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BUY RIGHT, SIT TIGHT

A BEGINNERS GUIDE TO INVESTING

In the recent past many investors have left the equity market disappointed because their portfolios have not done too well. And the reasons for this, as our research on this matter points out, is largely due to wrong selection of stocks, over-diversification, investing in penny stocks, etc. But, equities as an asset class has outperformed all other asset classes over the years and hence should play an important role in one's portfolio in order to create wealth in the long-term. Hence, it's important that investors realize this and come back to equity markets. With this objective in mind, we at Motilal Oswal have embarked on a new mission the 'Mission: Save the Investor'. The aim of the mission is to make investors aware on the one mantra that they need to follow to create wealth through equities i.e 'Buy Right. Sit Tight'. You too can create wealth for yourself if you follow this mantra religiously. Just read through this short book on the concept of 'Buy Right & Sit Tight' and get started. Happy Investing!

IFFERENT WAYS TO CREATE WEALTH

Investing is putting money aside today to get more tomorrow. This could be done by investing in a number of asset classes. Investments could be made in financial instruments like fixed deposits in banks and companies or debt instruments like bonds and debentures. These investments are made to generally get periodic returns in the form of interest with the original capital being reasonably safe; which is returned on maturity. While interest income generally gets consumed, the principal does not appreciate very much as inflation eats into the capital appreciation. Wealth creation is possible through investment in land and real estate. But, these require specialised knowledge and require large amounts of capital. Gold, while it has appreciated sharply in the recent past, has provided modest returns over long periods, while giving no periodic returns.

A common method of creating wealth is through investments in common stock or equities in the stock market. These provide periodic returns through dividends. These can be sold and the excess of the sales proceeds over the cost is the addition to the wealth.
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REATING WEALTH THROUGH THE STOCK MARKET TRADING VS INVESTING

There are two ways of wealth creation through stocks:-

Trading

& Investing

Trading is basically escorting a share from a low price to a higher price, the difference being the profit on the trade. Purchase is done without concentrating on the industry, company or its fundamentals. Price is the only criterion for purchase and sale. These decisions are based on momentum and are not based on any elaborate study. To the trader price is GOD, the rest being irrelevant. Trading could be intra day, or positional over the next few days or next few weeks. This way a trader could rotate his capital many times over and his wealth creation could be through the sum of his net profits in a number of trades.

While wealth creation through trading is alluring, its results are not heartening. The trader is pitted in a zero sum two person game with the rest of the world, which is the market. The trader has limited capital and is pitted against the market whose resources are infinite. Each trade ends with money changing hands from the market to the trader if his call has been right. If his call is wrong he loses money to the market. The game continues to infinity and ends if the trader gets all the money from his opponent, the market or if the trader loses all his money to the opponent. As the trader's capital is limited, the odds are stacked overwhelmingly against him. Experience shows that 98% traders lose their capital and it is only a very few who make it big through trading.

Investing is another way in which you can create wealth through the stock market
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Trading may be a 100 metre sprint, but, wealth creation is a marathon race. And thats where Investing comes in. If Trading is like 20-20 cricket, Investing is like a Test Match.
INVESTING HAS 2 BASIC RULES

RULE NO. 1 Never lose money

RULE NO. 2 Never forget Rule No. 1

The planning for the game (in investing) is different from that in trading. In one day and T20 cricket formats (Trading), the eye is on the clock and the run rate, while the aim is to hit out and score as fast as possible. If the batsman gets out rashly, it does not matter as the next batsman gets a chance to take the strike. In test cricket (Investing), the aim is to play in a steady manner and build a long innings to reach a sizable score for oneself and one's team.

Investment is something, which on thorough analysis, promises safety of principal and a satisfactory return
~ Benjamin Graham ~
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OMMON INVESTING MISTAKES

While everyone aims to make it big through investment, many fail. Hard work and enthusiasm may be rewarding in other businesses, they are counter productive in investment. There are many mistakes that investors make unknowingly which lead to wealth destruction. Some of the points to bear in mind are: Investment in stocks does not require too much time or hard work. Many make it their whole time profession giving them a lot of time on their hands. Work increases to take care of the available time and this leads to hyper activity and mindless trading. Dont work for your stocks, let your stocks work for you. There is no plan for the process of wealth creation. Creating wealth without having a process is good luck. And as you know its not often you get lucky. Hence you not only need to plan your play; you also need to play your plan when investing. Profit is simply the difference between the exit price and the entry price. Exit price is in the realm of many factors beyond ones control, but, the entry price is well within ones control. Develop a methodology for stock selection. Concentrate on businesses that you can understand.
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NVESTING BASICS

Have the purchase price to be so attractive, that even a modest sale gives an attractive return. Look at businesses where you can see the future for at least ten years. Now look at companies within the industry which have management calibre, competitive advantage and potential to grow at above industry rate. This can be done very simply by keeping your eyes and ears open. Try to find about management integrity, processes, management depth, the way it treats its top team and more importantly its workers and middle management, its ability to adapt to change, the way it treats its suppliers, customers, its creditors. This can be got either through published information or by talking to suppliers, customers, employees, exemployees and other companies.

Never get out of a stock if it has temporary problems. Dont have the itch to switch.
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NVESTING GROUND RULES

Investing is like playing a test match. One has to protect ones wicket while building up a huge score over a long duration of time. Here, one should study the macro economic environment, industry trends, management, financial performance for at least three years and the managements policy of sharing the companys profit through dividends. Some simple rules to watch before investing are as follows: Study at least three years working results. Look for consistent performance, one yearss performance could be accidental or managed. The Return on Capital Employed and Return on Equity should be above 20%. Steady performance is not enough, growth is the name of the game. Look for at least 15% growth in earnings and 10% growth in dividends. There is a dividend pricing model for shares, which projects share prices on the basis of dividends. In simple terms, it suggests that the higher the dividend, the higher the price. Secondly, the higher the compounded rate of growth of dividends, higher the price. Buying a good stock is not enough. Buy when the price is low. The final return depends not just on the exit price but also on the entry price.

If you dont have the time to study equity fundamentals before investing, you should take the advice of your equity advisor. Else, you could invest in a Portfolio Management Scheme (PMS) of a reputed organisation.
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UY RIGHT & SIT TIGHT

Some of the biggest fortunes have been made by investors who have invested wisely and held on for years. Warren Buffett, reputed to be one of the worlds richest men has made his fortune by holding on to wise investments for decades. The moral is obviously BUY RIGHT, SIT TIGHT. Warren Buffett in this context has said.

An investor has to do a small number of things right and avoid major mistakes to be outstandingly successful.
Steady uninterrupted investments increase in value through the power of compounding. Albert Einstein once said,

Compounding is the eighth wonder of the world.


Steady well chosen investments may see quotational losses, but, not permanent losses. Buy a basket of 10 to 20 scrips in steady non- cyclic industries and hold on for long periods.

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HE POWER OF INVESTING RIGHT

Here are some compounded annual rates of growth from well known companies by holding on for 20 years or since listing, whichever is later*.

Asian Paints Berger Paints Cipla Eicher Motor HDFC Ltd HDFC Bank Hero Honda

25% 31% 30% 30% 23% 25% 28%

Infosys Tech ITC L&T Nestle Kotak Mahindra Bank Pidilite Industries Sun Pharma

46% 21% 19% 19% 26% 23% 31%

In addition to the above steady growth rates in the value of holdings, these companies pay dividends periodically. These dividends amount to about 1 to 2% of the current market value of the holdings. Companies have a well thought out policy of dividend payout and as the earnings grow, dividends move in line.
*The stocks mentioned above are to illustrate a point. Past performance may or may not be sustained in future. This doesn't constitute any advice or recommendation from Motilal Oswal Financial Services. Readers are advised to use their discretion or consult a financial advisor. Personnel of Motilal Oswal Financial Services & its subsidiaries may have long / short position in the stocks mentioned above. 21

UMMARY

Owning a portfolio of good steady stocks in non-cyclical industries is like owning an orchard of fruit trees. It keeps you well fed through regular supply of fruits, while the land on which the orchard stands continues to appreciate in value.

Happy Investing!!

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