‘I want to be rich too, should I buy this IPO?’

The first part is implied, but the second part of the sentence above is what a young colleague asked me on the last day of DLF’s IPO. I’m not surprised — this is almost a process that happens towards the peak of every bull run. Hype runs in like adrenalin and there is almost an itch to join the investing bandwagon. Different matter that many of these highly competent, highly intelligent people have generally been risk averse. Whether this time it signifies the peak or a pause remains to be seen.

“That’s very good,” I said. “Do you have a demat account?”

“Demat? I have my PAN number¿”

Sensing she had never heard of the word, I tried to explain in as simple words as possible about how shares, including IPOs, can be bought only in dematerialised form and that she would have to open one.

“Like how?” I put her in touch with our in-house expert on stocks and off she went to become Client Account No. 7,903,390 on NSDL’s (National Securities Depository Ltd) 7,903,389 strong database of direct equity investors. The depositary holds Rs 31,42,645 crore worth of stocks in its custody, and my colleague will add her thousands to India’s stock story.

I believe she should not buy into the DLF IPO — or any other IPO or any other stock. Not until, that is, she’s learnt a thing or two about reading balance sheets, understanding businesses, tracking companies and the market. She did mention the last: “I’m planning to enroll on a stock simulation website to get a feel of things.”

“Sure, do that,” I said, “but also read One Up on Wall Street by Peter Lynch”, a prescription I’ve given to all my relatives, friends, colleagues, neighbours, e-groups — and even my doctor. (And a bible that many fund managers constantly refer to.) And if the dose is inadequate and the investor-patient needs a stronger antibiotic to negotiate the perceivably dangerous world of equity investing, I prescribe that too — Warren Buffett’s letters to shareholders, downloadable free from berkshirehath-away.com. Between the two, you’ve got your equity strategy education in place.

Next come the details — opening a demat account, applying the fundamentals to real life, finding out the difference between cyclicals and turnarounds, fast-growers and stalwarts, RoCE and RoE, PE multiples and how to apply them, when to use them and when to discard them. On this, there is no one source and the education is largely experiential and constant. Experts say you need to lose money to learn. I disagree. What you need to do in this age of information overload is be able to sift information from noise.

The most important edge you as a lay investor have while investing in stocks is your non-investment decisions. Did you go to Big Bazaar and buy the monthly groceries? Did you notice the crowds, making it so difficult to negotiate your way? Did you observe the long lines at the cash counter? Have you been seeing it for the past year or so? Yes? Congratulations, you’ve just finished 75 per cent of the research.

Now, all you need to do is to study Pantaloon Retail’s (Rs 447) financials and answer this question: is it still investment worthy?

Yes? Go buy.

No? Move on to your mobile phone - Bharti Airtel (Rs 813) or Reliance Communications (Rs 493)? Or banking - ICICI Bank (Rs 909) or State Bank of India (Rs 1,324)? And so on. Find a good company, then see if it’s worth the price.

I then asked my colleague another question: “What will you do if the DLF stock crashes to Rs 250 on listing?” She said, “Since I’m investing for the long term, I won’t worry about it too much, it’s from money I’ve set aside. But if it falls really low, I may sell it.”

Right answer, but: “Why sell a good company? If you thought DLF was investment worthy at Rs 550, it should be even more interesting at Rs 250. Why not buy more?”

“I guess, I should, yes.”

“No - not now, that is. You must buy stocks, but first you must understand them, be ready to spend time with them - at least as much time as you spent on buying your new phone. Until then, stay with equity funds.”

Meanwhile, I’m wondering whether her wanting to buy into IPOs today means crash of the market next week.

editor@expressindia.com
http://www.indianexpress.com/story/33730.html