Dalal Street for Dummies

Diversify to Derisk

Henry Markowitz won the Nobel Prize in Economics in 1990 for his work on reducing Portfolio risk by diversification. Essentially it means the more company shares you own ( if the companies are from different sectors, still better ), the less vulnerable to risk your portfolio will be. Very commensensical, one would say. Would it surprise you that our UTI proved that theory wrong. UTI's US-64 had the shares of nearly 3000 companies in its kitty at one time ( though most were not traded in stock exchanges would be a small matter ). Still its performance when compared to the benchmark BSE Sensex were abysmal.


Bring down your average cost

I bought shares in a mid cap company. The prices went down and I bought more. The vicious cycle continued till this particular stock formed nearly 70% of my portfolio. Bring down your average cost, the experts will tell you. Don’t throw good money after bad, I reply.
It was very recently that I came across this quotation from economist John Maynard Keynes, "The markets can remain irrational longer than you can remain solvent. " But I have always tried to be positive in my thoughts. The way I look at this is a couple hundred more shares in this company and they should be inviting me to join the Board of Directors. And then we will see who is laughing on the wrong side of his face

The Sachin touch

I believe I have the Midas touch. True , I may not have benefited personally , but what the heck, you cant have it both ways, can you. Shares I bought , and then sold for a pittance in profits have since reached the stratosphere. Consider this - Indian Rayon bought at 74, sold at 80 ( current price is 1200 ), M&M bought at 80 , sold at 120 ( current price is 750 ) , SBI bought at 185, sold at 215 ( current price is 1100 ) - the list goes on. So the next time you want to make a killing on the stock market, just ask me what share I recently sold.

Don’t listen to the 'experts'

I was disillusioned by the so called 'experts' pretty early into my stock market foray. You would have one expert talking glibly on the TV, singing paens to company X - 'X is clearly on an uptrend , will surely rise 20% in one month'. One month later , by which time X would have dutifully dropped 50% and numerous investors having lost their shirts are trying desperately to hold on to their chaddis, the same expert would be back on TV screaming "SELL X!!!" without so much as a polite "Sorry , I screwed up".

TINSTAAFL

There Is No Such Thing As A Free Lunch - this is as much true of the share market as it is of any other field. It’s a zero sum game - one man's loss is another's gain - unless your stock is going only one way - UP. Two words of advice : Caveat Emptor - Buyer beware applies here.