When To Buy and When Not To Sell - Part 2

In the first part of this series, I had shared some 'life experiences' of friends and family who have attempted 'success on the stock markets'. I'll re-use these experiences to share the Do's and Don'ts I have learnt, practiced and continue to improve on.

Here are some of my general views about the markets:

Don't follow opinions of analysts on business news channels.
- If they were so good, they would not be on TV. They would have been making money themselves.
- Most of them do not bet their money on the stocks they advise.
- Good news about stocks you have bought only confirms your bias about your stock. Bad news about the same stock does not help you make a decision to sell.
- Business newspapers will always have more BUY recommendations that SELL or HOLD. The reasons are:

• Get you to enter the trade; once you have bought, then only SELL or HOLD recommendations become applicable

• There are higher chances that you don't own the stock. If you already owned the stock, then a BUY recommendation confirms your bias about your stock pick

- BUY, STRONG BUY, ACCUMULATE are irrelevant in the context of buying a stock.
- Similarly, SELL, STRONG SELL, REDUCE is equally irrelevant when selling a stock.

- Most irrelevant is NEUTRAL, HOLD. Does it mean our educated analysts do not know what to do?

Coal India's Offer for Sale - Reason to Invest?

Many years ago I had done an analysis on IPOs of 2010 and also had discussed Coal India as part of the list. See - "IPOs of 2010 - A Reflection"

A few facts of the Coal India IPO.
- Discovered price after closure of book-building - Rs. 245.00
- Listing Date: November 4, 2010
- Closing price on day of listing: Rs. 342.35
- % Return on day of listing: 39.73%
- Issue was oversubscribed by 15 times.

Since the day of listing and till Jan 29, 2015 the company has given dividend 7 times for a total of Rs. 569/-. Please remember the share price falls (at the minimum) to the extent of the dividend paid on the ex-dividend date.


Today's Offer for Sale (OFS) was oversubscribed at 1.1 times at the base price of Rs. 358/-. Taking the closing price from the day of listing and the base price, the annualized gain (across the 4 years) is 1.14%.

I have considered the closing price on listing day as that is the 'discovered price' after the stock has gone through the gyrations of the stock market. The price of a share in the stock market takes into account many factors and hence is a more accurate reflection of the true value of the stock than what merchant bankers decide during an IPO / FPO / OFS.

So here are my inferences:
- Despite the coal shortage in  the country and the monopoly Coal India enjoys, its output has not increased substantially since the time of its IPO. If it had, the share price should have been much higher today.
- OFS route is the quickest route to sell shares. In the last few years, instead of "Follow-on Public Offer" (FPO), the government (in order to meet its disinvestment targets) has been using OFS route.
- Why the OFS route? The government can coerce its other companies (like LIC, SBI, etc.) to buy the shares and ensure the OFS is successful.
- Coal India was trading at Rs. 394/- on Jan 27, 2015, a day before the OFS date was announced, a drop of 10% in 3 trading days.

OFS is a route where the promoter is trying to offload his holdings to make a quick buck. The share price will fall slightly more in the following week when the shares are allotted to the people who subscribed to the issue. It could be a better opportunity to buy the share then!

If a company has great prospects, then the promoter should be either using the cash reserves to expand capacities or perhaps doing a buy-back if the share price does not reflect the true value of its future business.

Paying huge dividends, FPOs, OFS, etc. especially by Government companies is to just find a way to generate revenue to meet their budgetary targets and in turn window dress the fiscal deficit. :-)

Is India a Potential Case for a Sub-Prime Crisis?

We all have heard about the sub-prime crisis (2008) which brought the world economy to its knees. Many of us have heard about the root cause of the issue, perhaps understood (well or vaguely) the cause-reason relationship how it caused the financial markets to fail.

Without going into the complexities of what took place in US, let me comment if a similar 'sub-prime' crisis can occur in India.

Few definitions in order:
Sub-prime: A borrower who has a poor debt repayment history or a poor credit score.

Sub-prime loans: Typically the interest on these loans are higher than the loans extended to people with a good credit score.

Credit Score: A rating / score assigned by a Credit Bureau (in India it is CIBIL) based on multiple parameters. Some of the parameters include number of loans (any type of loans, credit cards), amount of loans taken, repayment history, age, income reported (through tax filings).

I recently applied for my credit report and found an interest statistic shared in the report alongwith my credit score.

In India, CIBIL score are given in a range of 300 to 900. A score of less than 650 is considered poor credit rating and a greater than 800 is an excellent credit rating.
The reports indicates and I quote "57.6% of all new loans sanctioned during last 1 year falls in the category of people having a score of greater than 800".

"80.5% of all new loans sanctioned had a score of greater than 750"

"Only 4.7% of all new loans sanctioned had a score of less than 650"

The above statistics allows me to infer the following:
- Majority of Indians (individuals) have very good / excellent credit score 
- Defaults (non-payment of dues on loans, credit cards, etc.) is potentially low in our country.
- We may not have a 'sub-prime' crisis in India soon.

What makes me wonder is if Indians are good at repayment of their dues, then why have our Banks being reporting higher NPAs (Non Performing Assets) over the last few years?

If individuals are not the reason why NPAs are increasing but corporates (who also take commercial loans) who are the culprits then shouldn't we have stronger checks and balances when loans are issued to them? Shouldn't there be stronger regulations to recover these loans?

Unfortunately, this is where our banking industry struggles. Our banks just don't have enough 'teeth to bite' wilful defaulters. E.g. Kingfisher and its flamboyant owner gets away by not paying back what he (his companies) owes to banks.

For more about Credit Bureaus

Indian Stock Markets Rally Post RBI Rate Cut

A few days ago, I had blogged about how 'Global Stock Markets' skid on the news of falling crude prices (pre-dominant and most quoted reason), Euro-Dollar parity, and multiple other reasons which were beyond the grasp of the common man.

Today, the Indian Stock markets had their best rally in the last 68 months. So what has changed in the world since I last blogged. Crude price is down another $5, Euro-Dollar parity has worsened, Greece has not exited the Eurozone. In the last few days, the stock markets in US and Europe have been up and down and all over the place.

Today's rally was triggered by a 0.25% reduction in the repo rate (to 7.75%). Does this small reduction in a rate prescribed by RBI's mighty governor have such a mammoth impact? Before I share my views about the event, let's understand "Repo Rate".

Repo Rate is the rate at which the RBI lends money to commercial banks. Similarly, "Reverse Repo Rate" is the rate at which RBI borrows money from commercial banks. These rates act as benchmarks for the borrowing and lending rates in the markets.

Banks use deposits through 'Current Accounts - Savings Accounts' (CASA deposits) from their customers and lend at a higher rate to other customers. The difference between the rate on the deposits and the rate on loans is called the spread or margin.

Here's why this reduction is not important in the short term.
- First, any reduction in repo rate does not percolate through the banking system to consumers immediately. It takes close to two quarters.
- Secondly, banks are quicker to up interest rates than bring down rates.
- Next, when repo rates go down and if the lending rates have to go down, then rates on deposits will also go down. Banks will not compromise on  the margins they make.

If costs of homes, cars, etc. are not coming down, does reduction in interest rates on loans 'excite' the customer to take a loan?

If companies are not running at 100% utilization of their factories, etc. as the demand for their goods is not picking up, will they take new loans to build newer capacities?

Interest movement does have an impact on a country's GDP, inflation, etc. but it cannot single handedly drive the change in a direction which the Finance Minister wants. This interest rate reduction is more of  the 'political' pressure exerted on the RBI governor.

Good Economics is Rarely Good Politics. But Bad Politics is Surely Bad Economics.

Summary - wait for a correction to buy stocks. In the interim, analyse which business / company you want to bet on for the future.

Stock Markets Skid on Global Turm-(Oil)

I couldn't resist writing on the chaos in the stock markets the world over.  In 2008, crude oil was $145 per barrel and today its close to $50 per barrel.

In the last 2 days, stock markets have fallen anywhere between 3-5%. The new year has not taken off well!! Not a single industry / company, related or unrelated to crude oil, has survived the bloodbath on the stock markets. E.g. I don't see a direct correlation between stock prices of IT companies vis-a-vis price of a barrel of crude oil!

So at what price of crude oil will global stock markets focus on nothing but the fundamentals of a company and its future growth prospects. The answer - no price is the right price.

In a market mayhem, the mantra is 'Becho Phir Socho' (Sell First and Then Think). In the last few days, I have tried to make sense of why falling crude oil prices are creating so much havoc. Some of these commenatries are as follows (my comments in italics):
- OPEC countries have not reduced supply and global demand has fallen. I don't know if demand of a growing population (across the world) in the cold winter months could actually trigger such a massive fall in demand. I am also not sure if increased use of renewable sources of energy is creating the decrease in demand for oil

- Euro v/s Dollar parity is at a multi-year low. Since the dollar has been the world's global currency, why should its dominance become a problem overnight!!

- Greece will exit the Eurozone. This small country had people panicking 2 years ago too. GDP of Greece represents 0.39% of the World Economy. Can a country cause US stock markets to tank 3%! Wow.

- The 100 day moving average has been broken and hence the trend is bearish. Though I am not an expert in technical anaylsis of stock price movement, but if the markets turnaround in the next one week and if we use say a 120 day moving average, will the trend become bullish?

I can go on and on but none of the commentaries makes sense to me. My years (not comparable to  the experience of market experts) in the stock markets has taught me one thing - any Tom, Dick and Harry on a business channel can explain just about anything of why a stock / index moved in a given direction post-facto and sound convincing. They talk with intelligent sounding stuff which the common man tends to accept as the truth. Even I sound intelligent at times. :-)

Conclusion: None of the experts on business channels place their money on their views. They even tell you that they have no personal investments in their recommendation. Take their views with a pinch of salt. Decide for yourself, place your bets, be disciplined in your entry and exit criteria for a stock. "Socho Phir Karo" (Think Before You Do).