50000 Sensex and No gains for me? Am I bad at investing? Basic Questions Answered

Before we delve into answering this question, let me start with an anecdote. There was a farmer who once started digging his farm, after digging just 10 mtrs in his farm he found oil. Every scientist and geologist who read this said "This is impossible, oil cannot be found at such shallow depths". But there it was, dark gold poring in slowly after the first hole was dug by the farmer. The farmer then floated a company, people valued his company at a billion dollars as the company now owned 100 acres of shallow oil pits. The farmer set up a team and they set up operations, once commercial operations started it was found they had only found a underground oil reserve of US army from World War II. As predicted, there was no oil reserve and there was no dark gold to be made in this ordinary farm.

Have you heard of the Gamestop and Amc fiasco? A group of reddit users drove the price of Gamestop, a company soon to be out of business, from USD $39.91 to a high of USD $ 347.51 within 7 days. Many hedge funds and investors bought the shares in the rally without checking the fundamentals. The share closed at USD $52.40 on Friday. Some investors continue to have their money blocked in the shares expecting it to rise again and this right here is the game of Stock market. Some one gains and Some one losses and eventually its a no sum game if you are speculating.

How does this answer our questions, well Sensex is a minor representation of the entire market. These large caps are performing very well as far as stock market is concerned. They have still not struck oil but we, the lay investors, continue to bet big on the farmer. The question whether its the right time to invest can always be answered but the question is it the right time to exit should be looked at in much more depth.

Now let me answer the questions that I have compiled from my recent conversations with my clients and my friends:

1) Should I exit the market now?

Answer: If you have made substantial gains and you have avenues where in you can invest productively again, its a great idea to book your profits now. You can use the monies made to pay off some part of your housing loan, car loan or simply book profits and use the same to invest in new shares. Remember, if the funds are going to lie dormant in your savings account or simply be made into a fixed deposit, then you are better off continuing to be invested in the market by simply booking profits.

   

2) Should I enter the market now?

Answer: Anytime is a good time to enter the market. I say that as I am a firm believer of investing in companies with strong fundamentals and strong business models. If the company can make it through tough times its shares are only going to grow in value. As learnt by me in a recent discussion with a stalwart of the industry, he said" Over the long term there is no Volatality, no risk, if you are investing in Good Businesses". So yes, do invest, but enter sensibly

3)  How do I indentify if the Share is good or bad?

Answer: Either have a good investment advisor you can trust or my personal favourite, do some ground work on your own. There are tons of free websites, my favourite being, www.screener.in . You will have to read about what business the company recomended is in, what has been its growth path in last few years, is it a good pay master with respect to taxes, dividends and loans. And only when these questions and much more are answered by your research should you invest.

4) Are mutual funds better than direct investment in shares?

Answer: If you know nothing about stock markets then mutual funds are a good starting point. Your funds are invested by an expert based on a certain theme eg. small caps or large caps, industry allocation etc. for a cost that comes out of your invested amounts. Over the long run, by investing in same portfolio like that of a mutual fund you are bound to earn more. But this comes with its own risks and hence start with Mutual funds and learn more about stocks to eventually transition into direct investing.

5) How do I indentify if I am being taken for a ride by the shares recommended by my advisor?

Answer: You can only be taken for a ride if you have not done your homework. When a share is recommended to you, you are expected to do your own research. Don't be another investor of Gamestop who rides with the flow. You are bound to loose money that way. Secondly, if your share has been consistently loosing value and if your agent continues to advise you to pick more shares of the stock saying we are averaging your loss, well thats a sure shot indicator you are being taken for a ride. Another indicator is you being advised to take companies based on tips and speculation. You may get calls stating that the government is giving a big order, or a new R&D and patent will drive the price of this share through the ceiling are a few more red flags to look out for. 

6) Where can I learn more about investing in stock market?

Answer:  My recommendations are start by reading "Romancing the Balance Sheet" by Mr. Anil Lamba. It will teach you the basics of finance. Secondly you read the Intelligent Investor by Benjamin Graham. These two will teach you the basic attributes to look for before investing your hard earned money. 

Lastly i advise always to reach out to an expert, better to pay a nominal fee to take a professional advise than to loose the entire lakh by investing without it. The above is an excerpt of a recent interview of mine. I would love to answer more questions if you have any. Please do share your experiences in the comment box below.

You can follow me at https://www.instagram.com/saranshdey/. Next week lets discuss on  Cryptocurrency and should you invest in them.

 

- Saransh Dey

CA, LL.B, MBA (IIM-K), B.Com