There is a famous saying in the stock market circles, it goes like this - "You know its time to get out of the market when the shoe shine boy starts giving you hot tips". We heard and read and probably experienced this many times, but have we learnt anything. Its always the "hot tips" that get to us, the "quick rich schemes", the envy and greed - two very basic human emotions, but which work totally against the better judgement of an investor.

Once you have overcome these, or rather have them under control, the only thing you really need to be a smart investor, is use your most important faculty - "common sense". Makes no sense, does it? After all people have to enroll in courses, be able to decipher balance sheets, know sophisticated formulas, have their ear to the ground to get information on a company, to become smart investors.

Well not really - Basically who is a smart investor - one who makes money, isn't it? I remember reading a story about a man who juggled with his portfolio, formulas, charts etc, only to end up with returns equivalent to risk free government securities. Also, he took great pleasure in scoffing at his spouse who had just returned from shopping and told him about this great product called L'eggs(stockings) which were selling like hot cakes in the supermarket. Perhaps they could pick up shares of the company that made them? But no sir, not only did he scoff at her, he found her suggestion downright ridiculous. But  he had the grace to look shamefaced, when at the end of the year, the price of scrip (making L'eggs) had appreciated considerably. 

So what you really need is common sense and a clear head.

The first and foremost thing about investing is to set a realistic measurable goal. It may be in terms of beating a particular index,
percentage appreciation p.a., or expressed any which way, but it should be measurable. Also it should be realistic. If software stocks are going through the roof, taking the index up and away with them, it doesn't mean that your portfolio will also go through the roof. A careful analysis of which stage have you entered the market vis-a-vis when the bull run began, will help to scale down your expectations. It is also important to set down a time frame whether in number of years, months or even weeks.

Next is to risk profile yourself. Of course "Kaun Nahin Banna chaahega crorepati!!" But remember the higher the upside, the lower the down side. So profile your riskiness into high, low and medium and allot your funds likewise. A good measure of riskiness is in the terms of return that you expect-equal to the market, below the market but above risk free government bonds and finally the ten baggers or above the market returns.

Being realistic in setting your goals and defining your risk profile is very important, because it is the indicator which tells you when to
exit from the market/ stock. And that my dear friend is the bane of all investors-not knowing when to exit! Whether it is lethargy or greed or plain sentiment, an investor cannot afford to ignore the exit timing. Other than your own internal targets, exit time is dictated by overall market scenario, specific information or developments relating to that industry/company etc. Exit is also dictated by the liquidity of a particular scrip. So choose stocks which have a good market capitalization so that when you want to sell, there is enough motion in the scrip for you to do so.

This also means that one cannot invest and then ignore. You have to  keep track of the scrips you have invested in. And not only that you have analyze the news and react to it. That is what a hands on investor has to do.

Because you have to track the scrips in your stable, it makes sense not to have your hands too full. Include only that many number of scrips in your portfolio which you can track and manage. Say for a portfolio of the size Rs. 10 lac, 10 scrips should be the limit. Now once you have set the parameters, the identification of the scrips is fairly easy.

Once common sense way of dealing with this is to think about investing as if you were researching a prospective groom for your daughter or a job for your son. Now obviously the first and foremost thing will be to see the area or rather industry/sector in which to invest. A pointer for this is the sectoral allocation in the sensex. If you want to be a bit more daring then include a couple of industries, which in your opinion are sunrise industries. But definition of sunrise industries should not be based on tips or hot news or rumors. Keep the common sense antenna working and read general magazines also, they give a lot of pointers to what is moving up or down in the economy. For instance an advertising blitz by a cosmetic manufacturer in a magazine can lead to thought of how is the company affording this, is there a change in the management, are the products being accepted in the market , should one look at the financials etc. etc.

Once you have identified the sectors, only look at the top three or five companies. So every one does that - it is boring, so predictable, but then that is what earns you the bucks. So don't get too adventurous and stick to the biggest and the best. Then of course is the track record of the management, its reputation of good practices, past success and failures, its ability to adapt, execute new ideas, its financial philosophies and finally its shareholder relations, which should be clean and transparent and communicative.

Then comes the task of narrowing down on a company. Here take a macro view of the company and its performance and place in the industry should be researched. A company's competitive position, its bargaining power with buyers and suppliers, threat of   substitution, competition and changes in industry structure, government policy, global competitiveness, cost advantages, operating efficiencies, quality of the products all go into positioning a company in the competitive arena. Also a managements long term view of investing in tangibles like brands, distribution networks etc, all go to increasing valuations and competitive position in the long run.
                    
Next comes the nitty gritty of the numbers. The company should of course be making cash profits or at least project to make cash profits in the next 3-5 years. The recent dot com gush would seem to mock this principle, but then see how the dot.com valuation shave fallen from dizzying heights. Also exposure to these kind of start up industries would depend on your risk profile as defined earlier. Companies should have operating cash flows higher than their requirement of cash for capital expenditure and investments only merit investments.

Valuations in terms of PE's and newer ratios like EVA etc. should be looked at also but they are subjective tools which represent the past. It is the future that concerns you. And they should be used in conjunction with the industry background and company position and so on. They cannot make the investment decision they should be interpreted in the right light and with the right amount of weights attached so as to form a part of the decision making process.

So armed with these pearls of wisdom and your common sense antenna, one can be a smart investor. Anther handy tip is to research a scrip the way you would research a groom for your child - you can't be too careless can you?

Aru Srivastava

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