Weekend Show: Root of the matter

Published in Corporate Dossier, Economic Times, Oct 31, 2008
Author: Devdutt Patnaik

The water from a river that flowed on the eastern edge of the kingdom was not reaching a farm. So the farmer went to the king and the king said, Build a wider canal. This was done, but still the water did not reach the farm. If anything, the flow dried up much earlier than before. Maybe, said the old minister, You should consider connecting the farm to the other river that flows on the western edge of the kingdom. The farmer followed the minister’s advice and sure enough water flowed effortlessly to his farm. What was the difference? It is the source, sir, not the canal, explained the minister. The eastern river is rain-fed while the western river is snow-fed. The former has a very limited reservoir; the latter has an abundant reservoir. The impact of irrigation depends not so much on the channel as much on the source.

The story made sense to Shekhar after his field trip to Satara. Eight months had passed since the new sales strategy had been rolled out. Satara was a very small market and Shekhar wanted to see the impact of the new strategy at the grassroots level. He was horrified to find that the team had not implemented the new strategy at all; they were still using the strategy that had been declared a failure a year earlier. But the new strategy was so clearly communicated in my presentation at the sales conference and in my email updates thereafter! he told the local manager. The manager looked at Shekhar and explained, rather sheepishly, Sir, who really listens to presentations and who actually reads emails? Shekhar felt like a fool.

On returning to Mumbai, Shekhar informed the Sales Director of the situation. He then declared his plan of extensively touring small markets and enforcing the new strategy. The Sales Director said, You are wasting time and resources widening the canal. Focus on the source, instead.  The Sales Director then narrated the story of the kingdom with a rain-fed river in the east and a snow-fed river in the west. You created a rain-fed river when you rolled out the strategy. Your presentation was good, very logical and systematic. It helped explain the sound foundation of the strategy to the management but it did not connect emotionally with the sales force. There was no attempt made to sell it to the sales managers. Your presentation lacked drama. Your words did not inspire. They did not feel any need to change from the old ways. So they went back and carried on as before. Now, you are paying the price. Instead of wasting time building canals for a rain-fed river, focus on creating a snow-fed source. The Sales Director then told Shekhar how this could be done.
At the next annual sales conference, everyone was invited to a resort away from the city. Everyone had to come dressed in formals. Everyone was expected to register. Everyone got a conference kit and a name tag. There was a powerful audio visual presentation explaining how the new strategy came into being.

The background music was grand. Trumpets were blown when the sales performance was announced and drums were beaten to a crescendo when the target for the following year was presented. Break away groups were formed to study and discuss the new strategy and the change in tactics. Opinions of every sales person were documented carefully. The final document of strategy and tactic was presented by Shekhar to the Commercial Director who nodded his head, signed it and presented it in all solemnity to the Sales Director who then, along with his regional managers took a pledge. This was followed by a minute long silence for the pledge to sink in, after which the day ended with a thunderous applause.

Why this drama? The Sales Director explained – while emails influence the eye, and logical presentation appeal to the head, dramatic conferences seep into the soul. The drama communicates the passion. It reaches out directly to the heart. It transforms the rain-fed source into a snow-fed source. This time, he told Shekhar, every manager carried the new strategy to their market. The source was strong – the irrigation would be widespread.

He then told Shekhar, in a Hindu temple rituals are performed regularly to re-charge the divinity of the enshrined idol. The more intensely these rituals are performed, longer is the divine potency of the deity retained. You too have to regularly re-invigorate the potency of the strategy otherwise time and distance will cause it to wane. So take full advantage of monthly and quarterly reviews to re-establish the source. This will prevent or delay eventual contamination. All rivers are sacred at the source but only the river Ganga is sacred even at its delta because its source, Gangotri, is the most powerful : it is located in heaven, in the locks of Shiva. Try and make the source of your strategy as powerful as Gangotri.

The Gangotri of the Jewish religion is so strong that despite centuries of persecution and exile the religion still thrives, as evident in the legend of the Bene Israelis of Maharasthra. A few centuries ago, a Jewish Rabbi stumbled upon a group of people on the Konkan coast of India who were known as Shani-vaar-Telis, oil-pressers who did not work on Saturday. While these people looked no different from others in their village, and behaved no differently, this ‘no work on Saturday’ policy singled them out. He asked the women to make him a meal of fish and noticed that the women selected only fish with scales and fin, and ignored the rest which as per Jewish dietary laws is non-Kosher hence forbidden. Why did these people who looked like Maharashtrians and spoke Marathi respect the Jewish Sabbath and follow Jewish dietary laws? There was only one explanation: they were one of the lost tribes of Israel, the Bene Israel, or sons of Israel, perhaps descendents of oil-pressers who were shipwrecked off the coast of India as they were driven being out of Judea by Assyrian kings over two thousand years ago. Separated from their Jewish homeland by space and time, these people still clung to the practices that reinforced their identity. The Jewish elders had always been obsessed with ritual practices of Sabbath and Kosher. Their rigid enforcement of this practice had annoyed many young Jews who did not like rituals; but it was this very insistence that had endured the test of time and ensured that the Jewish Diaspora, despite centuries of persecution and exile, did not lose their identity. Such is the power of the source.

Short term trading call : Escorts

Buy Escorts around 123-124. Stock looks ready to give breakout from downtrend & consolidation around 120 levels. Keep stop loss of 119 levels, if it crosses 119 levels near close of market hours then book your minimal loss. Safe traders can book around 128-130 within 2 trading sessions.

If stock closes above 130-31 then it will come in the medium term uptrend channel wherein it can achieve 160 to 180 levels provided broader market supports this upmove!

Short term Trading call: Tata Steel

Buy Tata Steel with a Sop loss of 320 (closing basis) for a short term (maximum 10 trading sessions) target of 350 - 360- 365 - 370.
Current price as on 30th Jan closing 346.5.
If it closes above 370 within two days then Tata steel will zoom up to 390.
If results on Feb 11 show growth prospects then expect 470 too!

What's a Buy signal?

Timing is the most crucial factor in market!

Your timely entry & timely exit out of the trade determines the quantum of your profit or loss.
Now how to know when is the right time to make the first move?

You 'may' buy a stock when:

• The volume traded in today's (that particular day) trade is higher than previous 5 day's average volume
• There is a higher delivery percentage compared to previous 3 days.
• The 5Day EMA is greater than 5Day SMA. Here EMA = exponential moving average & SMA = simple moving average.
• The stock has been falling for 6 or 8 consecutive days and then we get a close higher than the closing of previous two days.
• When the 20day EMA has moved above 50day EMA during the close of the day, buy the stock next day.
• When open& low of stock is same and this sustains for first 15mins then buy the stock!
• Based on your technical indicators, have faith in yourself & make a winning trade!

For any queries, contact me on email or mention in your comments.

About market for newbies

 

Nifty = S&P CNX NIFTY is the benchmark Index of top 50 blue chip (good) listed companies on the National Stock Exchange of India
Sensex = Sensitive Index is the benchmark Index  of top 30 blue chip (good) listed companies on the Bombay Stock Exchange of India. Established in 1875, BSE Ltd. (formerly known as Bombay Stock Exchange Ltd.), is Asia’s first Stock Exchange and one of India’s leading exchange groups. More than 5000 companies are listed on BSE making it world's No. 1 exchange in terms of listed members

Useful Glossary for any trader/investor:

• Trade = A Buy order or a sell order
• Equity = Also known as shares, scrips, stock, cash market
• CMP = Current market price is the price of the particular stock at that instant of time.
• Market order = current price demanded by the buyer or seller
• Limit order = your specified price at which you want to trade the stock.
• Order quantity = the number of shares you want to buy or sell
• Disclosed quantity = the number of shares you want other people to know that you are trading. (not mandatory to be entered while placing an order)
• Limit = Money you have in your account to trade

Example:
Mr.Vinay wants sees price of Reliance Industries at 850. This is the CMP. He wants to buy 100 shares at 849.50 but he wants the other side of market participant (seller) to know that he wants only 25 shares. Then in this case:

1. CMP = 850
2. Limit price = 849.50
3. Order Qty = 100
4. Order Disclosed Qty = 25.

Thus, whenever Reliance reaches (touches) 849.50, Vinay's buy order will get executed in batch of 25 shares each time (at same price) until all 100 shares are bought!

• Period on chart to be referred  = Candles are of  2min, 5 min, 15min, 30min, Daily chart, weekly chart.
• Volume traded = Total number of shares bought + sold during the specific time period. High volume means good liquidity.
•  EPS = Earnings per share is the total net profit of a company in a year divided by total free float
• PE ratio = Price to earnings ratio is the CMP divided by EPS. Higher EPS means more demand for the shares in market. Lower EPS signifies more value hidden in share price and room to appreciate exists.

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NIFTY Composition:  
(Base date: Nov03, 1995; Base value: 1000) 
Current value: 6126. 
This means since Nov -1995 to Jan-2014, Nifty appreciated by 512.6%

 http://www.nseindia.com/products/content/equities/indices/cnx_nifty.htm

Reading Stock Charts

Introduction to Candlesticks- How to read them

The Japanese began using technical analysis to trade rice in the 17th century. While this early version of technical analysis was different from the US version initiated by Charles Dow around 1900

Candlesticks in a graph of chart may be shown in black & white combination or Red & green combination.

• White or a Green candle symbolizes that stock closed positively/ higher compared to its yesterday's previous trading day's closing price.

• Inversely, a black or a red candle symbolizes that stock closed negatively/ lower compared to it's yesterday's/previous trading day's closing price.

Some significant candlestick patterns:

1.  Open price and low price of day is same and stock closes at day high = Most bullish candle
2. the 2nd most bullish candle is when, stock wen low nad buyers rushed in and bought shares pushing the close to day high.
3. The 4th Candle in the chart is inverse of the 2nd but still the stock managed to close positively!
4. The 11th, 12th & 13th candles are formed when there is movement in the stock but ultimately it closes at the same opening level, forming a 'Doji candle' 

RBI Policy v/s Stock market

 For stock markets, lower pressure of CRR & SLR rates on Banks means they have higher liquidity and can thus earn more depending upon the operational efficiency of their business model. Markets always gives thumbs up to rate cuts! As this drives profitability of the rate sensitive listed companies such as banks, real estate and automobile sector.

• If market perceives that current rate of interest is at appropriate level then it expects 'no change in RBI monitory policy'.
• If it is perceived that current market scenario has high inflation pressure then RBI increases rates to suck liquidity from market viz less money to buy means value of money is high and inflation goes down slowly.
• Alternately, if market participants perceive that inflation has gone down and stabilizing then it expects RBI to cut rates which leads to rally in stock markets. Its an euphoric situation!

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Brief description of RBI's interest rates:
The Reserve Bank of India (RBI) is India's central banking institution, which controls the monetary policy of the Indian rupee.

The RBI plays an important part in the development strategy of the Government of India. It is a member bank of the Asian Clearing Union. The general superintendence and direction of the RBI is entrusted with the 21-member- Central Board of Directors—the Governor (currently Raghuram Rajan), four Deputy Governors, two Finance Ministry representative, ten government-nominated directors to represent important elements from India's economy, and four directors to represent local boards headquartered at Mumbai, Kolkata, Chennai and New Delhi.

Each of these local boards consists of five members who represent regional interests, as well as the interests of co-operative and indigenous banks.

Banker of Banks

RBI also works as a central bank where commercial banks are account holders and can deposit money.RBI maintains banking accounts of all scheduled banks. Commercial banks create credit. It is the duty of the RBI to control the credit through the CRR, bank rate and open market operations. As banker's bank, the RBI facilitates the clearing of cheques between the commercial banks and helps inter-bank transfer of funds.
Reserve requirement cash reserve ratio (CRR)

Every commercial bank has to keep certain minimum cash reserves with RBI. RBI can prescribe Cash Reserve Ratio (CRR) for scheduled banks without any floor rate or ceiling rate.

An increase in Cash Reserve Ratio (CRR) will make it mandatory on the part of the banks to hold a large proportion of their deposits in the form of deposits with the RBI. This will reduce the size of their deposits and they will lend less. This will in turn decrease the money supply.

Less money in market means higher demand for money means inflation is lower viz you can buy more product/service for same amount of money as demand of money is higher!
Thus to control inflation RBI increase CRR rate. It is one of the measures. Other popular measure is SLR viz. Statutory Liquidity ratio

Apart from the CRR, banks are required to maintain liquid assets in the form of gold, cash and approved securities. Higher liquidity ratio forces commercial banks to maintain a larger proportion of their resources in liquid form and thus reduces their capacity to grant loans and advances, thus it is an anti-inflationary impact. A higher liquidity ratio diverts the bank funds from loans and advances to investment in government and approved securities.

What are Repo rate and Reverse Repo rate?

Repo (Repurchase) rate is the rate at which the RBI lends shot-term money to the banks against securities. When the repo rate increases borrowing from RBI becomes more expensive. Therefore, we can say that in case, RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate

Reverse Repo rate is the rate at which banks park their short-term excess liquidity with the RBI. The banks use this tool when they feel that they are stuck with excess funds and are not able to invest anywhere for reasonable returns. An increase in the reverse repo rate means that the RBI is ready to borrow money from the banks at a higher rate of interest. As a result, banks would prefer to keep more and more surplus funds with RBI.

Thus, we can conclude that Repo Rate signifies the rate at which liquidity is injected in the banking system by RBI, whereas Reverse repo rate signifies the rate at which the central bank absorbs liquidity from the banks

Weekend Show: Everybody Loves Hanuman

Published in Corporate Dossier, Economic Times supplement, 4 April 2008.
Author: Devdutt Patnaik
Hanuman plays an important role in the Ramayan, yet in the epic itself, he does not hold any great position. He is just one of the many monkeys Ram encounters in the forest. He is not Sugriva, leader of the monkey troop. He is not Angad, who is told to lead the band of monkeys searching for Sita. He is not Jambavan, the bear or Nila, the monkey, who are given the responsibility of building the bridge. He is projected as an obedient follower who, through his intelligence, strength and courage, wins the admiration of Ram and emerges as one of the most revered characters of the tale and a god in his own right. But at no point does Hanuman make any attempt to steal anyone’s glory; while in his own temple he stands powerful with mountain in hand and feet on a demon, in Ram’s temple he is most content sitting at the feet of his master, hands in supplication.
Who would not want a Hanuman in his team? One who is very good at his work, one who will do whatever he is told to do, one who will never seek either reward or recognition and one who finds validation in obeying his master.

If we go to Raju’s auto repair shop, we will find that all the work is done by his Hanuman: Amol, a young boy, who has been working with Raju for three years. Amol is a natural, able to fix the most complex of problems. Raju knows he can totally rely on Amol. No job is too big or too small for Amol. He is as happy changing a tyre, as he is fixing the brakes. He does not boss over the juniors and does not feel slighted if the seniors ask him to fetch tea. If there is a problem that eludes a standard solution, everyone knows that leave it to Amol – he will, like Hanuman crossing the sea, find a way.

Yes, it matters greatly to have a Hanuman in our team. One who will not question you. One who will do exactly what you tell him to do. One who delivers no matter what the odds. One who is loyal and devoted. But is that really good?

The following is a folk story of Hanuman: Hanuman once narrated the entire Ramayan to his mother, Anjani. After the narration, an impressed Anjani sought a clarification. “You are so strong that with a flick of a tail you could have destroyed the whole of Lanka, killed Ravan and rescued Sita. Why did you not do so? So much effort and time would have been saved – you would not have had to build a bridge to Lanka, you could have avoided the war. Why did you not do that?”

Hanuman replied, “Because Ram never asked me to.”

And suddenly we wonder if this was opportunity lost. Hanuman was asked to discover Sita’s location; he did that. Hanuman was asked to fetch the mountain of herbs that would save Lakshmana’s life; he did that. No one asked him to destroy the Rakshasas and rescue Sita. So he did not do that. One common explanation given for why Ram never asked Hanuman to kill Ravan and rescue Sita is that it was Ram’s duty to rescue Sita, not Hanuman’s. Ramayan is about Ram, not Hanuman. But it is not so in the corporate world; the story is about the entire organization, not just about the leaders.

In the entire epic, Hanuman proves his capability time and time again. On his way to find Sita, he displays his extraordinary power (crosses the ocean), brain (outwits the snake-demon Surasa), brawn (kills Simhika) and integrity (not resting on Mandara mountain). And yet, while everyone admires this, no one seems eager to take full advantage of it. Was this refusal to take advantage of Hanuman’s abilities a divine decision or merely a oversight? Is the same being done in the corporate world?

Yes, Raju loves Amol’s work. Yes, Raju admires Amol’s work. But is Raju harnessing the full potential of Amol? Is his contentment with Amol’s obedience preventing him from seeing all that Amol can do, proactively, creatively, independently, if he is given the freedom to do so? Ask Raju and he will say, “But I don’t stop Amol from doing anything.” He does not stop Amol from doing anything, but he does not encourage Amol to do something else either.

The greatest danger of having Hanumans in our team is that his actions are limited by our directions. Maybe we fear that if Hanuman thinks for himself, there will be chaos – he is a monkey after all. Maybe we fear that he will overshadow us. Hence, ultimately, only we decide the goals, we define the vision, we declare the mission and state the objective. Our Hanuman will help you realize all this. But, maybe, the goals could have been greater and grander, if we had let Hanuman do more than merely obey.

Amol once had given Raju a suggestion. “Sir, if we park our cars perpendicular to the wall rather than parallel we can keep more cars in the garage?” Raju ignored this suggestion. “Do you work,” he snapped at Amol without giving his words much thought. But the message he implicitly gave Amol was that – ‘I only want your obedience, not your intelligence.’ Amol immediately complied. And that marked the end of Amol’s creativity that would have perhaps made Raju’s auto repair shop a much greater success.

This is the danger of over compliance and extreme obedience. We prevent followers from thinking and contributing. It makes business sense therefore to take a closer look at the Hanumans in our team; we just might find in their hearts a Ram waiting to be coaxed out.

Various trading styles

Investors and traders basically have two moods - bearish and bullish. The conventional way to trade is a bullish attitude wherein you buy any stock or futures and sell after the value is increased. It requires a stronger conviction and larger risk appetite to go for shorting the trade.
Lets see with examples:

Vinay has Rs.10,000 to trade. This is Vinay's capital. Assuming that Vinay is a beginner in stock market, he would be having a low risk appetite viz he can afford to lose not more than Rs.100 to 200 in a single trade.

Vinay opts to buy ICICI Bank Ltd shares.

His 1st Trade: Vinay sees opportunity in buying ICICIBank at Rs1020 per share. Thus in his small capital of Rs.10,000 he can buy 9 shares.
After  few trading sessions, Vinay sees his trade was successful and he sees ICICI at 1080 level, he has earned profit of Rs.720 which is unrealized as he hasn't actually sold his shares.
Few days later the stock starts to fall, again coming to Rs.1020 levels. All the unrealized profit on his position/holding are lost.
So Vinay decides that next time when he gets the profitable position back, he will exit the stock quickly!!

The very next morning ICICI bank rises 55 points and reaches 1075 levels. Vinay gets little greedy (which is not wrong). His conviction that the stock of ICICI Bank Ltd is good gets stronger! and he decides to hold on for some more time.
Now, as the stock moved up several points in a single day, it comes down on account of profit booking. Vinay now has been tracking the movement of the stock and therefore has reduced fear in himself which is replaced by discipline.
 His discipline  pays off, ICICI bank rises in consecutive sessions. When it reaches Rs.1140, Vinay sees  he is sitting on profit of Rs.1,080 on his capital of Rs.10,000 which is 10%. He therefore decides to book profit and sells his 9 shares of ICICI bank. His capital has now grown to Rs.11,000 (adjusting the brokerage).

The stock rises more, but Vinay is happy that he learned and earned in a disciplined way!

One should note that catching exact bottom of a movement viz Buying opportunity and exact selling at the top is not always possible and hence should not be aimed for. Always aim for a chunk of the rising wave leaving the bottom and top on the table.
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Short Selling

We also have Mr. Deven, he is more experienced than Mr. Vinay in stock market trading and also has a capital of Rs.50,000.

Deven is more bearish about the market and believes that the banking stocks will eventually fall off.
He therefore tracks his favorite ICICI Bank stock. Deven has tracked ICICI for along time and has observed that the stock has shown huge upward movement in short span of time and therefore can fall off once trend reverses.
One fine day, Deven sees that ICICI Bank is struggling to cross 1200 levels and therefore shorts the stock viz Deven sells ICICI at 1200 levels , without owning them = Short selling.

Deven  shorted 20 shares with half of his capital. This is a good idea - Never play with whole capital on a single stock or in a single trade!

In that day itself around last hour, closing time Deven sees ICICI at 1160 levels. This means Deven has a profit of 20x (1200-1160) = Rs.800. He thinks was a good trade to earn 800 intra-day and therefore 'Covers' his position vix buy 20 shares of ICICI bank from market. This is called Short Covering!

Thus Deven utilized his understanding of ICICI bank's movement and earned handsomely in a falling market.
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These were two typical styles of trades in which Vinay was bullish and Deven was bearish on a particular stock. The point to be noted is that both initiated the trade when they saw opportunity thus timing is more important than the size of capital. Also, discipline and patience is the key.

Your Trading Capital

What is trading capital?

Trading capital is the amount of money a trader uses for trading. In the era of online trading, the trading capital needed and the cost of trading (brokerages + taxes) have gone down significantly, thanks to competition in brokers.

Many brokerage firms allow you to deposit small amounts of money to trade. In any case, you should never deposit more money to your 'trading account' than you would be willing to lose in the worst case.

Proper planned trades will help you minimise the risk of losing your trading capital and maximise the chances to increase it. A simple rule of thumb would be to never put more than 1% of your trading capital at risk in a single trade.

Usually, brokerages charge 10p to 50p per trade (taxes extra, payable to government)

What is trade?

When you buy a stock, the amount is deducted from your trading account and shares come to your Depository Account (DP Account). This is a single trade!
Similarly, if you sell a scrip without owning it which is known as Short selling, shares are first debited and so is the money too.. When later you make a counter trade viz a buy trade against this one, then shares get adjusted and money comes back to your trading account with additional profit or with deduction of loss.

A trader has to be very alert in case he opts to 'square off' viz exit his initial trade in that day itself = Intraday trade also known as MIS position. 
Such position usually gets automatically squared off at 3:00pm (or 3:15pm in some cases) same day!

Investment Strategies -- How to Ride the Bull and Tame the Bear

The best strategy to make money in a bull market is to recognize the trend early and make smart buys. Buy low -- sell high.




It may seem counter intuitive that you can make money during a bear market. Here are a few ways you can tame the bear:

• Short sell: A short sell is a trade that consists of borrowing stock you don't own, selling it, waiting for the price to fall, then buying it back at a lower price, thus obtaining a profit.
• Buy defensive stocks: This is a low-risk way for investors to keep their money in the stock market. A defensive stock is so named because its value doesn't fluctuate much. Utility stocks (energy, water, etc.) are popular defensive stocks.

The Long Run
History has shown that the stock market always rises over the long term. Bear markets and crashes happen, but the market always makes a comeback and eventually rises higher than it ever was before.

No one really knows the exact origin of the terms "bull" and "bear" to describe the stock market, but their meaning is clear. The most important thing to know about these terms is that they describe long-term trends, not short-term changes. Bull and bear markets are usually measured in years.

A bull market is a rising market. In a bull market, investors are positive. The economy tends to be strong.

A bear market is a declining market. It tends to begin with a sharp drop in stock prices across the board. There is usually an eye in the storm, during which stock prices increase. But the storm returns, of course, and the bear market falls and falls and falls.
In a bear market, the economy tends to be weak. Unemployment increases. Consumers spend less, which results in lower business profits. As we've seen, this devalues a given company's stock. Investors tend to sell their stocks before the value decreases too much. Investors don't want to take risks because they don't feel good about their chances.

Basics of Market

Every stock market of the world is driven by human perception!

Initially, when the price of stock/commodity/asset is low (perceived)  people buy in Hope that it will appreciate from here.
When there hope turns to reality, that is when price of that stock starts moving up! Greed sets in. During these two cycles there is a large clan of traders & investors who has missed the bus, these people and truly intelligent traders and analyst, explain the logic that its high time and the stock should be sold.. profits should be booked.. new fresh purchase is not a good idea! this is Skepticism.

When this word spreads in market at decent speed Fear creeps in. This eventually leads to Panic sell off of that stock. Soon we see lack of hope - despondency  the stock falls steeply..

Eventually word of mouth spreads again about fair valuation and the stock gathers clouds of Hope again.. only to repeat the Basic Cycle..