Wishful thinking is not the way to get rich

“Even though investment conditions, attitudes and opportunities often change over time and vary greatly from place to place, fundamental investment principles and basic `rules of the game’ nearly always remain the same,” write the Grewal duo on how the grass continues to be green for the basic framework.Don’t stop with salaries and pensions, advises the book, while arguing a case for investment.

“Hard work, thrift, and accumulated savings are no longer enough to provide for one’s future. Savings have to be intelligently invested and you have to actively manage your investments if you are to succeed in increasing, or at least in preserving, the purchasing power of your savings.”

Invest in shares and see your capital grow faster than in other forms of investment, exhort the authors.

As if to corroborate, the markets are now bullish; and their post-Budget exuberance has taken the indices to un-chartered territories!

Too much money chasing too few good stocks, they say, and retail investors also are jumping into the bandwagon, hoping to join the party.

To entice, the author, Grewals highlight the positives, such as how easy it is to manage share investments, compared to property and real estate. “You don’t have to worry about problems such as property taxes, upkeep of buildings, and eviction of unwanted tenants.” Again, unlike as with land or flats, you don’t need a lot of money to start with shares.

However, there are three basic investment rules that you should remember.

One, don’t buy unlisted shares; there, you don’t get the protection that stock exchanges offer, and in the absence of quotations you won’t be able to assess what the market price of such a share should be.

Two, keep away from inactive shares; “they are mostly shares of companies which are not doing well and whose future prospects appear to be dim,” explain the authors.

“Inexperienced investors looking for bargains are often attracted to such shares by virtue of their low prices. This is how beginners are normally trapped into making disastrous investments.” Instead, “hunt for value and pay a fair price for it.” Rule three is to steer clear of `closely-held’ companies; floating stock is smaller and volatility is more.

On what to look for in a company, the book has tips on identifying `growth’. Start looking in growth sectors of the economy because it is rare to find a growth company in a stagnant or declining sector. Then foresee the future demand for the company’s product, to know if there’s space for growth. Since growth does not happen by accident, you can see signs of growth work when companies plan for expansion and diversification, by buying land, signing collaboration deals, getting clearances and so on. Most of these activities get media coverage and so your inputs may well lie in financial newspapers. When studying annual financial results, look for plough-back and reserves. “As a rule-of-thumb, a company whose reserves are double that of its equity capital should be in a position to make a liberal bonus issue.”

Work out the book value per share, that is, shareholders’ funds divided by total number of equity shares issued, to know the worth of the share as per company’s books of accounts. If the market price is just around book value, “chances are that it is under-priced.”

Pat yourself if you know that EPS is PAT upon number of equity shares. EPS, as you know, is not a file format for graphics but earnings per share, the extra mile you’ll have to go without stopping at dividends per share.

The book offers you a basic jumpstart to launch on to P/E, yield, ROCE and RONW. There’s the PEG to connect P/E and expected growth rate; in general, “a PEG value below 0.5 indicates a very attractive buying opportunity.”

And beginners may need to think twice before venturing into shares with P/E more than 25. There’re `four simple rules for selling’.

One, don’t wait for the highest price, because fall can be sudden and steep; “sell as soon as you feel that you have made adequate profits on your investment.”

Two, sell when your target price is reached; “if your shares double in less than two years, sell them straightaway.”

Three, “once you realise you may have made a mistake, sell,” because it is pointless to harbour vague hopes that things will improve; “wishful thinking is not the way to get rich in the stock markets.” And four, “sell a share if you wouldn’t buy it at its prevailing price.” Get the Grewal gyan before riding the bulls in the bourses!


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