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Invest in stocks if you have money to spare & time to analyse

There are many stock-picking methods one could choose from, but the average investor more often than not, gets in or gets out at the wrong time. R Balakrishnan, explains what an investor needs to focus on

The average investor has no clue about what he is buying or selling, survives in the stock market mainly because of luck. The ones who do survive may have done so because of some skill or just luck. At an exclusive event organised by Moneylife Foundation, on how to invest in stocks safely, R Balakrishnan, who has over three decades of experience across banking, credit and capital markets, explained to the packed audience on how one should drown out the noise and evaluate a company using by crunching a few numbers. “An average investor has generally no clue about what he is buying or selling. His long-term investments or holdings are often an outcome of a short-term trade he initiated which went bad. He simply hates to sell below the price at which he bought,” said Mr Balakrishnan.

“Invest in stocks only if you have money to spare,” cautioned Mr Balakrishnan. “Don’t invest in stocks with money which is very important for you, to use it for a child’s education or marriage. In that case, don’t risk your hard earned money in stocks, keep it safe even though may earn lower returns on it”. Also, remember when investing in stocks, Mr Balakrishnan said, “Returns may not come when you want it. Stock prices are decided by many factors none of which controlled by us.”

He pointed out that when an investor buys a stock, he becomes a part-owner of the company. One should understand the business of the company, the sustainability of growth over the next five years or so. To be on a safer side, one should pick companies which have a history of more than 10 years, over which at least one business cycle is complete.

More importantly, the investor should look at the company’s management, whether the goal of the promoter aligns itself with the goals of the shareholder. “Look at the nature of companies, the trustworthiness and goodwill of promoters along with cash flows and future of business the companies have,” advised Mr Balakrishnan.

For those who dread numbers, Mr Balakrishnan says, “If you cannot go too deep in to the accounts, you should stay focused at least on one thing, namely, management quality. To me, the quality of management is perhaps the single most important factor in an analysis. Ultimately, when we buy a share, we are becoming a part-owner of the business that is run by someone. We are dependent on them to deliver. However good a business or industry, it cannot be better than the people at the helm.”

Mr Balakrishnan gave several examples of companies where the promoters have messed up the accounts or tried to hide expenses and show higher profits. For this one does have look at numbers in great detail. At times, the fraud is so well concealed it is difficult to find it out, but inconsistency in numbers can throw light on the quality of management. “When they have debt, and it keeps increasing, I worry. I have seen companies where the borrowings increase more than the sales numbers. Surely, that’s a sign of great trouble,” explained Mr Balakrishnan.

Using a detailed spreadsheet, Mr Balakrishnan explained how one can analyse the profit and loss account and the balance sheet of a company. To analyse such data, he said, one needs to divide it into three groups, earnings, the assets & liabilities and the cash flow. He also, pointed out that while short-listing companies, two most important ratios one should look at is the return on capital employed (RoCE) and return on equity, also know as return on networth (RoNW). RoE is a very important ratio, “It (RoE) is essentially profit after tax (PAT) expressed as a percentage of the total net worth or shareholders’ funds. In simple words, it tells me how efficiently the company uses shareholders’ money and how much it earns with that money. All other things—market share, brand value, corporate governance, competencies, etc—are secondary. If a company is good, its numbers should ultimately get reflected in superior earnings,” said Mr Balakrishnan. “Many people don’t do their homework. If you wish to invest in stocks you should devote at least an hour a week to understand the business of the company and the financial statements,” he said. The programme ended with a lively interaction with the audience.





4 years ago

kindly upload the session on your website

Vineeth A Kumar

4 years ago

As per my information long term stock holding minimum 7 yrs window - diversified industry exposure, takes care of risk mitigation... Do all companies allow fund switching option to clients...?
This kind of churning is a nightmare for middle class guys like me.
Am I on the right side of investment?
My God ML is scrambling my brain...that was on a positive note, or Madam Sucheta would have slaughtered me...

Kindly advice...!

Mohana Ganesh

4 years ago

I missed the session. Waiting for the upload on YouTube.


4 years ago

I missed the session.Hope sooner it's uploaded on YouTube channel.

Vinayak Bhimarao Mudholkar

4 years ago

The average life span of a company listed on the S&P 500 index of leading American companies is around 15 years…. This has come down dramatically from around 67 years in the 1920s…. Nifty churns by over 50% every decade. This churn ratio is very high, compared with developed markets (where churn ratios are around 25%) and with other major emerging markets (churn ratios of around 35%). The average probability of a sector leader remaining a sector leader five years later is only 15%, implying that 85% of BSE 500 companies slide towards mediocrity…..If this is reality then how one can invest in In dian equities for a long term like Buffet did ?....Can anybody explain?



In Reply to Vinayak Bhimarao Mudholkar 4 years ago

Dear Sir,

I guess there is no one single formula - otherwise we too would be there in the Forbes list of billionaires.

I was present there for this session yesterday and strongly recommend you to watch it on Moneylife TV, whenever it is uploaded.

It was a great learning opportunity yesterday and would like to thank Team Moneylife & Mr. R. Balakrishnan for imparting some very invaluable insights on investing in equities.

Please don't miss this one on Moneylife TV.

Happy Learning! & Happy Investing Too!!

Vinayak Bhimarao Mudholkar

In Reply to Nilesh KAMERKAR 4 years ago

Thank you for your kind explanation & certainly watch on Moneylife TV.

Sensex, Nifty on a positive move: Thursday closing report

The market has to break past 5,640 for today’s up move to continue

The fresh steps taken to stabilize the currency and the measures to reassure investors by the new governor of Reserve Bank of India (RBI) Raghuram Rajan were welcomed by the market. In response to the measures, the Nifty surged on a higher volume of 75.55 crore shares making the highest percentage gain since 28 June 2013.


Sensex and Nifty immediately hit the day’s high and throughout the session moved in a narrow range. The Sensex opened at 18,858 and moved in the range of 18,847 and 19,118. The Sensex closed at 18,980 (up 412 points or 2.22%). The Nifty opened at 5,554 and moved in the range of 5,553 and 5,626. The Nifty closed at 5,593 (up 145 points or 2.66%).


Except for IT (down 2.97%) and Pharma (down 0.32%), all the other indices closed in the green. The top five gainers were Bank Nifty (9.46%), PSU Bank (8.66%), Finance (7.82%), Realty (5.90%) and PSE (3.06%).


Of the 50 stocks on the Nifty, 33 ended in the green. The top five gainers were Axis Bank (15.91%); Kotak Mahindra Bank (9.43%); State Bank of India (9.36%); ICICI Bank (8.84%) and Bank of Baroda (8.72%). The losers were Sesa Goa (6.77%); TCS (3.63%); Infosys (3.53%); Lupin (2.63%) and HCL Technologies (1.96%).


Global credit rating agency Moody's Investors Service said that India's inflation and fiscal metrics remain weaker than peers. The ratings agency, however, said the country's current reserves can finance the current account and external debt payment needs. Moody's has an investment grade rating on India with a stable outlook.


India is among five emerging market countries, which could face significant funding risks as the dollar strengthens against their home currencies according to a report from Morgan Stanley. The report dated 4th September noted that external funding remains crucial for many countries in the Asian and emerging market pack, and that a strengthening dollar can ‘can create a significant challenge, which is already weighing on both earnings power and multiples.’


The International Monetary Fund (IMF) has said scope of easing monetary stance in India is very limited and it might have to be tightened due to high inflation. Also, IMF said emerging market economies should allow exchange rates to adjust to the fundamentals of their economies, and should curb only volatility, a key advice, given the fall in the rupee in recent times.


Except for Shanghai Composite (down 0.24%), Jakarta Composite (down 0.55%), NZSE 50 (down 0.13%) all the other Asian indices ended in the green. Hang Seng, top gainer, up 1.22%.


It has become clear that the two missiles that landed in the Mediterranean region on Tuesday, 3 September 2013, weren't part of a US led military strike in Syria.


US indices closed in the positive on Wednesday. US auto sales pointed to robustness in the manufacturing sector. The report showed consumer spending and manufacturing has risen in most of the 12 regions in the US and said job creation was steady or improving. Federal Reserve data released overnight showed that the US economy grew at a "modest to moderate" pace in July and August, according to the central bank’s "beige book".


One top Federal Reserve official said on Wednesday he was open-minded about reducing stimulus this month, as investors largely expect the central bank to do, while another policymaker said the U.S. central bank should actually do more for the economy. The comments reflect the uncertainty that lingers over financial markets two weeks before the Fed's 19 policymakers meet to decide whether to adjust the $85-billion monthly bond-buying program.


European indices were trading in the positive while US Futures were trading in the negative.


NSEL says no discrepancy in e-series stock holdings in vaults

NSEL said it is in the process of providing an exit window for investor to liquidate the e-series units and realise cash payments

Crisis-ridden National Spot Exchange Ltd (NSEL) on Thursday said that its stock positions of gold, silver and platinum, for e-series contracts tallies with depository records and there are no discrepancies in e-series stock holdings in vaults.


"In order to facilitate the investors to liquidate the e-series units, NSEL is in the process of providing an exit window to sell their units and realize cash payments, subject to necessary approvals," the Exchange said in a release.


NSEL said it has also posted the relevant audit report by Sharp & Tannan Associates on its website.


Last month, NSEL sacked its chief executive Anjani Sinha, accusing him of having hushed up the fact that warehousing receipts (WRs) are not backed by physical stock of commodities.


According to a report from Business Standard, one crucial difference that everybody overlooked (in NSEL saga) was that these (forward) contracts should have been backed up by the goods in the warehouses. Nobody seemed to verify whether the goods actually existed or not. Brokers started giving out contract notes to hundreds of investors backed against just one warehouse receipt (you cannot split a receipt). The warehouse receipt acted as title to the stock. The broker was taking a risk on the warehouse receipt, the report said.


Since the middle of July 2013, trading in NSEL has been suspended. NSEL has failed to make payouts to investors and failed to recover money from those who were supposed to make pay-ins. It now appears that there is not enough stock of commodities in the warehouses of NSEL against which warehouse receipts were issues. In August 2013, trading in e-series was also suspended. This was of concern for large number of investors who had purchased e-series products like e-gold.


The Exchange owes its investors at least Rs5,600 crore against investments made in stocks warehoused by NSEL. As a precautionary measure, the government of India on 6th August directed the Exchange to suspend the e-series contracts from trading.


E-series contributed about 40% of NSEL’s Rs18,315-crore total turnover in June. E-series contracts is a unique market segment, which functions like the cash segment in equities, but offers commodities in the demat form in smaller denominations.


You may also want to read...

NSEL's warehousing receipts similar to banker’s receipts of Harshad Mehta scam?


NSEL: Poor Regulation was not by chance


NSEL brokers with the highest exposures


Financial Technologies silent about NSEL scam in its AGM agenda



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