Renowned entrepreneur Sabeer Bhatia once said, "I learnt nothing from the success of Hotmail, but I learnt everything from the failure of my second venture Aarzoo!" similarly, when the markets were booming for the past few years, investors got intoxicated with high spirits of success. Now that the market has turned volatile, we have become introspective. The panel discussion on the topic "The Principles of Investing Right" brought out some valuable insights from the thought leaders in the market.

The three eminent panellists were:

* Chenraj Jain, Chairman of the Jain Group of Institutions and eminent educationist

* Abdul Gaffar Sait, CEO of Basket Option Pvt. Ltd, a leading wealth management company

* Dipan Mehta, veteran portfolio manager & broker with 20 years experience, often seen on business TV channels and featured on the ‘Tycoons of Dalal Street'

Excerpts from the Q and A session:

Q: What are the key principles that investors need to keep in mind?

Dipan - There is such madness in the market, it is now time for us to go back to the basics and relearn them to prevent mistakes.

Warren Buffett's principles of investment are good guidelines. He calls it his ‘area of competence', which means he invests only in what he understands. There is a story about a wise man giving guidance to a widow when she asked about how to save for her daughter's wedding. The wise man told her to buy gold since that is what she understands and it is useful as well.  Remember, there is a lot of luck involved in investment. So if you feel you are lucky in real estate, continue with that rather than go against your destiny.

Whether it is a short term or long term investment, whether you have to do the hard work or your advisor does it, the crucial issue is to make a well thought out decision. Make an effort to educate yourself on various investment opportunities or choose an advisor and put your complete faith. Any forecast by a lawyer, an investor, an astrologer is bound to go right or wrong and there is no assurance. The law of averages says that you stick to one person.

Abdul - One simple rule we could adopt is "Jitni Chaddar hain, utna hi pair failao", meaning stay within your limits. Any stock market crash happens when we have invested more than we can afford. When I started my advisory services firm, I began with futures trading in coffee on Chicago Board of Trade. But my first trade was a huge failure, which taught me that you cannot leverage more than your limits. Risk taking is great but remember that when things go wrong you should not lose all you have.

If you have unrealistic expectations, disappointment is bound to happen. I would also blame the crash on the asset managers and advisers who sold the wrong products to ignorant investors. Advisers insist on us to invest in a booming market and hold back when it is going down. How does that add value? Blaming them will not solve our problems; we buyers need to be careful about our investments. We should be more research oriented and keep away from all kinds of free tips and advice.

Chenraj - Always invest in whatever you are comfortable with and for a long term. Gold, diamonds and real estate are some of my safe bets which give assured growth.

Comment on the school of thought that says put all your eggs in one basket rather than diversifying your investments....

Dipan - It is the same thought process followed by Warren Buffett and George Soros. I am completely in tune with that thought process. Though it is excellent, it is very difficult to practice. You need to have a particular aptitude or temperament to be able to choose that one perfect asset and go after it. Are you courageous enough to put all your money on one particular asset class? If you ask me, even I don't have that courage; very few people have it and they are the billionaires! If it does not work, the downside is going to be too heavy to bear.

Abdul - What works for one person as a mantra, may not work for you. For instance, a friend of mine found the China is the most happening place to do business and he decided to pack up his business here and went there. Once in China the realization hit him that he does not even know the language! Why did Rakesh Jhunjhunwalla, the star broker invest in 30-40 stocks to earn his money; he could have chosen just one or two to get where he is today.

Q: Does higher the risk and higher the gain work as a good strategy?

Chenraj - That is a good strategy but the chances of losing everything is high. Some amount of luck is very essential in that strategy. High risks and high gains strategy works in business but rarely it works in stocks. In business, you understand your domain very well based on which you can take calculated risks. I have only seen individual investors suffering and rarely have I seen them rejoicing. Rarely do you find one company which rises like a meteor in a short time and gives great returns for all its investors.

Dipan - This strategy in the stock market is just about betting on an event. Even the best of the analysts have failed at certain times to judge the market timing.

Q: Would you advice a person who owns real estate to mortgage that property, raise loans to buy other properties?

Chenraj - It is not advisable to invest in metro cities in India now since they are all overheated. Apart from these, it depends on the location. For instance, Kolar Gold Fields was once a happening town, but now it has stagnated, while the neighbouring Hoskote has flourished with several industries coming up. It depends on what infrastructural facility is available there to boost the land value. If an SEZ or an airport is coming up nearby, automatically prices will rise. Nagpur is one such city which is growing rapidly and will be a hot destination in a few years. Tier II cities are also heating up and now we need to look at Tier III towns. Land regulations are quite confusing and you need to be foolhardy to get through them. If you have opportunity to buy into a gated community, then it is a good option.

Q: Where do see the Sensex heading three to six years down the line?

Abdul - If we take a logical approach, we see that corporate firms are growing at 15-20% every year and the Sensex is the cumulative reflection of all that growth. So logically, the Sensex should grow at that same rate. However, from now on, you will see a stock specific rally or fall or sector specific rally or fall.

Dipan - Due to the media hype, everyone is obsessed with the Sensex. You do not invest on the Sensex; rather you invest on individual stocks. Instead of wasting your time on studying the Sensex, if you spend the time on understanding a particular stock or a sector, you will be wealthier. Don't get into the macro picture; you will always find that there are some companies which will go up irrespective of where the market might be heading to. The challenge is to get hold of those stocks.

Q: Can we get an idea about the market situation by looking at the P/E ratio?

Dipan - P/E Ratio or Price-to-Earnings Ratio is the stock price divided by the earnings per share. As a thumb rule, the Price/Earnings to Growth (PEG) should be of 0.25-0.3 levels to be considered as good investment. It is the P/E multiple divided by the growth of the company. If the company you are considering is growing at 30% and it has a P/E multiples of 10 times, then it is a good buy. In a bull market, the PEG will go to 1.1-1.2, then as a disciplined investor, you will not be able to find much opportunity to invest. Obviously in a bear market, you will find a lot of stocks at a good PEG level.

Q: How do we arrive at the growth rate of a particular company?

Dipan - Growth rate is very subjective which you need to derive from the past performance. Looking at the company and the industry prospects, you need to make a well researched guess. For example, Educomp, which is going at a P/E multiple of 50, but the company has shown 120% growth in the last two years. Soon the growth will come down to realistic levels of 50-60%, for which the P/E multiple is fair enough.

You take the example of smaller IT companies like Mastek which offers a guidance of 30% growth and a P/E multiple of 7. The company has given a dividend yield of 2% and has cash on the books of 20% of the market price. These are things that indicate that there is an opportunity here. There are other issues to look at such as the management capability, entry barriers, event risks, etc. There are those scary situations where due to an event risk, the growth rate plunges down. Interacting with the management and with some industry experts, we can arrive at a sustainable growth rate of that industry.

Q: Why are futures and options branded as too risky while they are as safe as stock trading?

Abdul - They are surely much more risky than stock trading. You have a misconception that in futures, the profit margins are limited. If your stock falls by Rs.10, you need to pay the difference of Rs.10, which means 100% loss. When the markets are volatile, the margin money increases.

Dipan - Do you know that Warren Buffett classifies futures and options as weapons of mass destruction! Another way of understanding it is when you invest in a stock, you are investing on quality of the company; whereas when you invest in futures, you are investing on the direction of the market.

They were speaking at a Panel Discussion organized by Businessgyan and TASMAC on the topic ‘The Principles Of Investing Right'.  Balaji Pasumarthy, Chief Catalyst of Businessgyan was the panel Moderator. 

Compiled by Levin Lawrence for Businessgyan

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