FORECASTS

Sunday, November 15, 2009

All investment decisions are based on forecasts of the future. No investor would ever incur stock market losses if he could accurately predict the future. A bull something today with the expectation that it will be more valuable tomorrow. A bear, on the other hand, sells because he thinks the value of what he sells is likely to decline in the future. If both the bull and the bear knew what tomorrow would bring, their chances of going wrong and whether the future is predictable or not is a purely academic question insofar as the stock market investor is concerned. He really has no option but to try and predict it, otherwise he would not be able to function at all.

The finance minister frequently makes major policy announcements based on his forecasts of the economy’s future. A whole group of institutions such as the Planning Commission, National Council of Applied Economic Research, Center for Monitoring the Indian Economy and the Reserve Bank of India periodically publish reports giving future projections on the rate of growth of the GDP, industrial production, inflation and agricultural output. In fact, all our thoughts and actions are based on the underlying premise that the future is predictable. Civilized life, as we know it, would not be possible in the absence of a strongly entrenched belief that events succeed each other according to a pattern that can be discovered and understood.

All forecasting depends upon a sound understanding of reality. In the stock markets, the realities are the pace and direction of economic change, corporate strengths and weaknesses, capabilities of corporate managements, shifting perceptions of investors, potential power struggles, market psychology, impact of technology is devoted to an understanding of these realities.

MARKET GRAPHS

All stock market investors dread political instability, war, civil strife, political unrest, insurgency or any other political development that might have a effect on the business environment. These real and imaginary fears give rise to confusion because most of the investors have not developed standardized responses for dealing with political uncertainties. When confronted with a grave crisis of a political nature, most investors tend to panic and either sell too soon, or hold back from exploiting the great buying opportunity created by such a crisis.

However the point to note is that against this dismal record of political and economical problems, and despite strong opposition from entrenched vested interests. India succeeded in pushing through a bold economic reforms program that set the economy back on the path of a strong recovery. Also despite this disturbed and unnerving political scenario of the last ten years, the average Indian investor succeeded in multiplying his capital by 50 times.

MARKET INDICES

The purpose of a stock market index is to provide a means for measuring the overall movement of share prices in the stock market. The index helps provide market operators with a quick fix on market behavior and the likely trend in share prices. Ideally speaking, the best and most accurate way of measuring the overall price movements of the market would be to use an average based on the individual price movements of each and every share listed on the stock market. This may sound fine in theory but in practice it is physically cumbersome and time- consuming way to measure stock market behaviour. A stock market index provides a better and more practical alternative. The stock market index is an average based on the price movements of a select list of securities that are believed to represent the market as a whole. The usefulness and the value of a stock market index lies in how closely and accurately it reflects the overall and broad movement of share prices in the market

SHARE PRICES AND FACTS

Friday, November 13, 2009

Share prices are determined by investor perceptions of value. There is no such thing as the intrinsic value of a share. There is also no objective yardstick for measuring the value, or price, of a particular share. All perceptions of value are subjective in nature. They reflect what investors, in their collective judgment, perceive the value of a particular share to be at a particular time. And, what is more, there is not stability about either the individual investor's perception or the market's collective perception of value. Both are subject to frequent, and often unpredictable, changes. This is the main reason behind the high volatility observed in daily share price quotations. By and large, an investor's perception of value is determined by his expectation of how a share will perform in the future. This expectation is, turn, strongly influenced by numerous factors, some of them factual and others purely psychological, like prevailing market sentiment, current market behavior, economic and corporate news, views of widely followed analysts, dividends, bonus and rights issues, the international exchange rate of the rupee, threat of war, monsoons, rate of inflation, interest rates, fears of political instability.

In the short run there is often little connection between the success of a company's operations and the performance of its share on the stock markets. In the long run, however, there is a strong, an almost hundred percent, correlation between the performance of the company and the movement of the market price of its share. In the long run, share prices must move to reflect the strengths and weaknesses of their underlying companies. This short-term divergence between the company's operational success and the market performance of its share provides an opportunity to make money. However, this opportunity can only be exploited by investors who know that this diverseness is short-lived and will narrow down over a period of time. The key to making money on the stock market is to look for successful companies whose current share prices, because of negative or lagging investor perceptions, do not reflect the fact they are successful.

BULL MARKET TOPS

In the stock markets, the surest way of making the biggest gains is to buy when a bear market touches rock bottom, and to sell when a bull market scales a major peak. The only snag in this strategy is the fact that its successful application depends upon the timely identification of bear market bottoms and bull market tops. This is easier said than done because such tops and bottoms are always easier to spot through hindsight (often described as an exact science)than ahead of time. Time and again, it has been observed that the advance identification of such tops and bottoms often eludes even the most knowledgeable and seasoned of investors. However, this does not mean that spotting such major turning points in the bull-bear cycle is an impossible task. It may not always be possible to catch the exact tops and bottoms in every bull bear cycle, but there are some time -tested signals that can give sufficient advance indication that such tops and bottoms are close at hand. This knowledge is usually all that is required to ensure investment success.

Under normal circumstances there is no rational reason why any stock market index should appreciate by 100% in any particular year, over the peak of the precious year. Even under the most optimistic of economic conditions, an across-the-board jump in share prices of this magnitude would not be justified by corporate fundamentals. The reasons for such a steep appreciation in share prices must then logically be ascribed to uncontrolled euphoria and the emotional excesses of and over-enthused market to sell, even if your selling decision happens to be premature and dose not exactly coincide with the highest bull market peak.

A bull market invariably scales a major top only when hundreds of thousands of small investors, motivated by dreams of instant wealth, make a frenzied bid to grab whatever shares they can before it is too late. At such times, excitement runs high, emotions replace reason, greed replaces caution and market sentiment is feverishly bullish. Since an individual investor has limited capital at his disposal, he tends to get attracted towards shares that appear to be cheap and affordable. As a result. he usually ends up purchasing shares which quote at around, or below, their par values. These low-priced shares give him the feeling that he is acting prudently and with caution. He also persuades himself into believing that these below-par purchases are genuine bargains which will give him the twin benefits of limiting potential losses and unlimited potential gain. This is the main reason why at a major bull market top it often becomes difficult to find shares which quote at below-par prices.

As a rule-of-thumb, the selling signals flash red when the number of shares quoting at below-par prices falls to around 0.5% of the actively traded shares on any stock exchange. At such times, it pays to sell _and to sell heavily_without giving a second thought to whether one has made the right decision or not. When the market is close to a major top, the shares of closed-end mutual funds tends to quote at high premiums to their net asset values .

WHY FOREIGN INSTITUTIONAL INVESTORS WANT TO INVEST IN INDIA ?

Affluent countries have an abundance of surplus capital, a natural consequence of prosperity. As countries get more and more prosperous, their markets get saturated and the demand for capital diminishes. As a result, supply of capital exceeds demand and capital therefore tends to fetch very low returns.

In under-developed and developing countries there is a dearth of capital. As a result, the supply of available capital falls far short of the demand and capital thus fetches a very high return. developing countries have a huge potential for growth and a large pent-up demand for goods and services. When inter-country barriers and restrictions on the movement of capital are removed, or eased, then capital tends to flow from the affluent to developing countries so that it can earn higher returns. These capital flows can be in the form of loans, direct physical investments or portfolio investments.

Under normal circumstances, a major chunk of surplus capital of USA, Western Europe and Japan would have flowed to China and Russia. But these countries doesn't have have developed stock markets and therefore cannot absorb large foreign portfolio investments. These regions will no doubt, attract heavy capital inflows in the form of loans and direct physical investments, but the major chunk of foreign funds earmarked for overseas portfolio investments will eventually find its way to the Indian stock market. The Indian stock market offers really viable and practical option for portfolio investments to foreign fund managers. the major stock market boom in India will,in all likelihoo, be fuelled by foreign institutional investors.

Emotions Of a Investor

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Emotions are strong feelings and play a important role in the formulation of investment decisions. Most investment decisions are motivated by greed,fear and hope.
In a bull market, greed is the main motivating force fuelling investment decisions. Investors throw caution to the winds, borrow money at high rates of interest, stretch their financial resources , and take other unwarranted risks. In the bear market, on the other hand, fear is the dominating emotion. Fear leads to panic selling and unloading of otherwise sound scripts at unbelievably low prices.

Frequently, investment decisions are based on hope. An investor may want to buy a particular share because he thinks it will go up, but because he hopes that it will. Hope also sometimes makes an investor cling on to a share whose price is falling rapidly in the hope that it will eventually rebound to its original price. Wishful thinking is another word for hope.
Emotions distort the decision-making process. They frequently override reason, logic and some times even facts this happens especially when emotions come disguised as reason. They prevent investors from seeing reality as it really is , and not what they would want it to be. Emotions also prevent investors from changing their minds when proved wrong, or when there is need to change and adopt a different line of thinking.

Excessive fear, on the other hand, is a dangerous emotion because it can lead to panic selling and prevent the investor from picking up bargains in an atmosphere of doom and gloom..... the ideal time to do so.

TEN TIPS FOR A INVESTOR

1. Do not visit your stock broker every day. The more frequently you go to your broker's office, and listen to the rumors that circulate there, the greater the chances of your being influenced by the crowd opinion of the moment.

2. When you go through the stock market quotations in your daily news paper or through internet, do not focus your interest exclusively on the shares that interests you, the shares that you own, or the shares that you want to buy. Try to also read and remember the quotations of other shares. It will help you to acquire a wider and more balanced perspective.

3. Avoid talking freely and loudly about your investments in social gatherings. In fact, try to steer the conversation to subjects other than the stock market. This is particularly important during periods of extreme optimism and extreme pessimism. People who are habitually prone to be vocal about their investments are normally the first to get drawn into vertex of crowd emotions.

4. Do not take large loans for the purchase of shares. The very fact that you have taken such loans means that your thinking is already being strongly influenced by greed. There is also another disadvantage. In a falling market, heavy loans and the need to pay interest on them periodically, will make you particularly vulnerable to fear and panic. People who are not burdened by heavy loans are seldom pushed by greed and fear into taking foolish decisions.

5. Do not speculate, that is don't buy on margins or try to make money through short-term fluctuations in share prices. Speculators or invariably motivated by greed. They are also normally the first to panic whenever share prices begin to fall.

6. Adopt a long-term investment strategy. A long-term vision and perspective or seldom influenced by current market sentiments.

7. Diversify your portfolio. A concentrated portfolio will make you more vulnerable to fear and anxiety.

8. Invest only what you can afford to loose. Don't depend upon stock market games for running your kitchen, providing the school fees of your kids, meeting medical expenses or paying your apartment rent. In any case, even if you happen to be extremely rich, it would not be prudent to invest more than 50% of your assets in the stock market.

9. Investing your working capital of your business in the stock market is a risky job. That is a sure sign of uncontrolled greed.

10. Do not invest in shares offered through private placements from the promoter's quotes of new and upstart companies.