Monday, December 31, 2007

Stock Market Online Trading

Stock Market Online Trading - By: Noel Swanson, 2007-12-31

Trading stocks online can be very stimulating. It is both, either a great hobby or a full time job. In both cases you can earn much money. The stock market has made millionaires since the very beginnings of share trading. In the past you could trade stocks only for long term profits, today you can make profits within minutes.

Today you can buy and sell stocks around the clock in almost every stock market in the world. The US stock market is still very popular but why not investing in some of the great companies overseas? It has become so easy today to buy shares online that everybody with a PC and access to the Internet can do it.

What makes stock trading so fascinating? It is probably the possibility to get instant access to the markets. All the information you need is delivered in real time today at low costs. Stock quotes, fundamental data, news, charts. You can be your own investment adviser and make your own decisions.

Today there is almost no difference between a trader behind a trading desk at the bank and a private investor sitting behind his home computer. Both have cheap access to real time data of all the stocks they like to follow. The only difference might be the money an institutional investor has compared to a private trader.

There is a variety of online stock brokers today, more than we can count. How to find the right one? First you need to make the decision to trade either alone or together with the help of an experienced trader. There is nothing against doing everything yourself, with a discount broker you safe much fees and you are able to execute your trades yourself without human interaction. A full service broker gives you advice where you need it and does everything for you.

If you are more a speculator than an investor, you usually go with a discount stock broker because the commissions per trade are much cheaper. And since you are trading more often than an investor this can quickly add up. The average commissions for buying stocks is about $5 to $10 per order. The execution time of your order shouldn't be longer than 1 minute.

The trading platforms you get from your broker vary in performance, reliability and costs. If you are just starting with online stock trading then choose a known broker like Schwab for example. They have simple and easy to use trading platforms. Once you get more experienced and an active trader you might consider getting one of these direct access trading platforms. They cost something but offer a lot. Daytraders are using them to get filled in a split second.

The stock market gives you hundreds of opportunities every day. Thousands of stocks are listed on the various US stock exchanges and every stock is different. For more than 6 hours a day the regular market is open for taking your orders plus hours of special pre- and post market trading. You can spend your whole life analyzing and trading stocks back and forth.

Get all information about online stock trading in order to be successful. Understanding the stock market is the foundation of your trading success.

Investing in Indian Equities

By: Ashwanii0 Sharma, 2007-12-31

A lot of investors go about their investments in an illogical way. They are given a tip from their broker on basis of some rumor or news. They impulsively buy the scrip and afterwards wonder why they bought the stock.

Such Behavior is foolish and must be avoided. The moment you receive a tip on a stock, confirm the news on bse india or nse india website. The news, if any, will be on these sites; be it dividend payoffs, announcements, earnings, corporate move to buy another company, fight of top management or any other news.

Broadly one should abide by following guidelines:-

1. Business of CompanyBuy stocks of only those businesses that you understand. Once you have bought a stock, keep watch on quarterly results of that company and also keep watch on the general trend in the sector of that stock.

2. Study the past performanceAll companies present particulars of their fiscal operation in their yearly reports. Study their past performance and then invest.

3. Know the promotersThe Management team and promoters of a company are key people who bring growth to a business. Invest in companies that have good promoters, experienced management, and where promoters hold more than 40% of the shares.

4. Future outlook of the companyAlthough a company could have done well in the past, it is not necessary that it will carry on performing well in the time to come. Keep a close watch on sector trend and market trend. You can know this by reading views of financial experts.

5. Stock priceThe share price of each company fluctuates continuously on the stock markets with investors buying and selling the shares. The cost at which a person is conformable to buy or sell a share of a company is the perceived value of the share of the company taking into consideration the company’s present business and future business growth. Besides this, investor sentiment plays a large role in pricing of stocks. It is important that prior to buying a stock, you evaluate whether the price of that share at which it is available for purchase, is adequately valued i.e. it is not over-priced. Similarly, when you sell, you need to be sure that you are not selling dirt cheap.

To help you evaluate this, you may apply a popular ratio called the Price/Earning ratio (P/E ratio). The P/E ratio is based on the following formula:

P/E ratio = Market price of the share/Earning per share (EPS)*
*EPS = Profit After Tax (PAT)/ Total number of shares issued by the company{"/" means divided by}

You can find information on the EPS, PAT and total number of shares issued by the company from its annual report.

Once you have bought a stock after doing sufficient research, then you must not sell the stock in hurry if it falls by 5-10%.Share Tips India recommends investors to be aware of the technical tools of measuring stock performances before investing.

Lavanay is a featured boarder of Share Market India, the stock market discussion forum where he and other featured boarders give free advise to members.

Wednesday, December 26, 2007

Sensex zooms to 20199 !

What a day. We were right about the cash inflows into India ! 20199 is the Sensex.

Another realty boom project is coming up. Sabeer Bhatia, ex, proposes an 11000 acre, 1850 crore Nanocity in Haryana

Here is the detailed report

MUMBAI: Hotmail co-founder Sabeer Bhatia has embarked on an ambitious plan to set up a multi-billion dollar city called 'Nanocity' near Panchkula in Haryana, for which he is close to signing a deal with two or three real estate funds.

Nanocity, which would replicate the Silicon Valley, would be ready for occupation by 2010 and would have top infrastructure facilities besides housing several knowledge industries.

"Nanocity will be much bigger than the Silicon Valley. The success of Silicon Valley is because of two world-class educational institutions -- Stanford and Berkeley. And we intend to have world-class educational institutions in Nanocity," Bhatia told the media.

Already USD 300 million have been invested for land acquisition and an additional USD 1.2-1.5 billion investment would be needed for development of infrastructure like roads and sewage system, he said. Nanocity would be spread over 11,138 acres. It is located 25 km east of Chandigarh. Bhatia said that so far he has not contemplated applying for Special Economic Zone status.

Nanocity is promoted by Haryana State Industrial and Infrastructure Development Corporation, Bhatia said.

"The idea of building Nanocity is to develop a sustainable city with world class infrastructure and to create an ecosystem for innovation leading to economy, ecology and social cohesion," he said.

About 50 per cent of the area in Nanocity has been earmarked for development of parks and upkeep of open spaces.

Nanocity has been divided into four districts: IT, university, airport and biotech for administrative control. MORE PTI GN SUD DK PKS 12021344 DEL The IT district would house IT companies, promenade, golf course, market square, amphi theatre, central and link park. The university district would have university campus, cricket stadium, culture and arts. The airport district would have convention centres, hotels warehouse and industry. The biotech district would house medical centre, eco centre, horse race track, resort, eco park and biotechnolgies.

The urban structure in Nanocity would be developed as "mixed-use buildings". Street level building would be devoted to business and trade while the upper floors would be allocated for residential use.

On the power front, Nanocity would opt for solar energy, wind, geothermal and biomass. "We may get energy from Himachal Pradesh. American power company AES Corporation is looking at it," Bhatia said.

For water, Nanocity would use techniques such as rain water harvesting, waste water management, green building concepts, use of solar geysers and energy efficient lamps.

To have an eco-friendly environment, Nanocity has plans to build a bus rapid transit system that would connect the entire city.

Bhatia is confident that the Nanocity would create more jobs. For every high-tech employment position introduced, three low wage or informal sector jobs would be created, he said.

Article Source :

Monday, December 24, 2007

Stock Market Analysis

By: Leroy Rushing02 Leroy Rushing02, 2007-12-24

Basic Stock Trading AnalysisAnalysis is one of the most important aspects of stock market trading, and experienced stock market investors spend hours each day analyzing stock market trends before making a decision. In fact, it is important for any stock market investor to know the trends and stock market options that are available. If you are planning on carrying out some market research, here are a few tips to help you carry out effective research:

1. Business news websites

News websites have a panel of stock market experts that are constantly monitoring the stock markets. One of the simplest ways of getting unbiased stock market advice is visiting news websites and reading through their market analysis page. News websites update their market analysis on a daily basis and also have a ‘stocks to look out for’ section that can help newbie stock market investors to keep close tabs on future stock market options. Another popular feature most business and stock market expert websites have is a chart based analysis system that displays the ‘movement’ of stocks over a period of time.

2. Business newspapers

Although the internet is one of the leading resources for stock market analysis, business newspapers like the Business World are still the preferred source of information when it comes to the stock market. Not all information from a newspaper is available online, and a business newspaper is still one of the easiest ways to get insider news and expert advice on the stock market. In fact, any stock market expert will recommend subscribing to a business weekly for a more in depth look at the stock market.

3. Stock market software

Stock market software is essentially an artificial intelligence program that carries out a thorough comparison of various stocks to reveal a suitable candidate for purchase. Stock market software updates itself on a daily or hourly basis (depending on an individual’s requirements) and also carries out a detailed analysis of each stock market option. In addition, stock market software also produces various statistical data like average trading price, lowest closing, highest closing and other details that can help a stock market investor make an informed decision. There is software that will chart price movements in various time increments – from a few to several minutes, hours, or even days.

It is from these charts that you would be in the best position to find trade setups, trade reversals, trends, gaps, momentums, and so many other insights necessary for successful trading.It is important to remember that stock market software is essentially a tool and should not be the sole basis of any buy/sell decision. Stock market software is available from a variety of software firms and large stock market organizations usually have their own stock market software.

It is vital to understand that the stock market is influenced by various political and economical factors, and research is a vital part of any stock market decision. What is also true is that the stock market is all about making informed decisions and taking calculated risks. In fact, the reason why people all over the world are turning to research before making any stock market investment is because the stock market can essentially be deciphered by an analytic mind willing to take calculated risks from time to time.

For more information on investing in stocks and e-mini futures visit

Leroy Rushing is the author of this article on Trading Products. Find more information about Trading Plan Secretshere.

Article Source :

Senses rises by 692 points, Dow by 205, Nifty 218 !

What a surge ! Sensex, Dow and Nifty up !

The dollar inflows, assures the economic experts, will continue to flow into India. So far they have been proved to be right !

But the average investor, I mean the ordinary investor, is jittery. He is now scared to invest in scrips. The FIIs dominate the market and own 33% of Indian shares !

The prices of food items are rising in US and India. This will definitely affect economy, even though both governments give low inflation rates.

The cause of the rise of the Sensex was said to be Modi's victory in Gujarat, India's no 1 industrial state. Huge investment is planned in Gujarat, almost 8 lakh crores and Gujarat will surge ahead.

Another big investment is coming up in Punjab. Sabeer Bhatia of Ex Hotmail ( who sold to Bill Gates for 400 million dollars ) is coming up with a Nano City project in Punjab on 11000 acres. The project will include IT companies, airport and a University. It is a big NRI investment from a software engineer in Silicon valley. So more FDI inflows, more FII inflows, more NRI inflows and Indian will keep up tk 8-9% growth. But still the ordinary investor is confused now !

Monday, December 17, 2007

Blood Bath on Dalal Street !

The Sensex nosedived by almost 800 points at Bombay. This is a big correction.

Yesterday one of my clients phoned me from US saying that the inflation there has gone upto a whooping 30%. I told him the situation is no better in India, with essential foodstuffs going up by more than 100%. Last week I bought bitter melon at Rs 40. One month back it was only Rs 10 or 15 !.

The subprime crisis has taken its toll of the US. 2 million homes are under threat. My client told me that 2008 is going to be a bad year for the US. He had phoned to consult me astrologically. Since Jupiter was in his natal First, I had to warn him about the impending days and I told him that Jove's stay in the Janma or Lunar First is fraught with danger !. He said I am right, as his experience corroborated my statement. I told him to hold on till September !

From India's perspective, we have been warning about Jupiter's transit of the 6th. Oil bill is going up and power is a big problem. There should be a 12% growth in power, for the GDP growth to be sustained at 9%. Power growth is only 5%. Infrastructure is always a problem, despite the politicians' tall talk about India's growth !

Tuesday, December 11, 2007

Nifty closes above 6000 !

Nifty closed above 6000 for the first time. Sensex is at 20230 ! As we said earlier, the dollar inflows to India are likely to continue and one doesnt have to panic about subprime woes in the US.

Realtex is up and the realty companies, Unitech, GMR Infra, Shobha, Parsvanath are all doing well. Bankex also. Tech stocks are hit by the rising rupee.

We will come to know today about the Fed rate cut. Let us hope that the Dow and Sensex will not moving southward

Monday, December 10, 2007

Forex reserves cross $273 billion !

There is a possibility that the US Federal Reserve may reduce interest rates on Tuesday. If such an action is taken, there will be more dollar inflows into India and the Rupee may appreciate.

Already the forex reserves have crossed $ 273 b.

Nasscom, the Software Agency, has warned that troubles times are in the offing for IT companies, because of the rising rupee. Even though the software industry is growing by 28%, in the long run, IT companies may be worst hit by the rising rupee. Nasscom President Kiran Karnik said so last week.

But since dollar flows are likely to continue, the Sensex may still hold on to high 19000 levels. At the moment, it is 36 points down, to 19926.

Tuesday, December 04, 2007

Lessons from the master - XV

Last week ,we saw the master mention about his investment mistakes of the preceding 25 years in his 1989 letter to shareholders. Let us round off that list by discussing the rest of what he feels were his key investment mistakes.

"My most surprising discovery: the overwhelming importance in business of an unseen force that we might call 'the institutional imperative'. In business school, I was given no hint of the imperative's existence and I did not intuitively understand it when I entered the business world. I thought then that decent, intelligent, and experienced managers would automatically make rational business decisions. But I learned over time that isn't so. Instead, rationality frequently wilts when the institutional imperative comes into play."

How often have we seen merger between two companies not producing the desired outcome as was projected at the time of the merger? Or, how often have we seen management retain excess cash under the rationale that it will be used for future acquisitions? Further still, a lot of companies do things just because their peers are doing it even though it might bring no tangible benefits to them. The master has labeled these so called propensities to do things just for the sake of doing them 'the institutional imperatives' and has termed them as one of his most surprising discoveries. Further, he advises investors to steer clear of such companies and instead focus on companies, which appear alert to the problem of 'institutional imperative'.

Given the master's great predisposition towards choosing business owners with the highest levels of integrity and honesty, it comes as no surprise that one of his investment mistake concerns the quality of the management. This is what he has to say on the issue.

"After some other mistakes, I learned to go into business only with people whom I like, trust, and admire. As I noted before, this policy in itself will not ensure success: A second-class textile or department store company won't prosper simply because its managers are men that you would be pleased to see your daughter marry. However, an owner - or investor - can accomplish wonders if he manages to associate himself with such people in businesses that possess decent economic characteristics. Conversely, we do not wish to join with managers who lack admirable qualities, no matter how attractive the prospects of their business. We've never succeeded in making a good deal with a bad person."

Next on the list of investment mistakes is a confession that makes us realise that even the master is human and is prone to slip up occasionally. But what makes him a truly outstanding investor is the fact that he has had relatively fewer mistakes of commission rather than omission. In other words, while he may have let go of a couple of very attractive investments, he's hardly ever made an investment that cost him huge amounts of money.

This is what he has to say: "Some of my worst mistakes were not publicly visible. These were stock and business purchases whose virtues I understood and yet didn't make. It's no sin to miss a great opportunity outside one's area of competence. But I have passed on a couple of really big purchases that were served up to me on a platter and that I was fully capable of understanding. For Berkshire's shareholders, myself included, the cost of this thumb-sucking has been huge."

The master rounds off the list with a masterpiece of a comment. It gives us an insight into his almost inhuman like risk aversion qualities and goes us to show that he will hardly ever make an investment unless he is 100% sure of the outcome. It comes out brilliantly in this, his last comment on his investment mistakes of the past twenty-five years: "Our consistently conservative financial policies may appear to have been a mistake, but in my view were not. In retrospect, it is clear that significantly higher, though still conventional, leverage ratios at Berkshire would have produced considerably better returns on equity than the 23.8% we have actually averaged. Even in 1965, perhaps we could have judged there to be a 99% probability that higher leverage would lead to nothing but good. Correspondingly, we might have seen only a 1% chance that some shock factor, external or internal, would cause a conventional debt ratio to produce a result falling somewhere between temporary anguish and default.

We wouldn't have liked those 99:1 odds - and never will. A small chance of distress or disgrace cannot, in our view, be offset by a large chance of extra returns. If your actions are sensible, you are certain to get good results; in most such cases, leverage just moves things along faster. Charlie and I have never been in a big hurry: We enjoy the process far more than the proceeds - though we have learned to live with those also."

Article Source :

Lessons from the master - XX

Last week we got to know the master's take on the difference between a 'business' and a 'franchise'. Continuing with the letter from the same year, let us see what other wisdom he has to offer.

With the kind of fortune that the master has amassed over the years, one could be forgiven for thinking him as rather infallible and the one fully capable of identifying the next big industry or the next big multi-bagger. However, this myth is easily demolished in the master's following comments from the 1991 letter.

"Typically, our most egregious mistakes fall in the omission, rather than the commission, category. That may spare Charlie and me some embarrassment, since you don't see these errors; but their invisibility does not reduce their cost. In this mea culpa, I am not talking about missing out on some company that depends upon an esoteric invention (such as Xerox), high-technology (Apple), or even brilliant merchandising (Wal-Mart). We will never develop the competence to spot such businesses early. Instead I refer to business situations that Charlie and I can understand and that seem clearly attractive - but in which we nevertheless end up sucking our thumbs rather than buying."

There are two things that clearly stand out from the master's above quote. One is his ability to flawlessly identify his circle of competence and the second, his objectivity, from which comes his rare trait of accepting one's own mistake and working to eliminate it.

For those investors who believe that big fortune usually comes from identifying the next big thing or the next wave, they must have been surely forced to think again after coming face to face with the master's candid admission that he will never develop the competence to identify say the next 'Microsoft' or 'Pfizer' or how about the next 'Infosys' or the next 'Ranbaxy'. Indeed, outside one's industry of knowledge, it becomes very difficult to identify the next multi-bagger as it is just not high growth potential but a lot of other factors that go into making a highly successful company. In fact, even within one's industry of knowledge, it may prove to be a tough nut to crack.

So, if not the next multi-baggers, then how else can one become a successful long-term investor? The answer could lie in the master's quote from the same letter and given below.

"We continually search for large businesses with understandable, enduring and mouth-watering economics that are run by able and shareholder-oriented managements. This focus doesn't guarantee results: We both have to buy at a sensible price and get business performance from our companies that validate our assessment. But this investment approach - searching for the superstars - offers us our only chance for real success. Charlie and I are simply not smart enough, considering the large sums we work with, to get great results by adroitly buying and selling portions of far-from-great businesses. Nor do we think many others can achieve long-term investment success by flitting from flower to flower."

Thus, in investing as in other walks of life, easy does it. Hence, look around for stable businesses run by competent people and available at attractive prices. Trust us, it is much better than trying to look out for companies possessing the next revolutionary product or a service.

Article Source :

Lessons from the master - XIX

Last week, through the master's 1991 letter to shareholders, we threw some light on his concept of 'look-through' earnings and how one should build a long-term portfolio based on it. This week, let us see what further investment insight the master has up his sleeves in the remainder of the letter from the same year.

In the 1991 letter, while discussing his investments in the media sector, the master delivers yet another gem of an advice that can go a long way towards helping conduct a very good qualitative analyses of companies. Based on his enormous experience in analysing companies, the master classifies firms broadly into two main types, a business and a franchise and believes that many operations fall in some middle ground and can best be described as weak franchises or strong businesses. This is what he has to say on the characteristics of each of them:

"An economic franchise arises from a product or service that: (1) is needed or desired, (2) is thought by its customers to have no close substitute, and (3) is not subject to price regulation. The existence of all three conditions will be demonstrated by a company's ability to regularly price its product or service aggressively and thereby to earn high rates of return on capital. Moreover, franchises can tolerate mismanagement. Inept managers may diminish a franchise's profitability, but they cannot inflict mortal damage.

In contrast, "a business" earns exceptional profits only if it is the low-cost operator or if supply of its product or service is tight. Tightness in supply usually does not last long. With superior management, a company may maintain its status as a low-cost operator for a much longer time, but even then unceasingly faces the possibility of competitive attack. And a business, unlike a franchise, can be killed by poor management."

We believe equity investors can do themselves a world of good by taking the above advice to heart and using them in their analysis. If one were to visualise the financials of a company possessing characteristics of a 'franchise', the company that emerges is the one with a consistent long-term growth in revenues (the master says that a 'franchise' should have a product or a service that is needed or desired with no close substitutes) and high and stable margins, arising from the pricing power that the master mentioned, thus leading to a similar rise in earnings as the topline.

On the other hand, a 'business' would be an operation with erratic growth in earnings owing to frequent demand-supply imbalances or a company with a continuous decline after a period of strong growth owing to the competition playing catching up.

Thus, if an investor approaches the analysis of a firm armed with these tools or with the characteristics firmly ingrained into their brains, then we believe he should be able to weed out a lot of bad companies by simply glancing through their financials of the past few years and save considerable time in the process. Further, as the master has said that since a bad management cannot permanently dent the profitability of a franchise, turbulent times in such firms could be used as an opportunity for entering at attractive levels. It should, however, be borne in mind that the master is also of the opinion that most companies lie between the two definitions and hence, one needs to exercise utmost caution before committing a substantial sum towards a so-called 'franchise'.

Article Source :

Lessons from the master - XVIII

In the preceding letter of the series, we saw how the master gained significantly from the phenomenon of 'double-dip' that engulfed two of his investment vehicle's best holdings and how we as investors, stand to benefit from the same. In the following write-up, let us see what other tricks the master has up his sleeve through the remainder of his 1991 letter to his shareholders.

"We believe that investors can benefit by focusing on their own look-through earnings. To calculate these, they should determine the underlying earnings attributable to the shares they hold in their portfolio and total these. The goal of each investor should be to create a portfolio (in effect, a "company") that will deliver him or her the highest possible look-through earnings a decade or so from now.

An approach of this kind will force the investor to think about long-term business prospects rather than short-term stock market prospects, a perspective likely to improve results. It's true, of course, that, in the long run, the scoreboard for investment decisions is market price. But prices will be determined by future earnings. In investing, just as in baseball, to put runs on the scoreboard one must watch the playing field, not the scoreboard."

Yet again, the master's crystal-clear thinking and his ability to draw parallels between investing and other fields shines through in the above quote. The master is trying to highlight a simple fact that the probability of success in investing increases manifold if one is focused on building a portfolio that comprises of companies with the best earnings growth potential from a 10-year perspective. However, this is easier said than done. The attention of a multitude of investors in the stock markets is focused on the stock price rather than the underlying earnings. These gullible sets of investors seem to confuse between cause and effect in investing. One must never forget the fact that it is the earnings that drive the returns in the stock markets and not the prices alone. Thus, any strong jump in prices without a concomitant rise in earnings should be viewed with caution.

However, if the trend in the Indian stock market these days is any indication, investors seem to be turning a blind eye towards earnings growth and are buying into equities with promising growth prospects but very little actual earnings to justify the price rise. The risk of indulging in such practices becomes clear when one considers the tech mania of the late 1990s. In anticipation of strong earnings, investors had bid up the price of a lot of tech stocks to such levels that when the earnings failed to meet the lofty expectations, prices crashed, resulting into huge capital erosion. But alas, the investor memory seems to be very short and a similar event is waiting to be played out, although this time in some other sectors.

Hence, one would do well to heed to the master's advice and try and focus not on the stock prices but the underlying earnings. Further, the master is also in favour of having a 10 year view so that the tendency of investors to invest based on a short term view of things gets nipped in the bud and there emerges a portfolio, having companies with a proven track record and a strong and credible management team at the helm.

We will discuss other nuggets from the master's 1991 letter to shareholders in the next article of the series.

Article Source :

Lessons from the master - XVII

In our previous discussion on the master's 1990 letter to shareholders, we touched upon his fondness for doing business in pessimistic times, mainly for the prices they provide. Let us look what the master has to impart in terms of investment wisdom in his 1991 letter to shareholders.

"Coca-Cola and Gillette are two of the best companies in the world and we expect their earnings to grow at hefty rates in the years ahead. Over time, also, the value of our holdings in these stocks should grow in rough proportion. Last year, however, the valuations of these two companies rose far faster than their earnings. In effect, we got a double-dip benefit, delivered partly by the excellent earnings growth and even more so by the market's reappraisal of these stocks. We believe this reappraisal was warranted. But it can't recur annually: We'll have to settle for a single dip in the future."

The master's above-mentioned quote has been put up not to extol the virtues of the two companies but instead to drive home the enormous advantage of the 'double-dip' benefit that he has mentioned at the end of the paragraph. In the stock markets, it is very important to pay a reasonable multiple to the earnings of a company because if you overpay and if the multiples contract despite the high growth rates enjoyed by the company, then the overall returns stand diluted a bit. In fact, it can even lead to negative returns if the multiples contract to a great extent. On the other hand, investing in even a moderately growing company can lead to attractive returns if the multiples are low.

Imagine a company 'A' having a P/E of 25 and a company 'B' having a P/E of 10. Company 'A' is a high growth company, growing its profits by 20% per year and company 'B' is a relatively low growth company growing its profits annually by 12%. Now, two years down the line, because of 'A's growth rate, if its P/E were to come down to 20 and 'B's were to rise up to 12, then we would have in the case of 'B' what is known as a double dip effect. 'B' has benefited not only from the growth but also from the multiple expansion, resulting into returns in the range of 23% CAGR. 'A' on the other hand, despite its high earnings growth has helped earn its investors a return of just 7.3% CAGR. The main culprit here was the contraction in multiples of 'A', which fell to 20 from a high of 25.

This analysis could easily lead to one of the most important investment lessons and that is to pay a reasonable multiple despite high growth rates. For if there is a contraction, all the benefits from high growth rates go down the drain. Little wonder, the master has always insisted upon an adequate margin of safety, which if put differently, is nothing but buying a stock at multiples, which leave ample room for expansion and where chances of contraction are low.

If one were to apply the above lesson to the events playing out in the Indian stock markets currently, then it becomes clear that while the robust economic growth would continue to drive the growth in earnings of companies, most of the good quality companies are trading at multiples, which do not leave much room for expansion. In fact, if anything, the probability of the multiples coming down for quite a few companies is on the higher side, thus diluting the impact of high growth to a significant extent. Thus, we would advice investors to pay heed to the master and wait patiently for the multiples to come down to levels, where the benefits of the 'double dip' effect become apparent.

In the forthcoming articles, we will discuss the remainder of the master's 1991 letter.

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Lessons from the master - XVI

Last week, we got to know the major mistakes that the master thought he made in his illustrious career through his 1989 letter to shareholders. Let us now see what the master has to say through his 1990 letter to shareholders:

The master has always been a believer of the theory that stock investments should be made after taking into account an adequate margin of safety. But in euphoric times such as the current one on the Indian bourses, it is difficult to come across a good quality stock with an adequate margin of safety. However, when markets tumble and panic sets in, quite a few stocks start trading at an adequate margin of safety but the same stocks become risky for investors who not so long ago where willing to pay a hefty premium for them. The master, after observing a similar behavior pattern among the investors in those times, had the following to say on this rather weird psychological trait of majority of them:

"Investors who expect to be ongoing buyers of investments throughout their lifetimes should adopt a similar attitude toward market fluctuations; instead many illogically become euphoric when stock prices rise and unhappy when they fall. They show no such confusion in their reaction to food prices: Knowing they are forever going to be buyers of food, they welcome falling prices and deplore price increases. (It is the seller of food who doesn't like declining prices.)"

"The most common cause of low prices is pessimism - some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It is optimism that is the enemy of the rational buyer."

However, the master cautions that not every thing should be bought at low prices and this is what he has to say on the issue.

"None of this means, however, that a business or stock is an intelligent purchase simply because it is unpopular; a contrarian approach is just as foolish as a follow-the-crowd strategy. What is required is thinking rather than polling. Unfortunately, Bertrand Russell's observation about life in general applies with unusual force in the financial world: "Most men would rather die than think. Many do."

Thus, while low price scenario may be a good time to buy stocks that provide adequate margin of safety, one should look for good quality businesses that have delivered consistently on a long-term basis and are being run by shareholder friendly managements. One can hence use the current bull-run not to invest but to make ready a list of such stocks and then strike when opportunity arises. Please bear in mind that long-term wealth has been made in the market not by investing in the latest overpriced fads but by investing in a good quality company trading at valuations that have built in a considerable margin of safety. To read previous articles in the Warren Buffett letter series, please click below:

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Lessons from the master - XIV

In the previous article in the series, we discussed the master's 1989 letter and got to know his views on growth rates in a finite world and the mischief being played by investment bankers and promoters in order to justify a rather 'difficult to service' fund raising.

As the years have gone by, we have noticed that the master's letters have become lengthier and have come packed with even more investment wisdom. This has however, made it difficult to incorporate all the wisdom from one particular year in a single article. Thus henceforth, in cases where we feel necessary, we might divide the letter from the same year into two or maybe even three different articles. The letter for the year 1989 is we feel, one of such letters and hence, the following few paragraphs contain some additional investment wisdom from the 1989 letter.

In a section titled 'Mistakes of the First Twenty-five Years', the master has reviewed some of the major investment related mistakes that he has made in the twenty-five years preceding the year 1989. Let us go through those and try our best to avoid them if similar situations play themselves out before us:

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price. Charlie (Buffett's business partner) understood this early; I was a slow learner. But now, when buying companies or common stocks, we look for first-class businesses accompanied by first-class managements."

"Good jockeys will do well on good horses, but not on broken-down nags. The same managers employed in a business with good economic characteristics would have achieved fine records. But they were never going to make any progress while running in quicksand."

It should be worth pointing out that in the early years of his career, the master bought into businesses based on statistical cheapness rather than qualitative cheapness. While he experienced success using this approach, the difficult time faced by the textile business made him realize the virtue of a good business i.e. businesses with worthwhile returns and profit margins and run by exceptional people. According to him, while one may make decent profits in an ordinary business purchased at very low prices, lot of time may elapse before such profits can be made. Hence, he feels that it is always better to stick with wonderful company at a fair price, as according to him, time is the friend of a good business and an enemy of a bad business.

"Easy does it. After 25 years of buying and supervising a great variety of businesses, Charlie and I have not learned how to solve difficult business problems. What we have learned is to avoid them. To the extent we have been successful, it is because we concentrated on identifying one-foot hurdles that we could step over rather than because we acquired any ability to clear seven-footers."

The master's reluctance to invest in tech stocks during the tech boom is legendary and perfectly sums up what he intends to convey from the above paragraph. Invest in companies whose businesses are within your circle of competence and keep it easy and simple. According to him, human beings have this perverse tendency of making easy things difficult and one must not fall into such a trap.

The list of mistakes has a few more important points, which we would discuss in the next article in the series.

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Lessons from the master - XIII

In the previous article of this series, we saw Warren Buffett make some significant dents in the efficient market theory and also got to know his take on arbitrage. Let us see what the master has to say in his 1989 letter to shareholders.

Have you ever wondered why despite such enormous wealth and infrastructure, the US economy canters at a mere 3%-4% growth rate per annum and why a country like India, which has very little infrastructure in comparison to the US, is galloping at 7%-8% rate. Or better still, what happened to the 40%-50% growth rates that the Indian IT companies notched up so successfully in the not so recent past? The master has the following explanation to these phenomena:

"In a finite world, high growth rates must self-destruct. If the base from which the growth is taking place is tiny, this law may not operate for a time. But when the base balloons, the party ends: A high growth rate eventually forges its own anchor."

Indeed, in a world where resources are limited, consistently high growth rates would create pressure on those resources, thus resulting into either exhaustion of the resources or slowing down of growth. To better illustrate this point, let us return to the Indian IT industry. The demand for qualified IT professionals (a limited resource as we can produce only so much per year) has been so high in recent times that this has resulted in a disproportionate rise in salaries and attrition levels, thus impeding profit growth. Further, it is much easy to double revenues on a base of Rs 500 - Rs 600 m than on a base of Rs 50,000 m - Rs 60,000 m. Hence, those who are expecting these companies to grow at the same rate as in the past, might be in for some real surprise.

Another important topic that the master has touched upon in his 1989 letter is the gradual deterioration in the quality of representation of a company's true cash flow by certain promoters and their advisors in order to justify a shaky deal. While earlier, a company's cash flow, to justify its debt carrying capacity took into account its normal capex needs and modest reduction in debt per year, things had come to such a pass that EBITDA emerged as a substitute for a company's cash flow. Important to note that EBITDA not only excludes the normal capex needs of the company, but it was deemed enough to cover just the interest expense on debt and not the repayment of debt. This is what the master had to say on such practices:

"To induce lenders to finance even sillier transactions, they introduced an abomination, EBDIT - Earnings Before Depreciation, Interest and Taxes - as the test of a company's ability to pay interest. Using this sawed-off yardstick, the borrower ignored depreciation as an expense on the theory that it did not require a current cash outlay. Capital outlays at a business can be skipped, of course, in any given month, just as a human can skip a day or even a week of eating. But if the skipping becomes routine and is not made up, the body weakens and eventually dies. Furthermore, a start-and-stop feeding policy will over time produce a less healthy organism, human or corporate, than that produced by a steady diet. As businessmen, Charlie and I relish having competitors who are unable to fund capital expenditures."

Thus, since EBITDA does not even cover the normal capex needs of the company, the master advises investors to be wary of companies and investment bankers who rely on these yardsticks to justify a leveraged deal. The master also touches upon a special type of bond known as the zero coupon bonds and goes on to add that whenever the inherent advantage that these bonds offer (deferring interest payment and not recording them till the maturity of bonds) combine with lax standards for cash flow estimation like the EBITDA, it sure is a recipe for disaster. This is what he has to say on the combination of both:

"Whenever an investment banker starts talking about EBDIT - or whenever someone creates a capital structure that does not allow all interest, both payable and accrued, to be comfortably met out of current cash flow net of ample capital expenditures - zip up your wallet. Turn the tables by suggesting that the promoter and his high-priced entourage accept zero-coupon fees, deferring their take until the zero-coupon bonds have been paid in full. See then how much enthusiasm for the deal endures."

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Lessons from the master - XII

In our previous article on Warren Buffet's letter to shareholders, we discussed the master's 1987 letter and got to know his preference for businesses that are simple and easy to understand. In the same letter, Buffett also explained the concept of 'Mr Market' in a rather detailed way. Let us now see what the master has to offer in his 1988 letter to shareholders.

The year 1988 turned out to be quite an eventful one for Berkshire Hathaway, the master's investment vehicle. While the year saw the listing of the company on the New York Stock Exchange, it also turned out to be the year when Buffett made what can be termed as one of its best investments ever. Yes, we are talking about the company Coca Cola. The letter too was not short on investment wisdom either. Although he did discuss previously touched upon topics like accounting and management quality, these are not what we will focus on. Instead, let us see what the master has to say on some novel concepts like arbitrage and his take on the efficient market theory.

For those of you who would have thought that Warren Buffett is all about value investing and extremely lengthy time horizons, the mention of the word 'arbitrage' must have come as a pleasant surprise or may be, even as a shock. However, the master did engage in 'arbitrage' but in very small quantities and this is what he has to say on it.

"In past reports we have told you that our insurance subsidiaries sometimes engage in arbitrage as an alternative to holding short-term cash equivalents. We prefer, of course, to make major long-term commitments, but we often have more cash than good ideas. At such times, arbitrage sometimes promises much greater returns than Treasury Bills and, equally important, cools any temptation we may have to relax our standards for long-term investments."

First of all, let us see how does he define arbitrage.
"Since World War I the definition of arbitrage - or "risk arbitrage," as it is now sometimes called - has expanded to include the pursuit of profits from an announced corporate event such as sale of the company, merger, recapitalization, reorganization, liquidation, self-tender, etc. In most cases the arbitrageur expects to profit regardless of the behavior of the stock market. The major risk he usually faces instead is that the announced event won't happen."

Just as in his long-term investments, in arbitrage too, the master brings his legendary risk aversion technique to the fore and puts forth his criteria for evaluating arbitrage situations.

"To evaluate arbitrage situations you must answer four questions: (1) How likely is it that the promised event will indeed occur? (2) How long will your money be tied up? (3) What chance is there that something still better will transpire - a competing takeover bid, for example? and (4) What will happen if the event does not take place because of anti-trust action, financing glitches, etc.?"

And how exactly does he differ from other arbitrageurs? Let us hear the answer in his own words.

"Because we diversify so little, one particularly profitable or unprofitable transaction will affect our yearly result from arbitrage far more than it will the typical arbitrage operation. So far, Berkshire has not had a really bad experience. But we will - and when it happens we'll report the gory details to you."

"The other way we differ from some arbitrage operations is that we participate only in transactions that have been publicly announced. We do not trade on rumors or try to guess takeover candidates. We just read the newspapers, think about a few of the big propositions, and go by our own sense of probabilities."

Another important topic that the master touched upon in his 1988 letter was that of the Efficient Market Theory (EMT). This theory had become something like a cult in the financial academic circles in the 1970s and to put it simply, stated that stock analysis is an exercise in futility since the prices reflected virtually all the public information and hence, it was impossible to beat the market on a regular basis. However, this is what the master had to say on the investment professionals and academics who followed the theory to the 'Tee'.

"Observing correctly that the market was frequently efficient, they went on to conclude incorrectly that it was always efficient. The difference between these propositions is night and day."

In order to justify his stance, the master states that if beating markets would have been impossible, then he and his mentor, Benjamin Graham, would not have notched up returns in the region of 20% year after year for an incredibly long stretch of 63 years, when the market returns during the same period were just under 10% including dividends. Hence, despite evidences to the contrary, EMT continued to remain popular and forced the master to make the following comment.

"Over the 63 years, the general market delivered just under a 10% annual return, including dividends. That means US$ 1,000 would have grown to US$ 405,000 if all income had been reinvested. A 20% rate of return, however, would have produced US$ 97 m. That strikes us as a statistically significant differential that might, conceivably, arouse one's curiosity. Yet proponents of the theory have never seemed interested in discordant evidence of this type. True, they don't talk quite as much about their theory today as they used to. But no one, to my knowledge, has ever said he was wrong, no matter how many thousands of students he has sent forth misinstructed. EMT, moreover, continues to be an integral part of the investment curriculum at major business schools. Apparently, a reluctance to recant, and thereby to demystify the priesthood, is not limited to theologians."

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Lessons from the master - XI

Last week, we saw the master expand upon his concept of owner earnings and the only two basic jobs that he and his partner Charlie Munger engage in through his 1986 letter to his shareholders. This week, let us see what investment wisdom he brings to the table in his 1987 letter.

We are living in a fast changing world and every few years there comes a technology or a product that just brings about a revolution and spreads across the globe like a mania. Few examples that come to mind are the automobiles and aeroplanes in the US in the early 20th century or the recent Internet and dot-com mania. However, the fact that the companies in such revolutionary industries rake up equally impressive returns on the stock market is far from truth. While loss making abilities of the US auto companies and airliners are legendary, not less infamous either is the amount of wealth that has been destroyed in the Internet bubble at the cusp of the 21st century. No wonder this is what the master has to stay on which companies end up winners in the stock market.

"Experience indicates that the best business returns are usually achieved by companies that are doing something quite similar today to what they were doing five or ten years ago. That is no argument for managerial complacency. Businesses always have opportunities to improve service, product lines, manufacturing techniques, and the like, and obviously these opportunities should be seized. But a business that constantly encounters major change also encounters many chances for major error. Furthermore, economic terrain that is forever shifting violently is ground on which it is difficult to build a fortress-like business franchise. Such a franchise is usually the key to sustained high returns."

"Berkshire's experience has been similar. Our managers have produced extraordinary results by doing rather ordinary things - but doing them exceptionally well. Our managers protect their franchises, they control costs, they search for new products and markets that build on their existing strengths and they don't get diverted. They work exceptionally hard at the details of their businesses, and it shows."

Indeed, with technology changing so fast in industries such as auto and Internet, it becomes really difficult to zero in on a company that will continue to exist ten years from now and in the process still give attractive returns. This is definitely not the case with a single product company existing in an industry, where more the things change more they remain the same.

In an era when investing in equities had been reduced to nothing more than moving in and out of companies based on their quotations, the master was a breed different from the rest. He did not let fluctuations in stock prices influence his investment decisions but rather viewed investments from the point of view of a business analyst, judging companies on the basis of their operating results and viewing stock market not as a guide but as a servant. Laid out below is what perhaps is one of the most lucid yet one of the most effective explanations of how one should view the stock market.

The master says, "Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.

Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market's quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.

Mr. Market has another endearing characteristic - he doesn't mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.

But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice - Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren't certain that you understand and can value your business far better than Mr. Market, you don't belong in the game." Our discussion on Warren Buffet's previous letters to shareholders

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Elliott Waves Theory Basics

The Elliott Wave Theory is named after Ralph Nelson Elliott. Inspired by the Dow Theory and by observations found throughout nature, Elliott concluded that the movement of the stock market could be predicted by observing and identifying a repetitive pattern of waves. In fact, Elliott believed that all of man's activities, not just the stock market, were influenced by these identifiable series of waves.

Elliott based part his work on the Dow Theory, which also defines price movement in terms of waves, but Elliott discovered the fractal nature of market action. Thus Elliott was able to analyze markets in greater depth, identifying the specific characteristics of wave patterns and making detailed market predictions based on the patterns he had identified.

Definition of Elliott Waves

In the 1930s, Ralph Nelson Elliott found that the markets exhibited certain repeated patterns. His primary research was with stock market data for the Dow Jones Industrial Average. This research identified patterns or waves that recur in the markets. Very simply, in the direction of the trend, expect five waves. Any corrections against the trend are in three waves. Three wave corrections are lettered as "a, b, c." These patterns can be seen in long-term as well as in short-term charts. Ideally, smaller patterns can be identified within bigger patterns. In this sense, Elliott Waves are like a piece of broccoli, where the smaller piece, if broken off from the bigger piece, does, in fact, look like the big piece. This information (about smaller patterns fitting into bigger patterns), coupled with the Fibonacci relationships between the waves, offers the trader a level of anticipation and/or prediction when searching for and identifying trading opportunities with solid reward/risk ratios.

There have been many theories about the origin and the meaning of the patterns that Elliott discovered, including human behavior and harmony in nature. These rules, though, as applied to technical analysis of the markets (stocks, commodities, futures, etc.), can be very useful regardless of their meaning and origin.

Simplifying Elliott Wave Analysis

Elliott Wave analysis is a collection of complex techniques. Approximately 60 percent of these techniques are clear and easy to use. The other 40 are difficult to identify, especially for the beginner. The practical and conservative approach is to use the 60 percent that are clear.

When the analysis is not clear, why not find another market conforming to an Elliott Wave pattern that is easier to identify?

From years of fighting this battle, we have come up with the following practical approach to using Elliott Wave principles in trading.

The whole theory of Elliott Wave can be classified into two parts:

• Impulse patterns
• Corrective patterns

Elliott Wave Basics — Impulse Patterns

The impulse pattern consists of five waves. The five waves can be in either direction, up or down. Some examples are shown to the right and below.The first wave is usually a weak rally with only a small percentage of the traders participating. Once Wave 1 is over, they sell the market on Wave 2. The sell-off in Wave 2 is very vicious. Wave 2 will finally end without making new lows and the market will start to turn around for another rally.

The initial stages of the Wave 3 rally are slow, and it finally makes it to the top of the previous rally (the top of Wave 1).

At this time, there are a lot of stops above the top of Wave 1.

Traders are not convinced of the upward trend and are using this rally to add more shorts. For their analysis to be correct, the market should not take the top of the previous rally.

Therefore, many stops are placed above the top of Wave 1.

The Wave 3 rally picks up steam and takes the top of Wave 1. As soon as the Wave 1 high is exceeded, the stops are taken out. Depending on the number of stops, gaps are left open. Gaps are a good indication of a Wave 3 in progress. After taking the stops out, the Wave 3 rally has caught the attention of traders.

The next sequence of events are as follows: Traders who were initially long from the bottom finally have something to cheer about. They might even decide to add positions.

The traders who were stopped out (after being upset for a while) decide the trend is up, and they decide to buy into the rally. All this sudden interest fuels the Wave 3 rally.

This is the time when the majority of the traders have decided that the trend is up.

Finally, all the buying frenzy dies down; Wave 3 comes to a halt.

Profit taking now begins to set in. Traders who were long from the lows decide to take profits. They have a good trade and start to protect profits.This causes a pullback in the prices that is called Wave 4.

Wave 2 was a vicious sell-off; Wave 4 is an orderly profit-taking decline.

While profit-taking is in progress, the majority of traders are still convinced the trend is up. They were either late in getting in on this rally, or they have been on the sideline.

They consider this profit-taking decline an excellent place to buy in and get even.

On the end of Wave 4, more buying sets in and the prices start to rally again.

The Wave 5 rally lacks the huge enthusiasm and strength found in the Wave 3 rally. The Wave 5 advance is caused by a small group of traders.

Although the prices make a new high above the top of Wave 3, the rate of power, or strength, inside the Wave 5 advance is very small when compared to the Wave 3 advance.

Finally, when this lackluster buying interest dies out, the market tops out and enters a new phase.

Elliott Wave Basics — Corrective Patterns
Corrections are very hard to master. Most Elliott traders make money during an impulse pattern and then lose it back during the corrective phase.

An impulse pattern consists of five waves. With the exception of the triangle, corrective patterns consist of 3 waves. An impulse pattern is always followed by a corrective pattern. Corrective patterns can be grouped into two different categories:

• Simple Correction (Zig-Zag)
• Complex Corrections (Flat, Irregular, Triangle)

Simple Correction (Zig-Zag)

There is only one pattern in a simple correction. This pattern is called a Zig-Zag correction. A Zig-Zag correction is a three-wave pattern where the Wave B does not retrace more than 75 percent of Wave A. Wave C will make new lows below the end of Wave A. The Wave A of a Zig-Zag correction always has a five-wave pattern. In the other two types of corrections (Flat and Irregular), Wave A has a three-wave pattern. Thus, if you can identify a five-wave pattern inside Wave A of any correction, you can then expect the correction to turn out as a Zig-Zag formation.

Fibonacci Ratios inside a Zig-Zag Correction

Wave B
Usually 50% of Wave A
Should not exceed 75% of Wave A
Wave C
either 1 x Wave A
or 1.62 x Wave A
or 2.62 x Wave A

A simple correction is commonly called a Zig-Zag correction.

Complex Corrections (Flat, Irregular, Triangle)
The complex correction group consists of 3 patterns:

• Flat
• Irregular
• Triangle

Flat Correction
In a Flat correction, the length of each wave is identical. After a five-wave impulse pattern, the market drops in Wave A. It then rallies in a Wave B to the previous high. Finally, the market drops one last time in Wave C to the previous Wave A low.

Irregular Correction
In this type of correction, Wave B makes a new high. The final Wave C may drop to the beginning of Wave A, or below it.

Fibonacci Ratios in
an Irregular Wave
Wave B = either 1.15 x
Wave A or 1.25 x Wave A
Wave C = either 1.62 x
Wave A or 2.62 x Wave A

Triangle Correction

In addition to the three-wave correction patterns, there is another pattern that appears time and time again. It is called the Triangle pattern. Unlike other triangle studies, the Elliott Wave Triangle approach designates five sub-waves of a triangle as A, B, C, D and E in sequence.

Triangles, by far, most commonly occur as fourth waves. One can sometimes see a triangle as the Wave B of a three-wave correction. Triangles are very tricky and confusing. One must study the pattern very carefully prior to taking action. Prices tend to shoot out of the triangle formation in a swift thrust.

When triangles occur in the fourth wave, the market thrusts out of the triangle in the same direction as Wave 3. When triangles occur in Wave Bs, the market thrusts out of the triangle in the same direction as the Wave A.

Alteration Rule

If Wave Two is a simple correction, expect
Wave Four to be a complex correction.
If Wave Two is a complex correction,
expect Wave Four to be a simple correction.

Monday, December 03, 2007

Jove in the Sixth and India decelerates !

If India is to keep her 9% GDP growth, Power sector has to grow by 12%. The growth of Power is not upto the expected standards.

The rise of the price of oil is another deterrent factor.

When we survey India's progress, India has decelerated in almost all the sectors. The expected $ 160 billion exports may not be met. Problems galore for the Indian economy.

Despite all this, capital flows to India are continuing and the Sensex is at a healty 19.6 K levels. Today the total transaction was more than 84000 crores. Trimex is investing 5 billion dollars and developing 50 million sq feet of commercial space. So is DLF with a 3 billion dollar investment. ADB is investing 3 b and Coke is investing 250 million !

The subprime crisis in the US and the rising price of Crude are disconcerting factors. Hope they will not affect the Stock Market !

The Remarkable W.D. Gann

Article by John L. Gann Jr.,
grandson of W.D. Gann


If you had been a businessman traveling across Texas in 1891, you might have bought a newspaper and a couple of cigars from a tall, lanky 13-year-old selling them on your train. And as you talked with your fellow travelers about investments, you might have noticed the youth eavesdropping intently on your conversation.

If you had asked him, the boy might have told you his name was Willy and, yes, he was interested in commodities. His dad was a farmer in Angelina County, and just about everyone he knew was as well. They were all concerned about the price their cotton would bring. And had you inquired whether young Willy also wanted to till the East Texas soil when he got older, he might have said no, he didn't think so: he wanted to be a businessman. "Well, good luck, young Willy," you might have said. "Maybe you'll have your own business some day, maybe you'll even be famous. Who knows? No one can predict the future." The young eavesdropper going up and down the aisles of that train was William Delbert Gann. Was it really true, he might have wondered, that no one can predict the future?

W. D Gann was born on a farm some seven miles outside of Lufkin, Texas, on June 6, 1878. He was the firstborn of 11 children two girls and eight boys of Sam Houston Gann and Susan R. Gann. The Ganns lived in a too small house with no indoor plumbing and with not much of anything else. They were poor, and young Willy walked the seven miles into Lufkin for three years to go to school.

But the work he could do on the farm was more important to the family, so W. D. never even graduated from grammar school or attended high school. As the eldest boy, he had a special responsibility, and those years working on the farm may have been the beginning of his lifelong dedication to hard work. His religious upbringing as a Baptist may also have had something to do with it, for his faith stayed with him throughout his life as well.

A few years later W.D. worked in a brokerage in Texarkana and attended business school at night. He married Rena May Smith, and two daughters, Macie and Nora, were born in the first few years of the new twentieth century. W.D. made the fateful move to New York City in 1903 at the age of 25.

Working most likely at a major Wall Street brokerage, W.D. made other changes in his life as well. He divorced his Texas bride and in 1908 at the age of 30 married a 19-year-old colleen named Sarah Hannify. W.D. and Sadie had two children--Velma, born in 1909 and W.D.'s only son, John, who arrived six years later. In addition, Macie and Nora came to live with their father and were raised in New York by their Irish stepmother.

During the First World War the family moved from Manhattan to Brooklyn first to Bay Ridge, then to Flatbush. W. D. reportedly predicted the November 9, 1918 abdication of the Kaiser and the end of the war. But it was after the armistice that the fortunes of the Ganns of Brooklyn took their most dramatic turn. The W. D. that traders know today emerged in the Roaring Twenties.

In 1919 at the age of 41, W. D. Gann quit his job and went out on his own. He spent the rest of his life building his own business. He began publishing a daily market letter, the Supply and Demand Letter. The letter covered both stocks and commodities and provided its readers with annual forecasts. Forecasting was an activity with which W.D. had become fascinated. The young business prospered, and three years later W.D. Gann became a homeowner, buying a small house on Fenimore Street in his adopted home of Brooklyn. The market letter led to more ambitious publishing. In 1924 W.D.'s first book, Truth of the Stock Tape , was published.

A pioneering work on chart reading, it is still regarded by some as the best book ever written on the subject. An individualist and ambitious hard worker, W.D. self-published Truth through his new Financial Guardian Publishing Company. He personally wrote his own ads to market it and negotiated with bookstores to carry it. 'Truth was praised by The Wall Street Journal and sold well for years. Some consider it the best of his many books. For a first effort it was a significant accomplishment.

His market forecasts during the twenties were reportedly 85 percent accurate. But W. D. didn't confine his prognostications to prices. It was widely reported he predicted the elections of Wilson and Harding and, indeed, of every president since 1904. At age 49, W. D. Gann wrote what is perhaps his most unusual book, the 1927 Tunnel Through the Air . It is a prophetic work of fiction, not a genre every Wall Street analyst dabbles in. But W.D. Gann was one of a kind. The book is perhaps best known for having predicted that attack on the United States by Japan and an air war between the two powers. Though Tunnel may have had little to offer investors, it was well-publicized and enhanced its author's growing reputation.

The market in the 1920's seemed to be defying the law of gravity, but W.D. Gann didn't think it could last forever. In his forecast for 1929, he predicted the market would hit new highs until early April, then experience a sharp break, then resume with new highs until September 3. Then it would top and afterward would come the biggest market crash in its history. We all know what happened.

W. D. Gann prospered during the Depression, which he predicted would end in 1932. He acquired seats on various commodities exchanges, traded for his own account, wrote Wall Street Stock Selector in 1930 and New Stock Trend Detector in 1936. He continued making remarkably accurate forecasts as well as some less successful ones like the electoral defeat of FDR. He developed a new interest in investing in Florida real estate. He became a small-scale home-builder in Miami as well as the owner of a block of stores on the Tamiami Trail.

He also became airborne. He bought a plane in 1932 so he could fly over crop areas making observations to use in his forecasts. He hired Elinor Smith, a noted 21-year-old aviator, to fly him around. The novelty of his high-flying research--W.D. was the first to study markets in this way--helped keep him in the spotlight.

W. D. Gann's son John Gann also went into the securities business in 1936 at the age of 21. A year later he went to work for his dad until in 1941 his Uncle Sam announced he had plans for the young man in Europe. Back in Brooklyn, Sadie had health problems for some time and died at age 53 in 1942. Then after 20 years on Fenimore Street, an aging W.D. Gann moved to Miami for reasons both of health and personal preference. His How to make Profits in Commodities came out the same year.

He kept his business in New York, relying on his long-time personal secretary. In Miami he continued studying the market, trading, real estate investing, and instructing students. The next year at the age of 65, when most are thinking retirement, W.D. decided he'd get married and did, to a much younger woman.

Son John worked on W. D. Gann's business in New York briefly after the war, then left to pursue his own interests in the Industry. The two differed in their approach to the market. John L. Gann pursued a successful lifetime career with Wall Street's major brokerage housed until his passing in 1984.

The post-war years saw Gann start taking it easier. He published 45 Years in Wall Street in 1949. He sold his business to Joseph Lederer, a fellow student of the market. Around the same time he also separately sold the rights to all his books to Edward Lambert. He continued, however, to study, teach, and trade. He was made an honorary member of the International Mark Twain Society in 1950.

In 1954 he suffered a heart attack. A year later advanced stomach cancer was discovered. The doctors operated, but W. D. Gann failed to recover. He died in June, 1955, at the age of 77. He was buried with his second wife in Green-Wood Cemetery in Brooklyn at a location that looks toward Wall Street. It was a fitting location since he had studied the Street all his adult life.

In 1995, 40 years after his passing, William D. Gann is still talked about, written about, and studied avidly. It's an extraordinary testimonial to his work and one that even W.D. couldn't have predicted. Or could he? What lessons might there be in this remarkable man's life?

First is an affirmation of the American Dream. William Delbert Gann of Lufkin, Texas, started with nothing. He and his family had no money, no education, and no prospects. But less than 40-years after overhearing businessmen talk on railroad cars in Texas, W.D. Gann was known around the world.

Second, hard work pays. W. D. Gann rose early, worked late, and approached his business with great energy. Virtually all his education was self-administered. This teacher, writer, and prescient forecaster had a third-grade formal education. But he never stopped reading.

Third, unconventional thinking may have its merits. W.D. was intellectually curious to an extraordinary degree. He was unafraid of unorthodox ideas, whether in finance or in other areas of life. He wasn't always right--none of us are--but he dared to pursue a better idea.

Fourth, there may be something to that clean living business after all. A conservative Baptist, W.D. didn't smoke, drink, play cards, or dance. He was serious in demeanor and a conservative dresser, although he lightened up somewhat in his later years. He respected the value of a dollar and was prudent in his personal spending. Not every internationally acclaimed seer would continue to live in a modest house in Brooklyn.

Fifth, faith helps. W. D. Gann studied the Bible all his life. It was his Book of Books. His own last book, The Magic Word , published in 1950, strongly reflects this devotion.

And finally, the only lesson for traders I will venture to offer is W.D. Gann never stopped studying the market. Even after his forecasts happened, even after he achieved international acclaim. Although he believed in cycles, he also knew that markets are always changing and that decisions must be made based on today's conditions, not yesterday's.

W.D. might have rested on his laurels. But he kept studying and seeking greater understanding. If he couldn't afford to stop, can any trader afford to do so?

John L. Gann, Jr., is the grandson of William D. Gann. Most of the information in this article comes from W.D. Gann's son, the late John L. Gann, to whom this article is dedicated. The information herein is believed to be correct but no assurance of accuracy is offered.

Ticker and Investment Digest - 1909 article detailing the amazing trading techniques of Mr. Gann
The Morning Telegraph - A 1922 article on Mr. Gann
Gann's 1929 Annual Stock Market Forecast

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Homespun Wisdom from the 'Oracle of Omaha'

To prepare this week's cover story, senior writer Anthony Bianco got an opportunity most investors -- not to mention journalists -- would trade their eyeteeth for: a chance to spend four days at Warren Buffett's side. Bianco flew to Europe with Buffett on his much-loved private jet and then traveled with him through three countries as Buffett promoted recent Berkshire Hathaway (BRK.A) acquisition, Executive Jet Aviation.

The words of wisdom that follow have been culled from Bianco's nearly 40 pages of notes taken during his own private conversations with Buffett as well as at speaking engagements and press conferences. Clear themes emerge: Buffett insists on buying businesses he understands. He doesn't like to sell his holdings. He avoids Internet and technology stocks. And he feels very lucky to be born at a time when his greatest strength -- the ability to "allocate capital" -- would be so appreciated.

Although Buffett's experience managing a company with $124 billion in assets is unique, his brand of homespun wisdom can serve all investors evaluating stocks and mutual funds for their own portfolios.

On being a good investor:

"I'm a better businessman because I am an investor and a better investor because I am a businessman. If you have the mentality of both, it aids you in each field."

"I was born at the right time and place, where the ability to allocate capital really counts. I'm adapted to this society. I won the ovarian lottery. I got the ball that said, 'capital allocator -- United States.'"

"Success in investing doesn't correlate with I.Q. once you're above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing."

On identifying good companies:

"We don't do due diligence or go out kicking tires. It doesn't matter. What matters is understanding the competitive dynamics of a business. We can't be taken by a guy with a sales pitch... What really counts is the presence of a competitive advantage. You want a business with a big castle and a moat around it, and you want that moat to widen over time. Coke and Kodak both had marvelous moats 20 or 25 years ago. Kodak's has narrowed, while Coke has been building its moat. We want an economic castle."

"The best thing that happens to us is when a great company gets into temporary trouble... We want to buy them when they're on the operating table."

On the size of his stock portfolio:

"If I was running $1 million today, or $10 million for that matter, I'd be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I've ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that."

"The universe I can't play in [i.e., small companies] has become more attractive than the universe I can play in [that of large companies]. I have to look for elephants. It may be that the elephants are not as attractive as the mosquitoes. But that is the universe I must live in."

On selling stocks:

"I don't like to sell. We buy everything with the idea that we will hold them forever... That's the kind of shareholder I want with me in Berkshire. I've never had a target price or a target holding period on a stock. And I have enormous reluctance to sell our wholly owned businesses under almost any circumstances."

"Up until a few years ago, we sold things to buy more because I ran out of money. I had more ideas than money. Now I have more money than ideas."

On holding cash:

"Today we have $15 billion in cash. Do I like getting 5% on it? No. But I like the $15 billion, and I don't want to put it in something that's not going to give it back and then some. The nature of markets is that at times they offer extraordinary values and at other times you have to have the discipline to wait."

"If you think about it [i.e., the markets], you get these huge swings in valuations. It's the ideal business arrangement, as long as you don't go crazy. The 1970s were unbelievable. The world wasn't going to end, but businesses were being given away. Human nature has not changed. People will always behave in a manic-depressive way over time. They will offer great values to you."

On the Internet's impact on business:

"The Internet as a phenomenon is just huge. That much I understand. I just don't know how to make money at it... I don't try to profit from the Internet. But I do want to understand the damage it can do to an established business. Our approach is very much profiting from lack of change rather than from change. With Wrigley chewing gum, it's the lack of change that appeals to me. I don't think it is going to be hurt by the Internet. That's the kind of business I like."

On Internet stock valuations:

"There will be enormous amounts of disappointment. The numbers of people buying these stocks to hold them are very few. I think 98% of them are being bought by people because they are going up. If these stocks stop going up, they'll get out... Very few of these companies will be big winners in the long run. It's the nature of capitalism not to get a lot of winners. You get a few."

"With Coke I can come up with a very rational figure for the cash it will generate in the future. But with the top 10 Internet companies, how much cash will they produce over the next 25 years? If you say you don't know, then you don't know what it is worth and you are speculating, not investing. All I know is that I don't know, and if I don't know, I don't invest."

On technology stocks:

"How do you beat Bobby Fischer? You play him at any game but chess. I try to stay in games where I have an edge, and I never will in technology investing."

"I do admire the management of Intel and Microsoft, but I don't have a fix on where they will be in 10 years. I think it is harder to get a fix on those kinds of businesses. I don't know how to value them. And if I started playing around without knowing how to value a company, I might as well buy lottery tickets."

On economics:

"I am not a macro guy. I don't think about it. If Alan Greenspan is whispering in one ear and Bob Rubin in the other, I don't care at all. I'm watching the businesses."

"I don't read economic forecasts. I don't read the funny papers."

On mergers:

"I am very skeptical of most big mergers. The assumptions made tend to be very optimistic. People want to do deals -- you start with that. There's a lot of Darwin going on in companies. And people who get to the top want action. I've been on 19 boards in my life, and I'd say the great majority of deals that I've seen were not very good deals."

On PaineWebber analyst Alice Schroeder's research showing that Berkshire Hathaway is selling at a sizable discount:

"I think she did a very thorough job. It seems to me she varied from the standard approach of securities analysts. But I don't comment on the value. I don't want anybody to come into Berkshire based on what I'm saying about the value of the stock. Our goal is to have the stock sell as close to the intrinsic value as possible, so that people come in and go out on the same basis.

On Coca-Cola (KO):

"I have a very strong feeling that Coca-Cola will dominate a much larger soft drink business 10 years from now than today. But in terms of the short run, I have no idea what will happen."

On daytraders and other speculators:

"We try to communicate in a way that turns people off who have a crazy approach to stocks. It matters as much who you repel as who you attract. If we were sizably owned by day traders, we'd have crazy valuations in no time -- and in both directions."

On past mistakes:

"My biggest lost opportunity was probably Freddie Mac. We owned a savings and loan, and that entitled us to buy 1% of Freddie Mac stock when it first came out. We should have bought 100 S&Ls and loaded up on Freddie Mac. What was I doing? I was sucking my thumb."

"The biggest cause of that kind of mistake [here, failing to buy more Citicorp in 1991], is that I stop buying when the stock starts moving up. I get so enamored of how cheap it was when I started buying that I stop. I have too often folded my tent. I believe in loading up on these things. There wasn't anyone who thought Citibank was going to disappear. And there wasn't anyone who thought it wasn't cheap at $9 a share."

"We've lost very little on errors of commission. The errors of omission are the big ones."

Edited by Amey Stone

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The Magic of Compounding Part II

Learn the secrets of compounding. These are the same methods used by warren buffett to create the world's greatest investing fortune. Read it, study it, MASTER it.

Enlarge ImageThe New Slant

Really understanding compounding will make all the difference in investing. I believe that Warren Buffett, the world's greatest investor, is hardwired to think geometrically. He is rich beyond dreams because he totally gets the magic of compounding, and he executes on the concept. I am going to get these numbers wrong because I'm doing them from memory but it doesn't matter. You'll get the concept. Buffett started a partnership way back when. He had a number of limited partners invest with him, and he took 20% of the gains. In the late 1960s he terminated the partnership with his famous letter, "When you no longer understand the way the game is played, it's time to leave the game." I'm paraphrasing, even though it's in quotes.

Buffet took about $100 million out of that first partnership for himself, so he was working with $100 million, keep that in mind. In 1974 when the bear market bottomed, it might have been early 1975, he started another rise...he took over Berkshire Hathaway. Buffet, since the 1970's, has been getting a compounded (remember that means exponential) growth rate of about 22 to 24%.

This is where I introduce you to the cousin of the Magic of Compounding, which is called the Rule of 72. With the Rule of 72 you can calculate how long it will take you to double your money at any given rate of return. OK? Let’s take an example. If you're earning 12% on your money and you want to know how long it will take to double it (we're compounding, remember?) divide 72 by 12, and your answer is 6. It will take 6 years to double your money. Let’s do another one. If you're getting 6% on your money, divide 72 by 6 and you'll see that it will take 12 years to double. If you're getting 9%, it's 72 divided by 9, or 8 years to double up.

As for Warren Buffett, he's getting 22% on his money. This means you divide 72 by 22 and gee, in only 3.27 years, or every 3 years and 4 months, he doubles his money. Since he's been at it about 35 years with that $100 million he had to play with, he's doubled his original $100 million almost nine times. You get that by taking 35 years and dividing by a double every 3 years and 4 months. It equals 10.70, or let's go with nine doubles to adjust for a rate of compounding that is varying. The key point is he's not making 9 times his money with the $100 million, that would be an arithmetic progression that would give him $900 million. He's making nine doubles, a geometric or compounded progression.

Let's see how that works.
Warren Buffet's Geometric Progression
Starting Dollar Amount: $100 million

Time Periods Involved: Nine 3 year and 4 month periods

Period Time Taken Compounded Gain
0 Starting Point $100,000,000
1 3 years, 4 months later $200,000,000
2 6 years, 8 months later $400,000,000
3 10 years later $800,000,000
4 13 years, 4 months later $1,600,000,000
5 16 years, 8 months later $3,200,000,000
6 20 years later $6,400,000,000
7 23 years, 4 months later $12,800,000,000
8 26 years, 8 months later $25,600,000,000
9 30 years later $51,200,000,000

I believe Buffet is worth about $47 billion. It doesn't matter, he is somewhere in his ninth double. This is the magic of compounding! Also, he never sells. This means his money is doubling every three years and four months with no tax consequences. He gets taxed only when he sells. Under normal conditions, the money compounds until he dies, then it's taxed at a capital gains rate in the far distant future. In Buffett’s case, he’s giving most of his wealth to the Gates’ foundation to benefit society.

Teach your children to live a balanced life, and also help them master this concept and you will have very happy and very rich children. In stocks I show you how to make money at the bottom by buying depressed securities that are going to come right back, making you a fortune as they rocket off the bottom. In the future I will also show you how to make money with the Warren Buffet concept, or classical Graham and Dodd analysis. In the mean time, good luck with understanding the magic of compounding and good luck with

Start thinking exponentially, Make Money Now
By Richard Stoyeck
Published: 9/12/2006

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The Magic of compounding-Part I

Learn the secrets of compounding. These are the same methods used by warren buffett to create the world's greatest investing fortune. Read it, study it, MASTER it.

Enlarge ImageSome of you know about this, some of you don't. Either way I'm going to give you the basics of compounding, plus a couple of new slants on the concept. I suggest you read The Magic of Compounding not just once, but several times. If you have children, print this write-up, and give it to them to read. If they master this concept they will become rich.

The Basics

Compounding describes how numbers, or money, can grow. Numbers can grow in an arithmetic progression, for example 2,4,6,8,10,12 or 3,6,9,12,15,18, where one unit is added on at each step in the progression and that action provides the growth, or, numbers can grow exponentially, 2,4,8,16,32,64. In an exponential progression the increase comes by doubling the number at each step in the progression. See the difference? This is compounding.

Now the really amazing part, the magic, comes when you see how fast compounding will make money grow. And guess what! That's right, I've got a little game to play with you, a little story to tell, which will illustrate this principle. This puzzle is as old as J.P. Morgan's moustache comb, so if you've already been schooled in compounding you have heard it before. But didn't I tell you to read this section several times? OK, then, solve the puzzle with us once more while I tell it for the first time to the children for whom "The Magic of Compounding" has just been printed out.

The Puzzle

I'm a wealthy and generous man, and I want to hire you to work for me for one month. Since I'm also flexible, I give you a choice: you can choose to be paid the entire month's salary up front on the first day of your employment, or, I will pay you 1 cent the first day. After that I'll double your pay every day for the rest of the month, but you won't get the money until the last day of the month. So on the first day you'll work 8 whole hours, and you'll have 1 cent coming to you. But on the second day you'll earn 2 cents. Hold on, it gets better. On the 3rd you'll have earned 4 cents, the day after that 8 cents and so on. Saturdays and Sundays are included just to give you a better chance. Oh, by the way, if you take your pay all at once on the first day I'll give you a million bucks ($1,000,000.00) cash. Seems like an easy choice, doesn't it?

Well, you decide for yourself. Now let's look at how much the fellows who picked the penny-a-day plan are going to have at month's end. Remember, on the one hand $1,000,000.00. On the other hand you get a penny the first day, two cents on the second day, 4 cents on the 3rd day, and 16 cents on the 5thday. If you keep working the numbers by the 15th day, you are up to $163.84. By the 18th day, you have cracked the $1,000 dollar mark coming in with $1310.72.

At this point you have to start thinking to yourself that it has taken 18 days, and I am only at $1300 and change. Was I better off taking the million dollars like the other day offered and taking a one million dollar lump sum payment? Maybe you were let’s see what happens. Keep in mind, we are continuing to double our money every day and we have 12 days to go.

On the 20th day, you are up to $5,242.88. Your numbers quickly move up from here on successive days:
Day 21 $10,485.76
Day 22 $20,971.52
Day 23 $41,943.04
Day 24 $83,886.08
Day 25 $167,772.16
Day 26 $335,544.32

By the way, did any of you ask me what month of the year we're in? Is it February with 28 days, or leap year with 29 days, or September with 30 days, or December with 31 days? You should realize that it's going to make a difference. Do you want the million dollars? Ask your kids again which they would choose?

Day 27 $671,088.64
Day 28 $1,342,177.28
Day 29 $2,684,354.56
Day 30 $5,368,254.56
Day 31 $10,737,418.24

If you work for me in September with 30 days you make over $5,000,000. In December it's over $10,000,000!

I have never met the child who didn't leap at the $1,000,000 on day one. This is because the human mind thinks arithmetically, not exponentially. You might say that we are hardwired to think in this linear fashion. The software in our brains compels us to think about progressions as being simple arithmetic ones. Luckily though, how we think about things, our prejudices, our attitudes, and our mindsets, can all be changed and worked with. We can update the software! We can consciously change the way we think about numbers, money and investing by absorbing new information, namely, that when you make your money compound you can get rich sooner rather than later.

Start thinking exponentially, Make Money Now
By Richard Stoyeck
Published: 9/12/2006

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