Tuesday 8 May 2012

A must read article if you invest in stock/commodity markets

Written by Harb

This article is about a couple of memorable experiences of mine in investing in stock and commodity markets. It is said and rightly so that very few people earn in these markets. Still some of those who read this article can be one of those few.

Most of the readers who have dabbled in stock market must have heard about the fundamental and technical analysis of investing. So I need not elaborate on them. More so since the method I am going to write about is quite different from both. I may call this method "Thinking Aside" method.

Of course fundamental analysis - of knowing about the financial health of the company since inception - and technical analysis - knowing about the present position of its price on the charts and whether it is in bullish or bearish phase (Bullish means rising stock market prices. Bearish phase means the opposite) - will be necessary but only later. And as the reader will see even then they will not be of much importance here. Because "Thinking Aside" method will in fact be catching the stock at the very initial stages when fundamentals may have just begun to form and nobody  may have yet begun to draw charts of these stocks.

Those were post Harshad Mehta (infamous stockbroker and scamster of 1992) days and I had burnt my fingers by investing in Master Plus, the only stock besides ICICI most people like me first came to know of the stock markets post Rao-Manmohan Singh led economic liberalization. Stung, I began to read books on investing and finally landed on One Up On Wall Street : How To Use What You Already Know To Make Money In The Market by Peter Lynch, thought to be one of the great investors of those days. This book brought my attention for the first time to some "hat ke" thinking on investing.

"Computer companies" like Infosys were soon talk of the town as also of Dalal Street and anybody could see India jumping on the bandwagon of computerization. Everybody seemed to be thinking of buying computer and every investor talked of these computer-led companies. It was in such a scenario that I applied one of the formulas Peter Lynch gave in his book for the first time.

The formula was that besides other things find a company which has a difficult or difficult to speak name and if it does not seem to make any sense to you the better. Because then it will be most likely to be ignored by investors till it has begun to show sufficient profits to draw attention of analysts who will then, of course after buying it in sufficient quantity themselves, bring it to general public's notice by repeatedly writing about it in various newspapers and magazines.I searched the Economic Times, then almost the only source of information regarding stocks, and landed with a few names one of which was Moser Baer.

Most of my friends and relatives with whom I had the chance to talk to about this company would ask questions like:"What does the company make, Beer?" "Are the spellings you are telling correct?" "I  don't want to waste time on this company whose name I cannot understand...your mo..mo moser beer..." Hardly anybody spoke its name correctly, most said beer instead of Baer. I felt I had passed the first Peter Lynch test.

Then I reflected upon what this company was making. This company was making apparently 'minor,' nondescript accessories like Time Recorders, Floppy Diskettes etc for use in computers. I saw that while everybody was talking of computers and giant companies which made and used them nobody seemed to give a thought to such 'minor' background companies. While what was clear to me was that use of computers will lead to their increased wear and tear and such background companies may find themselves in the position of truly backbone companies to these giant computer-making/using companies.

Soon I developed so much love for this company that after a few months I actually visited its office with my family then perhaps at Lajpat Nagar, Delhi. I had read that one Mr Deepak Puri had started it. Though I could not meet him personally (he was out of station) I was quite impressed by the staff and by the working environment then prevailing in the office. I was left in no doubt that some day this company will go places. Its share was then hovering between Rs 7-8. Needless to say I bought as much as I could. The rest is history. The share eventually reached more than Rs 500, almost a hundred-bagger (which multiplied 100 times), incidently a phrase coined by Peter Lynch himself.

Since then the company has gone places and anybody further interested can read more about it at Wikipedia.

The second memorable investment which almost miraculously landed in my lap was in Gold.

Commodity Market called Multi Commodity Exchange or MCX had just been set up in India (2003) post Rao-Manmohan economic liberalization. As I could see the MCX/commodity trading progressing by leaps and bounds in the coming years I thought I should perhaps learn to invest in Gold through this market. Gold was then around Rs 6500-7000 per 10 gm. I began to dabble in it by trading in its futures in 2-3 lots of 10 gms each, the only lot-quantity allowed in the beginning.

Then suddenly the government allowed banks to sell Gold bars to people. Moreover it started to make all Gold hallmarked, i.e., to be certified by the Bureau of Indian Standards as to its quality.

I had often heard by then our women folk accusing goldsmiths of mixing cheap metals in their golden ornaments so that if later they went to sell the same they will not get the same amount of Gold as they originally purchased. Even the family goldsmith will find excuses to manipulate things to loot them on this count.

And I had also noticed that many rich people including service men wished to invest in Gold but were afraid of the same looting by the goldsmiths.

Now I thought...if people will be assured of the quality of Gold they were buying thanks to government's step many would come forward to buy it and then there are many overly rich people in India who would like to convert a part of their wealth not to talk of black money permanently into hallmarked Gold. So the Gold price are likely to skyrocket in due course of time.

In the meantime the MCX had allowed Gold futures to be traded even in Kg lots.

Needless to add, I bought some futures in Kg lots around Rs 8000 which later I sold around Rs 12000, though the rate has continued to increase even up to this day (latest around Rs 30000), perhaps now more because of international reasons.

PS: There are some more examples of similar investing but I have to stop because the article will become too lengthy. Moreover, I think interested people can learn even from these two examples how "Thinking Aside" works and how they can benefit from it.


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