Stock markets gamble or science

Stock markets gamble or science

A million-dollar question comes across us is where to invest our savings. We got options  like real estate , bullion ,fixed deposits. Which we treat them with positive bias as safe bets and when it comes to investing in stocks/shares first thing comes to mind is it is legal gambling and we isolate ourselves from the 2 trillion $ market cap of BSE more than the total advances of all the banks of India which has grown @ 16% in last 15 years.

Contrary to this growth still there are few who make money in stock markets. I started investing in stock markets 14 years ago with the gambling view and 2008 collapse proved me right and i made huge loss and left the stock markets but come to know that LIC had invested hugely in stocks market so one thing was sure. That LIC could not gamble with depositor’s premiums so there has to be some science or some reasons for something or for everything in stock markets.

Sustainable development is a big thing in stock markets. India is sufficient in resources like iron, coal, food, population, water, software. But we are lacking in technologies (defense and non-defense), capital goods, non-renewable energy, medical equipments. We have continuously run trade deficit for years

And still our gold and forex reserves kept increasing and at present we are at life high thanks to huge English-speaking population which

Provided big surplus in services(it) exports and huge remittances India receive from NRI working abroad and foreign direct investment. But international prices of commodities

Keeps on fluctuating like crude oil, metals and rare earths. From 2011 to 2013, 33% of import bill was energy due to high crude oil prices and natural gas

 and trade deficit got too big to handle which resulted in high inflation that lead to high interest rates and depreciating rupee and

Equities were completely discarded as we entered in third year of high crude oil prices

Coupled with taper tantrum issues (rising bond yields in USA).in 2014 crude oil prices start falling and later commodity prices also starts

Falling due to demand problems in china then stock markets in India saw a bull run. Good monsoon also kept the food prices lower which has huge

 weightage in CPI (an inflation measuring tool for RBI).

 when macro-economic situation gets favorable, stocks witness

A huge price earning expansion or price increase at same earnings and opposite happens when macros get worse.

Valuation is also an important criteria at least in the short term (1-2 yrs.). Right time to enter and right time to exit is a key big thing.

A not so good stock bought at cheaper valuation may give good profits than a very good stock bought at very high valuations. Bad stocks are bad at any valuations.

Bad stocks may be bad businesses, shell companies, bad managements or just bad luck.

Price earnings ratio = share price/earnings per share. We can check valuation by checking industry average price earnings ratio with the

Stock price earnings ratio. If it is lower than industry avg. Then stock may be available at discount

Or cheaper and if it is higher than the industry avg. then stock valuation is considered overvalued. There may be stock specific reasons as well

 which are reputation of the company, debt equity ratio, management decisions, fraud, technological edge, promoter holding which can easily be accessed by checking

Annual reports of the company.

I keep monitoring the results of my stocks and data released by govt like CPI inflation rate, forex reserves of India, credit growth rate, crude oil prices, metal prices

Sovereign treasury yields of g20 nations particularly USA, unemployment data and keep diversifying the portfolio and keep changing the weightage of stocks in portfolio.

One can be a great economist but one can’t claim himself to be a great stock market expert as there are factors which are beyond our control like

Political will, geo political tensions, spread of disease, weather, war and global trade wars which may have temporary effect or permanent

But under normal circumstances and in the long run stocks markets will work as science.