|Shashi Bhushan Singh, 24, Delhi|
|Buys momentum stocks|
|Gain: Rs 1 lakh in the past 6 months|
|For someone who exited the stock market after the January 2008 fall, Singh is a braveheart who couldn't stay away from it for too long. He re-entered in mid-2008 and in the past five months has adopted a new strategy—investing in momentum stocks. "Stock market doesn't behave in a logical manner. All that it seeks is news and its impact," he says. Momentum stocks have helped him make a quick entry and exit, booking quick profits in a short span ranging from a few days to a week.|
|Jignesh J. Shah, 40, Mumbai|
|Has a trading portfolio|
|Gain: Rs 40,000 a month since Oct '08|
|Shah has been donning two hats at the same time - investor and a trader. As a subbroker, he has the advantage of being in the thick of things. No wonder he has held on to some good stocks for wealth creation and trades in the rest to make money to add to his wealth. "With a split portfolio, I have the benefit of holding stocks and also trading in them. But it calls for immense discipline to do away with emotions while investing this way," he laughs.|
|Prasanth K, 24, Kochi|
|Plays on intra-day volatility|
|Gain: Rs 45,000 a month since Oct '08|
|Though it took him a while to master day trading, he has adapted to it like a professional. "Get into day trading once you get some experience in trading. Otherwise, seek guidance to familiarise yourself with the nuances of trading," he says. Intra-day traders select a few stocks that have a high volume turnover and are volatile through the day to bet on them. "Look for a trend which is price-based, not opinion-based," he says. This requires one to square an unfavourable trade regardless of one's individual opinion and emotion.|
|Ch. Ramakrishna, 29, Hyderabad|
|Seeks news and cues|
|Gain: Rs 50,000 in the past 6 months|
|For a 29-year-old, Ramakrishna comes across as a seasoned investor. He believes in investing in a business that he understands the most—construction and real estate. Employed with a Hyderabad-based construction company, he likes to stick to sectors he understands and, hence, looks for real estate and related business to invest in. "I track companies that are in the same business and operate on a scale that I can afford to invest in," he says. IRB Infrastructure was a moneymaker for him and he is looking for more such opportunities.|
|Parag Parikh, 55, Mumbai|
|Gain: Beaten the index since Oct '08|
|Parikh has been in the stock markets since the late 1970s and has seen many cycles. "Markets and investor behaviour have changed a lot over the years," he says. He stays focused and monitors his investment universe to make sure that the companies he holds are insulated against the global market turmoil and slowdown. This has called for a change in the sector and stock holdings to adapt to varying market conditions without changing his core positioning.|
|Ajay Hooda, 34, Delhi|
|Uses derivatives profitably|
|Gain: Rs 10 lakh in the past 6 months|
|A seasoned player since 1994, Ajay Hooda is not bothered about the direction the market takes—as long as it moves. The modus operandi for him is always the same: look for a clear-cut trend in particular stocks and create a position once it breaks its previous highs/lows. "I look for trends with technical analysis and take calculated risks," he says. Getting out of the wrong trade is the key, he feels. His success has also been linked to the calculated option trades that he has mastered in the derivative segment; he swears by it in bear market phases.|
When the bear comes out to play, most investors run away. This beast has been on the prowl for some time now, mauling those who tried to make a fortune, scarring those who did not pay enough heed. Sadly, it's going to be almost impossible to defeat it in the current market if you don't change your existing investment strategies. You need to be more short-term in your outlook and take a few calculated risks. In the next few pages, we shall discuss the strategies that some of the winners have adopted. These people—short-term investors and day traders—have not only squeezed past the snarling beast, but also tamed it enough to reward themselves. Some of these pointers might help you tweak your strategy in such a way that you too can make money in a downturn like the current one.
Think of an intra-day trader like the guy who always runs to catch the bus as it pulls away from the shelter, only to get off at the next stop. An investor is the one who has planned out his journey, studied the time-table, booked in advance and has managed to get out at the terminus. But it always helps if he knows what he's in for if he decides to take a shorter trip.
Long-term investors will tell you that Warren Buffett, the most successful investor of all time, rarely changes his long-term value investment strategy. But we are all human, and if there's money to be made in the short term, we want it. We will try to show you that this is possible—if you do your homework and if you go about it in a disciplined way.
Octogenarian Chandrakant Sampat, who has been an investor for over five decades, once said, "To be a good investor all one has to do is dream." However, to give those castles in the air a concrete foundation, an investor has to be wide awake, especially in these troubled times. It's human nature to follow the herd; when the Sensex hits an all-time high, even those who have no idea of a share storm the market. During a bear phase, there's invariably a stampede to exit. In fact, at times like the present, even seasoned investors panic and prefer to stay away from equities. So they incur losses that they could have avoided.
Apart from the dream, you require discipline. You also need to be prepared for change—and agree to alter your strategy to suit the changing times. Stock market behaviour has a lot to do with the factors that it depends on, be it the economy, liquidity, news, business cycles, even sentiment. It is a wise investor who knows how to react to the market's various moods. Successful investors change their strategies but know that they need to be disciplined and follow some basic rules. Some tenets tend to be common to all successful investors since they work in every market phase. Learning these basic rules and applying them in a regulated fashion will help you play the stock market right.
Buy momentum stocks
To many, momentum investing implies a walk on the wild side. Conservative, fundamentals-based investors see it as a major gamble. Despite its dubious reputation, momentum investing works and not just in a bear market. For this strategy to work, you can't adopt a buy-and-hold strategy. It calls for daily monitoring and sometimes selling sooner than anticipated.
In Delhi, Shashi Bhushan Singh, all of 24, swears by momentum stocks. He goes against all the accepted principles of longterm investing, claiming that he doesn't look at the fundamentals of a company, and even if he were to do so, wouldn't understand them in most cases. So, what does he look for? "Three things: a strong price chart, rapid earnings growth and recent positive news and forecasts by analyst reports from broking houses," he says.
Like all momentum investors, Singh scorns the idea of 10% returns in a year. He and others of his ilk look for the big, killer buys. "I bought 260 shares of Opto Circuits at Rs 81 a share on 26 March 2009 and sold it at Rs 102 on 31 March 2009," says Singh. His gain over five days was a neat 25%.
In Hyderabad, Ch Ramakrishna, 29, takes similar bets, but does so with some understanding about the business of the stocks that he picks. "I tracked IRB Infrastructure, a momentum stock. I bought it on 11 December 2008 for Rs 80 a share and sold it on 28 January 2009 for Rs 110 to make a 37.5% gain on one stock alone," he says. While Ramakrishna bought only 300 shares, to gain Rs 9,000, bigger momentum players tend to register higher gains because of larger stakes.
Create a trading portfolio
Gambling on momentum stocks might make you a fortune—but you could also lose your shirt. To hedge against the latter, investors like Mumbai-based Jignesh Shah split their portfolio and allocate a specific portion to long-term, fundamentally sound buys. With the remaining portion, they play. "I have split my portfolio into two," says 40-year-old Shah. This way 50% of his portfolio is allocated to long-term value picks and the other 50% is used for trading and speculative activities. The end result? He makes money any which way the market moves. He's both a bull and a bear.
Shah makes it a point to look at all technical indicators; while trading, he makes extensive use of Falcon, a software that gives him live updates of the stocks that hit new highs, lows, sudden spurt in volumes and bulk deals. "I try to cash in on emerging trends by either going long or short by using this software," he says. He bought 500 shares of Bajaj Hindusthan at Rs 43 per share on 4 March 2009 and sold them at Rs 76 per share on 15 April to make Rs 16,500 or 76% in a little over a month. As he says, "Eventually, long-term investing pays, but to make money in the short- to medium-term, you need to behave as a trader and churn your portfolio by selling and booking profits."
Watch intra-day volatility
One of the reasons most financial advisers (including this magazine) do not recommend playing the market is the incredible short-term volatility in prices. Lay investors could well be scared off the markets forever if they track the highs and lows in a single day. But traders are not (or so we devoutly hope) lay investors; they either have sufficient knowledge of the market or are wealthy enough not to be affected by the losses, or both.
A smart and committed full-time trader actually sees benefit in volatile situations and welcomes them. K. Prasanth, a Kochibased day trader makes his daily kill from volatile stocks on which he regularly makes money. "I increase my trading volumes when I can see some bullishness and higher volatility in a stock," he says. Take his trade on 30 March 2009, when he bought 100 shares of DLF at Rs 160 and bought 50 more as its price dipped to Rs 158. He sold at Rs 179 a share, making a neat profit of 12.5% in a single day.
You could also lose a packet in the process, and that's why we say that this kind of trading is only for those with knowledge or immense reserves of money. "I went wrong on Sesa Goa. I bought it for Rs 101, but the price kept falling after that," rues Singh.
Look for news and cues
Players like Singh might not have a clue about the fundamentals of a company, but they know all the rumours, have inside information and hardcore news about the company. This plays a big role in the way the prices of stocks fluctuate. This fluctuation, as we saw earlier, can be a great buying or selling opportunity.
Consider this. Between 16 December 2008 and 9 January 2009, the price of Satyam Computer fell from Rs 227 to Rs 19.75, when the news broke about its former CEO R. Ramalinga Raju cooking the books. The stock touched Rs 6.30 for a brief period on the NSE the day Raju confessed.
Both Singh and Prasanth picked up Satyam shares at this point, as they expected it to offer opportunities to gain from volatility. "With the Tech Mahindra takeover, I am confident of earning a good profit on the buy-back price they will offer," says Singh. Prasanth feels that the company has potential to grow over the next few years once the company recovers.
More recently, the Sensex gained 457 points to rise to 9,424 on 23 March after news of the US government's plans to purge as much as $1 trillion in toxic bank assets in a bid to tackle the financial crisis.
The same week, all banking stocks got a boost on reports that restoring lending would be a priority for the G-20, while oil and refinery stocks went up after oilproducing countries decided not to cut production. Speculation works when you are willing to go with the market sentiment and buy on the news that is likely to push up the stock price.
Stop-loss orders are great insurance policies that cost you nothing and can prevent a huge loss. Unless you plan to hold a stock forever, you should consider using stop-loss orders to protect yourself. All you have to do is set a price on the downside; if the stock price falls and hits that price, your stop-loss order becomes a market order and the broker sells the stock at the best available price. The big advantage of stoploss is that it takes the emotion out of a selling decision. "Whenever I plan to be out of touch from the stock market on a short holiday or routine work, I use stop-loss orders," says Shah.
Prasanth tells us how he could have lost a packet when he was trading in Shaw Wallace. On 7 January this year, he made a profit when its price went up from Rs 195 to Rs 210. "But in the second half of the day, when I had repurchased 20 shares for Rs 190 per share, expecting it to go up again, it kept falling. Fortunately, I had set a stop-loss at Rs 187 and the stock ended the day at Rs 185," he says.
Ramakrishna, meanwhile, wishes he had set a stop-loss on his MIC Electronics shares. He had bought its 300 shares for Rs 30 per share on 15 January and lost Rs 3,900 when the stock price kept going down. He exited on 17 March 2009. "I have learnt to use stop-loss and not be emotionally attached to stocks that keep falling," he says. What you must remember is that stoploss orders don't guarantee against losses; they do, however, check the degree of loss.
Judging by all that has been said about derivatives (and some of it in this magazine) you wouldn't be too far wrong in thinking that they are the very embodiment of investing evil. The thing about derivatives is that they are complex financial instruments, and so it is safer for lay investors to stay away from them. At a very basic level, derivatives are financial securities whose value is derived from another ‘underlying' financial security. Futures and options are two variants of this complex product, and there are levels even here—futures being more risky, as the degree of loss is unlimited, compared to options where the losses can be checked.
Ajay Hooda has been playing the market for over a decade and has seen the market change from trading in the rink to trading from a terminal. "For one living off trading as the sole source of income, I have regularly updated my skills and adapted to the changing market dynamics," he says. But even he is wary of futures and finds it safer to bet on options. In some ways, options can be compared to insurance. Just as you pay an insurance premium to obtain some protection against a specific event, options are derivative products that have a pay-off contingent upon the occurrence of some event for which you must pay a premium in advance. As derivatives can be used to speculate the movement of security prices and even the levels of financial indices and more, they are best for those who understand the risks associated with it and the technical factors.
"On 25 March, the RIL stock took off on the NSE, with the price going up by Rs 99, to Rs 1,549. As an options trader, I doubled my investments that day," says Hooda. Earlier, between August and October 2008, he made Rs 3.6 lakh on this scrip by selling at Rs 2,000 levels and covered his positions at Rs 1,500 levels between 8 August and 15 October. He booked a neat profit of around Rs 400 per share or Rs 3.6 lakh on his 900 shares as the scrip fell further below Rs 1,500.
Derivatives can be used as hedging or protecting against financial risk, or can be used to speculate the movement of commodities, security prices, interest rates or the levels of financial indices. The valuation of derivatives makes use of the statistical mathematics of uncertainty, which is very complex. That's why we repeatedly say that anyone who enters this arena should understand these instruments.
Investing is a little like sailing. The stronger the wind, the faster you sail. A skilled sailor can navigate rough weather and perhaps use the strong winds to his advantage. He knows when to tack, and when to take the sails down and ride it out. A skilled investor is like a good sailor; he knows when to gamble on the direction of the market and he knows when to stay put and ride out bad weather. And, like every good sailor, he knows when to get off the boat by selling at the right time.
|• Time to be fearful, not greedy|
|• Strong enough to survive|
|• How to make money, today|
|• All in a day's work|