Saturday, January 26, 2013

Stock tips from newsletters

Continuing from my previous post on the investment strategies that I employed, and my experiences with them, here is my strategy-b.

Strategy B: Taking cue from the tips sent by my bank

My demat account is with Axis bank and it sends me some recommendations every few days on the stocks that I should purchase. 
I ignored these initially as one of my friends had given me following advice:
  • Ignore the tips from various sources
  • Invest in stocks that you understand
  • Invest only in a few stocks that you can keep track of

There was one more strong reason why I ignored these newsletters. I had recently read book Fooled by Randomness by Nassim Nicholas Taleb and remembered Mysterious Letter section of it very distinctively. If you haven't read it yet, I strongly recommend you to read it (at least the Mysterious letter part -- Page 157). It shows how these newsletters giving recommendations on market could actually be a psychological trap.

Knowing all this well, I ignored the newsletters for some time. 

However, the greedy devil in me started taking over. This is what happened:

  • I thought, 
    • I manage a web product myself, and I know how tough would it be to run such a scammy newsletter. It is very tough feature to implement that you have to send different newsletter to different people each time, keep track of what has been sent to whom, etc. 
    • Also, the bank can't keep reducing its audience every 15 days. 
    • Plus, I joined this bank in between, thereby making it even tougher to run this scam for every person who keeps joining and leaving any time.
    • So this might actually be genuine newsletter.
  • Some of the companies recommended in the newsletter I kept watch on actually got their stocks shooting up, and left me feeling I missed the bus.
  • Every newsletter also had commentary on why the bank is recommending those stocks. I didn't quite read them or understand them, but surely they felt geeky enough to make me feel that someone has actually done the research on the company that one is expected to do before investing (I got this tip from One up on wall street by Peter Lynch). 
  • I thought the person who has done the research is more knowledgable than me, and there is a research there to support the data too. 

For the stocks suggested in these newsletters, I gave a cursory look at some of the terms I had learned from the Peter Lynch book e.g. P/E ratio, Net Assets etc. and started investing in some of these stocks (I chose the one that were promised to give high returns, and where I found my instinct saying Yes).

It started giving results and I was happy. Again I thought I had cracked it (Like my feeling in previous post).

However, few days back the inevitable happened. The stocks that were performing well, started dipping without me understanding why (no surprises there, I had no idea why I had bought those companies anyway). 

This lurching state that I am in, it definitely feels like ignoring newsletter advices was correct, as the principle is that we can't trust those newsletters on this as Prof. Sanjay Bakshi says "They want you to buy this stock, and they get paid when you buy it, and they don’t get paid if you don’t. And you’re not paying them. The issuers of the new securities are paying them."  ( Value Investing, the Sanjay Bakshi Way)

However, what I don't understand is the strategy of the newsletter guys. If I was them, what I would do is following:
"I would do the research on stock X and if I find it a good buy as per my research, I would buy it as much as I can, and then I would go about telling it to everyone, in the hope that others also would buy because of my advice, and hence they would contribute to the increase in the price of that stock, apart from the reasons which I thought were the reasons behind its expected growth".
In this process I only see benefit of every one. End user gets benefited as he gets to know of a good stock, and I gain because the stock that I picked, gains momentum.

So, for now I am stopping to give heed to newsletter advices, but I am yet to go deeper in it as to how this works, and why and when this fails. Will probably be able to do once I am in a position to analyse companies better.
My current abilities of analysing a company are pretty limited.

My initial novice investment strategies and their experiences

When I started investing, I thought of some strategies of making money in stocks.
Jotting down the experiences I had with those. It will be a series of posts (about 3-4 posts).

Strategy A: Take companies whose stocks fell recently

I thought this could be sound thing. I'd buy the stock that fell by high margin recently (1-2 days), and then sell it off later and make quick buck. Since I was new, I thought I would put in about Rs. 1k-2k per company so that if the investment flops, I don't lose much.  I started frequenting Top losers in NSE regularly and taking note of the companies which fell by highest %. In fact it became my one of the few bookmarked links.

To this strategy one of my friends suggested that, there is no point investing like that, as only small companies will have such wild days, and those are many times controlled by some big brothers who would buy/sell in large quantities and thereby control prices of such companies. He said, hence I would be very vulnerable to lose money with such companies; Such things won't happen with big companies, so I should concentrate on those.

Other than that, I had mixed experience while doing this (Some time in May 2012).

I bought Shri Lakshmi Cotsyn, Diamines, Ramky, NTPC and ING Vysya this way.

Some of these stocks started performing well. I thought I had cracked the formula and wondered why others couldn't crack such a simple thing.

However, I didn't sell them when they did well. They went down, and then I got stuck with them wondering when to sell. I also was thinking that I should go by the adage that I should invest for long term, and not short term. However, at the same time since I had no scientific reason to determine whether I should remain invested in these companies or not, I always kept thinking that probably I should sell as soon as I see profit.

Out of these companies, ING Vysya did real well. I increased my investment also in it based on a tip that I got. Later I sold it for some profit. I still have Shri Lakshmi Cotsyn, Diamines and NTPC. I sold Ramky at the earliest opportunity I got. 

In the course of time I read some books, got some knowledge and learned that this is not a good strategy to make money. It is just gambling. 

However, though I understood some of the merits of value investing, and saw why it is the more right approach to investing, I could not yet see why short term investing going by the market behaviour is a bad strategy (It is mentally more taxing and not good for heart for sure, as it is more like betting).

So, for now I have decided that till I understand value investing well, I would continue investing like this (in moderation though) and later on also I would assign a small percentage of my investments to this kind of investments. 

In my subsequent posts I would also talk about other strategies I took. All my buck is not put on this kind of investments. :)

Monday, January 21, 2013


I've recently started studying investments and have done some investments too. But as I read more, those are not considered investments, but rather "speculations". So I am now studying even more to be able to make true investments.

While at it, I am getting a lot of questions in mind as novice investor. Searching on net is sometimes not giving straightforward answers to my stupid questions. Also, a lot of times answers are not there in context of Indian market.

I have got answers to some of those. But I am pretty confident that I would forget answers to those questions and I'll get those questions in my mind again. So I thought I would jot the answers in this blog so that I can refer to them again.

In this process if I would be glad if I can earn some good karma of helping some people :)