investment objective in terms of risk. Categories of risk may have labels such as “income. Beginning investors generally should not get started with a margin account. The margin account agreement generally provides that the securities in your margin account may be lent out by the brokerage firm at any time without notice or compensation to you. the brokerage firm may ask you to sign a legally binding contract to use the arbitration process to settle any future dispute between you and the 40 .” or “aggressive growth. and be certain that the risk level you choose accurately reflects your age. How will you pay for your investments? Most investors maintain a “cash” account that requires payment in full for each security purchase.

your financial situation. how much money can you afford to lose if the value of one of your investments declines? An investment professional has a duty to make sure that he or she only recommends investments that are suitable for you.firm or your sales representative. especially when it comes to how much you will be paying for any investment. whether you’re saving to buy a home. or enjoying a comfortable retirement. paying for your children’s education. and any other information that your investment professional thinks is important. Can you provide me with references. The best investment professional is one who fully understands your objectives and matches investment recommendations to your goals. because 41 . That is. the names of people who have invested with you for a long time? How do you get paid? By commission? Based on a percentage of assets you manage? Another method? Do you get paid more for selling your own firm’s products? How much will it cost me in total to do business with you? • • • Your investment professional should understand your investment goals. Your investment professional should also understand your tolerance for risk. Signing this agreement means that you give up the right to sue your sales representative and firm in court. What training and experience do you have? How long have you been in business? • What is your investment philosophy? Do you take a lot of risks or are you more concerned about the safety of my money? Describe your typical client. You’ll want someone you can understand. that the investment makes sense for you based on your other securities holdings. That is. Ask Questions You can never ask a dumb question about your investments and the people who help you choose them. both in upfront costs and ongoing management fees. your means.

your investment professional should teach you about investing and the investment products.

How Should I Monitor My Investments?
Investing makes it possible for your money to work for you. In a sense, your money has become your employee, and that makes you the boss. You’ll want to keep a close watch on how your employee, your money, is doing. Some people like to look at the stock quotations every day to see how their investments have done. That’s probably too often. You may get too caught up in the ups and downs of the “trading” value of your investment, and sell when its value goes down temporarily—even though the performance of the company is still stellar. Remember, you’re in for the long haul. Some people prefer to see how they’re doing once a year. That’s probably not often enough. What’s best for you will most likely be somewhere in between, based on your goals and your investments. But it’s not enough to simply check an investment’s performance. You should compare that performance against an index of similar investments over the same period of time to see if you are getting the proper returns for the amount of risk that you are assuming. You should also compare the fees and commissions that you’re paying to what other investment professionals charge. While you should monitor performance regularly, you should pay close attention every time you send your money somewhere else to work. Every time you buy or sell an investment you will receive a confirmation slip from your broker. Make sure each trade was completed according to your instructions. Make sure the buying or selling price was what your broker quoted. And make sure the commissions or fees are what your broker said they would be. Watch out for unauthorized trades in your account. If you get a confirmation slip for a transaction that you didn’t approve beforehand, call your broker. It may have been a mistake. If your broker 42

refuses to correct it, put your complaint in writing and send it to the firm’s compliance officer. Serious complaints should always be made in writing. Remember, too, that if you rely on your investment professional for advice, he or she has an obligation to recommend investments that match your investment goals and tolerance for risk. Your investment professional should not be recommending trades simply to generate commissions. That’s called "churning," and it’s illegal.

How to Avoid Problems
Choosing someone to help you with your investments is one of the most important investment decisions you will ever make. While most investment professionals are honest and hardworking, you must watch out for those few unscrupulous individuals. They can make your life’s savings disappear in an instant. Securities regulators and law enforcement officials can and do catch these criminals. But putting them in jail doesn’t always get your money back. Too often, the money is gone. The good news is you can avoid potential problems by protecting yourself. Let’s say you’ve already met with several investment professionals based on recommendations from friends and others you trust, and you’ve found someone who clearly understands your investment objectives. Before you hire this person, you still have more homework. Ask your investment professional for written materials and prospectuses, and read them before you invest. If you have questions, now is the time to ask.
• • • • •

How will the investment make money? How is this investment consistent with my investment goals? What must happen for the investment to increase in value? What are the risks? Where can I get more information?

43

Stock investing is something that has been made out to be far more complicated than it needs to be. There are far more complicated approaches to stock-picking than those presented in this chapter, but the guidelines presented here will result in 95% of the results of those approaches with only 5% of the time, effort, and confusion. Since the name of this book is Five Minute Investing, I have chosen to build these guidelines in such a way as to minimize your time commitment while helping you avoid the investor mistakes outlined in previous sections. 1) Look for positive price momentum Most investors search diligently for companies where some good situation is developing - and rightfully so. They do this by asking brokers, looking for stories in the press, etc., but few stop to realize that the stock market itself gives them a list of such companies every day in the form of the new 52-week highs list. Most likely it's because they have believed some of the misconceptions and wrongly felt that if something appeared on the new-highs list, it's too late to buy. Actually, nothing could be further from the truth. The simplest, best way to assemble a list of potential high performers is to refer to this new 52week highs list included in just about every financial newspaper. I highly advocate that investors begin their stock picking expeditions by referring to this list. Remember that companies on the new-highs list do not get there because a certain financial reporter likes them, or because the government thinks they are good for society, or because a brokerage firm will get a hefty commission if the stock appears there. Stock market investors themselves who are knowledgeable about the company in question put them on the list by voting with their own hard-earned rupees, bidding the price up to new highs. Stocks do not appear on it unless there is something in fact really good and tangible happening with the company's prospects. Furthermore, few good situations develop in one day; they develop over many weeks, months, or years. So, many of the up trends evidenced in the new highs list will most probably continue on for some time. Not all 44

If something very good or bad starts to happen to a company's earnings trend. But the stocks that show positive momentum by appearing on the new-highs list have a excellent chance of continuing their trends. one is almost always better off picking one’s own investment ideas because one will know why he picked them. It is investor money and the more personal attention he can give to it. the better off he will be. unless he is very wealthy. the new-highs list technique isn't infallible.will. his performance can be further enhanced by not only choosing stocks making new 52-week highs.or hear about it from one’s broker. so begin your search with the 52-week high list. This will take a little more work for him because he will not find such a list in the newspaper. it may be best to let his advisor manage the majority of his money. 2) Diversify between industry groups 45 . All trends eventually come to an end and stocks can go from making new highs to making new lows with breathtaking rapidity. it will most likely start to show up in the trend of the stock long before one will read about it in the press . any stock making a new all-time high will also be on the new 52-week high list. In a nutshell. but as long as our strategy allows for weeding out those stocks that do not continue increasing in price we will probably be all right. but then neither is the stock-picking advice of broker. he can give more attention to his portfolio than can a broker or advisor. However. The best way to distinguish between issues making new 52-week and those making new all time highs is by looking at a long-term chart book. but better yet pick stocks that are at all time new highs in price. Certainly. Obviously. One should ask two questions:How often does a company make a new price high when something good isn't happening? How often does a company where something really good is happening fail to trade close to or at a new high price? Answer to both of these questions is seldom.

beware of picking those stocks that move very little whether the market is good or bad. make an attempt to diversify your portfolio between at least three industry groups. Issues considered to be defensive include utility companies. for the most part they sputter along and do not often have the potential for large increases in price. 4) Weed out takeover situations They are generally a small minority of the stocks on the new-highs list. Especially during market downturns. Takeovers and buyouts 46 . Closed-end mutual funds are mutual funds which have a fixed number of shares outstanding and trade just like a stock on an exchange. real estate investment trusts. it is best to avoid defensive stocks lest you get left behind when a bull market appears. So it is best to exclude defensive stocks. While they can sometimes post large increases in price. they hold up well mostly because investors flock to them for safety. These are generally referred to as "defensive" stocks because they are held by those wanting to defend themselves against the possibility of a bear market. food companies. This will help to reduce some of the risk in your portfolio and having your money spread over several industries will help even out more of the ups and downs in your account value than if you had everything in one industry. bonds. fine art. Whether you are investing in stocks. gold stocks. and closed-end mutual funds. at least from the aggressive portion of your portfolio.Because stocks within an industry tend to move more or less in lockstep. or whatever. These conservative picks tend to under perform the market over the long run. When the market turns better. certificates of deposit. In reality. So. While there have been times when each of these groups has done very well. for the most part they are a waste of time for those who are willing to take a little more risk in order to make a lot more money. giving the illusion that there are good things happening to their underlying businesses. the first rule of investing is: Diversify. these types of companies tend to simply sit still while the rest of the market charges ahead. 3) Beware of stodgy stocks When selecting stocks. making them a poor substitute for issues with real growth potential. defensive issues hold up well. oils.

all-at-once events which are highly speculative and thus do not lend themselves to prudent investing. I like to avoid stocks which have high week-to-week volatility and instead prefer ones which have a tendency for a cleaner trend. Once a firm is known to be a potential takeover target the price is dominated not by the company's market position or products. etc. This will give you a snapshot of the stock's personality from a volatility standpoint. There is an excellent chance that this company is in a buyout situation and should therefore be avoided. versus the competition. If you see that type of pattern. when they occur. Buyouts. sustainable advantage in their particular market? MYTH & REALITY # 1 47 . dig deeper.. most of the potential for further price advances is gone once the initial "pop" from the buyout has occurred. If a stock has a very volatile price pattern. but rather by the development of the buyout offer. The easiest way I have found to spot companies where a takeover has occurred is by looking at the price chart. then it generally means the company has no clear advantage in the marketplace for its product. services.are unnatural. Takeovers are almost always evidenced by a one-day increase in the price of the target company's stock of between 20% and 100%. 5) Check out the Chart Before you buy a stock. take a look at its price chart for the past year or two. Also. are big news and are generally well-known. Since there are many companies out there which do have a clear.

despite the fluctuations in value. investors are constantly trying to assess what will be left over for the shareholders both now and in the future. You could buy a set of stocks. Although they would fluctuate in value over your lifetime. first we need to review what common stocks are. chances are they would greatly increase in value during that period of time. or other less risky investments. and because of this additional risk the shareholder demands a higher expected return than does the bondholder. and pays interest on borrowed funds. if anything belongs to the holders of the firm's stock. the shareholders don't expect to give up all their gains . employee wages. It is obvious that the common shareholders see more variability (risk) in what they take home than bondholders. the returns at some point become permanent. the firm takes in revenue from customers in return for the firm's product. but have trended steadily higher in value over the years. the amount left over for the shareholders can be very large. than rupees invested in more predictable vehicles such as bonds or treasury bills. very small. on average. this expectation has been met: Stocks have had their ups and downs. one thing is for sure: common shareholders expect their returns to be volatile.and higher than the return on bonds. energy. employees or anyone else involved in the operation of the firm. That is. In the stock market. or even negative. So.because the outlook for business conditions are always changing. And. and with that revenue pays for raw materials. For as long as common stocks have existed (hundreds of years). raw material suppliers. This is why stock prices fluctuate . a share of common stock entitles the owner of that share to a fraction of what is left over after all other stakeholders in a business have been paid. This is not true with gambling. who are essentially the owners of the firm? Depending on business conditions and how well the company is managed. and what will be left over for the owners of a particular firm is always changing too. and hold them for the rest of your life. no other person would have lost money simply because your portfolio of stocks gained in value. but they also expect them to be positive and permanent over the long run . In 48 . However. But. supplies. Whatever is left over. The common shareholder stands last in line to be paid. In the most basic terms. It is this steady upward progression in the value of stocks that sets them apart from gambling in a major way. they have increased in value at a faster pace. treasury bills.To understand why stock investing is inherently different than gambling.

the amount of aggregate wealth increases for society as a whole. and therefore can only return to a winner what it took from a loser. They do not seesaw back and forth in the same range forever. if you buy and hold a well-diversified portfolio of stocks. It must be this way because gambling produces nothing. but only because they fritter their capital away with excessive or ill-founded trading strategies. it will give him confidence in pursuing a long-term plan for investing and will make one less prone to the destructive forces of fear and greed. This is because common stockholders do produce something: They postpone the consumption of goods (ie. the two facts to retain regarding myth #1 are as follows: Gambling transfers wealth from a winner to a loser because it produces nothing. Here is another fact which highlights the vast differences between gambling and stock investing: When gambling. Myth & Reality #2: Stock Market Predictions are the Key to Successful Investing One of the greatest popular myths about investing in stocks is that in order to be successful. every rupee won is a rupee lost by someone else. many people do lose money in stocks. the more likely you are to walk away a loser. it is because they do not understand that stocks give a positive and substantial return over time 49 . Of course. the longer you stay at the gaming tables. In the stock market. you are virtually assured of making money eventually. Every stock investor needs to know why investing and gambling are two totally different pursuits. so to speak. you must be able to predict the stock market's movements. they save some portion of their income ) in order to supply the seed capital needed to buy production equipment and produce goods. the longer you stay at it the better chance you have of coming away a winner.gambling. The value of stocks trends steadily upward over time. In fact. The value of common stocks increases without taking wealth away from anyone. in fact when the stock prices increase. They get the ball rolling. stock investors demand and receive a return that is substantial and permanent. In the aggregate. for firms wishing to produce goods. creates nothing. Once a person realize this. Investing increases overall wealth because the capital invested in stocks provides the initial funding for firms which exist for the purpose to producing goods and services. Why do people assume this? For some. So.

that person could far exceed the return of someone who simply bought a basket of stocks and sat on them. By far. they lack the ability to repeat this performance from one time period to another. If a person could predict which guru would be right for the next year. but in fact every credible study ever done on the subject has proven that these claims are invariably false. of course. he would be in good shape. the one fatal problem with this is that there has never been a single person who has figured out how to do it. Others simply humor their clients who are looking for market projections because they know that it is easier to give them a projection than to try to correct the clients' thinking.they falsely assume that stocks bounce around in the same range forever. perhaps most. Hence. the laws of statistics dictate that some of them must beat the market. Given the large number of market gurus that now exist. nearly every retail brokerage firm has a chief economist or market strategist whose main responsibility is to predict the climate for stocks. Nearly all market advisors claim to be able to call the markets every turn. and they therefore conclude they must predict movements in order to be able to sell at the top of the range and buy at the bottom of the range. For others. advisory services. which puts a premium on certainty. This will most likely seem an odd or even a absurd statement to some. despite their universal claims to the contrary. it is usually assumed by the beginning investor that to be successful. and such that are sold focus themselves almost exclusively on prediction of how the stock market in general will perform in the future. But in truth. most market prognosticators significantly under perform the market. and the group of market beaters will usually be a different group every time period that is sampled. the best way to make money in the stock market is to avoid approaches that rely on market predictions. any serious review of the results of market gurus over a long period of time reveals a track record that is no better (usually worse than) a simple buy-and-hold strategy. Some icons love to advance the cause of market predicting. However. it's just as hard to predict which guru (or which dart board) will be right for the coming year as it is to accurately predict market 50 . However. out of pure luck if nothing else. in fact. Don't misunderstand: There is no doubt that if a person could accurately predict the short-term fluctuations of the stock market. Experienced investors know. one must first become an expert at forecasting future market trends. For instance. the desire to predict is borne out of human nature. because they are paid to predict these movements. But. that nothing could be further from the truth. A large number of books. Yet. We love to know what will happen in advance.

then how can we succeed in the stock market? The key is to develop a method which will react to events as they occur. not "the market. our chances of being able to sort him out from those who simply got lucky are pretty slim. As most investors eventually learn. If you just can't help yourself. even if we are generous and assume that there is some market forecaster out there who has the holy grail of market prediction. I will reveal at this time how investor can be as good as the best market gurus in predicting the market: When you get up each and every morning for the rest of your life. make this astonishing 51 . we do best when we keep our bearish feelings from affecting our actions. the market prognosticators who are most successful over the past ten to fifteen years are those who have been perpetually bullish. The Reverse Scale Strategy is such a method and will be developed later. he is tempting fate and his emotions fear will almost certainly cause you to fail.or especially what it is forecasted to do in the future. We own our portfolio of stocks.. I recommend that you feel free to have your opinions about where the market is heading. and will ensure that our returns are as good or better than the returns on the general market.conditions. as opposed to how they will do in the future. but always invest as though the market is going higher." What we really need is a method which concentrates on how our stocks are actually doing. the conclusion must be that market forecasting is prone to failure. If he take out a huge mortgage on his home with the expectation of investing it for a quick payoff. Finally. An alternative mindset to the prediction game If we are not going to spend our energies wondering where the market is going. Of course. market prognosticators are notoriously inaccurate. If you already know the futility of market forecasting but feel that you simply must predict the market.. Although we all get bearish once in a while. We own our particular set of stocks. whatever those market returns may be in the future. If results are any indication. As of this writing. Over the long run. the best policy is to only invest money that he can afford to be patient with if the market stalls or backtracks. We can essentially ignore what "the market" is doing . Therefore. One of the purposes of this book is to free him from the compulsion we all seem to have to predict future market trends. one will be better off than if he had jumped in and out of the market. he has to exercise some caution in having an optimistic viewpoint.

it was around 5000. Naturally. but there is a certain point below which it will never again dip. Despite people's fears of bear markets. stock investors demand a permanent return on their investments. not declining. which is now at about 10000. certainly the gains enjoyed by shareholders up to sensex 7.000 or so may be considered "permanent. they advance to the point where they will never again return to their previous levels. from here the Dow may dive to 5000 or it may continue advancing. I do not expect to ever see it at 50 again. I do not expect to ever see it at 5000 again. just as investors in other types of assets demand a permanent return on theirs. Another good high-profile example of this is the Dow industrial Average. it was around 50. So. In the 1930." At some time in the future. having achieved a longrun accuracy of about 60%." If you make that your prediction every single day you will be as accurate as some of the best people in the field of economics. the market spends most of its time advancing. In the long run. So. a good investment strategy that doesn't rely on prediction will beat a market forecasting strategy. which is now at about 10000. Myth & Reality #3: What goes up must come down The statement "what goes up must come down" is certainly true in the natural world.000 will also become permanent as the market will at some point dip to the 10. but there is a certain point below which it will never again dip.000 will also become permanent as the market will at some point dip to the 10. one will see that in the aggregate. the gains up to sensex 10. So. A good high-profile example of this is the Sensex Average.prediction: "The market will be up today. there is no way to tell when that will occur. from here the sensex may dive to 7000 or it may continue advancing. As we have noted previously. certainly the gains enjoyed by shareholders up to Dow 5000 or so may be considered "permanent. So. the gains up to Dow 10. If one refers to the conclusion from Myth #1. some individual stocks do go up rapidly. stocks trend upward over time and at some point. In the 90s." At some time in the future.000 level for the last time.000 level for the last time Certainly. and it's often assumed to be true in the world of investing as well. and then give back the entire gain just as 52 .

this is the case more often than not." then keep in mind that it often happens that a stock moves way. There are many. this will cost him more in profits than it saves in losses. Of course. the average person commonly expresses the belief that when they have a profit going they should take the money and run . these are the types of stocks investor want to find and hold on. Once a good performing stock has been identified. Myth & Reality #4: What goes down must come back up. resulting in a net increase over time. it will cost him the really big gains. probably no more destructive misconception has ever been conceived than the idea of buying low and selling high. It's educational to note that all the above listed stocks spent a lot of time on the daily new-highs list while they were increasing in value. no myth is more pervasive among amateur investors. So if investor are going to believe the statement "what goes up must come down. However disappointing it may be to have a good profit going and then see it evaporate. Obviously.rapidly.often leaving a lot of money on the table when they do. the grain of truth in this myth is the fact that any stock trend consists of a series of advances and retreats. If investor thinks about it. don't wait for a pullback in price before taking his position. If he does. way up. often never to return. In the long run. then there must of necessity be some individual stocks that also advance without returning to their previous lower price levels. The emotional appeal of this myth leads investors to commit many of the most 53 . This myth is the granddaddy of them all. or Buy low. the fact that the entire stock market marches higher. we are still ahead by eight-fold. Think of it this way: If a stock increases tenfold in value and then undergoes a 20% correction. Even so. In fact. Whatever the reason for its appeal and widespread popularity. The new-highs list is published daily in most financial newspapers. It is a list of stocks which traded above their previous high price for the past 52 weeks. and then comes down just a little. do not let this bitter experience lead one to believe in taking profits too quickly. In the subject of investing. All seasoned investors have had this disappointing experience. many others. in the long run. sell high.

80 etc. and the Value Line Investment Survey. one of the most common investor mistakes is to buy stocks that are "down" in price. Although most people know this. Stocks make all price movements in trends. He will find that such moves are not at all uncommon. rather than choose ones that are at all-time highs? Simply put. Study the price chart of a stock that has had a large (four to ten-fold) increase in price and note 54 . do most beginning investors tend to choose stocks that have declined in price. sometimes huge. Why then. published by William O'Neill and Co. 50. note just how many stocks have made 300-1000% moves. 9. it of necessity must pass through 6. stocks will even make more stunning moves of 2000-3000% over longer periods of time. because they "feel" safer buying a stock that once sold for a higher price. Most investors will find it useful to study a long-term chart book in order to get a feel for how stocks make large price moves. It is inevitable that any stock in an uptrend will have periods of correction (shortterm pullbacks in price). 3. As will be covered later in this book. few take the time to realize the implications of it. Sometimes these movements are small. and some of them happen in an almost uninterrupted manner. This is why picking stocks that are trending upward in price gives him a better chance of finding timely. 2 or 1 on its way to 100. most stocks eventually have some large price trends which develop. Some good references for doing this are Long-term Values. Given enough time. 8. 7. you simply must eradicate from your mind the appeal of buying declining stocks! Think about this: If a stock is destined to go from 5 to 100. This is exactly the opposite of the truth! If you are to succeed in the stock market. This false sense of security has led many investors to the poorhouse over the years. As investor study these long-term charts.grievous errors on the most common investor mistakes. but the majority of novice investors assume the stock that is "down" in price will be a better bet than one that is trending upward. 30. Sometimes. The common assumption is that if a stock has gone from 40 to 10. winning stocks than buying stocks in a declining phase. It does not have to (necessarily) pass through 4. to get there. They are both at 10. it is somehow more likely to get to 40 again than is a stock that has gone from 4 to 10. but most often there are some long trends where pullbacks do not exceed 30% of the stock's peak price.

Valuation measures If investor are to make really big money in the stock market. then the stock must increase in value. And yet. This is because traditional measures of a stock's value generally are of little usefulness in circumstances where earnings are growing very quickly. everyone finds stocks that will ultimately turn out to be big winners . This is why trading strategy (or the way he manage his stock picks) is just as important as which stocks investor pick. It is impossible to reap big profits from the stock market unless you are willing to buy and hold onto stocks that are making new all-time highs in price. By studying the way in which price trends occur. Price/Earnings (P/E) ratios are a commonly misused measure of a stock's attractiveness as an investment. meaning that the stock is selling for a low price relative to the previous year's earnings.carefully just how many times this stock made a new all-time or at least a 52-week price high. stocks that are at new price highs tend to do better than those making new price lows. Further. From this he should learn that someone who is afraid to buy (or hold onto) stocks making new highs would automatically guarantee that they will never reap the benefits of large price moves. the reality is that companies have vastly different outlooks for growing earnings and that is why the market rightly assigns a low P/E ratio to some stocks and a high one to others. if he are buying stocks correctly. resign himself to the fact that just about everything he buy. will seem too high priced by just about any traditional measure of valuation. Eventually. it only by owns these very strong stocks that the true profit potential of stock investing is realized. There are also companies which grow earnings at 20 to 55 . Use of these measures as stock selection criteria often misleads investors into buying stocks that are declining in price. Many investors try to buy stocks that are selling for very low P/E ratios. They believe that if the stock is selling at a low P/E ratio. This approach to selecting stocks is flawed because it assumes all companies have roughly the same future earnings growth prospects. It is your trading strategy that will determine whether or not you reap the benefits of the winners you find. However.but not everyone ends up profiting from them. he will give himself confidence to hold onto his winners rather than succumbing to the temptation to sell his winners to 'lock in' profits. For instance. There are companies which grow earnings at 2 to 3% per year for years and years on end.

Another popular but flawed concept which leads investors into buying stocks which are declining is the practice of purchasing stocks which are selling for a low price relative to "book value. that a company which is positioned for high growth should be priced the same as a stodgy company in a shrinking industry. as proponents of a low-P/E ratio strategy do. even if they have financial measures which appear to make them good values. Stocks that appear to be cheap by financial measures and are falling in price tend to keep 56 . but instead by the abilities of the people working for the firm (human capital) and by the position of the firm in the market it serves. A person looking for low prices relative to book value forgets that most firms which are earning substandard amounts on their assets generally keep on earning low rates of return.30% per year over many years. 2. Much of the earning power of a firm is determined not by physical or financial assets. what matters most is what the firm can earn on those assets for their shareholders. After all. It is best to avoid stocks that are declining in price. It is absurd to assume." Book value is calculated by taking the value of the assets owned by the firm and subtracting out any debts the firm may have. There are three problems associated with using this calculation as a investment screening parameter: 1. Book values as calculated by accountants often bear no resemblance to the real value of assets on the balance sheet. the value of a firm’s assets really does not matter. 3. Firms which are selling for a low price relative to book value are selling for a low price for a very good reason: these firms invariably are earning a very low return on their assets. Book values capture none of this and thus ignore completely the most critical assets which a firm possesses.

every stock selection strategy produces both losers and winners.falling. the reason for selling a stock is always the same: 57 . COMMON MISTAKES COMMITED BY INVESTORS Mistake #1: Not having an exit plan before buying No matter how well or poorly founded. and what seems too expensive and is rising in price tends to keep on rising. In the case of both losers and winners.

he tend to get either greedy or scared. "how to determine the right time to sell?" The time when he can think most clearly about why he would eventually sell a stock is before it is purchased. and these are almost always a direct result of the investor failing to plan. "when you fail to plan. or greedy (if it soars). stockbrokers. As the saying goes. not rational. The pitfalls of trying to manage a stock portfolio without a plan are many and varied. These emotions lead to a desire to preserve profits. what will be their plan for letting the profit ride? If the investor who 58 . it is virtually impossible to make a good decision. leading to large losses and small gains. market advisors. before entering a trade. The advice of friends. the less rational his decisionmaking will be. and the like are all likely to have a magnifying effect on the natural elements of fear and greed that are present in every investor. the larger the position is. This is exactly why the majority of amateur investors under-perform the market: they do not have a plan. These influences can cause someone who does not have a well-thought-out plan to abandon profitable positions and hang on to losing ones. Once he own something. when they hear a tip or rumor on a stock they get so excited that they forget to ask themselves what they will do if it turns sour. As a result. he has no emotional attachment to it. or else every decision he make will be emotional." This saying is as true in the stock market as it is in any other aspect of life.To preserve capital and allow him to redeploy it to more profitable investments. how he will exit it. an even bigger source of under-performance is selling too soon when he do find a great winner. The reason is simple: he must have a plan and stick to it. How not having an exit plan hurts his performance Big losses are one thing which destroys most investor's performance. or if it soars. Before he buy anything. Therefore it is vital to make all decisions up front. Worse yet. The relevant question is. Emotional decisions almost always are poor ones. before he are scared (if the position happens to go down). leading to prematurely cutting off an ascending price trend. which means he can make totally rational decisions. Since the potential gains from a stock are always higher than the potential losses (100% loss potential versus unlimited upside potential). With emotions running rampant from a loss or a large gain. An exit plan is one thing that experienced investors/traders always have before initiating a position. you plan to fail. This is precisely the point at which most investors fail: They have no preconceived plan for exiting a stock before they buy it.

Almost always. they do it all at once. both profit and loss. In short. Secondly. the investor makes the mistake of cutting his winnings short.. In either outcome. he no doubt realize that making decisions based on wrong assumptions renders his chances of success to be minuscule. The normal fluctuations of stock prices have an exaggerated effect on the plunger's emotions by virtue of the huge amount of capital represented by the position. If the plunger had thought about an exit plan beforehand. the plunger lacks an exit plan for the purchase before buying. he probably would have realized the potential pitfalls and would have taken a more appropriately-sized position. the investor will often have a large rupee gain that is hard to resist cashing in. This plan should cover all possible outcomes of the trade. or hold on in hopes of an increase in value (which may well never happen). most investors don't want to think about planning ahead.exactly the opposite of what he should be trying to accomplish. Plunging can work occasionally if one is fortunate enough to select a stock that immediately increases in value and never looks back. In this latter case. plunging leads to cutting his potential gains short and letting his losses keep mounting. the emotions of plunging work against the poor investor.doesn't plan ahead also happens to believe some of the myths presented in then his/her chances of making a good decision are almost nil. For if the stock declines.they put the selling criteria decision off until it is unavoidable. (especially for adverse possibilities) when they are buying a stock . The real problem with doing this is that the investor puts themselves in a perfect position for their emotional decision-making to run wild. his stock either begins declining or increasing. An exit plan must be identified for every investment before the investment is made. If the stock increases in value. However. If he are a decision-maker of any kind. Typically what happens is the following: First. and usually too late. Taking too large of a position leads to emotional involvement which leads in turn to poor 59 . in most cases the plunger has such a large percentage of his capital riding on a single stock that the emotions of greed and fear work against him in a major way. Unfortunately.. Mistake #2: Plunging too much into a stock all at once Another common error committed by many investors is plunging. This means that the investor makes two mistakes: First. For this reason. the plunger will either get scared or sell out with a loss that is a sickening percentage of his capital. they purchase entirely too large a position in a single stock. the need for an exit plan based on sound theory before a stock purchase cannot be overemphasized. Then. the plunger takes a huge position.

As unbelievable as it seems to the novice investor. It also exposes you to the potential for lots of damage from one bad trade. Once a stock starts to decline it can become a vicious cycle.000 into a stock that is trending upward.decisions. All the while. that is. the original purchase may still be languishing far below where we dumped it. the opportunity cost of holding a losing stock is far greater than the loss on the stock itself. waiting for it to come back. the decision to sell May save us as much as Rs8. They reason (poorly) that as long as they don't sell. Most hold on to their losers. not what they paid for it . For this reason. Diversify . Often. This is a error because the value of their stock is the current market price. or continue going sideways.000. leading to even more declines. Some also hold on because they can't face up to the fact that they made a mistake.000 loss more quickly than if we'd continued to hold the losing stock. then they haven't really lost anything. The distinct possibility exists that we could make up the Rs2. the money he could have made by redeploying his capital to a more promising investment.000. Count on this fact. These losers must be dealt with in some way in order to limit their impact on his overall performance. The other compelling reason for selling losers is the concept of opportunity cost. Let's say we have Rs10. The second reason for considering cutting our loss short is that by redeploying the Rs8. the decline is most likely to continue. we increase our chances of making up the Rs2. Here as elsewhere. hoping against hope that the stock will someday pull itself together.000 invested in a particular issue and it declines to where it is worth only Rs8. First.but their rationalization helps them feel better about themselves. it is important to stop the bleeding once it becomes apparent that he has chosen a loser. There are two reasons to consider selling the stock in this example. If it does. Mistake 3: Failing to cut losses A certain percentage of stocks he chooses will show themselves to be losers.000 loss and makes an additional Rs8. Even if a stock does come back. the more and longer a stock declines the more it is apt to continue declining.don't bet the farm. it is a much better bet statistically 60 . the actions of most investors are opposite the logical course of action. long time to do so.000 profit by redeploying our capital from the declining stock to the ascending one. and time is money. While there are no guarantees that the ascending stock will continue ascending. it will likely take a long. and like most trends. the current market value of our stock. the stock is clearly in a downtrend.

This is when you buy a stock and set a price that you will sell at if and when the stock makes it to the target 61 . They wrongly assume that if a stock has doubled or tripled then that is about the best they can hope for. If your objective is to make as much money as you can. going with the long-term statistics is a key to longterm success. Sometimes a stock that has doubled will go on to make another tenfold increase from there.than the declining one. Though it might seem that this is a relatively minor problem. Again. That's simply another way of saying that the most he can lose on a single stock is 100% of what is invested. then you must put yourself into a position to hold onto really big winners when they come your way. Beware of the common compulsion to hold onto his losers. I believe it is a bigger mistake than failing to cut your losses. In the stock market. because in a properly diversified portfolio the potential profit from any one stock is far more than the potential loss. Mistake #4: Selling too soon Another error that cuts seriously into many investors results is the error of selling a winning stock too soon. but the potential gain from every stock is unlimited. If you have a strategy that emphasizes taking the money and running every time you get a double or triple. the best way to convince yourself of this is to get a long-term stock chart publication and start studying it. Think big I believe the reason most investors fail to hold onto winners long enough is that they simply do not realize how big a move can sometimes be realized. However. Price Objectives Another insidious reason for investors selling too soon is the use of price objectives. If he do succumb to this temptation. It can (usually does) take years for this type of move to occur. then you are seriously shortchanging yourself. investors who take the time to study the history of stock trends know better. it actually is a very serious error because it robs he of his really big profits. his portfolio may still be profitable (as long as he also do not sell his winners). but over a several year time frame your chances of finding a huge upward trend is far better than you'd think. but it will not be as profitable as it could be.

just as they often lag when bad things are in the works. The reason is that when a company's earnings are (or are about to start) growing rapidly. Through the use of price objectives. If you study stock trends I believe you will come to the conclusion that the trend of a stock is a more accurate indicator of when to sell than are calculated estimates of a stock's ‘value. because it takes time for good trends to be recognized and assimilated by stock analysts. as you cannot possibly make more of a profit than that which is reflected in the target price. The stock may even be selling for many times the earnings estimate for next year. This is a good reason to become your own investment advisor and portfolio manager. by definition you'll be worse off than if you had bought your stocks and done nothing but sit on them forever. Finally. the price of the stock may be high relative to the current earnings. the task of giving advice to large numbers of people is made manageable for the advice-giver. but only a few times the next year's actual earnings. One of the enigmas of the stock market is the tendency for what seems overvalued to keep going higher still. Don't try to guess how far a stock can move up. However.' Why then are price objectives used? The reason they are so popular is because of the need for retail brokerage houses and newsletter writers to give some sort of selling advice to large numbers of retail clients. These target prices are usually arrived at as a certain percentage above the entry price. If you do not give your stocks a lot of room to move upward. and what seems reasonably valued or cheap to keep on retreating. The use of price selling targets mostly results in you capping your profits. or else are based on some analyst's assessment of the 'value' of the stock. I feel that the use of target selling prices is a seriously flawed practice. stock analysts' earnings estimates for coming years tend to lag when something good is brewing. 62 . it should be obvious to all that capping your profits is not a good thing. If you employ a strategy which cuts your losses but also caps your gains. if next year's earnings could be known. Thus. you will guarantee that your stock market profits will be below average. it seldom results in the best possible outcome for the client.price. The thing to remember about this is that the aggregate consensus of all market participants (as reflected in the stock's price trend) tends to be more accurate and more timely than published earnings estimates. However arrived at.

facts that you may not be aware of no matter how well you research the company. it's interesting to note that it's fairly common that a stock which is today making a new 52-week high has as its 52-week low a price that was a 52-week high< a year ago. As we have seen. The two objectives are vastly different. The novice wrongly assumes that if a stock is near its low for the year then it must be "low" and therefore in an opportune position to be bought. the timing of when (and at what price) the stock's slide will end. but your chances of finding those exceptions are mighty slim because you are only one of thousands of people who are looking for such leads. As an aside. That might seem like a confusing statement but if you think about it. as you are betting against the entire market's assessment of the company's earnings trend. If a stock is making a serious decline it is because market participants know some facts about the company's future earnings potential . Sometimes the market is wrong. of course." But in reality buying a down trending stock is always risky. book value. that price which was once a new high will now be listed as the lowest price for the past 52 weeks. If the stock has been in an uptrend for a year or more. Often. investors convince themselves that buying a stock from the 52-week lows list is not a risky proposition because of that stock's low price relative to past earnings. Try to keep in mind that your objective is to maximize profits. not to outsmart the market. Your chances of being right about both things are slim. 63 . since this information is readily available. so they keep on buying dogs until their portfolio looks like a kennel.Mistake #5: Choosing stocks that are in a downtrend Buying stocks which are in a downward price spiral is the most common mistake among novice investors. the hapless bottom-fisher finds out after it is too late just how easy it is for such a stock to keep on making new (and even lower) 52-week lows. it will make a lot of sense. you need to be right about two things at once: First that the stock's slide will end (a surprising number never do until they become worthless). In order to profit from such a strategy. The typical scenario for this particular mistake is an inexperienced investor scouring the stock pages looking for stocks near their 52-week lows. It is very hard for one person to correctly second-guess the sum total wisdom of thousands of other investors. Beginning investors usually do not even consider the possibility that this could be true. Seldom is the entire market wrong about these matters. and secondly. or some other measure of "value.

Rs1.e. (Of course Investor doesn't know this. the practice of buying down trending stocks is such a pervasive and major error that the importance of eliminating it from your bag of tricks cannot be overemphasized. Investor. Investor picks a portfolio of ten stocks and puts Rs10. I call it Time-Based Rupee Cost Averaging. it is called Price-Based Rupee Cost Averaging . Price-Based DCA makes no sense in any circumstances and is sure to bankrupt you if practiced consistently. so it's twice as good a deal as it was at Rs40. When an investor adds to a position on equal time periods (i. The rest of this section I want to devote to explaining why you must never practice Price-Based DCA as a strategy. who is going to pursue a Price-Based Rupee Cost Averaging strategy.. either). The reasoning in the mind of the investor who does this goes something like this: "I bought the stock when it was Rs40. and we aren't going to tell him. Mistake #6: Adding to a losing position Another strategic error commonly practiced by many amateur investors is adding more money to a losing position. Now it is Rs20. Listen to the signals of the market.e.000. for a total investment of Rs100.putting an certain rupee amount into a stock at specified time intervals or at specified price intervals when the stock drops in value. If a stock is trending steadily downward.000 with each 20% decline in price).. When an investor invests an equal rupee amount each time a stock declines in price by a certain level (i." Sometimes this is called rupee cost averaging .000 into each stock. What you need to remember is that while Time-Based DCA can make sense if done in a controlled manner. However. decline until it becomes worthless) sometime within the next year. There is no need to rehash that section now. let's also assume we know ahead of time that one of the stocks in Investor's portfolio is going to go bankrupt (that is. there is a good reason for it. Just for fun. Rs1. Let's assume we have the ability to anonymously observe a certain naive investor. Find greener pastures elsewhere. But. The fallacy of Price-Based DCA can best be illustrated by the following example.Much of the problems associated with this strategy have already been dealt with. under the section: Buy Low and Sell High. Besides. since he is a devout Price-Based DCA 64 .000 every quarter) independent of the price of the stock. because it is the most destructive of all investor mistakes and represents in the extreme why you should never add to a losing position. my average cost per share will come way down once I add to the position.

Some folks have a hard time parting with something that has done so well for them. Can you guess what will happen to Investor over the next year as we watch him trade? It should be an agonizing thing to watch because. bearing fruit year after year. Never add to a losing position. In the most 65 . He will lose his entire Rs100. Investor's strategy will over the course of the next year automatically allocate all of his capital to the stock that is to go bankrupt. eventually you will encounter a Waterloo as Investor is about to.advocate. as you may have figured out by now. his trading rule is that whenever one of his stocks declines 50% in price from his purchase point. but eventually they decline in productivity and die or produce substandard fruit. Every gardener knows that the fruit of even the best-growing plants eventually needs to be picked before it turns overripe and finally. This is because there are an infinite number of sequential 50% declines that can occur between his initial purchase point and zero. If you pursue a Price-Based DCA strategy consistently. Save the ‘till death do us part' thing for your marriage. rotten. Likewise. but again. 000 unless he has the good sense at some point to realize what a bloody poor strategy he has. lasting but a single outstanding season and then dying. 000 worth of one of his better-performing stocks and use the proceeds to buy more shares in the declining stock. When you do. If the issue declines another 50% from his second purchase point. he will sell another Rs5. he will sell Rs5. This is because inevitably you will someday get a stock in your portfolio that is bound for the scrap heap. A stock can have a phenomenal rise that lasts many years. but most will eventually start lagging and break down.000 of one of his other stocks and again add to this declining stock. Mistake #7: Falling in love with a stock It's a common mistake to have a good run with a stock and then decide that you will never sell it. it means something is starting to go wrong. you may find yourself standing in bankruptcy court with Investor. cut the loss and don't even think about adding to the position! Otherwise. even the stocks that grew so well in their season eventually need to be sold. Even a noted long-term investor takes profits occasionally. Others are like apple trees. Some plants are annuals. not for your stocks. When you have a losing position. what your emotions tell you to do and what you should do are two different things.

but we need to make sure that our reaping is not done prematurely but allows for long-term growth. Without realizing it.you throw your line back into the water in hopes of catching "a fish. By so doing they lose focus of what they are trying to do: Make money. fuzzy feelings for it." "I'll show that stock. If you are fishing and a fish slips off your hook. Try to remain emotionally unattached to a stock so that you are not blinded to what the market is telling you about it. Mistake #8: Trying to "Get Even" with a Stock One of the big investor mistakes I've observed is that some investors. of course. this is not logical thinking unless the stock has recovered and is showing itself still to be one of the 66 . many people's common sense goes out the window when it comes to the stock market." It seems obvious when fishing. They made some good money off this stock and so they have warm. so why do they keep coming back to a proven loser? The answer is." they say to themselves. once they've taken a loss on a stock. It crops up in everyone now and then. they are looking to "get even. but unfortunately. There are thousands of companies available for them to invest in ." not "the fish. As you will see later. people also return to a stock because they had such a good experience with it. but when it does. They keep gunning for that one particular stock. Therefore we must reap. ignoring the other rich targets which abound around them. Sometimes. We must instead find a balance between selling too soon and selling too late. It must not be done based on guesswork but instead on the actual performance of the stocks in your portfolio. Again. the Reverse Scale Strategy sets its parameters so that we do not engage in short-term trading. The perfect system would be one which tells us the exact top. one mistake begets another. from then on? Of course not . and we will take a close look at how it manifests itself in the next chapter. not save face. you must resist it and think logically. they become enamored of the stock simply because it has "done them wrong. Ego is one of the most destructive forces that you can unleash on your investment performance. do you refuse to pull in any fish other than the one that got away. There is no doubt that our chances of making really big money on a stock increases commensurate with the length of time we hold it. keep looking for an opportunity to buy that same stock. they may go from star to oblivion and bankruptcy. Thus." Like an adolescent ratios been beaten up. but that is impossible in reality.extreme case. ego. so you can recognize it.

Why would we want to learn about the worst strategy? Because once we know the worst possible strategy. eventually it always leads to the poorhouse when applied to individual stocks. or a portfolio of stocks with equally disastrous results. a simple strategy known as Scale Trading. as anyone using it will not last very long in the stock market. and occasionally. then we can reverse its ideas to craft a strategy which does just the opposite . Individual stocks can and do become worthless on occasion.000) and decide to buy another Rs1.it will be destined to produce some tremendous long-term gains. the cord snaps! Nevertheless it is useful to study this method because often much can be learned by studying a truly bad approach to anything and then reversing its concepts. this strategy has no redeeming value. whether it was sold for a profit or a loss. But even then. I like to think of it as the financial equivalent of bungee-jumping: It's exciting. risky. it requires a lot of capital and advance planning to be successful.stronger stocks in the market. mostly because commodities have inherent value meaning that they cannot decline to zero value.000 worth of stock if the price declines by 20%. T Scale trading can be a viable strategy when applied to commodity futures. and selling those purchases as they increase in value. takes a lot of guts. the investor might buy 20 shares of stock at Rs50/share (for Rs1. It is the manifestation of all the most devastating investor mistakes. Scale trading is not a very popular or widespread strategy except among extreme neophytes. For instance. forget it. Once you have sold a stock. Scale Trading Other than the fact that it is simple. The next step down our road to investment success involves briefly reviewing the worst stock trading strategy investor can imagine. While it can produce small profits over short periods of time. It is accomplished by taking an initial position and then adding to it in predetermined increments as the position declines in value. which is one of the main reasons why scale trading is such an unfit approach for stock investing. one that is destined to maximize losses over the long run. If the price increases from Rs50 67 . Scale trading can be applied to a single stock.

Each time this happens the trader pockets another Rs200 profit.984 Rs10.046) (Rs1. So.37 Rs34.06 Rs0 (Rs200) (Rs560) (Rs1.993 Rs6.664) (Rs5. The purchase and sale levels for this particular situation are shown in the following table: Scale Trade from 50.00 Rs44. for example. at which point the scale trader sells off the last of his shares .before declining to Rs40.944 Rs3.563 Rs4. he will sell his 20 shares (purchased at Rs50) for Rs60/share.984 Rs9.635) (Rs2.45 Rs26.686 Rs3.945 Rs4.990 Rs4.04 Rs12.332) 25 5/8 Rs998 20 ½ Rs1.64 Rs23.432 Rs2.359 Rs3.320 Rs4. excluding the effect of commissions.17 Rs17.92 Rs11.000 5 3/8 Rs999 4 1/4 Rs1.456 Rs4.000 Rs1. 20% declining purchase increments.989 Rs7.044) (Rs3. selling any shares acquired at 32 on a subsequent rise to 40.983 Cumulative Rs Invested Cumulative Cumulative Shares Owned 20 45 76 115 164 225 301 396 515 664 850 1083 Value Shares Rs1. Price Amount Shares Level Invested bought This 50 40 32 Rs1.986 Rs8.44 Rs39.22 Rs20.001 The scale trader is hoping to profit by. There is no limit to the amount of times that a stock can oscillate between any two or more of the price levels.those purchased at 50.152 Rs4. for a profit of Rs200 less commissions. and so on until the stock advances to 60. any shares purchased at 20 1/2 would be sold at 25 5/8.833) (Rs4.000 Rs992 This 20 25 31 39 49 61 76 95 119 149 186 233 Purchase Purchase Rs1.70 Rs30.651 of Cumulative Total Profit/ Cost/Share (loss) Rs50.982 Rs11. another 25 shares are added at Rs40 with the idea of selling those acquired at Rs40 if the price then increases to Rs50.419) (Rs7.800 Rs2.994 Rs5. and so on.992 Rs3.44 Rs15.004 16 3/8 Rs999 13 1/8 Rs996 10 ½ Rs996 8 3/8 Rs998 6 3/4 Rs1.528) (Rs6.000 Rs1.307) (Rs3.000 Rs2. 68 .000 Rs2.

though. meaning that the 25 shares acquired at 40 are sold when the price reaches Rs50. 833 unrealized losses so far. the price then takes another dive down to Rs15. and a subsequent 25 shares are purchased at that price. the stock opens a few points lower and just keeps on dropping until it hits Rs10 3/8.so 25 shares are purchased at Rs40. its closing price for the day. From there. and Rs16 3/8. as the price drops from Rs55 all the way down to Rs30 . he has a Rs1. So far. but he reasons that when the price goes back up to Rs60 he will have completed his trade and sold out every single position for a profit. so good. and Rs10 1/2.000 invested at any point. but let's traces what happens with this trading method through a hypothetical situation. Next. Shares are purchased at Rs32. but Rs400 profit on an Rs3. At this point.046 unrealized loss bringing his net profit to a negative Rs246. The shares purchased at Rs32 are sold for Rs40 for another Rs200 profit. True. Rs13 1/8. The next day. Rs16 3/8. netting a profit before commissions of Rs200. 20 shares acquired at Rs50 are still in his inventory. Then the price runs up to Rs30 before retreating back to 25 5/8. The company that our scale-trading friend is trading reports that it is under Federal investigation concerning false financial reporting. our trader makes up the chart as shown above. From Rs40. Rs20 1/2. As indicated. the unexpected happens. He is getting a little worried because he is eight months into this trade and he has an Rs800 realized gain and an Rs3. The only negative so far is that it took four months to do this. 000 investments over four months is not bad. the price increases to Rs55. and the ones scooped up at Rs20 1/2 for Rs25 5/8. Though shaken by the news. and another 31 shares at Rs32 before increasing again to Rs40. and takes his position of 20 shares purchased at a price of Rs50/share. At this time. our friend is disciplined about his system and buys slugs of the stock right on schedule at Rs25 5/8. since the price topped out this time at Rs30.It seems like a foolproof approach to the neophyte trader. he doesn't get to sell those shares. bringing his total trading profits to Rs800. He starts to wake up at night wondering what will happen to his position. 000 investments accept a net loss. From this. he narrowly misses selling his shares acquired for Rs25 5/8 at 32. Rs25 5/8. he nets out another Rs400. He also is realizing that so far he has nothing to show for his nearly Rs8. since although he realized that this could happen. Quite a windfall for our trader as he sells the shares acquired at Rs16 3/8 for Rs20 1/2. he never thought that it actually 69 . Let's say the price then slips to Rs40. However. Fantastic: He has so far generated a Rs400 realized profit and never had more than Rs3. Rs20 1/2.

Thinking they have discovered a money machine. but I assure you that every single day someone gets the bright idea to do exactly what our poor friend in the story did. you not only have to be disciplined. This requires that the balance sheet and income statements for some previous years are revised to reflect the effects of the management misstatement and cover-up. Now he realizes that so much time has passed that even if the stock rises back up to Rs60 someday. but these pale in relation to what he has invested and what he could have earned even from a passbook savings account. and capital invested. his annual rate of return for the amount invested will be minuscule. This little story might sound extreme. but the theory on which your system or method is based must be correct as well. not every scale trade results in a disaster. but he still got mired into a terrible mess. But the potential for profit is small considering the time. Our scale trading friend has a Rs6. and ten or eleven thousand rupees invested in the stock he still holds. causing him to either give up his strategy completely or invest even more money. 000 to Rs7. worry.he held to his system against all odds. he also has to live with the worry for the next five years that the stock will further decline.would happen. in the following months the investigation reveals that the company does actually have some fraudulent practices. 000 unrealized loss in addition to his Rs800 trading gain. The typical pattern with scale trades is a series of small profits followed by one gigantic and inevitable loss. The lesson to be learned is that to be successful. On top of this. Once in a while over the next few years he may get a Rs200 trading gain as the stock bounces around. Of course. in fact most of them probably result in a profit sooner or later. A bad theory well implemented still results in a loss. The experienced (though crooked) management of the company is ousted for their sins and replaced. and it languishes in the low single digits for the next five years. Some folks even apply the scale trading technique to several different stocks at the same time. So the price of the stock works its way lower and eventually levels out between Rs4 and Rs5 per share. The trader in the story was disciplined . 70 . Unfortunately for our friend. they begin scale trading and the rest is simply a matter of time. It is scary to realize what can happen when you get caught up into a flawed strategy such as scale trading.

So if our novice scale trader started with a Rs10.900 in which he has Rs17. The fatal assumption made by the scale-trading theory is "what goes down must come up. This is after starting with only Rs1.000.900 we might expect him to lose.000 or some other large amount. the numbers would be worthless stock and at a sickening loss of at least Rs17. The only saving grace is that people tend to pursue this strategy when they are young.it may even become totally worthless and enter bankruptcy proceedings." and as we have discussed earlier.a loss of Rs13.000 initial position at Rs50/share instead of the Rs1.000. The negatives of scale trading are: 1. this simply is not the case with stocks.This does nothing but compress the amount of time it takes to lock on to a stock that just keeps declining and declining in value . This is because unless he inherited his money.000 position in the example. the hapless scale-trader will own stock with a market value of Rs4. almost as bad. and have little money to lose. The positives of scale trading are: 1. It is simple and not subjective. Perhaps it will sit there for years or even decades while the poor trader sits trapped in his losing position earning little or nothing on his money. foolish. he likely won't lose the entire Rs170.900 invested . 2. It can generate lots of small gains in choppy market conditions. he probably won't have that much to lose. it may decline from Rs50 all the way down to Rs10/share and sit there for a long time. Or. the stocks which do worst suck up the most capital as more and more purchases are made while it declines. if the price of the stock declines to slightly above Rs1/share. In the example above. If the company goes bankrupt. and the usual case is that the neophyte feels his strategy is so foolproof that he starts with Rs5.900 (if he had sense enough to stop buying once the stock fell below Rs1/share). All capital is automatically 71 . You can rest assured that anyone who uses this approach consistently in the stock market will meet this demise fairly earlyon in the process. When applied to a portfolio of stocks.

There have been a plethora of seemingly rock-solid companies over the years that have ended up in bankruptcy court. Even when a scale trade is successful. everyone who practices scale trading encounters a stock that declines precipitously and then goes bankrupt. 3. The scale trader never gets the full benefit of a favorable trend since he is always selling his winners and buying more of his losers. The losses from such an occurrence are huge. the amount of profit to be had is very small relative to the amount invested and especially relative to the risk of catastrophic loss. under the right conditions.allocated to the worst-performing stocks in the portfolio while the best stocks are sold off. if a bankruptcy should occur. Few people I know have unlimited capital. just the opposite of what you want to do. creatively find a way to lose even more money than he has. he can't even get the tax benefit of a write-off. The biggest problem is that scale trading cuts the trader's gains and lets his losses run. It is impossible to plan how much capital it will take to execute the strategy since you never know how far down a stock will go before it recovers . When a scale-trader finds himself locked into a large losing position. 2. therefore an infinite number of purchases you would need to make to fully execute the strategy. then he can write off the entire amount! 72 . 5. Eventually. If a scale trader uses margin (borrows money from the broker to buy even more stock). 6. Of course. since his strategy makes no provision for him to sell out his position. The result is at best a disastrous underperformance versus the market or at the worst a total loss of capital. the trader may. 4. There are an infinite number of 50% declines between any positive number and zero.if it does recover.

ANALYSIS According to the survey done by me among the investors with the help of number of questions the following analysis is done with the help of graphical tool. • In the data collected during survey the following graphs are plotted. When Market is Low (Question no 7) 73 . These shows the responses of people with the questions 70 60 50 40 t n c r e P 30 20 10 0 Buy blue chip Buy just to average " Sell and go out of " Wait for right time undervalued stocks out cost market to invest.

70 60 50 40 t n c r e P 30 20 10 0 "A single good stock at once "Diversify your portfolio by "Invest gradually following investing in different wait watch and play portfol strategy You invest in (question 9) 74 .

60 50 40 30 t n c r e P 20 10 0 strongly agree agree can't say strongly disagree should have exit plan before buying any stock (question 10) 75 .

40 30 20 t n c r e P 10 0 strongly agree agree can't say disagree strongly disagree Sell a stock as soon as it starts giving profit (question 11) 76 .

60 50 40 30 t n c r e P 20 10 0 Investment gambling Manipulated game Stock market is 77 .

but you absolutely must not make the error of prematurely cashing in your winners. for optimal performance it is best to both cut losses and ride winners as long as possible. you can probably afford to make the mistake of holding onto your losers. Lets gains run their course. Before we can develop a strategy for investing. The degree to which a strategy stacks up well against these criteria determines its desirability. Some say it is 10%. cuts losses short. This is a necessary element for any good plan of investing. and does not allow a good stock enough room for normal day-to-day fluctuations. When cutting losses to 8% or 10%. there are many strategies that can be used in stock investing. The very best strategies will satisfy the following eight requirements: 1. Others say you should never lose more than 8%. that you should never lose more than 10% on a stock trade. that is. 78 . However. it is extremely easy to get bumped out of a stock only to have it recover and begin soaring again without your being on board. but there are certain characteristics to look for in any plan for investing. Since we expect our gains over long periods of time to exceed 100% of our initial investment. the amount of damage that can be done by cutting our winning stocks short far surpasses the damage we can do by failing to cut losses.Characteristics to look for in any investing system Obviously. especially the part about letting gains run to their full potential. we need to have a set of criteria by which to judge if it is a good plan or not. As long as a portfolio is well-diversified. I have found that cutting losses this short leads to excessive trading and excessive losses. 2. Much has been written about what the ideal point is for cutting losses. Building upon our previous discussions about common investor mistakes and stock-market myths.

as long as the position continues to be profitable. Also. It is also unnecessary to take such daredevil risks because most trends last long enough that there is plenty of time to get on board and a lot of money can still be made by entering a trend in several installments as it is developing. It is risky to enter any market all at once because it maximizes your ability to lose a lot of money in a hurry. I will have lost only 3% of my account's assets on the trade since I only invested 10% of my accounts assets into the stock. As an example. Gradual entry into major positions. it will take a long string of uninterrupted losers in order to seriously deplete your trading capital. 3. This is the type of approach which must be avoided at all costs. and these drawdowns in capital really hurt you. in fact. It is inevitable that any system which attempts to let gains run will eventually build some large positions in a few stocks as the stocks grow in value. there is nothing magical about the 3% number. it is OK to build a position by adding to the position as it advances in value. 79 . I will not sell the stock unless it gets into serious trouble and falls 30%. If the worst happens and the stock does lose 30% of its value. it is improbable that all of your positions will drop to your sell point. they maximize the potential reward for holding a particular stock or basket of stocks.For this reason I prefer to take a radically different view of loss-cutting. some approaches cause an investor to plunge a large amount of his capital into and out of the market all at one time. I might set my stop-loss point back 30% from my purchase point and invest no more than 10% of my account's assets into a single stock. In this way. Of course. That is the good way to develop a large position. One poor timing decision can result in a loss of a large percentage of your capital. If you can aim to lose no more than 3% of your cash on any one trade. Therefore. I aim never to lose more than 3 % of my total account value on a single stock trade . However. Even in a market dip. I believe that this approach to loss-cutting is far superior to arbitrary rules which require cutting losses too short. A 33% loss of your capital requires a 50% gain on the remaining capital just to get to the break-even point. but the point is to keep your possible losses from any one trade to a very small amount. most professionals continually add to their stock holdings as the price moves in their favor. So. 10% times 30% equals 3%.

Minimal chance of a large loss from any one position . 8. and yet are poor long-term decisions. not in our worst. Minimum rupees invested 80 in losers/underperformers. when it becomes clear that the trend is beginning to profoundly weaken or even reverse. everything will turn out well. as the gradual entry into a position is a means for minimizing the chance of loss from a single bad decision. While we want to make sure we have a means for riding a stock's trend for as long as it can go. or liquidating a position. Again. Any plan of attack should score well in the area of keeping our eggs in many baskets as opposed to one. and we should not have a large percentage of our assets in a single stock unless our average purchase price is far below the current market price. or plunging. The common complaint one hears from many stock market participants is that they wish they hadn't invested so much in XYZ Company and they wish they had invested more in ABC Co. A successful system needs to ensure that our biggest investments are in our best stocks.4. Sells a stock once it begins to underperform. This is an adjunct to #2. If a strategy allows us to build a large position in an issue that is lagging or even losing money for us. If we do well at that. You may still feel these emotions. we can sustain a large one-day drop in the price of a stock without losing much. 6. but as long as your system is sound and you adhere to it fastidiously. adding to. If not. you will find yourself making judgment calls that relieve your short-term stress. Maximum rupees invested in biggest winners. we need to have a system which allows for selling the stock so we can redeploy capital to greener pastures. it cannot be emphasized too much that massive drawdowns in your capital are to be avoided at all costs. 7. predetermined criteria for initiating. Precise and unambiguous signals and marching orders are the best way to head off the effects of euphoria and fear. Clear. if any. In the heat of battle when you are dealing with your hard-earned money. of our original investment. the instructions from your system must be as clear as crystal. This mis-allocation of assets is usually accomplished via some of the common investor mistakes in. especially the mistakes of adding to a losing position. there is something seriously wrong with that strategy. . 5.

or add to a losing position once it is established as a loser. I want to emphasize that perhaps the best strategy of all. is to simply apply the stock picking criteria. say. on the other hand. and in the right market conditions may deliver large profits over time. is developed by inverting the Scale Trading approach. Stocks have historically returned on 81 . Before we get into the details of the Reverse Scale Strategy. let's think about a portfolio of ten stocks held over a period of time. what is certain to happen over the next five years? First of all we can't predict what the total return on the portfolio will be. 9. we studied the worst of all trading strategies. The only thing we know about the portfolio is that it is composed of ten stocks. you will need to select a substantial number of stocks to achieve an adequate level of diversification. five years. Practiced consistently. then buy and hold their selected stocks without ever selling them. This is important because throughout this book I assume that the reader's time is his most valuable asset. and also will depend on how well our ten companies individually perform over that period of time. it is hard to beat a buy-and-hold strategy. let's not worry about which stocks are in the portfolio. The Reverse Scale Strategy.This is the converse of #7. Now let me ask the question. To begin with. but for results versus risk and time expended. For now. The one inevitable characteristic of all stock portfolios. because that will depend on market conditions over the next five years. for most people. It systematically snowballs your losses and jettisons your best stocks just as they start to become winners. though. "what can we predict about the portfolio five years from now?" In other words. Of course. It is interesting to note that the only ways you can accomplish having too much invested in a loser is to either plunge into it all at once and fail to cut your loss. the scale-trading approach is a surefire ticket to the soup line. Both of these are deadly mistakes and any system we develop must preclude us from committing these sins. and probably in short supply as well. let's take a side trip to examine how all portfolios inevitably act over time. Not time consuming to maintain. I recommend the simple buy-and-hold approach for the vast majority of people.

82 . This is not exactly a revelation. which might mean a move of two. perhaps declining marginally. We could expect that one or two of the stocks will have tremendously outperformed the market averages. Some will have proven to be dogs. It may be disheartening to you to realize how little we actually can foretell about the future performance of our portfolio. Since every portfolio of stocks contains future winners and future losers. we are left with this: The challenge of investing is to make sure that when you get to the end of your holding period.average about 9% per year. A large portion of the stocks will have performed pretty much in line with the market. To realize how this concept can be useful to us. some stocks in the portfolio will have performed vastly better than others. or in the extreme case. you find that most of your money was invested in the stocks which performed the best. or maybe even ten or more times our entry price. either. gone out of business in the meantime. there's also a very good chance that your tenstock portfolio will have returned something close to what the market averages returned over the five years. So obviously we can't accurately predict what each individual stock in the portfolio will return. It also varies considerably from company to company. and relatively little was invested in the stocks which did the worst. Let's call this the Trend Concept. depending on market conditions. and it is this: At the end of the five year holding period. For the sake of reference. call this the Variability Concept. However there is only one thing that we can fairly confidently predict about any basket of stocks. but over any five year period this can range from a negative number to a very positive number of 20% per year or more. we also have to add to it another fact we've already discussed in great length about the stock market: Stocks make large moves in continuous trends which almost always take months or years to develop. If you've chosen your stocks randomly. four.

So in other words. Whether the move is up or down. They are evolutionary. is to develop a system that will accomplish this allocation of capital to our strongest and best-performing stocks. we can do this by simply reversing the scale trading approach learned about in the last chapter. It is equally apparent that this condition will develop slowly. instead of when they move down in price. Their buying or selling leading up to the announcement moves the stock while the public is still clueless as to why it is moving. . even if they are not supposed to know. not all-at-once step functions. in combination with the scale trader's foolish trading rules required the poor trader to buy more and 83 . The union of these two inevitable events should lead logically to this conclusion: If only we could find a way to gradually allocate our investment rupees to the bestperforming stocks in our portfolio as they are becoming the best-performing stocks. the tendency for a declining stock to keep on declining. bankruptcy filing.Large price movements are gradual incremental events. or something of that sort. The reason for this is that there are always some folks who know about these pending announcements before they happen. then we'd have a tremendous chance of greatly increasing our investment returns above and beyond what would be achieved by simply choosing those same ten stocks and holding them in equal rupee amounts. Putting the Trend and Variability concepts together. then. a really big move does not normally happen overnight unless there is a merger announcement. it becomes apparent that there will most likely be a wide gap in the returns between the best-performing and worst-performing stock in your ten-stock portfolio. not revolutionary. This is what call this Reverse Scale Strategy. we add equal rupee amounts to our stock positions as they move up in price. Reversing the Scale Trading example What we need. with the gap in total returns between the best and worst stock growing steadily as the holding period lengthens. As it turns out. Even then. Like a snowball rolling downhill. the actual announcement has often been preceded by an uptrend (in the case of a pending buyout) or a downtrend (in the case of a pending bankruptcy filing).

realize large long-term gains. The Snowball Effect Let us assume that a person has made five snowballs. all equal in size. Your average cost per share is always above Your average cost per share is always below the current market price after second the current market purchase. price after second Sacrifices large long-term gains for small Sacrifices small short-term gains in order to short-term gains. losing positions. following is a brief contrast of Scale Trading versus the Reverse Scale Strategy: Scale Trading Positions added only if stock declines.more while his position became worth less and less. Makes no attempt to cut losses. automatically allocates In a portfolio. it becomes much easier to see how wise it is to follow the Reverse Scale Strategy. Unlimited potential for loss. Reverse Scale Strategy Positions added only if stock increases. Once you have really grasped how foolish the scale trading strategy is. To give you a flavor for the advantages of adding to a position as it moves up in price. automatically allocates majority of capital to worst-performing majority of capital to best-performing issues. Adds to Cuts losses. purchase. One of the snowballs starts out okay but doesn't get 84 . Does not add to losing positions. In a portfolio. issues. and he gives each of them a equal push to start them rolling downhill. Unlimited potential for gain.

Trading rules for the Reverse Scale Strategy: an example. as in the stock market. sheer sizes make it unstoppable. both the Scale Trading approach and the Reverse Scale Strategy cause a snowballing effect. the snowball that rolls the farthest gets the biggest and picks up more snow gradually as it goes. Still another makes it a bit further than those two. The analogy between snowball-rolling and a portfolio of stocks is a good one. however. momentum. Hence. From then on. but then stall out because they became large and happened to be on a part of the hill that was not as steep as some other areas. depending on whether you are using the Scale Trading approach (snowballing losses) or the Reverse Scale Strategy (snowballing gains). our strategy will make sure that the stock which advances the furthest gets most of our capital. because it adds snow to it gradually as it progresses. and you can control how much of a shove you give each. To learn how to implement the Reverse Scale Strategy. Even though we can't predict which snowball will roll the farthest. but then hits a wet area and gets bogged down. The size of the snowball can represent either losses or gains. there are things you can control and things you cannot control about the stocks you are investing in. It goes several times the distance of any of the other snowballs.very far. as it hits a rock that was hiding below the surface of the snow. Obviously. Really. Two others make it about halfway down the hill. the hill still gives more snow to the one that eventually does go the furthest. the beauty of the Reverse Scale Strategy is that just as the hill and gravity make sure the snowball that goes the furthest gets the most snow. With snowballs. and its quick start. happens to have just the right type of snow and a nice steep incline. let's run through an example for one single stock. One of the snowballs. You can control how big you make each snowball initially. many of the factors are out of your control or unpredictable. You have to choose which strategy you would prefer: One which snowballs losses or profits. and after a while. Although we will be using the Reverse Scale Strategy in a portfolio of several or 85 . exploding the snowball into smithereens.

100 Rs33.00 Rs0 13 1/4 Invested bought Rs Invested Shares this Purchase * N/A N/A N/A N/A N/A N/A N/A Owned Value of Cost Shares Share Rs per Profit/(Loss) .more stocks.38 Rs1. (instead of 50% lower.000 50 Rs1.000 Rs20.993 120 86 Rs8.27 Rs4. For a stock where our initial purchase was at Rs20 per share.990 83 Rs2. our decision chart would look as follows (the initial entry position is highlighted): Reverse Scale Strategy. as with scale trading). As you can see. it is much easier to illustrate the concept using just one stock. 50% purchase increments (Chart #1) Decision Amount Shares Cumulative Cumulative Current Cumulative Total Point Price Level Losscutting point Initial entry point Decision 30 point 1 Decision 45 point 2 Decision 67 1/2 Rs1.013 15 Rs3.108 Rs990 22 Rs2. we will be adding an equal rupee amount at each price level. The trading rule is: We will invest an additional designated number of rupees at each price level as that level is reached . First. This rupee amount is the same as our initial position in rupees.and only if it is reached. each succeeding decision point being 50% higher than the previous one. we construct a chart similar to what the scale trader in the last chapter constructed.725 Rs28.745 Rs990 33 Rs1.980 105 Rs4.000 50 Rs1. but a reduced number of shares due to the higher price paid for each successive purchase. only our chart begins at the initial purchase price and goes up.98 Rs500 20 Rs1.490 Rs23.

5. and so on for as far as you need to go. then it's a good bet it's lost enough momentum that it will have a hard time becoming a market leader once again. However. Our other trading rule is: Whenever our stock increases to reach a decision point and then retreats all the way back to a previous decision point.5.013 10 Rs5.point 3 Decision 101 1/4 point 4 * Since shares can only be bought in increments of one. each successive Decision Point is arrived at by multiplying the previous one by 1. So the first decision point is calculated by multiplying the Rs20 initial entry price by 1.163 Rs38. this number does not always equal Rs1. As we have discussed in earlier chapters. Rs30 times 1. but the cost of the closest increment of one share that can be purchased with Rs1. its uptrend may be ending or about to go dormant for a long.5 results in Rs45. long time. we have to draw the line at some point. Given that our decision points are 50% apart Summary of Purchases and Sale (Chart #2): Shares Purchased Price per Share Total Cost Commission Net Cost Purchase #1 50 Purchase #2 33 Purchase #3 22 Purchase #4 15 Rs20 Rs30 Rs45 Rs67 1/2 87 Rs1000 Rs990 Rs990 Rs1013 Rs25 Rs25 Rs25 Rs25 Rs1025 Rs1015 Rs1015 Rs1038 Rs1.50 Rs8. In other words. we will sell out our entire position in the stock. it's best to trade it in and start over with another more promising issue.158 . So.000. which yields Rs30. we need to give a market-leading stock plenty of room for normal retreats off its highs in order to be able to ride the long trends when they develop.000 for each purchase. Why do we have this trading rule? Simply because if a stock retreats enough to make it all the way back to a previous decision point. Again.005 130 Rs13.

Purchase #5 10

Rs101 1/4

Rs1013

Rs25

Rs1038

Total cost of all the purchases: Rs5,131. Total shares purchased: 130 Proceeds from 130 shares sold at Rs67 1/2 = Rs8,775. Minus Rs 25 commission = Rs8,750. Net Profit = Rs8,750 minus Rs5,131 or Rs3,619. Just to illustrate the previously made point about the Reverse Scale Strategy making it hard to get shaken out of a stock prematurely, please note what our sell decision point would have been had the price topped out at only Rs100 instead of at 101 1/4 or higher. In that case, the price would have had to retreat from Rs100 all the way down to Rs45/share in order to trigger a sellout of the position, since it never reached the Rs101 1/4 level and therefore Rs67 1/2 never became our sellout point. Now, I know emotionally it might seem disheartening to you to have to sit idly by while a stock sinks from a peak of Rs100 down to Rs45. But believe me, there are plenty of times where this discipline of being able to ride out the occasional temporary steep correction will be the very thing that allows you to sometimes go on to make a huge gain of 1,000% or more. Keep in mind that gains of 1,000% happen much more often than you'd think if you are using the stockpicking criteria presented in Chapter 4. It is also much easier to ride a stock down temporarily if it is only one of many stocks you own, so make sure you diversify! For the sake of covering all the bases in the last example, what would have happened if our stock had turned out to be a loser instead of a winner? If after we took our initial position at Rs20 per share, the stock declined to 13 1/4 or lower (Rs20 divided by 1.5), we would have sold the initial position and started looking for a new stock to start over with. We would have incurred a loss of Rs337.50 plus two Rs25.00 commissions, for a total loss of Rs387.50. We then would go prospecting for a new stock to trade. Remember, we do not want to keep gunning for the same stock once we've been bumped out of it by our system.

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When you make an investment, you are giving your money to a company or an enterprise, hoping that it will be successful and pay you back with even more money. 89

Some investments make money, and some don’t. You can potentially make money in an investment if:
• •

The company performs better than its competitors. Other investors recognize it’s a good company, so that when it comes time to sell your investment, others want to buy it. The company makes profits, meaning they make enough money to pay you interest for your bond, or maybe dividends on your stock.

You can lose money if:
• • •

The company’s competitors are better than it is. Consumers don’t want to buy the company’s products or services. The company’s officers fail at managing the business well, they spend too much money, and their expenses are larger than their profits. Other investors that you would need to sell to think the company’s stock is too expensive given its performance and future outlook. The people running the company are dishonest. They use your money to buy homes, clothes, and vacations, instead of using your money on the business. They lie about any aspect of the business: claim past or future profits that do not exist, claim it has contracts to sell its products when it doesn’t, or make up fake numbers on their finances to dupe investors.

The brokers who sell the company’s stock manipulate the price so that it doesn’t reflect the true value of the company. After they pump up the price, these brokers dump the stock, the price falls, and investors lose their money.

For whatever reason, you have to sell your investment when the market is down.

Hence there are several myths still present in the mind of a investor who is going to invest in stock market. So these myths are needed to be removed so that investor can invest freely in the share market. If the recommendations mentioned in chapter 5 are followed by any investor than he can some 90

91 .how overcome these myths and can know the reality of stock market.

religarefinmart.nseindia.moneycontrol.Books: Marketing research C R Kothari Websites • • • • www.com www.com www.relegaresecurities.com www.com 92 .

In what Proportion do you invest your funds amongst the investment options? Bonds _____ Shares _____ Insurance _____ Bank Deposits _____ Real Estate _____ Gold _____ Mutual Funds _____ ULIP ____ Others (Please Specify) _________________ 93 .000 – 5.00.00.00. Please rate the features you consider before investing in Financial Market (1.00.00.000 □ Mutual Funds □ ULIP □ 2.000 □ 5.000 – 3.000 □ 3.00.:___________________________ Income (Tick Range) □ 1.00.000 – 2. Which are the present investments products in which you have invested or currently investing? □ Bank Fixed Deposit □ Stock & Shares 2.000 and above □ Post Office □ Others _____________ 1. 5.APPENDIX Questionnaire Name: ______________________________ Age: □ 20 – 30 □ 40 – 50 Gender: □ 30 – 40 □ 50 and More □ Female □ Male Profession: □ Government Employee □ Private Sector Employee □ Self Employed □ Business □ Others (Please Specify) Contact No.Highest) □ High Returns □ Tax Rebate □ Risk Free Returns □ Investment Horizon □ Systematic Investment 3.Lowest.

9. Comment on Relegate according to you in the following fields (1 is for best and five is for worst) Service Transparency Research Pricing 7. Stock whose price is increasing continuously. Mutual funds. Wait for right time to invest.4.20 Years 3. A new offering (IPO). 5. One should have exit plan before buying any stock • • • Strongly agree. Less than a year 6. 10 . 1 . Less Than 1 Year. 5 – 10 Years 4. Stock which is consistent in the market. Agree Can’t say 94 . 5 Years 3. Which stock you generally invest in? • • • • Under valued stocks. 3 – 5 Years. Buy just to average out cost. Sell and go out of market. You invest in • • • • A single good stock at once Diversify your portfolio by investing in different portfolio. 8. 10. How Long You Have Been Investing in the Market? 1. 4.3 Years 2. When share market is low what you generally prefer to do? • • • • Buy blue chip stocks which are under valued. How Long You Have Been Associated With Relegate? 1. Invest gradually following wait watch and play strategy. 1 – 5 Years 2.

13. 11. Are you satisfied with Relegate if not then why? ______________________________________________________ ______________________________________________________ ______________________________________________________ 95 . Sell a stock as soon as it starts giving profit • • • • • Strongly agree Agree Can’t say Disagree Strongly disagree 12. On what basis you buy any stock • Your intuition • Prediction • Fundamentals of the company. • Last track record.• • Disagree Strongly disagree. According to you stock market is • • • Investment Gambling Manipulated game. 14.

96 .