2. 1. Make investments in the larger companies with price-earning ratios
(P/E) of 10 or below.
2. Keep investments limited to the top 2 - 3 companies in each
industry or service group.
3. Invest in companies operating in high growth (or sun rise)
industries.
4. The price-earning ratio and earnings per share are important tools
to estimate the fair value of shares.
3. 5. High price-earning ratio implies that:
- super growth is expected in the company's earnings in the near future;
- investor confidence is high; and
- watch out for low earnings per share ( an earnings per share of 15% of par value
of a share is reasonable).
6. Low price-earning ratio implies that:
- investor confidence is low or poor; and
- a high growth stock or company not yet recognized.
4. 7. High returns can be earned from high priced stocks with
reasonable price-earning ratios.
8. Apply the theory of contrary opinion:
- The crowd is usually wrong, go against the crowd.
- When everyone expects the market to decline, prices will rise; and when
everyone expects the market to rise, prices will fall
- In the early stages of majority opinion, it pays to follow or precede the crowd.
- Contrary stock market action pays off only when timed to coincide with the last
stages in the consolidation of a widespread majority viewpoint.
5. - Sell a stock below the anticipated peak price.
- Buy and sell stocks at intermediate levels.
- The bulls make money, the bears make money, the pigs go broke.
9. Preferential allotment should be treated as subsidiary opportunities
for making money.
10. Rights issues enable fresh investment without dilution of
ownership.
11. Bonus shares expand the total shares outstanding, trading volume
and liquidity of the share.
6. 12. Timing your buys:
- Initially base investment decisions on selection rather than timing, unless you
have an intuitive flair for predicting short term price fluctuations.
- For superior results learn to combine good selection with good timing.
- Time the buy at share prices close to the lowest price of the year. Last years
average price would be close to current year's lowest price.
- Never buy shares at prices greater than or equal to peak price of previous year.
- Under normal conditions buy shares at prices between last year's lowest price
and average price.
7. 13. Timing your sells:
- The best time to sell usually coincides with the stock market boom.
- Reasons why investors are unable to sell at the right time are that investors
tend to marry their stocks.
- Reasons why investors sell shares are that they may have made a mistake in
their initial selection.
8. 14. When to sell:
- When the price-earning ratio of a stock held in the portfolio shoot up to
unrealistic levels.
- When the investor has made 100% to 200% profit on his or her
investment.
- The investor has overshot his original objective.
- The investor incurs a loss of 8% to 10% due to a fall in the stock price.
However, do not sell in case the loss is due to temporary and widespread
decline in the stock market.
9. STOCK MARKET INVESTMENT STRATEGIES
The stock market investment strategies are relevant to investors who are
in it for the long haul. There are basically two strategies that an investor
can apply; the first one being to "buy low and sell high" and the second
one being to "buy high and sell higher".
10. 1. The aspects to be considered with respect to the company would be that it
is:
- Well managed.
- Technologically advanced.
- A market leader or a potential market leader in its industry.
- Committed to long term growth and expansion.
11. 2. To ensure a margin of safety and a reduction of risk, the investor
would be well advised to diversify.
- Invest in a number of growth companies operating in equally fast growing
sectors of the economy.
- Keep a watch on these companies, using every dip in stock price to buy and
increase your share holding in these companies.
3. Do not sell these stocks, except in certain specified conditions.
12. 4. The investor is expected to make money by capitalizing on the underlying
growth of a fast growth company.
5. The investor is expected to bank on the climate and not on the weather.
6. The advantages of this strategy are:
-Shifts emphasis from timing and price to selection. Thus, making initial selection
very important.
- Misses opportunity to sell at peaks, but buys at every dip.
- A carefully selected and diversified portfolio is safer and less risky.
- Simple to implement.
- Maximizes advantages and benefits from tax laws.
- Investments in fast growth companies have low dividend returns, the gains are
mainly from capital appreciation.
13. 7. An investor would on occasion have reason to sell stocks held in his
portfolio. When to sell would be governed by the following:
- Stocks should not be sold solely to en-cash profit or loss.
- Stocks which are loss making should be sold to prevent long term capital loss.
- Stocks of companies which have reached the end of their long term growth
phase; and future prospects are questionable.
- When the investor has made a mistake or error in the initial selection of the
stock.
- When the price earning ratio (P/E) crosses 40.
After a steep and sustained rise (of 100% to 200%) in stock price over a period of
one year or longer.
14. 8. A investor would have an occasion have reason not to sell stocks held in his
portfolio. When not to sell would be governed by the following:
- Simply to en-cash short term gains.
- To shift from slow moving to fast moving stocks.
- In response to current news causing short term market trends
9. The initial selection of the stock is critical. To reiterate the selection
criteria for companies to be held in our portfolio are:
- Well managed.
- Technologically advanced.
- Has long term expansion and or diversification plan.
- Is market leader or a potential market leader in its industry.
15. 10. The investor would ideally diversify his portfolio by investing in stocks of
10 companies spread over the lead industries of the economy.
11. The investor would also diversify over time. That is he would take his time
to invest his money and spread his purchases of the selected stocks from the
present to a point of time in the future. This would also help in averaging the
purchase price and help bring about an additional margin of safety.
12. The investor would be able to give time to his investments to produce
results.
13. Do not get upset over and by short term market fluctuations. Bank on the
trends and don't worry about the tremors. The investor must keep his mind on
the long term cycle and ignore the sporadic ups and downs in daily price
movement.
