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Yesterday was quite an eventful day for India. While the Indian cricket team defeated the Proteas to level the one-day cricket series, the Indian stock markets (read, the Sensex) cruised higher to cross the 'much-awaited' 9,000 points level. While the Indian cricket team had to come from behind to register their win over the world's second best team, the stock markets' moved up with effortless ease.

At this stage, loud noises of 'what to buy?' seem to have turned to whispers as every investor is trying to get hold of (clandestinely) the 'one' stock that is still undervalued despite the markets having turned overbought. And now with experts vouching for the Sensex to reach the 10 k level by this year-end, the whispers have got thinner and thinner. Every one wishes to get hands to that 'elusive' buying opportunity that does not really seem to be there in the whole scheme of things.

At the current levels, the Indian markets (the Nifty) are trading at 17.8 times trailing 12-month earnings. Even considering that the constituent companies of the Nifty grow their earnings by 15% each year in the next two years, the 2-year forward P/E comes to over 13.5 times. For foreign investors, these valuations are not really 'attractive' considering that most of the other emerging markets are trading at sub-15 P/E on a trailing 12-month basis.

As far as domestic retail investors are concerned, while there still are selective opportunities in the waiting to be grabbed for long-term investing purposes, the risk return ratio has skewed deeper towards the former, i.e., risk. At the current juncture, thus, we believe that investors should introspect about the sustainability of this 'liquidity driven euphoria'. It would be a wise move now to think about what could go wrong that could lead to FIIs (as they are the pump primers of this rally) pulling out their investments from Indian equities.

We have already witnessed (in October 2005) as to what can happen when FIIs decide to pull out. While our concern should not be construed as if we are bearish on the markets, since we continue to believe that Indian equities are a place to remain invested in for the next 3 to 5 years, we do believe that investors must strictly follow a bottom-up approach to investing. Do not rely on 'whisper-based' investing. That is going to lead you to nowhere!

Note: When a story is told from person to person, especially if it is gossip or scandal, it inevitably gets distorted and exaggerated. This process is called Chinese whispers.

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Please find Interview of Mr. Rakesh Jhunjhunwala at the following link: Click here

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Compulink System - Click Here for the Complete Article Repro India - Click Here for the Complete Article

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What causes stocks to become cheap? This is one of the most fascinating questions about the stock market. With literally millions of investors scanning the market for opportunities, a near-instantaneous flow of information and financial reporting better than ever, how is it that stocks can become mispriced with such regularity? Speaking very generally, it's because investors do not always behave rationally – they have emotions and biases that affect their decisions. If you can identify these biases and relate them to specific investment opportunities, you'll have an advantage over the crowd. 1. It's right under your nose This one doesn't happen often, but occasionally stocks can quietly become cheap. If a company's share price goes sideways for some years while the business continues to chug along, the valuation steadily becomes more attractive. How can this happen without the market noticing? Well, for one thing, stocks that don't move a lot (up or down) don't generate much news, and with thousands of stocks to watch, many money managers rely on the headlines to bring stocks to their attention. So businesses can just chug along under the radar, even when they're pretty sizable. A contributing factor is that Wall Street generally goes with "what's working now," which means that some stocks might be cheap just because they're not in vogue. This happened with small caps and REITs – among other areas – when nothing but mega-caps and tech were going up in the late 1990s, and I think the same thing has been happening with large caps over the past few years. After a lengthy stretch of strong small-cap performance, many investors were projecting the recent past into the future and buying "what works" – small caps – rather than looking for bargains among large caps. (This may be starting to change, but only just.) The are called "purloined letter" stocks, after the Edgar Allen Poe story in which an important letter was hidden from the police in plain sight by simply being crumpled up as if it were unimportant. Consider Coke (KO), Johnson & Johnson (JNJ) and Wal-Mart (WMT). Over the past five years, Coke and Wal-Mart shares are down by one-third and by about 10 percent, respectively, while J&J's stock has risen about 20 percent. But J&J is generating 70 percent more cash from operations than it was five years ago, Coke's cash flow has risen 80 percent and Wal-Mart's cash flow has doubled. They're bargains in plain sight that are mispriced simply because Wall Street has been too busy chasing China plays and energy stocks. 2. The smell is bad Stocks that have a "taint" are often priced irrationally. This was the case with Philip Morris (MO) (now Altria) for years, and you also often see it with companies that are emerging from bankruptcy. How could K-Mart (SHLD) have been so cheap when it re-emerged from bankruptcy? Because most investors didn't want to bother with a stock that had only recently risen from the dead. This may be one of the reasons why J.P. Morgan Chase (JPM) is so attractively priced right now. Investors hear the word "derivatives" and run screaming for the hills despite the fact that the more exotic derivatives account for a single-digit portion of the firm's equity. Moreover, the vast majority of the firm's counterparties have credit ratings of BBB or above, which makes default pretty unlikely. So is Morgan's derivatives business a risk worth keeping an eye on? You bet. Is it enough of a worry for the shares to merit a price-book ratio of just 1.3? Nope. 3. Guilt by association Finally, you often see good companies in tough industries mispriced because investors tar them with the same brush as their less attractive peers. The steel industry has gotten a bad rap from many investors who associate it with giant pension costs, crushing debt loads, bankrupt firms, and industry overcapacity. In most cases – particularly for U.S.-based integrated steel companies – this is an accurate assessment. However, when you look at a company like Gerdau (GGB) in Brazil – with access to incredibly cheap hydroelectric power – or Posco (PKX) in Korea – with a virtual monopoly in the Korean market – you see firms that can be pretty attractive investments despite their tough industry environment. Although both of these stocks only have a 3-star rating from us right now, we currently have a 5-star rating on Mittal Steel (MT), currently the world's largest steel firm. Steel is a tough industry, but not tough enough that a company with a fully funded pension plan, an investment-grade credit rating and dominant market positions throughout the world can't offer an attractive return when it's priced at just 5 times earnings. Pat Dorsey, CFA, does not own shares in any of the securities mentioned above. Visit Morningstar.com (http://www.morningstar.com) for comprehensive stock and mutual fund information, helpful investing tools and lively conversations.Copyright (c) 2005 The Belleville News-Democrat

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By Jonathan Clements

The numbers don't lie. But investors, it seems, don't want to hear the truth.

Most stock-fund managers fail to beat the market, Strategists often flunk at forecasting and investment newsletters offer mediocre advice.

Yet investors keep buying actively managed funds, they keep listening to strategists and they keep subscribing to investment newsletters.

What's going on here? There are a handful of explanations for this apparently bizarre behavior:

WE THINK WE CAN PICK WINNERS.

According to fund researchers Lipper Analytical Services, 86% of diversified U.S. stock funds have lagged behind the Standard & Poor's 500-stock index over the past 10 years. That suggests investors would be much better off purchasing index funds, which simply seek to track the performance of the market averages.

Yet we persist in buying actively managed stock funds, because we like to believe that we can overcome the odds and select those 14% of funds that beat the market.

"People are overconfident and overly optimistic," says Terrance Odean, a finance professor at the University of California at Davis. "In many respects, this is useful. People who are optimistic tend to be happier, tend to work harder and tend to persevere. The downside is, in financial markets, there's a cost to this overconfidence. People spend too much time and money trying to beat the market."

WE WANT TO BELIEVE THERE IS ORDER.

Academics insist that stock-price movements can't be predicted. But the rest of us have a hard time accepting this. We want to find some explanation for all those wild share-price swings. After all, this is how we are saving for our kids' college and our own retirement.

"We believe the gurus because it is hard for us to imagine that the stock market is random," says Meir Statman, a finance professor at Santa Clara University in California. "We look for patterns. Gurus are the ones who come in and explain the pattern."

WE WANT TO BE TOLD WHAT TO DO.

Market strategists haven't exactly covered themselves in glory. Wilshire Associates, of Santa Monica, Calif., calculates that you would have earned an average 280.6% over the past 10 years by following the asset-allocation advice of brokerage-house strategists.

By contrast, you could have pocketed 286.1% simply by holding a fixed mix of 55% stocks, 35% bonds and 10% cash investments, which is considered a neutral market position.

Moreover, the advantage of this robotic approach is understated, because the 280.6% result for the brokerage firms doesn't reflect the investment costs and taxes you would have incurred in following the market strategists' shifting mix of stocks, bonds and cash.

Yet while these and other pundits may offer mediocre advice, this advice probably gives some investors the necessary confidence to get their money out of savings accounts and into better-performing investments.

"For some, it is just what they needed," Mr. Statman says. "It gives them the courage to act. But others are stuck with gurus who are waiting for the Dow to go back to 2000 before they get back into the market."

WE WANT A PIECE OF THE ACTION.

Harvard University economics professor Andrew Metrick studied investment newsletters and found that, on average, the performance of their stock picks was very close to that of the market -- before taking into account trading costs.

"After trading costs, on average they would have lagged behind the market," he says. "There doesn't seem to be a lot of evidence that the stock selection of these newsletters is any good."

So why do folks bother to subscribe? "One motivation for reading the newsletters is to get superior returns," notes Mr. Metrick. "But I'm sure there are a lot of other reasons as well."

Indeed, for many, investing is not only a way to make money, but also a hobby. Subscribers enjoy trading on the advice of the newsletters, and they like the thrill of trying to earn market-beating returns, even if the chances of success are slim.

"After all, people also go to Vegas and to the racetrack as well," Mr. Metrick says. "A lot of this is related to gambling. People enjoy trading."

WE WANT TO HAVE SOMEONE TO BLAME.

When everything goes wrong, scapegoats come in handy. "People take credit for their successes and they blame their failures on chance and on others," Mr. Odean notes.

"Say you buy a newsletter and things go well," he continues. "You can say, 'I'm a genius and I picked the right newsletter.' If things go badly, you can say, 'The guy who writes the newsletter is an idiot.' It's nice to have somebody to blame so you don't have to blame yourself."

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By Jonathan Clements/Wall Street Journal Interactive Edition

It is a risky time to be a stock-market investor. It always is.

The notion of risk can be slippery. It is usually associated with volatility, as measured by gauges like beta and standard deviation. The more volatile an investment or a portfolio is, the riskier it is deemed to be.

Yet these short-term price swings don't capture my sense of risk. Instead, I worry about investment losses that could have a lasting impact.

Falling Short. When investing, the greatest danger is failing to meet your financial goals, because you save too little or earn lackluster returns.

The need to save is obvious. What about returns? If your portfolio is to grow, you must outperform inflation, taxes and investment costs. And the best way for long-term investors to do that, I believe, is to buy and hold stocks.

Risky? If you compare the short-term performance of stocks with that of bonds and money-market funds, the traditional link between risk and reward seems alive and well. The greater returns of stocks are accompanied by greater short-term gyrations.

But over the long haul, this risk-reward relationship isn't quite so simple. Indeed, stocks actually seem safer because they are more likely to make you decent money, while bonds and money funds find it tougher to stay ahead of inflation, taxes and investment costs.

Compelled to Sell. Investing is delayed consumption. We tuck money away with the notion that, somewhere down the road, it will get spent. But what happens if the future arrives -- and the stock market is underwater? You could be forced to sell at dirt-cheap prices.

To avoid that risk, look to unload your stocks when you are within five years of needing the cash, preferably making your sales when the market is buoyant.

Unrequited Love. Too many investors bet too heavily on just one or two stocks. Sure, that may mean handsome gains. But if you bet wrong, you could suffer losses you will never recoup.

The solution is simple enough. Use mutual funds to spread your money among a good number of stocks in a variety of market sectors, including large, small and foreign stocks.

Left Behind. If you jump in and out of stocks in an effort to catch bull markets and sidestep market declines, you run the risk of being out of the market when stocks are bulldozing ahead. That is a real danger, because big stock-market gains are often concentrated in a few weeks or even days.

To avoid this particular pothole, decide what portion of your portfolio you want in stocks and then stick with this percentage no matter what is happening in the market.

Relatively Miserable. Even if you stick with stocks through thick and thin, you could still suffer lackluster results, thanks to market-lagging performance by your stocks and funds. Because of that danger, consider using index funds for at least part of your stock portfolio.

Index funds buy the stocks that constitute a market index in an effort to match the index's performance. By keeping a portion of your money in these funds, you guarantee that whatever the market delivers, that is what you will get.

Closed for Business. My fondness for index funds comes with one reservation. With an index fund, you are locked into a particular market or markets. What if one of these markets ceases to exist?

It has happened. Finance professors Philippe Jorion and William Goetzmann examined 21 national stock markets that date back to the 1920s. Over the next seven decades, eight shut down temporarily and seven suffered a long-term closing.

It is hard to imagine the U.S. market closing. But it is entirely conceivable that this could occur in some of the smaller foreign markets found in international index funds.

If a closing were threatened, an index fund might get out before the market shutters, though probably at a steep loss. By contrast, at least some actively managed funds would no doubt prove nimble enough to bail out at decent prices.

Friendly Fire. Yeah, individual stocks fall apart. But the danger is greatest for those who foolishly bet too much on any one company. True, the market can take a sudden dive. But that has grim consequences only if you sell in a panic or have money in stocks that you will need to spend in the near future.

The stock market often goes haywire. But it is the way investors react that causes the real damage. Keep that in mind in the days ahead.

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This book presents 24 ideas Buffet has followed from day one.

Your reviewer enumerates below these twenty-four ideas with his comments for your ready reference:

To succeed in the market, you need only ordinary intelligence. But in addition, you need the kind of temperament to help you ride out the storms and stick to your long-term plans. If you can stay cool while those around you are panicking, you can surely prevail.

Don't dwell on the price of stocks. Instead, study the underlying business, its earnings capacity and its future. If the question is, "How long will you wait?" – "If we're in the right place, we'll wait indefinitely" says Buffet.

(i) Business he can understand

(ii) Companies with favorable long-term prospects

(iii) Business operated by honest and competent people

(iv) Businesses priced very attractively

(v) Business with free cash flow

Don't think about "stock in the short term." Think about "business in the long term".

Do not be tempted by get-rich-quick deals involving relatively complex companies (e.g., high-tech companies). They are the most unpredictable in the long run. Look for the absence of change. Look for the business whose only change in the future will be doing more business, e.g Gillette Blades.

Portfolio concentration – the opposite of diversification – also has the power to focus the mind. If you're putting your eggs in only a few baskets, you're far less likely to make investments on impulse or emotion.

Abstain from looking at share prices every day. Study the playing field and not the scoreboard. Know the value of something rather than the price of everything.

What if you had to predict how every stock in the Standard & Poor's (S&P) 500 would do over the next few years?

In this scenario you have very poor chance of being correct. But if your job was to find only one stock among those 500 that would do well? In this revised scenario you have a good chance. A few good investments are all that is needed.

It's possible to imagine a cataclysm so terrible that the markets would collapse and not bounce back. Externalities don't matter – and you can't predict them, anyway. And what can you do about them? Focus on what you can know: the workings of a good business.

Assess the management team before you invest. A investing in any company that has a record of financial or accounting shenanigans, (creative accounting, accounting jugglery). Weak accounting usually means weak business performance. Strong companies do not have to resort to tricks.

Wall Street is the only place where people go to in Rolls Royce to get advice from people who take the subway. Ignore the charts. A value investor is not concerned with charts. Invest like Benjamin Graham. Graham told investors to "search for discrepancies between the value of a business and the price of small pieces of that business in the market." This is the key to value investing, and it's far more productive than getting dizzy studying hundreds of stock charts. Offer documents of most mutual funds say – in small print – that past performance is no guarantee of future success. Buffet says the same thing about the market: If history revealed the path to riches, librarians would be rich.

Make independent thinking one of your portfolio's greatest assets. Being smart isn't good enough, says Buffet. Lots of high-IQ people fall victim to the herd mentality. Independent thinking is one of Buffet's greatest strengths. Make it one of your own.

Write down the industries and businesses with which you feel most comfortable. Confine your investments to them.

Short-term forecasts of stock or bond prices are useless. They tell you more about the forecaster than they tell you about the future. Take the time you would spend listening to forecasts and instead use it to analyze a business's track record. Develop an investing strategy that does not depend on the overall movement of the market.

19. Understand "Mr. Market" and the "Margin of Safety"

What makes for a good investor? A good investor is one who combines good business judgment with an ability to ignore the wild swings of the marketplace. When the emotions start to swirl, remember Ben Graham's "Mr.Market" concept, and look for a "margin of safety".

Make sure that you also understand Buffet's concepts of Mr. Market and the margin of safety. Like the Lord, the market helps those who help themselves. But, unlike God, the market doesn't forgive those who "know not what they do". Bide your time, and wait for Mr. Market to get depressed and lower stock prices enough to provide a margin-ofsafety buying opportunity. 20. Be Fearful when Others Are Greedy and Greedy When Others Are Fearful

You can safely predict that people will be greedy, fearful, or foolish. Trouble is you just can't predict when or in what order.Buy when people are selling and sell when people are buying.

21. Read, Read Some More, and Then Think

Mr. Warren Buffet spends something like six hours a day reading and an hour or two on the phone. The rest of the time, he thinks.He therefore advises get in the habit of reading. The best thing to start is to read Buffett's annual reports and letters. Finally, restrict your time only to things worth reading.

22. Use All Your Horsepower

How big is your engine, and how efficiently do you put it to work? Warren Buffett suggests that lots of people have "400 – horsepower engines" but only 100 horsepower of output. Smart people, in other words, often allow themselves to get distracted from the task at hand and act in irrational ways. The person who gets full output from a 200-horse-power engine, says Buffett, is a lot better off.

Make sure that you have the right role models. Strive for rational behaviour, good habits, and proper temperament. Write down the habits, practices and philosophies that you want to make your own. Then be sure to keep track of them and eventually own them. Financial success is a "matter of having the right habits".

23. A the Costly Mistakes of Others

This is self explanatory and need no comments!

24. Become a Sound Investor

Buffet says that Ben Graham was about "sound investing". He wasn't about brilliant investing or fads and fashions , and the good thing about sound investing is that it can make you wealthy if you are in not too much of a hurry, and it never makes you poor.

To become a sound investor, you need to develop sound investing habits. Always fight the noise to get the real story. Always practice continuous improvement.It's less about solving difficult business problems, says Warren Buffet, and more about a ing them. It's about finding and stepping over "one-foot hurdles" rather than developing the extraordinary skills needed to clear sevenfooturdles.

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by Suresh Krishnamurthy Given the prevailing valuation levels, identifying a stock with potential demands considerable resourcefulness, though it is not impossible for the diligent investor. There are certain strategies that can be adopted that will considerably add value when pursued consistently over a long period. Click Here for the Complete Article

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Study says managers’ ability to beat the market is as cyclical as the Street itself Mark Hulbert Few mutual fund managers beat the stockmarket over the long term. That sad truth is widely understood, and it helps to account for the vast popularity of index funds, which aspire only to match the returns of a particular market. But a new study suggests that it may be too soon to give up on actively managed mutual funds. While few managers can outpace the market as it moves up and down, year in and year out, substantial numbers can predictably outperform it during parts of the economic cycle, the study has found. The study, called ‘Investing in mutual funds when returns are predictable’, is forthcoming in the Journal of Financial Economics. In the past, the study says, most mutual fund research assumed that managers’ ability or inability to outperform the market was constant, regardless of the waxing and waning of the market cycle. But the study made a different assumption: that significant numbers of managers may have market-beating abilities at some stage of the economic cycle, but not at the others. A manager, who can beat the market during a recession, for example, or in periods of high inflation, may well lag behind it in periods of robust economic growth or low inflation. The study specifically correlated funds’ returns with four macroeconomic variables that previous studies found to be good leading indicators: the 90-day Treasury bill rate, the stock market’s dividend yield, the difference between the interest rates of junk bonds and higher-quality issues (the so-called default spread) and the rate difference between longer-term Treasuries and 90-day Treasury bills (the term spread). How can this help investors beat the market? To find out, the study built a hypothetical portfolio that invested each month in the no-load funds that historically performed the best when the four macroeconomic variables were similar to that month’s readings. They back-tested the portfolio from 1980 through 2002, using only the information that was publicly available in each month. The study also compared their portfolio’s gain with that of several strategies that previous research had found to have market-beating potential. None of those others came close. The professors’ strategy does come with significant caveats about its real-world profitability. Because the portfolio is rebalanced monthly, it can require frequent switching among funds. According to Professor Wermers, the average holding period of funds in the portfolio was only about four months, so almost all the capital gains would be taxed at the higher short-term rate. That means the strategy works better in tax-deferred accounts. And what happens if a fund under consideration imposes huge fees or other restrictions on frequent short-term trading, as some funds have started to do? In such a case, the professors would simply avoid the fund. After all, Professor Wermers says, there are still plenty of funds that don’t have such restrictions but do have managers that can beat the market during part of a cycle. The study concede that their strategy is probably more appropriate for institutions than for individual investors. Still, it can teach us not to be too quick to conclude from the fund industry’s dismal long-term record that virtually no managers have market-beating ability.— NYT News Service

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The one perceived disadvantage of growth stocks is their greater volatility. While volatility is often equated with risk, it is also a source of considerable opportunity. Even those companies with the financial resources and product diversity to reduce the long-term risk can still have short-term price fluctuations. These dips provide outstanding opportunities for those investors to establish positions or add to positions when the stocks are down. While investors are always most aware of these short-term risks when the stocks have dropped in price, the better growth stocks often have the lowest risk at the time they are considered to be the riskiest. For example, after the 1987 crash, many biotech stocks were selling for at least 50% below their 1987 highs and were perceived as high-risk investments. They were trading at levels which were close to hard asset value, and clearly less than their acquisition value. At these prices, the long-term risk was greatly reduced. Thus, we started the aggressive portfolio with a leveraged position.

Inefficient markets result when all buyers do not have the same information. This is in part due to the unique problems inherent in properly valuing development-stage companies. Most of them are losing money, and the value is in products that are not yet approved for sale. The visibility is increased and the risk is reduced as these products progress through the regulatory cycle. Opportunities are created because the investment community often ignores this progress as it happens. Investors get excited when a prominent medical publication publishes results, or the product passes a major regulatory hurdle. However, the real value changes as clinical trials prove that the drug actually works. Investing in these stocks is further complicated by the speed with which events get discounted. In recent years, news of technological progress has often been ignored, while in the early eighties, stock prices would move dramatically on any good news. This variability in the investment reaction means that investing in these companies at times requires a great deal of patience.

Over the years, we have become increasingly impressed by the importance of management in the long-term success of biotechnology companies. The rapidly changing technology and the many years it takes to get a product approved make managerial decisions that much more important. Many of our less successful investments have been among those companies with only adequate management. These intangibles are difficult to discuss in MTSL, but they are an important part of the investment decision. We want to emphasize that our evaluation of management is often different than the prevailing opinion within the investment community, and our experience leads us to believe that this has been an integral part of our success over the years.

We are frequently asked, "How do I build a portfolio?" Building a portfolio of our recommended stocks should be done with awareness of your tolerance for risk. A few of the larger companies such as Elan and Chiron have only modest long-term risk. The smaller companies require more diversification (at least 4 or 5 stocks) to reduce long-term risk. All of the stocks have more than normal volatility and thus short-term price risk.

One of the essential keys to growth investing is a long-term outlook. The cumulative value of MTSL over time will provide the understanding necessary for an intelligent reaction to events. Through your patience, perseverance and an investment strategy which fits your investment needs and desires, your growth investing in biotechnology should be very profitable for many years to come.

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Almost all i-flex shareholders appear to have held on to their shares despite Oracle Corporation's offer of a 10% premium (at Rs 882.62 a share) in its open offer to minority shareholders. Oracle paid around Rs 800 per share to a Citigroup venture fund to acquire its entire 41% holding in the company. The open offer for up to 20% of i-flex's equity, which ended late last month, helped Oracle get only an additional 0.68% stake in the company. This is easy to understand. i-flex shares have traded at an average rate of Rs 954 since Oracle announced the acquisition last August, well above the open offer price.

The reason why Oracle managed to at least get a marginal stake through the open offer was that i-flex's share price had fallen below the open offer price in the last five days of the open offer period. Investors are largely of the view that the company's fortunes could improve significantly under Oracle, which services about 8,500 clients in the financial services space. What's more, Oracle has strong business relationships with 17 of the world's top 20 banks, which analysts feel could be used to sell i-flex's core banking solution, Flexcube. This is one of the main reasons i-flex trades at Rs 965 per share, or about 29.2 times estimated earnings for the year ended March, 2006.

Interestingly, Infosys shares get a valuation of about 29.8 times forward earnings, making i-flex amongst the most expensive shares in the IT segment. This is hardly justifiable simply on business fundamentals, given Infy's disproportionately higher size, consistent earnings growth record and linear business model. i-flex's earnings, in comparison, have traditionally been lumpy with growth depending largely on the amount of license fees booked in a particular period. In the first six months of this fiscal, for instance, the company's earnings per share fell 47%, despite a healthy 29% growth in revenues.

Of course, there is the possibility of the company winning large deals, thanks to its new parent and also the fact that it's not owned by Citigroup anymore - according to analysts, it wasn't easy selling Flexcube to Citibank's peer group with Citi on board. Nevertheless, the fact that i-flex enjoys margins as high as Infy's signals that investors expect other triggers for the stock - like another attempt by Oracle to increase its stake in the company.

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In making an investment decision, apart from returns, there is one more very important factor that weighs heavy on investors' minds - risk. Simply defined, it is the uncertainty of happening/non-happening of a certain event(s) that is likely to affect future returns.

A risk is generally attributed to external factors that create disturbance in the existing scheme of things. Some of these external factors are geo-political uncertainties (elections, terrorist attacks and wars), financial crisis and economic downturn. However, what stockbuyers generally fail to understand is that, apart from these external factors, there is one very big 'risk-factor' that is very inherent (or internal) to them. This internal risk is that of 'indiscipline'.

By indiscipline, we mean that stockbuyers tend to forget the basic scruples of safe and sound investing, as they are then lured by the high probability of earning 'a big bang for their buck'. These times when everything around seems promising and that the stock markets are rising incessantly, discipline generally gives way to chaos. And this leads to even the best of investors putting their money into the worst of stocks believing that their invested company is the 'next big thing'. Ironically, as just these very times when stockbuyers need to stick to the fundamentals of sound investing, they seem to forget these (the fundamentals).

This is where the 'behavioral' aspect of investing gains importance. And this is the time when a stockbuyer, before making the next investment (say investment 'X') should look into a mirror, and ask certain strict questions to himself. First, he needs to ask whether he understands his investment 'X' as well as he thinks he does. This would include:

• asking whether the investor has enough experience of similar kind in the past. This is like, when an investor is thinking of investing in say, Tisco, he should ascertain what has been his previous experience with the company;

• asking what has been other people's track record in the past in making a similar kind of investment;

• ascertaining how much returns should his investment 'X' generate for him to break-even after his taxes and cost of making the investment. This would make clear the price that he would be ready to pay for the value of the investment 'X'.

Secondly, the stockbuyer needs to ask himself as to what would be his reaction in case his 'correct' analysis about investment 'X' goes wrong. This would then involve:

• asking whether he has adequately allocated his assets (into equity, debt, insurance) to tide over losses from his investment 'X';

• asking whether he has a track record of controlled behaviour (i.e. acknowledging that he made a mistake) or else he would be a part of the overall chaos when things go wrong;

• asking whether he is relying on a well-calculated approach and what is his tolerance level of risk. He could find out his tolerance level by studying his past losses.

Now, while the answer to the first question (i.e. whether the stockbuyer understands his investment 'X' as well as he thinks he does) would be indicative of the 'confidence' level of the stockbuyer, the answer to the second ( i.e. what would be his reaction in case his 'correct' analysis about investment 'X' goes wrong) would speak about the 'consequences' in times his investment decision goes wrong. If the stock buyer has clear answers for all the abovementioned questions, he would only make his larger task (of making investment 'X') easier. Thus, before you (as an investor with a long-term horizon of 2 to 3 years) invest, make sure that you have pragmatically ascertained your probability of being right and as to how would you react to the consequences of being wrong. Always, look at the downside before the upside. And always, look into the mirror before investing!

Posted by toughiee at 11:47 AM | Permalink | Comments | links to this post

Tom Gardner has made it his mission to uncover the best underfollowed, underappreciated companies before Wall Street gets on board. The legendary Peter Lynch once had a few things to say on the subject, and Tom thinks investors should listen up.

By Tom Gardner November 23, 2005