Sucessful Equity Investment Themes

PRE-REQUISIT

 1. Investment should be for multiplying CASH SURPLUS. Surplus means funds not required for existing business.

2. Any GROWTH investment should be publicly traded instruments like equity and not in land, real estate, jewels & precious metal, antiques & airplanes and satellite.

3. It should give higher returns than bank interest(11%) plus rate of inflation (7%). To this one should add 25% risk premium and 2% two way transaction cost. Hence, the total return expectation should be at least 7 + 11 + 25 + 2= 40%.

4. Equity investment should be carried out with PROFESSIONAL ADVICE as one consults solicitor for helping in land and estate transactions or consulting engineers and architects for construction of factories and homes or chartered accountants for audit and income tax matters.

GAINS FROM EQUITY

1. Gains mean surpluses arising from investing at lower equity price and disinvesting at higher price.

2. Gains arise by investing 100% money while Speculative Profits arise by trading on margin money. One should always thrive for more gains from long terms (more than 12 months) equity investment and less from short terms (less than 12 months). Momentum weekly/ daily trading should be avoided.

RE-INVESTMENT PRECAUTION

1. When gains arise from long-term equity investment, it should be again re-invested in equity at an opportune time, to create wealth over a period of say 5 to 10 years.

2. Time of profitable disinvestment and time of re-investment need not be same. The realised gains can lie idle for the next best opportunity of bargain hunting. This is tough for even seasoned investors but not for successful equity investors.

3. As far as possible one should never plan re-investment before realising the accrued gains. Also realised gain should not be invested in other forms of non-liquid investments because the multiplier of gains looses steam if the total money (Capital + Realised gain) is again not ploughed back in high growth potential equities. The price they pay is very heavy in terms of multiplier effect.

EQUITY CURRENCY

Equity is an exchangeable security for cash at any given time. One has to be wise enough to convert cash into equity and equity into cash. It is this efficient conversion done at a right time and repeated over a period of time leads to creation of wealth during this period. Say in 10 years if one does this conversion properly in correct rotation small initial amount of the first year leads to much larger amount at the end of the tenth year.


Power of Idle Money & Retainer Fees

Power of idle money and risk of simultaneous switch of realised profit should be recognised and tackled professionally. Very often lay investors confuse themselves with concept of compound interest and equity investment. They think idle money must fetch some returns. In equity investment one has to wait for right price and time.

In fact this waiting is the most important part of investment planning,. This function of waiting for right time and opportunity usually goes unrewarded to the equity managers/advisors. Many successful investor overcome this anomaly by paying retailer fee to the managers/advisors.

10:1 BUY : SALE OPPORTUNITY

Any equity gives you 10 buying opportunity at every downward correction and you can participate in future rise in its price depending on your conviction. But sale opportunity offered by equity to investors comes once, that is at a historic peak, euphoric bull run or unrealistic expectation built up in its price. Even time wise there could be as many as 10 bottoms in equity chart but peak is usually one or two. If buying is a fundamental, articulate and deciplined decision, selling is 10th square of these properties.

INVESTMENT ON MARGIN & LEVERAGE

When one buys equity / index futures on payment of certain percentage of value as margin money, he is indulging in speculation. Typically he pays 10% to 20% of purchase value as margin or pays option premium, balance amount paid by badla financier or option writer.

Similarly he sells holding without tendering the delivery 'short sale' and carries forward his sale by paying margin. He is bullish on his holding but wants to reduce his cost of holding by taking advantage of short-term movements in the stock. He wants to earn on news, rumors insider information, counter position & company announcements.

Here your ‘margin buy’ or 'short sale' along with collective position of all market participants is reflected in outstanding positions displayed in daily & weekly statement. So huge position built up on any counter whether of long purchase or short sale invites the contrarians, usually financially powerful market operators, to go against the position of the counter and make huge killings. Also with each carry forward at the end of week, one pays 'settlement difference' and 'settlement brokerage'. Sometime you get 'settlement difference' but you always have to pay 'the brokerage'. In Futures there is mark-to-market margin every day. Derivative mechanisms are good for big speculators and market operators but very risky for retail investors.

Also in case of borrowed funds interest accrues every day irrespective of a working day or a holiday. While equity price may not rise in tandem with interest accrued. Equity price may rise suddenly after a gap of a long side ways moment. The mismatch in outflow with inflow compels investor to sell out before the merits of the stock are fully discounted by stock market.

The console he takes while leveraging is that even in other businesses one borrows from bank on interest to manufacture or stock the commodities and when sales proceeds is realized, he pays off his lender retaining his profit. In reality, at stock market the equation is not so simple.