DIWALI BONANZA........INVEST TILL NEXT DIWALI

BUY THESE STOCK ON THIS DIWALI .........TO EARN........100-200 % RETURN......TILL NEXT DIWALI

1. ERA INFRA(bse code 530323)-CMP 189.10...........TR 350-400

2.CEAT (bse code 500878)- CMP172.80.........TR 250-275

3.JK TYRE IND ((bse code 530007)- CMP157.25..........TR 250-290

4.LARSEN & TOUBRO LTD. (bse code 500510) -CMP 1694.65 ..........TR 2300-2400

5.BARTRONICS (bse code 532694) -CMP 165.55..........TR 300-325

6.ESSAR OIL(bse code 500134) -CMP 171.25..........TR 300-350

7.NUCLEU SOFTWARE(bse code 531209) -CMP 107.35..........TR 250-300

!!! DISCLAIMER !!!
Investment recommendations made here are for information purposes only. While utmost care has been taken in preparing the same, I claim no responsibility for its accuracy. Readers of this blog who buy or sell securities based on the information posted here are solely responsible for their actions. Myself or my acquaintances may or may not have positions in the recommended scrips.

How wealth can be created in stocks

A 200 year history of stocks, bonds and gold

In a study conducted in the U.S.A it was found that over a longer period of time Stocks outperformed all asset classes, followed by bonds then gold. Bonds were the most consistent while stocks and gold were erratic. Gold never did enough to beat inflation while bonds did only slightly better. The following table indicates how stocks have been the best performing asset class over the past two centuries

Source: Ibbotson Associates and Jeremy Siegel, Wharton Business School

Key Observations:

1. One dollar invested and reinvested in US companies since 1802 would have accumulated a total nominal return of nearly $8.8 million by the end of 2001
   
2. The inflation adjusted return of that dollar would have been early $600’000.
   
3. Inflation takes away $8.14 millions or 1.44% (8.32%-6.88%) of annual return. Clearly inflation is our biggest threat to creating wealth.
   
4. Treasury Bills fared slightly better by providing 3.5% and 2.9% of inflation adjusted real rate of return.
   
5. Over a period of 200 years Gold and the Dollar with real rate of returns at -.001% and -1.3% moved more or less in line with inflation. In other words you could not have become rich by buying these asset classes
   

Inspte of the data provided above why is it so that the typical Indian fancies gold, bonds and real estate to equities? There are no clear cut answers and some soul searching that I did led me into the following conclusions:

1) Since stock quotes are available on a day to day basis they manage to create maximum amount of fear and panic amongst investors.

2) Liquidity in stocks is another reason for people to get out early. Almost all of us have ancestral homes running into more then 50 years and sometimes going as high as 70 to 100 years. The reason why we held on to them was there were no two way quotes available from 9.55 to 3.30 on all week days. Compounding works O.K for shorter periods of time, but creates magic over the long term. No wonder Einstein called it the eighth wonder of the world.

3) Gold has become a symbol of emotional bondage we often relate to gold with a sense of historical nostalgia – the old wedding ring, the first bracelet that your father gifted you. These are things that we do not sell and the first stock that your father gave you was sold the moment it went up 20%.

So the point that I am initiating this debate on is that stocks are the only way to long term prosperity and it would make sense for investors to take some risk create more space for stocks in their asset allocation model the next time they sit with their Financial Advisor.

Is the indian stock market expensive ?

I would value the market like a stock ( the Sensex or the nifty is essentially a combination 30 or 50 stocks )

I would look at three factors to judge whether market is expensive or cheap

a) The current return on equity of the market as a whole

b) The current interest rates

c) The forward growth rate expected of the market

a and b are facts and c an estimate and hence any judgement is an estimate.

The current rate is around 18-20 % ( i do have exact numbers ). The interest rates (risk free) is around 7 % . Both these numbers from historical perspective are better than the average.The returns have been a bit lower and the interest rates a bit higher.

The forward growth rate can be conservatively be estimated at atleast the GDP growth of 5-6 % ( last decade number ). In reality it has been around 10 % but it always pays to be conservative

So with these three inputs and with some historical perspective that the average PE of indian markets have been 17-18 on average , we can assume that the market is slightly undervalued(from a long term perspective) if GDP grow @9-10 % in next 5-10 year

If the indian industry keeps doing well ( rate of return holds) and the inflation does not spike, the current levels do not look overlvalued.

In my entire analysis there are'nt too many hard figures ...only expectations and assumptions

Well any 'expert' or layman (like mine) opinion is just that - a set of expectations and assumption which subsequent events can invalidate So what i am doing - well for one not selling the index ( which one can through futures ) , but not buying too in one time , because the market does not give a 'margin of safety' at these levels..

Buy "NIFTYBEES" ETF to safe bet on indian Economy and GDP which grow above 9 % in next 5-10 year..