The Greater Fools Theory - MUST READ FOR SHORT TERM INVESTORS

PLEASE READ EACH LINE OF THIS POSTING............. IT IS A MUST READ FOR ALL INVESTORS........

The universal truth question of stock market:

What is the real worth of your stock?

Perfect Answer:

Whatever someone else is willing to pay for it at a particular moment of time in market!

The bigger fool theory or greater fool theory (also called survivor investing), is the belief held by one who makes a questionable investment, with the assumption that they will be able to sell it later to "a bigger fool.” In other words, buying something not because you believe that it is worth the price, but rather because you believe that you will be able to sell it to some one else for an even higher price.

Actually, this theory states that all peoples investing in stock market are fools. Every fool that is purchasing stocks always thinks that there is still a bigger fool present in the market who will pay more amount on his already over valued stocks. These assumptions of fools drive the market and make the cycles, cycles continue and market attains new heights. Always, a greater fool keeps purchasing in the high market and in booming era. When a big and bigger fool enters in market continuously then market usually comes to saturation. That saturation point is a point beyond which no fool in market is present. Precisely there are no investors left to purchase stocks.

No need to be a market pundit to predict the saturation of market, just keep your eyes and ears open and you will identify. Just observer market fully with your ears opens all the time, when you listen from anybody (who was not at all interested in stock market earlier) their intentions in entering markets, BEWARE…………….

In my views this theory is not at all wrong, just correlate with the market mayhem happened in the BSE and NSA in last 6 months.

I can give Many Classical Examples :

Example First:

Rise of RPL

When RPL was at Rs300, peoples were still entering in that stock. RPL rose without any fundamental, still there is no production there. According to this theory those peoples were biggest fools of the market who purchased RPL at 300.

The Fall of GMR Infra

The so called great pundits were giving the calls to purchase GMR at 260. Biggest fools got into market by purchasing it at 265/-

pls note: no doubt GMR infra is a long term bet, but entering at 260 was fullishness....

These are two of many stocks that bought the biggest fools in the market at its saturation point.

My Dear Friends, my idea is not demoralize you all … I wanna just say that you must understand when to enter the market and not to trade short…. Be a long term investor always… don’t be the biggest fool…………………

Thanks much for reading this…

Comments are welcome……

DEMYSTFYING STOCK MARKET MYTHS..........

Myth 1 - High Market CAP Stock will give highest returns

If this is true then Stocks of Reliance and NTPC should be at highest CMP and Rohit Ferro should be at 150 levels.

Market CAP of GMR Infra – 18,000 Cr, CMP=110

Market CAP of Rohit Ferro – 350 Cr, CMP=150

Don’t get trapped in Brokers so called TIPS. Do your own analyses on each stock its vision, economy and sector relation, government involvement in that stock etc?

Myth 2 – Investing in Share Market is just like Gambling

Nothing could be more untrue than this myth, yet it's a big reason why many people shy away from the stock market. To understand why investing in shares is inherently different from gambling, we need to review what it means to buy a share.

A share is ownership in a company. It entitles the holder to a claim on assets as well as a fraction of the profits that the company generates. Too often, people think of shares as a way to test their luck, and they forget that stock represents the ownership of a company. In the stock market, investors are constantly trying to assess the profit that will be left over for the shareholders. This is why stock prices fluctuate. The outlook for business conditions is always changing, and thus so are the future earnings of a company. Assessing the value of a company isn't an easy practice.

Gambling, contrary to investing, is a zero-sum game. It merely takes money from a loser and gives it to a winner. No value is ever created. In contrast, by investing we increase the potential to increase the overall wealth of society. As companies compete, they increase productivity and develop products that make our lives better. Don't confuse investing for wealth creation with gambling's zero-sum game. In investing the seller could be selling because they have made substantial returns with the share; this does not stop the buyer from making additional returns if it is a share from a well-grounded company. The cardinal rule then becomes ascertaining the solidity of the company before investing in it as opposed to testing ones luck.

Myth 3 – Fallen Shares will eventually go up

Nothing is more destructive to a new investor thinking that a stock trading near its bottom is a good pick always.

Example:

Suppose you are looking at Two Stocks, Stock A which rose to Rs50 in last Year and now come at Rs8 and Stock B (a smaller company with good potential) has risen from Rs5 to rs10. Which Stock will you buy????? It is interesting to note that a major chunk of investor will choose to invest in stock A without thinking about the future potential power of Stock B. Thinking this was is a cardinal mistake in investing

If you are an investor, price should only be one part of the investing equation. The goal is to buy good companies at a reasonable price. Don't confuse value investing with buying companies solely because their market price has fallen; value investing is about buying high quality companies that are undervalued by the market.

Myth 4 – Having just a little Knowledge, because it is better than none, is enough to invest in the stock market.

For investing in Stock market you must understand the economy, the political factors related to that stock and future prospects of that company in detail. Invest in business rather then in a company.

Because the future of your investment is tied to the future of the company, you should think like an owner. Ask yourself: What kind of a company would I want to own and what kind of a management would I like to have working for me?

Myth 5 – P/E Ratio Tell you whether stock is Cheap or Expensive

Any investor can find P/E Ratio of company on any financial website. So P/E must be the great way to compare stocks. Right?? I Say WRONG… absolutely WRONG

P/E ratios don’t say anything about a stock’s value!. One of the most important things you’d like to know is the worth of each stock based upon its earnings, profitability and other key financial data. In other words, you’d like to have a sense of the stock’s intrinsic value.

Youth Financial Planning – Reach For the Stars

Boom in Indian economy, growing industry has filled the pockets of youth. As far as the income is concerned, given the boom in economy and its ever improving aspects, opportunities have never been better!

From Last 3 Years the disposable income has grown substantially, so the spending habit. It’s definitely a happy situation to be in! But youth ignore a great habit – SAVING MONEY. The rationale is simple – every youth is assuming that future is looking great here then what is the need to set aside money for future? but I think that as surplus money is growing it is the right time to save money for future needs like for your child 1^st birthday party, his/her education etc. Instead of spending money in a thing or service that you don’t need in actual SAVE that money and see the power of compound interest over your money in coming years.

Here I will try to explore as many possibilities to guide you how to save money and have good financial portfolio. I am certain that you will like my article.

Start Early

If you start earning from age 21, then start saving immediately. Please don’t wait till age 25. Rs 1000 investment per month for 20 years will become 17 lakhs (assuming 18% interest as offered by some good Mutual Funds)

Why you invest

Factor 1 - INFLATION

If one thing cost you Rs 100 per day then the same thing will cost you Rs134 after 5 years (assuming 6% inflation/annum). So to maintain the same living standard you have to spent more money.

Factor 2 – The Standard of Living

In near future, you want to have an excellent standard of living but that would cost you much more than that of now. You wish you have your own car instead of going by bus or public vehicle. As the time goes, you will have dependents and you will be the one who will take care of his/her financial needs.

Things to be focused in early stages

POINT 1 – Maximize the surplus by cutting unnecessary wasteful expenditure.

POINT 2- invest the surplus in instruments which are best suited to your needs, your profile and your risk appetite.

Set a objectives

Before investing, set a clear objective. There should not be any lack of clarity in your future needs. Set your risk appetite. Set the goals.

Example: If you want to be a Crorepati after 15 years?

The solution is not always a 100% low-risk portfolio or a 100% high-risk portfolio. In fact for most of us a blended asset allocation will work best. But even then equities will and should account for the largest chunk of your portfolio.

Equities

Some people call it SATTA MARKET, KAALA BAZAAR, but the truth is that they have lost their money based on fool theory (one fool purchase overpriced rate stock and then sell that stock to a bigger fool). Over the long term equities are the best instrument for maximum returns.

A common problem associated with stock investment is the method of selection. I am continuously trying to develop your skills to select the MULTIBAGGERS out of dirt. Often investors rely on “tips” of brokers/friend to decide which company to buy into. Before investing into a particular stock he must have an understanding of economy, interest rates, political and legal environment and lot of other things.

As a young investor EQUITY IS A MUST IN YOUR PORTFOLIO.

Fixed Income instruments- PPF, NSC etc

Offers assured fixed returns, normally 8% per annum. Safety of Capital is the major difference between equities and fixed income investments. However, the stability in fixed income comes at a price. If there is any subsequent hike in interest rates you will not be able to gain due to locked-in period. PPF runs over 15 year time frame and investors are required to make a minimum investment of Rs500 to keep their account active and at max you can deposit 70000 in a financial year.

This instrument is best suited for investors with a low to moderate risk profile

As a young investor, a small portion of your portfolio should be invested in fixed income instruments to impart a degree of stability to the portfolio.

Mutual Funds

You directly invest in aforementioned avenues when you invest in equities and fixed income instruments. Mutual fund put a virtual layer between you and your investment. Mutual fund managers collect money from a large number of investors and then invest that amount in various instruments according to their policy and guidelines. These are expert MF Managers.

ULIPS

Unit Linked Insurance Plans. Insurance products like endowment plans are tools for taking care of future expenses and therefore combine long term savings and insurance. By these plans you can have a life shield which assures a corpus to your family in case of unfortunate death of policyholder. One should not let tax saving or just returns influence your decision of buying and insurance plan. This scheme provides insurance with investments and it is proved that over long period ULIPs are best instruments after equity. ULIP manager invest your money in debt and equity both, hence their performance is market linked.

WANT TO SEARCH FOR NEXT MULTIBAGGER? READ THIS………

1. Checkout Promoter Holdings

Check out the promoter holding in a stock. Ideally it should be more than 55% OR should be increasing by each fiscal year. If the promoter holding are above 70% then grab the stock. The factor that usually works in favor of companies with large promoter holdings is the fair amount of confidence in the promoters. The reason is that promoters are holding a significant chunk of their stock and low free float always helps the stock rally up.

As a rule of thumb, high promoter shareholding represents monetary interest of the promoter group in the company. It demonstrates the commitment of the management in running the business. The promoter holding could also provide indications about willingness of the promoters to put in considerable time and efforts in developing the business

2. Which Sector Company Belongs to??

Check out the booming sector of the year. Consider the view long-term. Always try to find out the undervalued OR underestimated sector. I can bet on the Industrial gas and chemical sector considering a term of 2 years. Industrial gas sector will boom shortly as there will be plethora of demands for these gases. Although there is no Large Cap company in this sector, but a smallcap when turn into large cap called multibagger

3. Is there any underestimated stock??

People always talk about the stocks which are favorites of the brokers, which are heavily traded. But I think that nobody should rely on the broker tips, always do whatever you think is right. There are so many stocks that are still underestimated by peoples only you need to remove cloud of dirt from them.

4. Book Value(BV)???

If you are searching for multibaggers then go for a stock whose CMP is less then it’s BV. Many times I have bought stocks who’s BV was greater then their CMP. BV also plays an important role while buying a stock

5. Don’t look at the Management

How many people know the GM or CMD of Satyam Computers?? Only few. My dear friends, don’t look at the directors of a rock solid company. On 31^st December 1995 Price of Satyam Computers was only 7Rs (yes, seven rupees) and it was 737Rs on January 02, 2008 with CAGR of 59.05. So find out the Next Satyam Computer……….

6. Prefer Small CAP over Large CAP if you hunting for Multibagger

The market cap of a company is inversely proportional to whether that company could be a multibagger or not. In other words companies with small market caps are more prone to going up a number of times compared to companies with large market caps.

Company Market cap on 31^st Dec 1995(in crores) Market cap today

Infosys 708 81221

Satyam 228 23641

HDFC 135 29766

I think above data is enough to prove my point.

7. EPS

There is no such standard EPS value. Check if EPS is increasing year by year then grab the stock. More the EPS more value will stock gain.

8. Hold (The Biggest factor in wealth creation)

Hold the stock for a long term, at least for 3 years. You can see your money increasing in multiples.

I biggest mistake was to sell my Allied Digital Stocks in rs300 in December 2007 now its hovering around 900 after touching 52k high of 1200Rs.

9. Small Value Stock

Try to get a stock which is lower than Rs80 or Rs100. Only they can turn to be a Unitech. There is only a few chances that a stock of Rs500 will become multibagger.

10. Listen to Your Heart – How is your sentiments with Stock?

When you want to invest, then do research on 10 stocks and listen to your heart in which stock you want to invest.

11. Invest in Business you know better

Always invest in business not in stock. Don’t invest in a company who’s business you don’t know.

Dear Investors, I would love to have your comments on my this posting

Your Queries? Pls contact me at my email ID.

Dear Investors,

although i am posting regular updates about my findings, and soon i will share with you the POTENTIAL MULTIBAGGERS.

If you have any stock related doubts then please email me at

bsensediamonds@gmail.com

I would love to resolve your queries over your specific stocks.

Regards,
Deepak