10 great investing rules from history

10 great investing rules from history

 

Remember that old adage to the effect that those who don't learn lessons from history are bound suffer avoidable hardship?

Learning the important lessons that history of investment offers, will rev up your investing profits. . .

1. Put all your eggs in one basket and watch that basket!

This saying comes from Mark Twain, but has been applied to stock market investment more or less verbatim by both John Maynard Keynes and Warren Buffett. Modern portfolio theory suggests that one can reduce risk by diversification.

However, if you were an active investor you would do better to concentrate your shareholdings in a limited number of companies which you feel you understand. This can actually reduce risk.

2. When the ducks quack, feed them

This is an old Wall Street adage relating to initial public offerings. Investment bankers are out to make money and will sell the public anything within the bounds of the law.

Research suggests that, in general, IPOs rocket upwards on the first day's trading but tend to under perform comparable companies over a three-year period. Since small investors don't receive fair allocations of the best IPOs but are landed with the duds, they should avoid the new issue market entirely.

3. Markets make opinions, not the other way round

When markets rise, commentators find a way of rationalising the gains. Take the tech bull market. We were told that the 'valuation clocks' were broken and that companies deserved to trade on a higher price-earnings ratio.

We were also told that US productivity had risen and that the US would experience a higher growth rate in the past. We were also told that Greenspan et al would prevent another cyclical downturn. All these comments were spurious rationalisations of an 'irrationally exuberant' market.

4. Buy low, sell high

This advice seems obvious, but investors always ignore it. The demand curve for investment assets is like that for a luxury good -- the higher the price, the greater the demand.

Hence we see turnover rising during a bull market and falling during a bear market. Investors should always be prepared to act contrary to the market.

5. When the rest of the world is mad, we must imitate them in some measure

This observation came from the mouth of an eighteenth-century banker, John Martin, during the South Sea Bubble of 1720. It is another expression of the 'greater fool' theory, namely that you can buy over-priced shares and sell them on at a profit to some sucker.

This speculative attitude has been much in evidence in recent years in the form of momentum investing. Of course, you can make money if you find a greater fool, but you also will lose your money if you don't.

6. During a bull market nobody needs a broker. During a bear market nobody wants one

This is another Wall Street saying, cited more recently by Alan Abelson in Barron's. We are now more aware than ever that most brokerage research is generally of a low quality and that broker recommendations cannot be followed profitably.

Investors should avoid reading research by brokers whose parent company provides financial services for the company concerned.

7. Every man his own broker

This is, in fact, the title of the first investment book, written by Thomas Mortimer in the 1750s. It was republished several times. If you can't trust brokers, you must replace them. The problem is that the private investor is not well-equipped to do so. So, first learn, then invest.

8. Markets can remain irrational longer than you can remain solvent

This saying comes from John Maynard Keynes, the great English economist. He was also an acute observer of markets and a speculator. The point of Keynes's comment is that your observation may be fundamentally correct but it can take the market a long time to catch up.

For example, the dotcom bubble ran for almost five years from the flotation of Netscape in the summer of 1995 to the Nasdaq collapse in March 2000. Many people lost a lot of money shorting the likes of eToys and Amazon.com before the market woke up to its absurd overvaluation of the sector.

9. A mine is a hole in the ground with a liar standing over it

This saying also comes from Mark Twain. It should remind investors to be wary of all projectors, whether they are promoting gold mines, biotech or some other new-fangled technology.

In general, the promise of outsize profits are followed by the reality of painful losses. You will make more money in the long run by restraining your greed.

10. Be diffident when others exalt, and with a secret joy buy when others think it in their interests to sell

This advice comes from the English writer, Sir Richard Steele, in an article for The Spectator in the early 1700s. To my knowledge it is the first expression of a contrarian investment philosophy.

The art of investment lies in judiciously going against the crowd. It is both intellectually more fulfilling to refute the market consensus and in the long run should be more profitable. Academic research suggests that unloved 'value shares' tend to outperform so-called 'growth stocks' over the long run.

5 investing mistakes to avoid in 2009

5 investing mistakes to avoid in 2009

 

For many investors, 2008 was a nightmare that came true. After four years of boom, when the tables turned, it wiped out lakhs of crores (trillions) of investors' wealth.

Last December, there would have been a smile on everyone's face. While the United States had started feeling the pinch of the sub prime crisis, many experts claimed that India was decoupled from what was happening there. Well, it took just one month to change the scenario.

On January 21, in a matter of hours the benchmark indices, Sensex and Nifty, hit the lower circuits. And in the next 11 months, there have been few moments of pleasure for the stock market investor.

Both the indices are down over 50 per cent. But depending on portfolio, some investors have even lost 80-85 per cent.

As the year-end approaches, let's look at some of the mistakes that many investors made during the last year and hopefully, refrain from making them again.

 

1. Over-leveraging

Buying stocks with borrowed money is leveraging. And it is a crime that many investors committed last year.

Typically, a broker either lends or allows the investor to have a larger position than the money that has been deposited. The interest rate on such lending is higher. Consider this, often an investor has Rs 1 lakh and has positions in the market four to five times of that.

When things are good and stock prices are rising to dizzying levels, everyone is happy. The return on investment outstrips the interest cost. But when the market falls, it is a complete disaster.

For instance, when Reliance Industries was trading at Rs 2,500, you bought stocks worth Rs 4 lakh (Rs 400,000) on an initial capital of Rs 1 lakh (Rs 100,000). If the stock moves to Rs 2,700, it has gone up by only 8 per cent, but the return on investment (Rs 1 lakh) is 32 per cent.

Now if the stock dips to Rs 2,000, down 20 per cent, you stand to lose 80 per cent. Now if you add the interest cost to the total capital loss, then the initial capital might have been wiped out.

Lesson: Multiplier effect has both sides. Use the loan facility very responsibly and with stringent limits to it.

2. Averaging effect

Whenever stock markets start falling, the initial reaction from investors is to buy more. The idea being that there would be cost averaging.

However, when a slide like this happens, this should be the last thing on your mind. It's because while you may have brought down the acquisition cost, a lot of money has gone into this process. It is almost like throwing good money after bad money.

Often, this happens when one refuses to believe that things are turning sour and the recovery would take a long, long time.

Lesson: Emotional attachment to a stock can be very damaging. If you have made the mistake of buying shares at higher price, don't multiply it by buying them at every low.

3. Investing on tips or rumours

Many investors can be accused of this one. But things can go real bad sometimes. This is especially true with mid- and-small-cap stocks.

There are hundreds of examples where tips are given for penny stocks or Z category stocks. Initially, it may give you some money. In the long run, however, such investing tactics can be fatal.

Lesson: Just ignore.

4. Derivatives play

For a lay investor, this is a definite no. As investing guru Warrant Buffet had once said, derivatives are 'financial weapons of mass destruction'.

A large number of small investors used the derivatives route to invest rather than the cash segment. It was easy since futures and options allowed them to take positions on either side (long or short) with little over 20 per cent margin or little option premium.

But since they have to pay only 20 per cent, bigger risks are taken. That is, small losses are not booked. Instead, positions are rolled on in the hope that ultimately things would favour them.

No wonder, losses keep mounting and can really hurt sometimes. For example, it is better to buy futures at Rs 25 and book profits around 25.5 or 26 levels, effectively earning 10-20 per cent return on the margin amount. However, keeping the position open even while losing can be disastrous.

Lesson: Derivatives are not an investment tool but a hedging mechanism. So either don't use it or use only after you equip yourself with its pros and cons.

5. IPO investment

On an average, during boom times, initial public offerings (IPOs) of companies are oversubscribed by 40-50 times. As a result, investors use the IPO route to make quick money.

That is, on the day of listing they simply book profits. For many, it is a sure shot mantra for quick money.

But when the scrip lists lower than the offer price, getting stuck is very much possible. And if someone has taken a loan and applied for the IPO then things could get real bad. Investors who invested using IPO funding facility get hurt the most.

Long-term IPO investors may still make a decent return over a long run, but subscribe and sell on first day is out of sight at the moment.

Lesson: Invest in IPOs only when you believe in the company. Otherwise, just stay away.

Investors should realise that making money is a long-term process. However, in their attempt to make a quick buck, many suffer. In 2009, make sure that these mistakes will not be repeated.

 

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7 lessons to learn from a market downturn

 

7 lessons to learn from a market downturn

You can never really understand investing until you weather a market downturn. The valuable lessons learned can help you through the bad times and can be applied to your portfolio when the economy recovers. Listed below are some common investor experiences during tough economic times and the lessons each investor can come away with after surviving the events.

Lesson #1: Evaluate your egg baskets
You're pulling your hair out because everything you invest in goes down. The lesson: Always keep a diversified portfolio, regardless of current market conditions.

 

If everything you own is moving in the same direction, at the same rate, your portfolio is probably not well diversified, and you could stand to reconsider your asset-allocation choices. The specific assets in your portfolio will depend on your objectives and risk-tolerance level, but you should always include multiple types of investments.

Taking a more conservative stance to preserve capital should mean changing the percentages of holdings from aggressive, risky stocks to more conservative holdings, not moving everything to a single investment type.

For example, increasing bonds and decreasing small-cap growth holdings maintains diversification, whereas liquidating everything to money market securities does not. Under normal market conditions, a diversified portfolio reduces big swings in performance over time.

Lesson #2: No such thing as a sure thing
That stock you thought was a sure thing just tanked. The lesson: Sometimes the unpredictable happens. It happens to the best analysts, the best fund managers, the best advisors, and, it can happen to you.

The perfect chart interpretation, fundamental analysis, or tarot card reading won't predict every possible incident that can impact your investment.

• Use due diligence to mitigate risk as much as possible.
• Review quarterly and annual reports for clues on risks to the company's business as well as their responses to the risks.
• You can also glean industry weaknesses from current events and industry associations.

More often, an investment is impacted by a combination of events. Don't kick yourself over unpredictable or extraordinary events like supply-chain failures, mergers, lawsuits, product failures, etc.

Lesson #3: Proper risk management
You thought an investment was risk-free, but it wasn't. The lesson: Every investment has some type of risk.

You can attempt to measure the risk and try to offset it, but you must acknowledge that risk is inherent in each trade. Evaluate your willingness to take each risk.

Lesson #4: Liquidity matters
You always stay fully invested, so you miss out on opportunities requiring accessible cash. The lesson: Having cash in a certificate of deposit or money market account enables you to take advantage of high-quality investments at fire sale prices. It also decreases overall portfolio risk.

Plan ahead to replenish cash accounts. For example, use the proceeds from a called bond to invest in the money market instead of purchasing a new bond.Sometimes cash can be obtained by reorganizing debt or trimming discretionary spending. Set a specific percentage of your overall portfolio to hold in cash.

Lesson #5: Patience
Your account balance is lower than it was last quarter, so you overhaul your investment strategy before taking advantage of your current investments. The lesson: Sometimes it takes the market an extended period of time to bounce back.

Your overall portfolio balance on a given date is not as important as the direction it is trending and expected returns for the future. The key is preparedness for the impending market upturn based on an estimated lag time behind market indicators. Evaluate your strategy, but remember that sometimes patience is the solution.

Lesson #6: Be your own advisor
The market news gets bleaker every day - now you're paralyzed with fear! The lesson: Market news has to be interpreted relative to your situation.

Sometimes investors overreact, particularly with large or popular stocks, because bad news is replayed continuously via every news outlet. Here are some steps you can follow to help you keep your head in the face of bad news:

• Pay attention and understand the news, then analyze the financials yourself.
• Determine if the information represents a significant downward financial trend, a major negative shift in a company's business, or just a temporary blip.
• Listen for cues the company may be downgrading its own expected returns. Find out if the downgrade is for one quarter, one year or if it is so abstract you can't tell.
• Conduct an industry analysis of the company's competitors.

After a thorough evaluation, you can decide if your portfolio needs a change.

Lesson #7: When to sell and when to hold
The market indicators don't seem to have a silver lining. The lesson: Know when to sell existing positions and when to hold on.

Don't be afraid to cut your losses. If the current value of your portfolio is lower than your cost basis and showing signs of dropping further, consider taking some losses now. Remember, those losses can be carried forward to offset capital gains for up to seven years.

Selective selling can produce cash needed to buy investments with better earnings potential. On the other hand, maintain investments with solid financials that are experiencing price corrections based on expected price-earnings ratios. Make decisions on each investment, but don't forget to evaluate your overall asset allocation.

Conclusion
Downward stock market swings are inevitable. The better-prepared you are to deal with them, the better your portfolio will endure them. You may have already learned some of these lessons the hard way, but if not, take the time to learn from others' mistakes before they become yours.

 

 

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9 market trends to watch out for in 2009

 

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9 market trends to watch out for in 2009

 

 

Investors would like to forget 2008 -- a year when the Sensitive Index shed more than half its value in 2008, its worst performance ever.

But market experts say investors could look forward to some important changes in 2009.

 

Here are some of them. . .

 

1. The sectors that could spark a rally

 

Insurance could be the big story in the New Year, as some private insurance companies are expected to make their debut in the equity market.

The other sector to watch out for is banking, which has been battered on the stock exchanges. Any recovery in banking stocks -- something that is widely expected -- will send a clear signal that the worst may be over.

2. Newer instruments to raise money

Raising money through traditional routes is becoming difficult. So companies will be looking at newer routes.

At least six companies are exploring the option of issuing a combination of warrants with non-convertible debentures (NCDs) in the first quarter the calendar year itself.

Citigroup Global Markets MD Ravi Kapoor says the new instrument will help companies to avail funds at a cheaper rate.

Earlier, warrants used to be issued through preferential allotment or public issues, but with the recent relaxation, companies will be able to reap benefits of both bonds and warrants simultaneously. FCCBs and fixed deposits will act as the maximum capital generating resources during the financial year 2009-10, he said.

3. Export of indices

The benchmark indices have become popular abroad, and NSE's Nifty futures trading in Singapore is a perfect example of this.

Some more products based on Indian stock indices are set to be launched on overseas exchanges. Apart from NSE's Singapore futures, Exchange Traded Funds (ETFs) based on Nifty are traded on the London Stock Exchange, Lyxor, Borsa Italiana and Deutsche Borse.

The Sensex futures are listed on Chicago. In the coming months, expect the Sensex futures on Singapore exchange also.

Nifty-based ETF may be launched on one of the US stock exchange as there is a great deal of interest for such a product. Interestingly, discussions are being held to launch a Nifty-based structured product in Israel.

4. Indian Depository Receipts (IDRs)

Global Depository Receipts and American Depository Receipts have become popular instruments for Indian companies to raise money overseas.

Foreign companies have been allowed to raise money from India by issuing IDRs, the guidelines for which were issued three-four years.

Though no company has come forward so far, there are indications that Standard Chartered may emerge as the first foreign entity to float an IDR issue

5. Screen-based trading of MFs' units

Sebi Chairman C B Bhave, who had set up the depository system, is expected to implement a system, whereby MF units can be traded on exchanges, or investments can be made through internet with an option to receive and make online payments.

This can save time and cost and the liquid schemes of mutual funds can be used like a bank account. The Association of Mutual Funds of India (AMFI) is already studying a proposal in this regard.

 

OTC products also on screens

With the emergence of technology, more and more screen-based products are being introduced. The next in queue is futures trading on interest rate. Interest rate futures are set to be launched in the early part of 2009.

The success of currency futures will tempt regulators to introduce screen-based trading for over-the-counter market products such as currency forwards and overnight interest rate swaps.

 

More stock exchanges

The new year is expected to bring some competition to the Bombay Stock Exchange and the National Stock Exchange.

At least two stock exchanges are expected to come up this year, depending on regulatory approval. The aspirants are Reliance Money and Financial Technologies.

Exchanges for SMEs

Small and medium enterprises find it difficult to get cheap access to capital. The problem may be resolved somewhat with the emergence of SME Exchanges.

Three companies are now awaiting the market regulator's approval for this.

Improved equity cult

The Securities and Exchange Board of India (Sebi) has appointed New Delhi-based economic think tank National council of Applied Economic Research (NCAER) to do a survey on the reasons for the low level of household investments in equity.

Sebi is expected to take some concrete actions after NCAER submits its findings. another ambitious survey of Indian households is being done by Mumbai-based Centre for Monitoring Indian Economy (CMIE).

This survey is expected to be out in the next couple of months and Indian households' income, expenses, savings and investments trends will be known. 

 

India's biggest scams

 

 

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India's biggest scams

 

The Satyam Computer Services fraud is neither the first nor will it be the last corporate scam to have hit India, so investors must be on guard and ask for more information before making any investment decision, says former Sebi chairman M Damodaran.

Sound advice. But with corporates, brokers, banks, politicians, regulators colluding at times, many a multi-crore scam has hit India. And the saga is likely to go on.

India has seen some of the most high-profile scandals where investors have lost billions of rupees just because a few people in high places could not control their greed.The Satyam Computer Services fraud is neither the first nor will it be the last corporate scam to have hit India, so investors must be on guard and ask for more information before making any investment decision, says former Sebi chairman M Damodaran.

Sound advice. But with corporates, brokers, banks, politicians, regulators colluding at times, many a multi-crore scam has hit India. And the saga is likely to go on.

India has seen some of the most high-profile scandals where investors have lost billions of rupees just because a few people in high places could not control their greed.

 

 

Here's more about India's biggest scams...

 

1. Ramalinga Raju

The biggest corporate scam in India has come from one of the most respected businessmen.

Satyam founder Byrraju Ramalinga Raju resigned as its chairman after admitting to cooking up the account books.

His efforts to fill the "fictitious assets with real ones" through Maytas acquisition failed, after which he decided to confess the crime.

With a fraud involving about Rs 8,000 crore (Rs 80 billion), Satyam is heading for more trouble in the days ahead.

On Wednesday, India's fourth largest IT company lost a staggering Rs 10,000 crore (Rs 100 billion) in market capitalisation as investors reacted sharply and dumped shares, pushing down the scrip by 78 per cent to Rs 39.95 on the Bombay Stock Exchange.

The NYSE-listed firm could also face regulator action in the US.

"I am now prepared to subject myself to the laws of the land and face consequences thereof," Raju said in a letter to SEBI and the Board of Directors, while giving details of how the profits were inflated over the years and his failed attempts to "fill the fictitious assets with real ones."

Raju said the company's balance sheet as of September 30 carries "inflated (non-existent) cash and bank balances of Rs 5,040 crore (Rs 50.40 billion) as against Rs 5,361 crore (Rs 53.61 billion) reflected in the books."

 

2. Harshad Mehta

He was known as the 'Big Bull'. However, his bull run did not last too long.

He triggered a rise in the Bombay Stock Exchange in the year 1992 by trading in shares at a premium across many segments.

Taking advantages of the loopholes in the banking system, Harshad and his associates triggered a securities scam diverting funds to the tune of Rs 4000 crore (Rs 40 billion) from the banks to stockbrokers between April 1991 to May 1992.

Harshad Mehta worked with the New India Assurance Company before he moved ahead to try his luck in the stock markets. Mehta soon mastered the tricks of the trade and set out on dangerous game plan.

Mehta has siphoned off huge sums of money from several banks and millions of investors were conned in the process. His scam was exposed, the markets crashed and he was arrested and banned for life from trading in the stock markets.

He was later charged with 72 criminal offences.

A Special Court also sentenced Sudhir Mehta, Harshad Mehta's brother, and six others, including four bank officials, to rigorous imprisonment (RI) ranging from 1 year to 10 years on the charge of duping State Bank of India to the tune of Rs 600 crore (Rs 6 billion) in connection with the securities scam that rocked the financial markets in 1992. He died in 2002 with many litigations still pending against him.

 

3. Ketan Parekh

Ketan Parekh followed Harshad Mehta's footsteps to swindle crores of rupees from banks. A chartered accountant he used to run a family business, NH Securities.Ketan however had bigger plans in mind. He targetted smaller exchanges like the Allahabad Stock Exchange and the Calcutta Stock Exchange, and bought shares in fictitious names.

His dealings revolved around shares of ten companies like Himachal Futuristic, Global Tele-Systems, SSI Ltd, DSQ Software, Zee Telefilms, Silverline, Pentamedia Graphics and Satyam Computer (K-10 scrips).

Ketan borrowed Rs 250 crore from Global Trust Bank to fuel his ambitions. Ketan alongwith his associates also managed to get Rs 1,000 crore from the Madhavpura Mercantile Co-operative Bank.

According to RBI regulations, a broker is allowed a loan of only Rs 15 crore (Rs 150 million). There was evidence of price rigging in the scrips of Global Trust Bank, Zee Telefilms, HFCL, Lupin Laboratories, Aftek Infosys and Padmini Polymer.

 

4. C R Bhansali

The Bhansali scam resulted in a loss of over Rs 1,200 crore (Rs 12 billion).

He first launched the finance company CRB Capital Markets, followed by CRB Mutual Fund and CRB Share Custodial Services. He ruled like a financial wizard 1992 to 1996 collecting money from the public through fixed deposits, bonds and debentures. The money was transferred to companies that never existed.

CRB Capital Markets raised a whopping Rs 176 crore in three years. In 1994 CRB Mutual Funds raised Rs 230 crore and Rs 180 crore came via fixed deposits. Bhansali also succeeded to to raise about Rs 900 crore from the markets.

However, his good days did not last long, after 1995 he received several jolts. Bhansali tried borrowing more money from the market. This led to a financial crisis.

It became difficult for Bhansali to sustain himself. The Reserve Bank of India (RBI) refused banking status to CRB and he was in the dock. SBI was one of the banks to be hit by his huge defaults

 

5. Cobbler scam

Sohin Daya, son of a former Sheriff of Mumbai, was the main accused in the multi-crore shoes scam. Daya of Dawood Shoes, Rafique Tejani of Metro Shoes, and Kishore Signapurkar of Milano Shoes were arrested for creating several leather co-operative societies which did not exist.

They availed loans of crores of rupees on behalf of these fictitious societies. The scam was exposed in 1995. The accused created a fictitious cooperative society of cobblers to take advantage of government loans through various schemes.

Officials of the Maharashtra State Finance Corporation, Citibank, Bank of Oman, Dena Bank, Development Credit Bank, Saraswat Co-operative Bank, and Bank of Bahrain and Kuwait were also charge sheeted.

 

6.IPO Scam

The Securities and Exchange Board of India barred 24 key operators, including Indiabulls and Karvy Stock Broking, from operating in the stock market and banned 12 depository participants from opening fresh accounts for their involvement in the Initial Public Offer scam.

It also banned 85 financiers from capital market activities.

Suzlon Energy Ltd's Rs 1,496.34 crore (Rs 14.963 billion) public issue (September 23-29, 2005). The retail portion was oversubscribed 6.04 times and the non-institutional portion was oversubscribed 40.27 times. Key operators used 21,692 fictitious accounts to corner 323,023 shares representing 3.74 per cent of the total number of shares allotted to retail individual investors.

Jet Airways's Rs 1,899.3 crore (Rs 18.993 billion) public offer (Feb 18-24, 2005). The retail portion was subscribed 2.99 times and the non-institutional portion by 12.5 times. Key operators used 1186 fake accounts for cornering 20,901 shares repersenting 0.52 per cent of the total number of shares allotted to retail investors.

National Thermal Power Corporation Ltd's Rs 5,368.14 crore (Rs 53.681 billion) IPO (Oct 7-14, 2004). The retail portion was oversubscribed 3.73 times and the non-institutional portion by 11.93 times. Key operators used a total of 12,853 afferent accounts for cornering 2,750,730 shares representing 1.3 per cent of the total number of shares allotted to retail investors.

Tata Consultancy Services's Rs 4,713.47 crore (Rs 47.134 billion) public offer (Aug 19-23, 2004). The retail portion was oversubscribed 2.86 times and the non-institutional portion by 19.15 times. Key operators used 14,619 'benami' accounts to corner 261,294 shares representing 2.09 per cent of the total shares allotted to retail individual investors.

Patni Computer System Ltd's Rs 430.65 crore (Rs 4.306 billion) public issue (Jan 27-Feb 5 2004). The retail portion was oversubscribed 9.36 times and the non-institutional portion by 39.22 times. A lone key operator used 2541 afferent account for cornering 127,050 shares representing 2.71 per cent of the total number of shares allotted to retail investors.

 

7. Dinesh Dalmia

Dinesh Dalmia was the managing director of DSQ Software Limited when the Central Bureau of Investigation arrested him for his involvement in a stocks scam of Rs 595 crore (Rs 5.95 billion).

Dalmia's group included DSQ Holdings Ltd, Hulda Properties and Trades Ltd, and Powerflow Holding and Trading Pvt Ltd.

Dalmia resorted to illegal ways to make money through the partly paid shares of DSQ Software Ltd, in the name of New Vision Investment Ltd, UK, and unallotted shares in the name of Dinesh Dalmia Technology Trust.

Investigation showed that 1.30 crore (13 million) shares of DSQ Software Ltd had not been listed on any stock exchange.

 

8. Abdul Karim Telgi

He paid for his own education at Sarvodaya Vidyalaya by selling fruits and vegetables on trains.

He is today famous (or infamous) for being he man behind one of India's biggest scams.

The Telgi case is another big scam that rocked India. The fake stamp racket involving Abdul Karim Telgi was exposed in 2000. The loss is estimated to be Rs 171.33 crore (Rs 1.71 billion), it was initially pegged to be Rs 30,000 crore (Rs 300 bilion), which was later clarified by the CBI as an exaggerated figure.

In 1994, Abdul Karim Telgi acquired a stamp paper license from the Indian government and began printing fake stamp papers.

Telgi bribed to get into the government security press in Nashik and bought special machines to print fake stamp papers.

Telgi's networked spread across 13 states involving 176 offices, 1,000 employees and 123 bank accounts in 18 cities.

 

9.Virendra Rastogi

Virendra Rastogi chief executive of RBG Resources was charged with for deceiving banks worldwide of an estimated $1 billion.

He was also involved in the duty-drawback scam to the tune of Rs 43 crore (Rs 430 milion) in India.

The CBI said that five companies, whose directors were the four Rastogi brothers -- Subash, Virender, Ravinde and Narinder -- exported bicycle parts during 1995-96 to Russia and Hong Kong by heavily over invoicing the value of goods for claiming excess duty draw back from customs.

 

10. The UTI Scam

Former UTI chairman P S Subramanyam and two executive directors -- M M Kapur and S K Basu -- and a stockbroker Rakesh G Mehta, were arrested in connection with the 'UTI scam'.

UTI had purchased 40,000 shares of Cyberspace between September 25, 2000, and September 25, 2000 for about Rs 3.33 crore (Rs 33.3 million) from Rakesh Mehta when there were no buyers for the scrip. The market price was around Rs 830.

The CBI said it was the conspiracy of these four people which resulted in the loss of Rs 32 crore (Rs 320 million). Subramanyam, Kapur and Basu had changed their stance on an investment advice of the equities research cell of UTI.

The promoter of Cyberspace Infosys, Arvind Johari was arrested in connection with the case. The officals were paid Rs 50 lakh (Rs 5 million) by Cyberspace to promote its shares.

He also received Rs 1.18 crore (Rs 11.8 million) from the company through a circuitous route for possible rigging the Cyberspace counter.

11. Uday Goyal

Uday Goyal, managing director of Arrow Global Agrotech Ltd, was yet another fraudster who cheated investors promising high returns through plantations. Goyal conned investors to the tune of over Rs 210 crore (Rs 2.10 billion). He was finally arrested.

The plantation scam was exposed when two investors filed a complaint when they failed to get the promised returns.

Over 43,300 persons had fallen into Goyal's trap. Several criminal complaints were filed with the Economic Offences Wing.

The company's directors and their relatives had misused the investors' money to buy properties. The High Court asked the company to sell its properties and repay its investors.

 

12. Sanjay Agarwal

Home Trade had created waves with celebrity endorsements.

But Sanjay Agarwal's finance portal was just a veil to cover up his shady deals. He swindled a whopping Rs 600 crore (Rs 6 billion) from more than 25 cooperative banks.

The government securities (gilt) scam of 2001 was exposed when the Reserve Bank of India checked the acounts of some cooperative banks following unusual activities in the gilt market.

Co-operative banks and brokers acted in collusion in abid to make easy money at the cost of the hard earned savings of millions of Indians. In this case, even the Public Provident Fund (PPF) was affected.

A sum of about Rs 92 crore (Rs 920 million) was missing from the Seamen's Provident Fund. Sanjay Agarwal, Ketan Sheth (a broker), Nandkishore Trivedi and Baluchan Rai (a Hong Kong-based Non-Resident Indian) were behind the Home Trade scam.

 

 

How to master a bear market

How to master a bear market

Witnessing a bear market for stocks doesn't have to be about suffering and loss, even though some cash losses may be unavoidable. Instead, investors should always try to see what is presented to them as an opportunity, a chance to learn about how markets respond to the events surrounding a bear market or any other extended period of dull returns. Read on to learn about how to weather a downturn.

What is a bear market?

The boilerplate definition says that any time broad stock market indexes fall more than 20 per cent from a previous high, a bear market is in effect. Most economists will tell you that bear markets simply need to occur from time to time to "keep everyone honest".

In other words, they are a natural way to regulate the occasional imbalances that sprout up between corporate earnings, consumer demand and the combination of legislative and regulatory changes in the marketplace. Cyclical patterns of stock returns are just as evident in our past as the cyclical patterns of economic growth and unemployment that have been around for hundreds of years.

Bear markets can take a big bite out of the returns of long-term stockholders. If an investor could, by some miracle, avoid the downturns altogether while participating in all the upswings (bull markets), their returns would be spectacular - even better than Warren Buffet or Peter Lynch. While that kind of perfection is simply beyond reach, savvy investors can see far enough around the corner to make adjustments to their portfolios and spare themselves some losses.

These adjustments are a combination of asset allocation changes (moving out of stocks and into fixed income products) and switches within a stock portfolio itself.

When the bear comes knocking

If it appears that a bear market could be around the corner, get your portfolio in order by identifying the relative risks of each holding, whether it's a single security, a mutual fund, or even hard assets like real estate and gold. In bear markets, the stocks most susceptible to falling are those that are richly valued based on current or future profits. This often translates into growth stocks (stocks with price-earnings ratios(P/E ratios) and earnings growth higher than market averages) falling in price.

Value stocks, meanwhile, may outperform the broad market indexes because of their lower P/E ratios and the perceived stability of earnings. Value stocks also often come with dividends, and this income becomes more precious in a downturn when equity growth disappears. Because value stocks tend to get ignored during bull runs in the market, there is often an influx of investor capital and general interest in these stodgy companies when markets turn sour.

Many young investors tend to focus on companies that have outsized earnings growth (and associated high valuations), operate in high-profile industries, or sell products with which they are personally familiar. There is absolutely nothing wrong with this strategy, but when markets begin to fall broadly, it is an excellent time to explore some lesser-known industries, companies and products. They may be stodgy, but the very traits that make them boring during the good times turn them into gems when the rain comes.

Seek out defensive investments

In working to identify the potential risks in your portfolio, focus on company earnings as a barometer of risk. Companies that have been growing earnings at a fast clip probably have high P/Es to go with it. Also, companies that compete for consumers' discretionary income may have a harder time meeting earnings targets if the economy is turning south. Some industries that commonly fit the bill here include entertainment, travel, retailers and media companies.

You may decide to sell or trim some positions that have performed especially well compared to the market or its competitors in the industry. This would be a good time to do so; even though the company's prospects may remain intact, markets tend to drop regardless of merit. Even that "favorite stock" of yours deserves a strong look from the devil's advocate point of view.

Identify the root causes of weakness

It may take some time for a consensus to form, but eventually there will be evidence of what ended up causing the bear market to occur. Rarely is one specific event to blame, but a core theme should start to appear; identifying that theme can help identify when the bear market might be at an end. Armed with the experience of a bear market, you may find yourself wiser and better-prepared when the next one arrives.

A case study: 2000-2002 bear market

Consider the bear market that occurred between the spring of 2000 and the fall of 2002, often referred to as the "tech bubble" or dotcom bubble. As the monikers suggest, the problems in this market began with technology stocks, as evidenced by the more than 60 per cent drop in the tech-laden Nasdaq index. But weakness in a few sectors quickly spread, eventually dragging down all corners of the equity map. Even the blue-chip Dow Jones Industrial Average fell over 25 per cent during the period.

Leading up to the year 2000, the explosion of the internet led to dramatic innovations in all areas of technology, including data servers, personal computers, software and broadband transmission systems like fiber optics and cable. By the late 1990s, any company remotely involved in the internet had a sky-high market cap, giving it access to very cheap capital. Stocks with little or no earnings were suddenly worth billions, and used their stock currency to buy other companies, obtain bank credit and expand operations.

Meanwhile, non-tech based companies felt the need to get caught up technologically, and spent billions on equipment as well as activities related to "Y2K" preparation, further inflating demand for tech products, but it was an artificial demand that could not be supported over time.

The snowball effect

As always happens near the peak of a bubble or bull market, confidence turned to hubris, and stock valuations got well above historical norms. Some analysts even felt the internet was enough of a paradigm shift that traditional methods of valuing stocks could be thrown out altogether.

But this was certainly not the case, and the first evidence came from the companies that had been some of the darlings of the stock race upward - the large suppliers of internet trafficking equipment, such as fiber optic cabling, routers and server hardware. After rising meteorically, sales began to fall sharply by 2000, and this sales drought was then felt by those companies' suppliers, and so on across the supply chain.

Pretty soon the corporate customers realized that they had all the technology equipment they needed, and the big orders stopped coming in. A massive glut of production capacity and inventory had been created, so prices dropped hard and fast. In the end, many companies that were worth billions as little as three years earlier went belly-up, never having earned more than a few million dollars in revenue.

The only thing that allowed the market to recover from bear territory was when all that excess capacity and supply got either written off the books, or eaten up by true demand growth. This finally showed up in the growth of net earnings for the core technology suppliers in late 2002, right around when the broad market indexes finally resumed their historical upward trend.

Start looking at the macro data

Some people follow specific pieces of macroeconomic data, such as gross domestic product or the recent unemployment figure, but more important are what the numbers can tell us about the current state of affairs. Bear markets are largely driven by negative expectations, so it stands to reason that it won't turn around until expectations are more positive than negative.

For most investors - especially the large institutional ones, which control trillions of investment dollars - positive expectations are most driven by the anticipation of strong GDP growth, low inflation and low unemployment. So if these types of economic indicators have been reporting weak for several quarters, a turnaround or a reversal of the trend could have a big effect on perceptions.

A more in-depth study of these economic indicators will teach you which ones affect the markets a lot, or which ones may be smaller in scope but apply more to your own investments. (From unemployment to inflation to government policy, learn what macroeconomics measures and how it affects you in Macroeconomic Analysis.)

Position yourself for the future

You may find yourself at your most weary and battle-scarred at the tail end of the bear market, when prices have stabilised to the downside and positive signs of growth or reform can be seen throughout the market.

This is the time to shed your fear and start dipping your toes back into the markets, rotating your way back into sectors or industries that you had shied away from. Before jumping back to your old favorite stocks, look closely to see how well they navigated the downturn; make sure their end markets are still strong and that management is proving responsive to market events.

Parting thoughts

Bear markets are inevitable, but so are their recoveries. If you have to suffer through the misfortune of investing through one, give yourself the gift of learning everything you can about the markets, as well as your own temperament, biases and strengths.

It will pay off down the road, because another bear market is always on the horizon. Don't be afraid to chart your own course, despite what the mass media outlets say. Most of them are in the business of telling you how things are today, but investors have time frames of 5, 15 or even 50 years from now, and how they finish the race is much more important than the day-to-day machinations of the market.

 

 

10 rules of successful trading

 

 

Unlike investors who need markets to move up in order to profit from their investment, traders don't depend only on bull markets. They can profit even in down trends.

This is a crucial advantage traders enjoy over investors -- the ability to make money whether the market is moving up or down. This fact should not, however, lead you to believe that trading is easy; it requires both a skill-set and rigorous discipline.

Many people take to trading in the mistaken belief that it is the simplest way of making money. Far from it, I believe it is the easiest way of losing money. There is an old Wall Street adage, that 'the easiest way of making a small fortune in the markets is having a large fortune'.

This game is by no means for the faint hearted. And, this battle is not won or lost during trading hours but before the markets open but through a disciplined approach to trading.

1. Always have a trading plan

Winning traders diligently maintain charts and keep aside some hours for market analysis. Every evening a winning trader updates his notebook and writes his strategy for the next day. Winning traders have a sense of the market's main trend. They identify the strongest sectors of the market and then the strongest stocks in those sectors. They know the level they are going to enter at and approximate targets for the anticipated move.

For example, I am willing to hold till the market is acting right. Once the market is unable to hold certain levels and breaks crucial supports, I book profits. Again, this depends on the type of market I am dealing with.

In a strong up trend, I want the market to throw me out of a profitable trade.

In a mild up trend, I am a little more cautious and try to book profits at the first sign of weakness.

In a choppy market, not only do I trade the lightest, I book profits while the market is still moving in my direction.

Good technical traders do not worry or debate about the news flow; they go by what the market is doing.

2. Avoid overtrading

Overtrading is the single biggest malaise of most traders. A disciplined trader is always ready to trade light when the market turns choppy and even not trade if there are no trades on the horizon.

For example, I trade full steam only when I see a trending market and reduce my trading stakes when I am not confident of the expected move. I reduce my trade even more if the market is stuck in a choppy mode with very small swings.

A disciplined trader knows when to build positions and step on the gas and when to trade light and he can only make this assessment after he is clear about his analysis of the market and has a trading plan at the beginning of every trading day.

3. Don't get unnerved by losses

A winning trader is always cautious; he knows each trade is just another trade, so he always uses money management techniques. He never over leverages and always has set-ups and rules which he follows religiously.

He takes losses in his stride and tries to understand why the market moved against him. Often you get important trading lessons from your losses.

4. Try to capture the large market moves

Novice traders often book profits too quickly because they want to enjoy the winning feeling. Sometimes even on the media one hears things like, "You never lose your shirt booking profits." I believe novice traders actually lose their account equity quickly because they do not book their losses quickly enough.

Knowledgeable traders on the other hand, will also lose their trading equity  --  though slowly  --  if they are satisfied in booking small profits all the time. By doing that the only person who can grow rich is your broker. And this does happen because, inevitably, you will have periods of drawdowns when you are not in sync with the market. You can never cover a 15-20% drawdown if you keep booking small profits. The best you will do is be at breakeven at the end of the day, which is not the goal of successful trading.

A trading account that is not growing is not sustainable. Thus when you believe you have entered into a large move, you need to ride it out till the market stops acting right. Traders with a lot of knowledge of technical analysis, but little experience, often get into the quagmire of following very small targets, believing the market to be overbought at every small rise  --  and uniformly so in all markets.

Such traders are unable to make money because they are too smart for their own good. They forget to see the phase of the market. Not only do these traders book profits early, sometimes they even take short positions believing that a correction is "due". Markets do not generally correct when corrections are "due".

The best policy is to use a trailing stop loss and let the market run when it wants to run. The disciplined trader understands this and keeps stop losses wide enough so that he is balanced between staying in the move as well as protecting his equity. Capturing a few large moves every year is what really makes worthwhile trading profits.

5. Always keeps learning

You cannot learn trading in a day or even a few weeks, sometimes not even in months. Successful traders keep reading all the new research on technical analysis they can get their hands on. They also read a number of books every month about techniques, about trading psychology and about other successful traders and how they manage their accounts.

I often like to think about traders as jihadis; unless there is a fire in the belly, unless there is a strong will and commitment to win, it is impossible to win consistently in the market.

6. Always be alert to opportunities of making some money with less risky strategies as well

Futures trading, for example, is a very risky business. The best of chartists and the best of traders sometimes fail. Sure, it gives the highest returns but these may not be consistent  --  and the drawdowns can be large.

Traders should always remember that no matter how good your analysis is, sometimes the market is not willing to oblige. In such times the 4-5% that can be earned in covered calls or futures and cash arbitrage comes in very handy. It improves the long term sustainability of a trader and keeps your profit register ringing.

Traders must learn to live with lower risk and lower return at certain times in the market, in order to protect and enlarge their capital.

Disciplined traders have reasonable risk and return expectations and are open to using less risky and less exciting strategies of making money, which helps them tide over rough periods in the markets.

7. Treat trading as a business and keep a positive attitude

Trading can be an expensive adventure sport. It should be treated as a business and should be very profit oriented. Successful traders review their performance at regular intervals and try to identify causes of both superior and inferior performance.

The focus should be on consistent profits rather than erratic large profits and losses. Also, trading performance should not be made a judgement on an individual; rather, it should be considered a consequence of right or wrong actions.

Disciplined traders are able to identify when they are out of sync with the market and need to reduce position size, or keep away altogether. Successful trading is like dancing in rhythm with the market.

Unsuccessful traders often cut down on all other expenses but refuse to see what might be wrong with their trading methods. Denial is a costly attitude in trading. If you see that a particular trade is not working the way you had expected, reduce or eliminate your positions and see what is going on.

Most disciplined and successful traders are very humble. Humility is a virtue that traders should learn on their own, else the market makes sure that they do. Ego and an "I can do no wrong" attitude in good times can lead to severe drawdowns in the long term.

Also, bad days in trading should be accepted as cheerfully as the good ones. So disciplined traders maintain composure whether they have made a profit or not on a particular day and avoid mood swings.

A good way to do this is to also participate in activities other than trading and let the mind rest so that it is fresh for the next trading day.

8. Never blame the market for your reverses

Disciplined traders do not blame the market, the government, the companies or anyone else, conveniently excluding themselves, for their losses. The market gives ample opportunities to traders to make money. It is only the trader's fault if he fails to recognise them.

Also, the market has various phases. It is overbought sometimes and oversold at other times. It is trending some of the time and choppy at others. It is for a trader to take maximum advantage of favourable market conditions and keep away from unfavourable ones.

With the help of derivatives, it is now possible to make some money in all kinds of markets. So the trader needs to look for opportunities all the time.

To my mind, the important keys to making long term money in trading are:

Keeping losses small. Remember all losses start small.

• Ride as many big moves as possible.
• Avoid overtrading.
• Never try to impose your will on the market.
• It is impossible to practice all of the above perfectly. However, if you can practice all of the above with some degree of success, improvement in trading performance can be dramatic.

9. Keep a cushion

If new traders are lucky to come into a market during a roaring bull phase, they sometimes think that the market is the best place to put all one's money. But successful and seasoned traders know that if the market starts acting differently in the future, which it surely will, profits will stop pouring in and there might even be periods of losses.

So do not commit more than a certain amount to the market at any given point of time. Take profits from your broker whenever you have them in your trading account and stow them away in a separate account.

I say this because the market is like a deep and big well. No matter how much money you put in it, it can all vanish. So by having an account where you accumulate profits during good times, it helps you when markets turn unfavourable.

This also makes drawdowns less stressful as you have the cushion of previously earned profits. Trading is about walking a tightrope most times. Make sure you have enough cushion if you fall.

10. Understand that there is no holy grail in the market

There is no magical key to the Indian or any other stock market. If there were, investment banks that spend billions of dollars on research would snap it up. Investing software and trading books by themselves can't make you enormously wealthy.

They can only give you tools and skills that you can learn to apply. And, finally, there is no free lunch; every trading penny has to be earned. I would recommend that each trader identify his own style, his own patterns, his own horizon and the set-ups that he is most comfortable with and practice them to perfection.

You need only to be able to trade very few patterns to make consistent profits in the market.

No gizmos can make a difference to your trading. There are no signals that are always 100% correct, so stop looking for them.

Focus, instead, on percentage trades, trying to catch large moves and keeping your methodology simple. What needs constant improving are discipline and your trading psychology.

At end of the day, money is not made by how complicated-looking your analysis is but whether it gets you in the right trade at the right time. Over-analysis can, in fact, lead to paralysis and that is death for a trader. If you can't pull the trigger at the right time, then all your analysis and knowledge is a waste.