Sunday, January 31, 2010

Be Cautious!

Dear readers,

In continuation with the previous post, I wish to light on few general but prudence issues related to equity investment. You may well verse about most of these points, still wish to talk again which backs my experience.

We have been completed the procedures to have a PAN card and Demat/Trading account in the previous article. Now you are ready to fuse with the wonderful, equally disastrous world of equity market. You will get the entire terminology related to equity investment on Internet, the good, the bad and the ugly. But it is very much related to your moral fiber, what you are going to absorb. You will not be persuaded with the good or bad by just surfing on net, but with dedicated reading, moreover you are the person who has to weigh things logically.

Take some firm decisions which may protect your precious money in a great way. I too, have suffered substantial loses in my initial days of investing and that’s the source of following weird tips.

Never think about short term gains in stocks until or unless you have:-

Your own funds,

Apt knowledge on the trading systems, traps, inner plays, boiler room tactics etc... ,

Presumably proved or rated strategies (not yet available),

enough time to spend or to stick your eyeballs on the trading terminal.

Because, no one will care your money than you.

Next, “go against the herd”. This is a familiar slogan, but hard to turn up. The common retail investors are often make investment decisions based on what they read in financial dailies/magazines, tips from brokers(mostly paid), or tips from their friends/colleagues(indirectly from brokers again). Never follow intraday/short term tips from brokers/experts because you may be one of the very last persons who transact on that particular call. The real gainers have already been positioned much before you. And mostly, they have started booking their profits by the time you are trying to enter. Means the tips are always reach you late. In some cases, acting reverse to the tips will benefits you.

Simply avoid expert’s recommendations for intraday/short term trading who provides it frequently in public. My simple lay man logic says, if they are ever dead sure on any of their calls at any point of time, they could have stopped this recommendation job for ever. In addition, it is a known factor that some of these experts are backhanders for recommending stocks/IPOs.

You have to keep open your eyes and ears. Try to have in-depth knowledge on scrips where you are going to put your hard earned money. You will not trust any related news until you have verified it’s probability. You can depend the Internet in a big way or the leading magazines/newspapers like, Capital Market, Economic times, Business Standards, Business line, Financial express, business India, Business world, Outlook money etc. But the most important part is, you have to develop a skill gradually to analyze the information to genuine decisions. You can talk with people who you feel your well wishers on the matter. But in most of the cases, your own decision will works better, which shaped after sheer research on the subject than any of the external counsels.

Another conspiracy behind these buying tips is hidden agenda of brokers. They benefits better, when you do frequent transactions and that is their bread. You are paying certain percentage as brokerage on every transactions whether it is buying or selling. Better you reduce the frequency, because you are gaming and the probable winner is broker only with better earnings, whether market goes up or down. They have lakhs of customers and your becoming the common trader, who generates profit for brokers without any commendable gains, but prone to heavy lose.

What all the basic criteria you consider before making decision to invest in a stock. You can ask this question to hundred experts, they will give you answers in 100 ways. Because no benchmarks specified for selecting a stock to invest, else we could have thousands of Buffets/Jhunjhunwalas. People analyzes charts, technicals, balance sheets, P & L statements, quarterly statements, debt reatios, cash flows etc.. etc… All these have their own importance at certain levels. But, what you do?. You are an ordinary person who have little money to invest and wish to multiply it in the least possible time. Will you blindly follow the tips of any magazine, expert, broker or friend?. If the answer is No, I have some simple, but proved norms to select a stock for investment, not for trading.

Select few companies who you feel

have good fundamentals.

have sense in the business they do

understandable future growth perspectives

follows trends or needs of the generation

provides reliable products or services with logical costing.

who's product/services people enjoys with obsession.

Basically, meeting the above norms are enough for you to select a scrip. 90% of firms who can collectively meets up the above criteria will have to do the business in a better way. The demand of their shares should hike as well the price. The simple and known demand and supply theory.

Please stay away from the market, if you have heavy financial burdens. Shares hardly help you for an immediate recovery, but in most of the cases it will dip you more.

Never invest in stocks with any form of lending because stocks are highly inflammable. It may increase your burdens which may drive you tense to abnormal.

Greed and fear are the other two sins. Hard to control, cause functioning on the comatose head. Initial gains can guide you to dangerous levels which might be irrecoverable. Greed is the by product of extreme confidence or in some cases, both are same. I personally know few gentlemen, the worst victims of this anarchy. Greed starts to work unknowingly and it always compels you to take illogical decisions with out much thinking. Most of the times, it pressurize you to act beyond your capacity which turns to hazardous. If a wrong decision unfortunately dragged you to irrecoverable lose, then you will be panic. A panic mind can not take a matured decision ever. It pushes you to more gutters and the results will be total destruction.

Please read my post regarding this subject on the link below.

Patience will pay well in almost every facet of life. The calm but cautious waiting for a desired result is an essential quality for every human being/investor. Rectifying a decision in certain point of time is also a better habit than sticking on the dismals.

Never be in emotions. Refer Para 7-8 of my post at the following link

In addition, once you have bought a share and exited with desired gains. The stock may go further higher levels. Never feel desperate as you lost further gains. And it is more harmful to acquire those stocks in higher levels. On the other side, some stocks may go down after your buys. If you have made the decision to buy that stock after an exhaustive homework, don’t worry about temporary fluctuations. But you should try to find out the reasons to reach proper decisions.

Thats all for now. We will discuss more on the topic in future…

Regards & Happy investing

Shabu Thachat -


  1. Shabu Sir,

    Impressive Lesson. :)

    My Few Cents on "Go Against herd " : People often choose to be a part of the the herd rather than be left alone. People thrilled to talk about their

    good profits but always aovid to disclose their losses to public/comrade/crony(s) for fear of being tagged as a fool [big mistake ;)]. Brain always

    wants to take short cut to make quick dicision. One Shortcut Eg : Typifying/Representative(Ness) : When Tata Stell (this Quarter) annouced good

    result with bumber NP margin, retail investors( trapped by operators ;) by taking advtg of that news) jump in to other stocks in the same sector with

    the hope of good Q Number and Rise in Share Price. This is one such type of short cut way which brain forces us to act. General Rule : Your Action

    Should Control your Emotion but not Vice-Versa :). herd Metality Another Eg(Famous One dot com Bouble) : Every Body Chasing Tech stocks in

    1998-200. Infosys peaked @ steller high P/E in 2001 and still not recovered to those level. Those who followed herd @ that time they are still

    suffering more.Many tech comanies asked Buffets for investment, he asked dead simple question. How You guys earn from Simple Website ?. 'N' no of

    answers didnt convinsed Buffet and Buffet saved multi billion $'s by not investion in internet companies. Investors during 97-01 had high expectation

    of earnings in tech stocks which tech companies failed to meet those euphoric high expecation, Stock collapsed like hell due to extreme high

    valuations and Failed to meet high expectations. During 2007-2008 realty stock collapsed due to herd mentality(realty biz model is buy higher sell

    even higher wont work :) ). Herd mentality is often used to the advantage of speculators. Even FII suffered a lot by investing in Big Realty Stocks.

    John Paulson a famouse hedge fund manager was betting against the housing crash that occurred in the 2008-2009 timeframe, but the herd is

    against John :). Going Against herd is possible but in short term during initial stage it makes your irritating which makes emotion to take control of your action, but you have to control your emotion by Action as i said earlier :).

    FYI : nice Graph on cycle of stock market.



  2. Dear Mahesh,

    Thanks for the detailed comments with good examples. Such informative comments will helpful to all kind of readers, especially new investors..

    Keep reading

  3. Thanks Shabu for the nice article.....You are one of the very few genuine people in the market sharing really good information......I am not able to see the seventy list on the link you provided...can you send me that......

  4. Sir,

    It is not possible to identify good or bad stock by surfing internet. When a stock is under valued we will see many bad views about that stock in the net. When a stock is over-valued, we will see many good views about that stock. Every analysts say again and again not to follow herd. But views of most of these analysts are similar to that of herd. When a stock is over bought, we will hear many good news. When a stock is over sold, we will hear many bad news. Before investing we should prepare ourself to hold the stock during bad times. We should book full or partial profits when stock is over bought and not when bad news is out. Q3 result of zicom is bad. But according to me it is foolish to sell zicom now when there is chance that zicom could get big order from common wealth game. I don't think all tip providers try to cheat their clients. But the problem is if hit ratio of a tip provider is high then more traders will follow him and at that time big players trade aganist the herd. I check views and tips of a stock market community in with over 1 lakh members. My observation is if 1 or 2 calls of a new tip provider are hits then many traders start following him. When majority traders start praising him, market will start going against him. We should trade or invest only if we have skills. If it was possible to make money by following tips then we could make money with out doing any job. According to me this is impossible.

  5. Dear Jagadeesh,

    Thanks for the comment.

    I have removed that list before I started the paid service. But you can get few ideas on PF building.


  6. Dear James,

    Thanks for the detailed comment.


  7. Another nice post Shabu!!

    I remind myself a famous Warren Buffet Quote "The stock market is designed to transfer money from the active to the patient." ..i think the key to success at end of the day is patience...need to set the mentality to buy stock only when we are ready to keep it for lifetime..this is same
    mentality we require when we buy any apartment/or a flat to stay and hold forever( these mentality keeps us to looks in all angle before we take any action)...Difficult to apply in stock market :-)..but finally these small mental shifts makes a 'HUGE' difference in long run :-) ...

    Am process of trying out this mental shifts ..but seems a herculean task for a ordinary investor/person like me :-)


  8. Dear Venkat,

    Thanks for the encouraging comment. You are absolutly right and on the other side, it is harder to bring on practice.

    I am thinking on a post regarding this subject and hope to place in few days.


  9. Viral Rajnikant DholakiaFebruary 6, 2010 at 6:11 PM

    Dear Shabu,

    Nice subject for discussion as well as enlightenment. Especially, new investors who get lured to the vagaries of 'Trading' through tips and technical charts both.

    I would like to add a perspective regarding 'Short-term Trading':

    1) Good Luck + Good Knwoledge = Big Profits
    2) Good Luck + Low Knowledge = Net Profits
    3) No Luck + Good Knowledge = Net Loss
    4) No Luck + No Knowledge = Big Losses

    Determine in which category you as a 'Trader' fall into. Hopefully, every Trader wil co-relate his fate in trading with one of the above 4 instances linked with luck and knowledge.

  10. Dear Viral,

    Thanks for the comment.. I am fully agree with the equations.

  11. Dear Shabu

    I observed your active participation at website
    Kindly note that there was a sebi order against the website for some violations.




The blog is associated with information on Indian stock market and author’s investment view points on various emerging stocks/sectors. The contents discussed in this blog are purely my own personal opinion and in no case weigh it as any kind of recommendation for stock market investment. The sheer purpose of this blog is to educate the interested community on market related subjects based on my experience and I am, in no way, responsible for investment decisions based on the contents described in this blog.

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