Author’s Note

Dare to Dream with Stocks

Most investors can't figure out ki paisa jaldi banana hai ki jyaada?

April 11th, 2001, I was sitting in the computer lab of a software training institute learning the art of using artificial intelligence to solve human problems, even though my mind remained nervously fixated in anticipation to the results that Infosys would report. The results came in quite early with a  lower profit guidance of 30%, down from the 100% growth that the company was generating which sent the stock crashing down 17% and with that the entire market nosedived further into an abyss. As prices fell unabated, I was getting mentally prepared to the risk of my financiers rushing in to sell my over-leveraged accounts due to my inability to arrange further cash to meet up to the margin requirements.

The past couple of years had been disastrous for us. After my father passed away in October 1999, the Government of Jammu and Kashmir cancelled our mining lease, forcing us to leave our full fledged gypsum mining project without compensation. The project had sucked in all our savings and a little more, borrowed from friends and relatives and there seemed no recourse left. The battle was now to be fought in the courts and though we obtained a stay against the government's decision, the fight had to be given up as we ran out of money to pay the lawyers. As we relocated back to our family property in Kolkata, I was left without work and income. At that time, a friend suggested that anyone who could write software codes and move out to the U.S stands to make around $50,000 to $60,000 a year and hence I joined a software training institute so that the next phase of my life could be better than the earlier one. But no sooner had I joined this software training institute, the technology bubble was pierced and the entire market seemed headed for a brutal slowdown.

With nothing to do and the fees for software training course deposited I was half heartedly learning the skills which were the flavour of those times. However, I remained active in stocks with a portfolio that consisted of names like DSQ Software, Silverline, Pentamedia, Global Tele Systems and Sri Adhikari Brothers - all under leverage. These names reflected more of my ignorance and psychological build up rather than my intelligence and stock picking skills.

These stocks were far below their all time highs even as the story had folded for good. Despite this, I continued to hold them with the solitary hope of selling them out on a bounce. When a defeated investor waits for a higher price to sell his losers all that he gets in return is a new wave of selling that takes his shares to an even lower level. The same was happening to me as I continued to save my stocks from being sold by trying to answer margin calls by stretching to the maximum, till it reached a point on that April afternoon, where I could take it no more. As my financiers started to liquidate my portfolio to recover their dues, the damage was complete as it brought a long awaited closure to my first romance with the stock market.

In spite of this, I always thought that the stock market remained the only way to make a lot of money from a few. With nothing to do, I started to look for an activity that could be initiated with minimum capital and at the same time help me retain my independence. Even though I was academically qualified, taking a job was out of question as it would not let me follow my passion so the only option left was to become a teacher by starting a tutorial centre. There was a serious reluctance to take teaching as a profession because a few months back I was running a multi-crore gypsum mining project and the descent looked a little too insulting for comfort. But as beggars can't be choosers, I took to my new found profession with open arms and converted a section of my house to a learning center so that I could earn some money to make ends meet and also put it into stocks. I dared to dream with stocks to become rich - again!

While I used to take private tuitions during the morning and the evening, I spent time reading about investors who had made it big from the market. Though I had been investing for long, looking at stocks did not seem the same after that. Over the next few years, I followed it up with at least two hundred books on investing and each book increased my level of understanding both about stocks and the businesses that they represented. Price no longer looked the same as value and I learnt that good stocks could stay down even while the bad ones could move up uninterruptedly for a while - both without reason. My early years were wasted in searching for the low P/E stocks that were hitting their 52 week lows which was a classic way to lose capital. I experienced that there was more to stock picking than just the P/E ratio and the dividend yield. I also learnt that investing is not just a formula driven exercise but also a feel based endeavour. One has to feel about the product, business and the management in equal importance to sales, profits and valuations.

I also learnt the most important aspect of investing is that markets pay for growth and a company that is showing above average growth is like the child who always comes first in class - he always gets what he wants.

THE BIG BREAK:

I was desperate to get some capital to buy stocks as I was investing with just a few thousands each month. It was clear that the quantum of investment would have to be raised if I were to make a decent return from this game  One option was to sell my life insurance policies which in any case were under default due to my inability to pay the premium on time. Surrendering a life insurance policy to raise cash for investing in stocks was as blasphemous as it could get. However, I either wanted to have too much or nothing so jumped in to surrender my insurance policies and replaced it with a term plan instead.

Meanwhile, I persuaded my mamaji (maternal uncle) to lend me some shares so that I could borrow against the same to invest in the markets. The timing of these events could not have been more perfect. As I raised cash against the borrowed shares, the cheques from my surrendered policies also dropped in and they coincided with the 9/11 crash of the twin towers. This gave me a chance to double and triple my money in the beaten down software names like HCL Technologies and SSI in a few months. These profits were then diverted into Eserve, Mphasis BFL and Mastek as IT enabled services and BPO seemed to be the new theme at that time.

I continued to buy and invest in shares instead of diverting the quick income to the safety of fixed deposits and bonds. My plan was clear, I was willing to have very little money against an outside chance of making lots of it.

I took investing a little more seriously after 2001 because I knew that I did not have a second chance. The option of losing money on capital created out of leverage was simply unacceptable. Maybe that is why I have always been paranoid of the risk and try assessing the probability of permanent destruction of capital from any investment before evaluating the upside triggers of the same.

OPENING UP MULTIPLE SOURCES OF INCOME:

Investing out of savings was one way to increase my stock market exposure; the other was to look at new sources of generating income. To augment my income stream, I started conducting classes on stock market investing, took up mutual fund distribution and engaged myself in many other activities so that I could put more money to work.

While increasing income was one way to put more money in stocks, taking leverage on the existing holdings was another. I followed these two things by postponing expenses and for which I was more than adequately supported by my family members. For instance, I did not own a car till 2010 when I bought a used Honda City. The idea of buying a depreciating asset did not make sense to me especially when my investments seemed to be going up ten, twenty and forty times, I do not remember taking a holiday till 2010 just because there was an opportunity cost attached to each rupee of spending.

I could have of course taken a holiday and bought a car in 2003 itself.

Overall, my little story was backed by a firm belief in stocks and by the advent of new investing opportunities that came my way during that time. Given a chance again, I seriously doubt if I would be able to replicate again what I could in the last 13 years. This book is all about my journey in the stock market and my decision to dare to dream with stocks.

MY EARLY YEARS:

I was born in an educated middle class family but was just about mediocre at studies. Being a not so bright student and not a dumb one either meant that I had to go with commerce in high school. Surprisingly, I became a better student the moment I took up commerce and in about a few months I was topping the class and was the school topper in the high school exams which got me an admission in Shri Ram College of Commerce (SRCC). Though I went to SRCC, I returned back in a week as I could not handle the ragging at all!

I finally graduated from St Xavier's College, Kolkata and almost simultaneously got a Cost Accounting degree as that was the only course that could be pursued with graduation at that time. I have always felt that education does not matter too much as to how an investor performs in the market. Making money from stocks requires as much skill as it needs an emotional balance and while there are many people who can display their skill at picking stocks there aren't too many who can be confident at having the right kind of emotional balance when it comes to playing the investment game.

Earlier, I used to think that having a finance background is essential to succeed in the market but now I am convinced that having a degree in finance is essential if one has to work as a research analyst but not so much important if he wants to be a successful investor. Personally, I rarely get into the depth of research as many think I do because the big picture call is more important to me than the critical line by line analysis.

As a one man research team, I focus very little on financial modelling. I have no subscription to any real time newswires nor have any standard financial software for running screeners or any query at my command. All my information is sourced freely from the internet.  Even though I read brokerage and analyst reports, the underlying interest remains to look for the general opinion on the street rather than to form my opinion on a stock.

WHY DID I WRITE THIS BOOK?

There are hundreds of books on investing and the idea to write one more was crystallized because I thought that my effort would provide a different perspective from what actually exists in the marketplace. This book 'The Thoughtful Investor' is thus an attempt to combine the various facets of investing and bring them under one roof so as to present an investor with a strategy that should generate consistent long term returns irrespective of where the overall market is going.

Having been actively involved with stocks for over two decades now, I have understood that the stock market is a game of snakes and ladders where it is as important to look for the ladders as it is to avoid the snakes. Taking this theme forward, this book is a reflection of my strategy in guiding an investor to make enough from stocks, so that he becomes - financially free.

I have seen that the general investor still thinks about stocks as a money making exercise rather than a wealth creating endeavour. How many investors come to the market with the firm belief of making over Rs 5 crores from a start up capital of Rs 10 lacs is a question whose answer I keep looking for, all the time. Making an investment grow fifty times in twenty years can be achieved by generating a compounded annual growth rate of 22% only and while critics will argue with the inflation adjusted value of Rs 5 crores, twenty years from now the better thing to do is get to that figure first and worry about inflation later on.

In reality, most members of the investing community lack that perspective.

Taking early profits from good companies and sitting with losses on the bad ones just because the purchase price is above the current market price forms the critical attribute of the unINVESTOR . A naive investor also looks for low priced inferior businesses with little emphasis on the management factor. These investors remain fixated with valuations and are more than likely to miss any multibagger opportunity either by ignoring the stock because of its high valuation or by selling out too early in the fear of losing back all the accumulated profits.

I have tried to address these common investor attributes so that the small investor achieves the necessary skill to become a large one.

None of the books written so far have comprehensively tried to cover the Indian markets. My attempt at sharing my ideas and experiences are backed with real examples of stocks from the Indian market with regard to both the companies that made it big and those that could not. I have personally tried to share my experiences as far as possible to support the practical angle to the whole debate. These chapters have also been put up with relevant info-graphics to increase the retaining power of the reader.

My children also remained the biggest source of inspiration when it came to writing 'The Thoughtful Investor'. A father always wants to share his knowledge and ideas with his children. As my children are small, I sometimes wondered on the mode of this knowledge transfer if a car that I was travelling in, rolled over the edge of a mountain cliff. This book would therefore come in handy if my kids were to decide in becoming full time investors when they grow up.

This book took me over twelve months to write and is an arrangement of my experiences gathered over the last twenty two years of my investment career. Even though I have been in the market since 1992, I wasted the first nine years and interestingly what I did in the next thirteen was diametrically opposite to what I used to do in the first nine. I learnt later that an investor can never expect to succeed with just one strategy. Markets change all the time and the participants have to keep evolving to the new dynamics if they are to become accomplished players of the field.

I have tried to share all that I know about stocks in this book. The book pretty much defines my investing strategy both in style and scope that has helped me survive and profit from this game for the past several years and I remain convinced that the same would help the reader in his journey to achieve financial freedom - through stock market investing.

After reading the book you can log in to the forum at http://www.theequitydesk.com - - www.theequitydesk.com for a discussion on the contents of the book along with other fellow readers where I would also try and participate so that the interactive feature of the web is retained with the old world of paper. We can open separate topics for each of the sections or chapters so that the process of learning and sharing can be expanded on a larger scale.

I also look forward for your reviews at http://www.thethoughtfulinvestor.i - - www.thethoughtfulinvestor.i n which is presently under construction and should be up and running soon.

Wishing you all the best,

Happy Investing,

Basant Maheshwari