Taking the plunge

Market rookie Kamya Jaiswal realises that there is more to stock-picking than following broker reports.

Kamya Jaiswal        Print Edition: February, 2010

14th December
I no longer need an alarm clock. My brokerage house wakes me up every morning with a message on the opening values of major indices in India and abroad. Evenings set in with another round of figures, those of the closing values. I don't understand how this is supposed to benefit me. I don't jump out of bed and go online to start buying or selling stocks. After all, am I not a long-term investor? The RM seems to have forgotten this. My inbox is flooded with recommendations on stocks and derivatives every day. All those who sign up for such advice should have a designated e-mail for these inputs alone. But I shouldn't crib. The mails are the starting point for my investing journey. The latest addition to the RM's list of must-haves is Jindal Steel. The reason: forecasts of a higher demand for steel in 2010 and a completely full order book this year. One more stock and my mind is spinning. How do the old hands manage portfolios with scrips for every letter in the alphabet?

17th December
New additions to my ever-expanding list of stocks to buy:
BPCL: As oil prices are expected to rise, it will increase the profitability of the company. Also, the government has announced compensation for the losses suffered by oil companies in the past year. The bonus: BPCL has an impressive line-up of demand that should push up earnings in 2010.
HPCL: Same reasons as above.
After adding these three to the five stocks I had chosen and six previous recommendations, my list now has 14 stocks. I checked with Professor Calculus about the ideal number of companies I should invest in. He was non-committal, saying "what" I buy is more important than "how much". I've decided not to look at any more mails this week as they will distract me further. Instead, I should track these stocks and take my decision this year. That gives me only 13 days, five of which will be spent travelling (it's the holiday season) and three in the madness of closing the magazine's current issue. I am left with five days.
PS: The reports on the recommendations include a lot of jargon, such as PE ratios and EBIDTA values. It is not as if they can be ignored; in fact, they are very important. But I have resolved to write only about the things I understand.

Experts predict that in 2010, Indian stocks will regain their Return on Equity superiority over emerging markets. The sectors expected to do well include real estate, auto, media, retail, banking and financial services.
Experts predict that in 2010, Indian stocks will regain their Return on Equity superiority over emerging markets. The sectors expected to do well include real estate, auto, media, retail, banking and financial services.
22nd December
Not much to say as I do my homework on the shortlisted companies. Just one thing—how qualified are the RMs of brokerage houses? I ask because I hope they are doing more than reading the research reports on the Net like me. I checked with my colleagues and the answers are not encouraging. Apparently, the job of managing others' hard-earned money requires no standard qualification. If you are lucky, your RM may have pursued an MBA in finance. Otherwise, they are more likely to have been 'internally trained'. My goal for the next two-three months: to reduce dependence on the RM.

29th December
I had made a list of stocks, honestly. Before taking off for a (hopefully) white new year in a quaint cottage in Chail, I wanted to get the investments off my mind. The fact that both my father and the RM are on my case to figure out what I plan to do with the money accelerated the speed of my research. My progress was stalled when I confronted two problems. First, I realised my information did not help me distinguish between stocks within a sector. For instance, all the companies have full order books, are expected to increase earnings in the next couple of years and have stable managements. So why would I choose, say, a BPCL over an HPCL? Second, how do I know the price at which I should buy a company, given that prices easily vary by about 10 per cent in a day, substantially adding to, or eating into, my profits?

The struggle, I am told, is called valuation analysis. It answers two questions—is the stock worth its current price and is it the best stock in a specific genre? There are several valuation tools about which I plan to learn next year. But I can't move ahead without knowing about the simplest, the PE (price to earnings) ratio. Mathematically, it's the price of a share divided by the earnings per share. The result tells you how many times the company's profit per share you'll pay to own one scrip.

The lower the PE ratio, the cheaper the stock. Finding the ratio for today was easy as most personal finance Websites have this information. On the basis of the ratio, I should choose HPCL (2.52) over BPCL (4.54) in the oil sector; Tata Steel (15.25) over SAIL (18.58) and Jindal Steel (52.64); Reliance Infrastructure (21.65) over Punj Lloyd (26.45) and GMR Infrastructure (520.23), and Hotel Leela (19.35), which gets a walkin as it has no competitor in the hospitality sector. So are these my famous five?

4th January 2010
Happy new year to me as I take the plunge and invest Rs 15,000 each in the famous five. Yes, I still have doubts, but I couldn't wait any longer. 'Do it' is my mantra for 2010 and this was the first thing off my list. Looking for some more black coffee; there is a train to Delhi in a few hours and office tomorrow morning.

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