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Case study - Gitanjali

GITANJALI

The stocks starts moving from support level 66 and sees a upward move till level 82 which is also its resistance. The move from its support to its resistance is 24.24% which is also your returns on investment

Now you know the past moment of this stock and as we all know history repeates itself. This stock belongs to the Jewellery sector which show a consolidation phase. There is a possibility that the trend will continue.

So level 66 is a good buy for stock subject to your money management setup.

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Union Budget FY 2018-19

Union Budget FY 2018-19

The finance minister,  Arun Jaitley, will present the budget on 1st February 2018. It would be interesting to understand various concepts associated with budget so that one is able to grasp the budget better.

A budget is an annual statement of estimated revenue and expenditure in upcoming fiscal year. (April 1^st 2018 to March 31st 2019). The budget has several objectives such as reducing inequalities of income and wealth, reallocation of resources between government and private sector, attaining economic stability, managing public enterprises and achieving economic growth.

There are three important concepts in relation to Budget

1.      Receipts

2.      Expenditures

3.      Deficits

Receipts

Receipts refer to revenues collected by the government through various means. There are two kinds of Receipts:

1.      Revenue Receipts

2.      Capital Receipts

Capital Receipts are those receipts which create a liability or cause reduction in government assets.

Let us now explore various sources of Capital Receipts:

1.      Recovery of Loans
This reduces assets of government and hence must be classified as Capital Receipt. It should be remembered that a loan given is an asset in the book of accounts. And recovery of loans reduces this asset class. 

2.      Borrowings
Funds raised by government from borrowing are treated as capital receipts as these create liability for government. Amount borrowed is a liability since one has to repay the borrowing.

3.      Disinvestment Receipts
Funds raised by disinvestment are also capital receipts as these reduce assets of government. Disinvestment of public sector enterprise clearly reduces government ownership of these enterprises and thus reduces assets of government.

Revenue Receipts are those receipts (revenues) of government which do not create a liability or cause reduction in government assets. Examples of Revenue receipts are:

1.      Tax Revenues
Taxes are compulsory payments imposed by government on people. There are two kinds of taxes – direct tax and indirect tax.

Direct Tax is when the burden of tax and liability of tax falls on the same person. Examples of direct taxes are Income Tax, Corporation Tax, Wealth Tax and Gift Tax. You pay these personally.

In case the tax burden can be passed on to another person that kind of tax is called Indirect Tax – for instance – excise duty, custom duty, service tax, sales tax. These kinds of taxes are passed on by a person/organisation to another person/organisation i.e. you pay these taxes but recover them from the actual consumer.

2.      Non-Tax Revenue
These refer to those kinds of revenues other than taxes. Examples include: Profits and Dividends of Public Enterprises, Interest over loans granted, External Aid Received, Fees and Fines, etc.

Expenditures

Budget expenditure refers to estimated expenditures incurred by the government under different heads in a year. Just as there is classification in Receipts as revenue receipts and capital receipts, similarly budget expenditures are also classified as:

1.      Capital Expenditures

2.      Revenue Expenditures

Let us look at both of these types of expenditures one by one.

1.      Capital Expenditure refers to those expenditures which result in creation of asset or reduction in liability. Examples of Capital Expenditure include expenses on creation of roads, bridges, buildings etc. Clearly a road, a bridge or a building is an asset.

2.      Revenue Expenditures do not create assets and do not reduce liability. Examples include salaries, interest payments, pensions, subsidies etc. Capital expenditures can also be understood as developmental and revenue expenditures as non developmental.

NOTE: A capital expenditure can be distinguished from a revenue expenditure in that capital expenditures are a one-time expenditure, whereas revenue expenditures are recurring expenditures.

Deficits

Finally let us try to understand various kinds of deficits. A budget is said to be balanced when receipts equal expenditures.

Balanced Budget: Receipts = Expenditures

A budget is said to be in surplus when receipts are in excess of expenditures.

Surplus Budget: Receipts > Expenditures

A budget is said to be in deficit when receipts are short of expenditures.

Deficit Budget: Receipts < Expenditures

There are various kinds of deficits.

Revenue Deficit refers to excess of revenue expenditures over revenue receipts.

Revenue Deficit = Revenue Expenditures – Revenue Receipts

Capital Deficit on other hand refers to excess of capital expenditures over capital receipts

Capital Deficit = Capital Expenditures – Capital Receipts

Fiscal Deficit refers to excess of total expenditures over total receipt, excluding borrowings.

Fiscal Deficit = (Total Expenditures) – (Total Receipt – Borrowings)

Finally Primary Deficit means Fiscal deficit reduced by interest payments.

Primary Deficit = Fiscal Deficit – Interest Payments

Expectations form the Budget FY2018-19

As is expected every year, the general expectation this year too is that the budget will further boost economic growth, taxes will be reasonable and there will be some sops for the common man to cope with the rising cost of living. There are strong reasons that as the Finance Minister, Arun Jaitley presents the last full budget of the NDA government, the emphasis will be more towards social welfare and agriculture, the corporate sector too have their expectations.

·         The year 2017 was a year of significant structural changes, including GST and bank recapitalisation plan. While demonetisation and GST led to some market disruptions and subdued production sentiment, the economy has recently shown signs of recovery. There are strong reasons to believe that consumption sentiment and investment demand might see a turnaround.

·         While the country recorded a dramatic jump of 30 places to reach 100th rank in the World Bank's Ease of Doing Business, much remains to be done. Further action on infrastructural bottlenecks, swift implementation of investment projects and so on. 

·         Tax reforms and particularly reform in tax litigation should be the most critical priority now for the government. There Indian economy may be prone market uncertainty ahead of general elections, changes in the US and global economy, rise in crude oil prices which would be needed to be tackled well.

·         Corporate tax rate is expected to be cut from 30% to 25 % for all the companies.

·         Next is the expectation of a reduction in personal tax rate. The salaried class is expecting some announcement on Standard deduction to make their life  easier. One of the biggest expectations of the salaried class is change in the salary structure. The deductions under the salary slabs, like house rent and medical expenses too are outdated and requires changes.

·         More reforms in GST, M&A, Companies Act, FEMA etc. are also expected.

·         Assessment and appeal process is considered as the most critical reform in the tax administration, followed by certainty of interpretations/positions to bring down prolonged litigation. Speedy refunds along with more income-tax tribunals and courts are areas where ease is required.

·         Globally, Indian tax authorities are perceived as highly aggressive which has dented the image of the country and reduces the confidence of global investors to boost further investment in India.

·         Incentivising digital transactions will be a win-win for both citizens and the government and it will encourage people to digitise their financial transactions. Tax concessions on digital transactions such as reduced tax rates for direct as well as indirect taxes can also encourage high participation in digital economy. Overall this might lead to higher tax revenues by increasing the taxpayer base and help in further lowering of tax rates.

·         The government may increase income tax deductions on investments made by taxpayers in securities with a rider that the exemption will be available only on investments made in government infrastructure projects. Stock markets also expect that long-term capital gains tax does not come back.

Economic Survey

The Economic Survey sets the stage for Finance Minister Arun Jaitley's annual budget on February 1. It suggests that though the India's economy is set to grow between 7-7.5 % in the 2018-19 (April-March) with exports and private investment poised for a rebound, economic management will be challenging in the coming year. This year’s Economic Survey indicates the following:

·         There is large increase in registered indirect and direct taxpayers. There has been a 50%  increase in the number of indirect taxpayers. The growth in direct tax collections of the Centre has kept pace with the previous year and is expected to meet targets, with a growth of 13.7 % while indirect taxes grew by 18.3 % during April-November 2017.

·         States' prosperity is positively correlated with their international and inter-state trade. For the first time in India's history, data on the international exports of states has been dwelt in the Economic Survey. Such data indicates a strong correlation between export performance and states' standard of living.

·         India's firm export structure is substantially more egalitarian than in other large countries. The survey pointed out that after remaining in negative territory for a couple of years, growth of exports rebounded into positive one during 2016-17 and expected to grow faster in 2017-18. Clothing incentive package boosted exports of readymade garments. The rebate of state levies (ROSL) has increased exports of readymade garments (man-made fibers) by about 16 %.

·         Indian parents continue to have children until they get the desired number of sons. The survey highlighted that the Indian society exhibits a strong desire for a male child. Son preference giving rise to sex selective abortion and differential survival has led to skewed sex ratios at birth and beyond, leading to estimates of 63 million "missing" women.

·         Substantial avoidable litigation in tax arena which government action could reduce. Delays and pendency are caused due to the increase in overall workload of the judiciary, in turn due to expanding jurisdictions and use of injunctions and stays; in the case of tax litigation, this stems from government persisting with litigation despite high rates of failure at every stage of the appellate process.

·         To re-ignite growth, raising investment is more important than raising saving. The survey indicated that growth in savings did not bring economic growth but the growth in investment did.

·         Direct tax collections by the states and local governments are significantly lower than those of their counterparts in other federal countries. The survey stated that the country's direct tax collections are lower than that of Brazil and Germany.

·         Extreme weather adversely impacts agricultural yields. The survey cited extreme temperature increases and deficiency in rainfall as reasons for the changes in agricultural yields.

Gitanjali Gems

Support & Resistance Pattern
























GITANJALI
The stocks starts moving from support level 66 and sees a upward move till level 82 which is also its resistance. The move from its support to its resistance is 24.24% which is also your returns on investment

Now you know the past moment of this stock and as we all know history repeates itself. This stock belongs to the Jewellery sector which show a consolidation phase. There is a possibility that the trend will continue.

So level 66 is a good buy for stock subject to your money management setup.

Max financial ltd

MFSL

The stocks starts moving from support level 515 and sees a upward move till level 601 which is also its resistance. The move from its support to its resistance is 16.70% which can be your returns on investment

Now you know the past moment of this stock and as we all know history repeates itself. This stock belongs to finance and investment sector which show a consolidation phase. There is a possibility that the trend will continue.

• So level 515 is a good buy for stock subject to your money management setup.

IDFC BANK LTD

IDFC

The stocks starts moving from support level 56-57 and sees a upward move till level 67 which is also its resistance. The move from its support to its resistance is 17.54%  which can be your  returns on investment

As you know history repeates itself. This stock belongs to the banking sector which show a consolidation phase. There is a possibility that the trend will continue.

So level  56-57 is a good buy for stock subject to your money management setup.

LTTS

LTTS success Story 

On 18th Jan 2018 we spotted an opportunity of LTTS @ price 976 on our strategy of support and resistance today 24th Jan 2018 the price is running @ price 1211.90 giving us a return of 24.17% within 6days. So by using this strategy one can get good return on their investments in a short period. contact 9820277043

Success CASE STUDY FOR BAJAJ AUTO

Success  study BAJAJ AUTO

stock started moving from  level 3101 it seen good upward journey with price rise up to level 3328 in 15days period of time which has  proven as resistance or top level. The movement from level 3101 to Level   3328 .was 9% which can be your return on investment .

 selling pressure or supply become heavily as traders started booking profit as they got 12%  return on thier investment , due to heavy selling pressure price fall down near Level 3101  .

Now  you know past movement of this stock ,remember history repeat itself  we coming to the sector position this stock belong to auto sector which shows in consolidation phase . There are possibilities that trend will remain continue. So Level 3101is a good buy for this stock subject to your money managment setup.

Success bull runner with today's closing price 3274 with our target still at 3328.

HINDPETRO

stock started moving from  level 400.61 it seen good upward journey with price rise up to level 434.64 in 10days period of time which has  proven as resistance or top level. The movement from LEVEL 400.61  TO434. 64 Level    .was 8.50% which can be your return on investment .

 selling pressure or supply become heavily as traders started booking profit as they got 8.50% return on thier investment , due to heavy selling pressure price fall down near Level 400.61

Now  you know past movement of this stock ,remember history repeat itself  we coming to the sector position this stock belong to oil and gas sector which shows in consolidation phase . There are possibilities that trend will remain continue. So Level 400.61is a good buy for this stock subject to your money managment setup.

Posted by Team 

Mob ; 98202 77043

 LTTS

stock started moving from  level 968.77 it seen good upward journey with price rise up to level 1127 in 15days period of time which has  proven as resistance or top level. The movement from LEVEL 968.77  TO 1127 Level    .was 16.33% which can be your return on investment .

 selling pressure or supply become heavily as traders started booking profit as they got 16.33% return on thier investment , due to heavy selling pressure price fall down near Level 968.77

Now  you know past movement of this stock ,remember history repeat itself  we coming to the sector position this stock belong to IT sector which shows in consolidation phase . There are possibilities that trend will remain continue. So Level 968.77 is a good buy for this stock subject to your money managment setup.

Posted by  Team

Mob ; 98202 77043

    BAJAJ AUTO

stock started moving from  level 3101 it seen good upward journey with price rise up to level 3328 in 15days period of time which has  proven as resistance or top level. The movement from level 3101 to Level   3328 .was 9% which can be your return on investment .

 selling pressure or supply become heavily as traders started booking profit as they got 9%  return on thier investment , due to heavy selling pressure price fall down near Level 3101  .

Now  you know past movement of this stock ,remember history repeat itself  we coming to the sector position this stock belong to auto sector which shows in consolidation phase . There are possibilities that trend will remain continue. So Level 3101is a good buy for this stock subject to your money managment setup.    Have A great week Ahead

Posted  By Our Team 

Mob: 98202 77043

HOW TO USE A MOVING AVERAGE TO BUY STOCKS?

Before we get into the application of the moving average in buying stocks, it would be prudent to define the concept first. The moving average identifies reversals and trends, measures an asset’s  momentum strength and also determines potential areas for an asset to locate resistance or support. It is seen and established that varying time periods monitor momentum and moving averages can set stop-losses.

Identification of Trend 

Trend identification is a primary and key function of moving averages. This is used by a large number of traders who wish to befriend trends.  Moving averages happen to be lagging indicators, i.e they don’t predict any new trends. Instead, they confirm trends when they are established. A stock becomes an uptrend one when its price goes above the moving average which slopes upwards. Conversely, traders take recourse to a price that falls below a sloping average that is downward to confirm downtrends. It is also often seen that traders only hold a long position in any asset when prices trade above the moving average.

Measuring Momentum 

Many novice traders are often curious about the measurement of  momentum and how a moving average may be applied to achieve it. The answer is simple. What one needs to do is to pay attention to time periods that are used to create the average. Every single time period provides valuable insights into different momentum types. Generally speaking, short-term momentum is measurable by taking into consideration moving averages over twenty or lesser number of days. Medium-term  momentum is measurable from moving averages created within a span of twenty to one hundred days. Similarly, long-term momentum can be measured using moving averages over one hundred days or more. The common thumb rule is using a fifteen day moving average to measure short-term momentum.

A proven method to ascertain the direction and strength of the asset’s momentum is by placing 3 moving averages on a chart and then analysing how they relate to each other. These 3 moving averages are taken from price movements taken from the short, medium and long-terms.

Providing Support 

Moving averages are also commonly used to determine potential price support. It is often seen that while applying moving averages, the dipping price of a particular asset often stops and reverses its direction at the identical level of a notable average. For instance, a two hundred -day moving average is generally able to prop up a particular stock’s price after it dipped from its highest level. Many traders anticipate  bounce offs on the notable moving averages and resort to other specialized technical indicators to confirm an expected move. 

Resistance Provider

If an asset’s price dips below a powerful support level in the long term, it is usually seen that the average acts as a powerful barrier preventing investors from raising the price to above the average level. Traders often take this resistance as signs to book profits or close out any long positions that may already be existing. Short Sellers  also make use of these averages to make entries as the price may often bounce off  such resistance and continue to keep dipping. As a long position holder of an asset that keeps trading below the most notable moving averages, you definitely need to keep a close watch on these levels as they stand to affect your investment’s value greatly. 

Managing Risk

The two main characteristics of moving averages — resistance and support — make the latter a most effective tool for risk management. Moving averages have the ability to locate strategic points for setting  stop-loss orders that allow traders to exit losing positions prior to more damage being done. Traders holding long positions in stocks who set stop-losses below influential and the notable averages can thus save plenty of money. And that’s exactly why moving averages are so important to frame successful trading strategies.

In sum, it goes without saying that moving averages are an inextricable part of any trading strategy and over time, have proven again and again to be one of the most effective tools of risk management. Particularly in volatile markets, they help prevent financial losses to retail investors who stand the risk of losing heavy sums of their hard earned money by way of the stop loss mechanism.

Source by Angel Broking 

HOW TO AVOID EMOTIONAL INVESTING

Emotional investing is dangerous, given the vagaries in the most unpredictable mood swings of the stock market.

Your investments, as they say, are your best friends. They may also turn out to be your worst enemies. This is more so for stock market investors who let their hearts rule their heads. In other words, emotional investing is dangerous, given the vagaries in the most unpredictable mood swings of the stock market. Emotion-fueled actions like buying stocks at a premium and selling them at lower prices do not make a wise investor. Similarly, clinging on to particular stocks for sentimental reasons is bound to negatively affect portfolio performance.

The following ways may be remembered to avoid emotional investing:

Don’t Run After Returns Only: Don’t over-react when the stock market starts moving. Think before you leap. Even though news of the market crashing unsettles us very much, taking rash decisions and offloading all your stock could lead to huge financial losses. It is always prudent to remind yourself that any investment plan or stock in which you put your money must work long term and should be linked to your retirement objectives. A day’s market fluctuations is no determinant of drastic buying or selling. So investing in stocks when the market streaks upwards or dumping them post a downturn won’t benefit you in any way.

Be realistic:  If your tolerance is low risk and your portfolio includes stable and well known companies with steady past performances and which guarantee long-term growth, your returns, in all probability, will not be fantastic at least in one calendar year. Remember, the more risky your portfolio is, the more it will fluctuate. Most investors desire the best benefits without taking any risk. This is definitely unrealistic. Your diverse and long-term plan that has been created with your final goals in mind shall help you in setting realistic and practical expectations in the future.

The Stock Market Is No Playground: Some dare devil investors take the stock market as a challenge which they want to overcome at any cost. They take it like a game where the stock market, as an opponent, has to be beaten no matter what. It’s truly a myth that investing constantly in the market gets you better returns. It certainly isn’t wise to make investments and then let complacence set in, expecting that the same investment will get you the best returns every year. So invest smarter instead of playing the typical buying and selling game which you most probably won’t win.

Long-term Plans Are Essential: Emotional investing usually takes over when long-term plans do not exist. Any long-term plan needs to be customized in order to meet some specific goals that you may have. When you don’t have a long term plan, you are actually like a ship without sails and don’t have a definite course to chart. You are actually veering off track and this could lead to some very disastrous consequences. Investment choices vary from person to person depending on age, income potential and your long term needs. You could make investments for buying a house in future, your children’s education and marriage, medical needs etc.

Take Professional Help: For newcomers to the stock market, it is always advisable to consult professional financial advisors who are experienced, knowledgeable and more importantly, reliable. Take advice from friends and associates who have used their services and then select one to guide you through the motions, at least initially.  It could be a worthwhile investment for the fees that you would be paying him and his advice, if correct, will always work to your benefit in the long run. However, you have to choose carefully after taking his overall goodwill, experience and knowledge into consideration. Rest assured, selecting the wrong advisor will inevitably work to your detriment.

Always remember that it’s your hard earned money that is at stake. And protected it must be at any cost.  When the going is good, offload all stocks that have appreciated your capital without allowing sentiment to rule your moves. As Warren Buffet once said, “Don’t we discard garments that have outlived their use?” The same applies to stocks also.

Source By Angel Broking 

EQUITY INVESTMENT TRIGGERS FOR THE FINANCIAL YEAR 2017-18

As the Nifty stands at a new high and the Sensex just a few hundred points shy of a new high, the question arises about the outlook for equities in the coming financial year. While at a very broad level, valuations may be at the upper end of the historic band, there could be some key triggers to help the equity markets in the coming financial year. There are 8 key factors that could drive the demand for equities in the financial year 2017-18…

8 factors that could drive demand for equities in India in 2017-18…

• Global liquidity may continue to pour into India in the coming financial year. The reasons are not far to seek. Even after the pain of demonetization, the Indian economy is expected to grow above 7.5% in the coming financial year. What is more; this growth will be achieved without compromising on fiscal deficit targets. This is likely to keep the FPIs interested in Indian equities at a fundamental level. If the FPI inflows in the month of March are anything to go by, then the FPI inflows are likely to continue in a bigger way in the coming fiscal year.

• The strength of the INR could be a key factor that could support FPI inflows into equities, apart from the relative valuation attractiveness of Indian equities. A strong rupee works in favour of global investors since their equity returns get enhanced by a strong currency. Ironically, the INR has strengthened from 68/$ to almost 64.6/$ at a time when the consensus estimate was that the INR would depreciate below the 72/$ mark. By wrongly anticipating the INR, most FPIs actually lost out on the rupee appreciation. Hence, the left-out feeling is leading to a surge of FPI flows into India and will continue into the new fiscal.

• Oil is likely to stay reasonably priced and that will ensure that the dividends of cheap oil will continue. Over the last 30 months, more than a trillion dollars of wealth transfer has happened from oil producers to oil consumers. India, which depends on oil imports for nearly 75% of its requirement, has been one of the obvious beneficiaries of low oil prices. With the US stockpiles high, global storage dwindling and millions of shale production in the sidelines, prices of Brent crude are unlikely to shoot up any time soon. That will benefit the Indian mid-cap companies in particular.

• Domestic liquidity could continue to flow into equities due to the TINA factor. There is no alternative (TINA) has been a key driver of domestic flows into equities. Domestic mutual funds are flush with funds due to a sharp rise in the number of SIPs. Retail investors are expected to infuse nearly $75 billion into the Indian equity markets and most of these funds are likely to flow into equity mutual funds. The way MFs sustained inflows into equities between October 2016 and January 2017 underlines that they have arrived as critical players.

• The alternatives to equity investing have been dwindling in India. Gold has become too volatile and does not assure that value will grow consistently. With the government clamping down on benami properties and real estate transactions, investors are getting increasingly wary of property market. Bonds and FDs are tax-inefficient and the yields are just about sufficient to cover the risk of inflation. Under these circumstances, only equity and equity-linked products remain as veritable investment options to create wealth. That could be a key driver for domestic demand for equities.

• Stability and continuity at the centre and states could be a major sentimental trigger for Indian equity markets. The recent emphatic victory in states like UP, Uttarakhand, Goa and Manipur have set the tone for a domination of the BJP across key states in the Hindi belt. This augurs well for continuity of reforms process post the 2019 elections. This will be a great positive especially for global investors looking for drastic reforms.

• GST could be a game changer for Indian markets. The GST overall is likely to boost GDP growth by 2% per annum. At the current GDP level of $2 trillion, this additional growth is likely to translate into $40 billion per annum. This is likely to show up in the form of additional GDP from the coming year and that will be positive for Indian equities. But the real benefits of GST may be indirect. The GST will create a national tax network that will introduce efficiencies in the way companies manage their logistics. The entire logistics rationale of Indian companies will shift from being tax-driven to being driven by commercial considerations. The actual impact of this move on valuations could be huge.

• Demonetization and digitization could be a major game changer for Indian equities. While demonetization has pushed large chunks of the informal economy into the formal mode, digitization is likely to expand the ambit of banking services substantially. In the process this could create a huge market across smaller towns and rural areas. By prising open huge markets, the combination of demonetization and digitization could push large parts of the parallel economy into the economic mainstream.

To cut a long story short, a combination of positive macros, global cues and company level factors are likely to favour Indian equities in the coming fiscal year. With India’s GDP growth likely to continue to outperform China, the growth advantage is likely to translate into greater interest in Indian equities. That may be the big story for fiscal year 2017-18.

Source By Angel Broking 

SELLING ON GREED AND BUYING ON FEAR IS EASIER SAID THAN DONE

Ask any veteran investor about his secret of investment and he will ask you to “Sell on greed and buy on fear”. If you look back at the markets over the last 10 years, this strategy would have precisely yielded rich dividends. Then why is that most investors and traders find it so difficult to sell on greed and buy on fear. For example, 2002 and 2009 were screaming buys for even the most naïve investor. Similarly, 2000 and 2008 were screaming sells even for someone with a very rudimentary understanding of the markets. Then why then did you not put all your savings into equities either in 2002 or in 2009?

Buying on fear and selling on fear is easier said than done. At the end of the day, initiating a trade may be an analytical game but sustaining the trade is, more often than not, a psychological game. That is where traders and investors falter and that is the reason selling on greed and buying on fear appears to be so difficult in reality. There are actually 3 reasons for the same...

Peer pressure spoils the show; more often than not...

In the stock markets, the easiest thing to do is what your neighbour at your apartment or your colleague in office is dong. Most of the investors tend to buy what is sold to them and not what they should be buying. It is during market peaks that you will find a plethora of IPOs in the market; you will find analysts recommending stocks at steep valuations; you will find traders telling that the market structure is changing etc. These forces are extremely hard to resist. More so when you see you neighbour has just bought a private banking stock at 60 times P/E and sold it off at 70 times P/E. This kind of peer pressure is hard to resist!

The bull market is likely to make you believe that the only way to make money is to keep buying like there is no tomorrow. Your intuition tells you that buying Wipro at 150 times P/E ratio in 2000 was a bad choice, but you still went ahead and did that because that is what every Tom, Dick and Harry on the street was doing.

At the peak, you start believing that this bull market is different…

At the peak of the tech boom, investors were told that technology would transform the world to the extent that electronic money will replace physical money entirely. Much later in 2007, we all believed that Unitech at Rs.25,000 per share was justified because real estate companies must be valued based on land banks rather than on sales and earnings. Eventually both these arguments flopped. Technology did not structurally change the way we did business and most technology stocks lost nearly 90% over the next few years. Similarly, land banks turned out to be notional numbers when the entire valuation of land parcels started to crumble. Not surprisingly, most realty companies lost nearly 95% of their market value and are nowhere close to their peaks even after 10 years. As John Templeton rightly said, the most dangerous argument in capital markets is “This time it is Different”. It is this perverse argument that typically induces investors to keep buying aggressively at market peaks. When there is greed, you become greedy too and believe that this time something will be different. Of course, it is another matter that things rarely turn out to be different in practice.

To be greedy at lower levels, one needs to have liquidity on hand...

This entire process is a vicious cycle. If you have been fearful at the top and sold off your shares then you will have liquidity at the bottom. The biggest reason for not being greedy at lower levels is that you just do not have liquidity on hand. You bought L&T at 6000 and do not have the heart to now sell it off at Rs.3000. So you hold on in the hope that you will eventually make a profit on L&T, which unfortunately never materializes. In the process you miss out on the salivating opportunities at the market bottoms.

There is another angle to the liquidity argument. Market peaks generally tend to lead economic peaks. By the time the market has turned down, the liquidity in the economy is tight and required funds are not easily available. Even if you have the conviction, the financier does not have the conviction at those levels to finance you. That is the crux of the problem. So is there not a solution to this problem?

The solution can come in the form of a disciplined rule-based trading. When you say rule-based, then it must strictly be rule based. For example, say you have bought an IT stock at 18 times valuations. If the historic average valuation is 23 times earnings and the stock goes 10% above that, then you exit. That means at 25 times earnings you exit. That may imply that you miss out on the last frenzy of the stock, but that is a risk worth taking and a profit worth forsaking. At least, by liquidating your position close to the peak, you are well funded when the moment of fear arises. That can be a starting point for you!

Source by Angel broking