And so the market has hit an all time high of 28202 and as i keep saying its not the best time to invest, and why is that so, i shall brief you later.Its the time to learn some basics. The other day I was talking to a senior who also invests in stock market. When I asked him his style of investing, he told me that he invests in companies whose products he uses or finds in demand. Pretty rational explanation it seems, huh!
Actually its not. Its always good to check which companies are being commonly used by people and that should be an important consideration, which i shall explain in my Rule 5 pertaining to qualitative aspects of investing. But here is the catch, if it was so simple, everybody would have done so and become multimillionaires, but that is not possible since if all people have a lot of money, the importance of money or its purchasing power would depreciate. So much for the moral lecture but actually it is a fact in economics . The catch is that those companies which are popular would be in demand and you know what happens to the girl or guy who is most fancied by the opposite sex in college, his or her rates go up and its not worth the effort. Simple! If a company is already trading at a high price , probably it won't go further up.
So now coming to my second Rule of hitting it big in stock market.
Rule 2: Never Buy Any Stock with a P/E value of 12.5.
Now a lot of people would be wondering what is P/E. P/E means price to earnings ratio. Price is the market price of the share, and NOT the book value( Remember Market price and Book Value from our old post). and Earning is earning per share of the stock in one financial year. Suppose a company earned Rs 1o lakh from its last year's operations and there are 1 lakh shares. how much would the EPS( earning per share) be? yes ,you guessed it right. It would be Rs 10.
Now a company whose share price is Rs 100 with an earning per share would have a P/E of 10 which is okay. Now lets say this same company started having better sales and ended up having an annual earning of Rs 1 crore. That's cool! a growth of 900% in 1 year but its share price sky rocketed to Rs 2000. Now its earning per share(EPS) will be Rs 100(Rs 1 crore divided by 1 lakh shares) and so the P/E becomes 2000/100= 20. Now despite the fact that this company has done very well in the last year it is risky to invest in such a company. I am not saying its a bad company to invest in, it may continue its upward swing but thats a speculation.And I am not teaching you how to gamble. Growth is an important consideration which i will talk about in my next Rule but for now even if the company is growing very fast, if it has a P/E of 12.5 or more, do not buy.
See I already told you that the essence of investing is just like marriage. You don't look for the best features. You rule out the points that make living with that person impossible. So for now if a share has a book value of more than 1.5 its market price or if it has a P/E of more than 12.5, just back off. There are plenty of fishes in the sea.If you are wondering how I came to a P/E of 12.5, just check the rate of return of a bank fixed deposit or EPF and toggle it upside down. you would understand. An FD is the best rate of return which is assured to you in an indian scenario. In other countries the rates are different and so i will go for a different cut off for P/E.
Now time for the pick of the week. even when the market is skyrocketing. There are some stocks which are selling cheap. one of them is Syndicate Bank . At 128 Rupees a piece , it has a P/E value of 5 and book value of around Rs 190 with a Book value to market price of 0.68. Its a public sector bank where average P/E is 12.46 . Ya I know what you are thinking. Its CMD was embroiled in a controversy involving bribery and all. Guess what they are getting a new CMD. See here is how it goes.Its a government owned bank. Can government go bankrupt! No. And even if some rogue elements were indulging in wrong practice, it doesn't matter the entire bank is bad, plus even if they make a little less profit for a year or so because of the bad loans they gave, They still have a cushion of 150% when it comes to P/E of public sector bank. as market sentiments get better. it will pick up.Also the new BJP government is trying to revamp the public sector banks by infusing more money nad increasing its accountability because more than half of its shares belong to government and thus half its earnings
so Rule of the week:Never Buy Any Stock with a P/E value of 12.5.
and Pick of the week: Syndicate bank. it is trading at Rs 128.65 as of today, 19 January 2015
Actually its not. Its always good to check which companies are being commonly used by people and that should be an important consideration, which i shall explain in my Rule 5 pertaining to qualitative aspects of investing. But here is the catch, if it was so simple, everybody would have done so and become multimillionaires, but that is not possible since if all people have a lot of money, the importance of money or its purchasing power would depreciate. So much for the moral lecture but actually it is a fact in economics . The catch is that those companies which are popular would be in demand and you know what happens to the girl or guy who is most fancied by the opposite sex in college, his or her rates go up and its not worth the effort. Simple! If a company is already trading at a high price , probably it won't go further up.
So now coming to my second Rule of hitting it big in stock market.
Rule 2: Never Buy Any Stock with a P/E value of 12.5.
Now a lot of people would be wondering what is P/E. P/E means price to earnings ratio. Price is the market price of the share, and NOT the book value( Remember Market price and Book Value from our old post). and Earning is earning per share of the stock in one financial year. Suppose a company earned Rs 1o lakh from its last year's operations and there are 1 lakh shares. how much would the EPS( earning per share) be? yes ,you guessed it right. It would be Rs 10.
Now a company whose share price is Rs 100 with an earning per share would have a P/E of 10 which is okay. Now lets say this same company started having better sales and ended up having an annual earning of Rs 1 crore. That's cool! a growth of 900% in 1 year but its share price sky rocketed to Rs 2000. Now its earning per share(EPS) will be Rs 100(Rs 1 crore divided by 1 lakh shares) and so the P/E becomes 2000/100= 20. Now despite the fact that this company has done very well in the last year it is risky to invest in such a company. I am not saying its a bad company to invest in, it may continue its upward swing but thats a speculation.And I am not teaching you how to gamble. Growth is an important consideration which i will talk about in my next Rule but for now even if the company is growing very fast, if it has a P/E of 12.5 or more, do not buy.
See I already told you that the essence of investing is just like marriage. You don't look for the best features. You rule out the points that make living with that person impossible. So for now if a share has a book value of more than 1.5 its market price or if it has a P/E of more than 12.5, just back off. There are plenty of fishes in the sea.If you are wondering how I came to a P/E of 12.5, just check the rate of return of a bank fixed deposit or EPF and toggle it upside down. you would understand. An FD is the best rate of return which is assured to you in an indian scenario. In other countries the rates are different and so i will go for a different cut off for P/E.
Now time for the pick of the week. even when the market is skyrocketing. There are some stocks which are selling cheap. one of them is Syndicate Bank . At 128 Rupees a piece , it has a P/E value of 5 and book value of around Rs 190 with a Book value to market price of 0.68. Its a public sector bank where average P/E is 12.46 . Ya I know what you are thinking. Its CMD was embroiled in a controversy involving bribery and all. Guess what they are getting a new CMD. See here is how it goes.Its a government owned bank. Can government go bankrupt! No. And even if some rogue elements were indulging in wrong practice, it doesn't matter the entire bank is bad, plus even if they make a little less profit for a year or so because of the bad loans they gave, They still have a cushion of 150% when it comes to P/E of public sector bank. as market sentiments get better. it will pick up.Also the new BJP government is trying to revamp the public sector banks by infusing more money nad increasing its accountability because more than half of its shares belong to government and thus half its earnings
so Rule of the week:Never Buy Any Stock with a P/E value of 12.5.
and Pick of the week: Syndicate bank. it is trading at Rs 128.65 as of today, 19 January 2015
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