Objective – based investment strategy


It is very difficult to on the upward and downward movement of Stocks. This is something like no two investors are alike and decisions are based on the investors objective, time – horizon and risk- profile. In the stock market there are investors with different profiles like day-traders short-term traders, long-term investors etc. An investment in a stock is largely a function of the objectives. An objective of a day- trader would be different from that of a short- term trader or long term investor. The decision depends on the cost of funds.

An investor, despite being a long-term investor may be compelled to sell a stock even if the growth prospectus are excellent if the investment is done on the basis of borrowed funds and there is a compulsion to pay back the borrowed funds.

Let us take the case of a financial analyst who is an expert advisor on stocks. He forecast at the beginning of the year that the stock price of an Engineering company, which was quoting between the rates of Rs 290 and 370 had the potential to scale upward in view of the bright outlook for the industry in general and the company in particular. After 4 months the stock witnessed hectic activity and shot up to over Rs 540 after witnessing a phase of consolidation at around Rs 460 levels. After the sharp rise many clients of the analyst called up seeking his views as to whether they should start to book profits in the stock or retain the stock on a long- term basis. This was very difficult to answer without discussing the objective of the investor. The expert has done the same and given suitable opinion to suit the investor.

A day trader would be content with small profit even if there is potential to earn large profits over a longer period of time. Day-traders normally do leveraged traders. For example, a day-traders may have a bank balance or Rs 100,000 and would be able to buy only 1000 shares of a company quoting at Rs 100 if the purchase is by way of delivery. He would buy 10,000 shares at Rs 100 valued at Rs 1,000,000 ready to take a loss up to Rs 100,000 if the trade goes adverse as an alternate..

A day-trader would be content to book a profit of Re 1 per share and lock a gain of Rs 10,000 whereas a long-term investor would be happy with a profit of Rs 100 per share. Therefore, profit motive is largely dependent on the profile of the investor. An investor with a longer-term horizon can hold on to the stock of the aforesaid Engineering company and participate in the long-term growth of the company whereas it would be beneficial for short term traders to take profit if their price objectives have been achieved. We are giving below another practical aspect of investing on long term basis.

Investors who have a long-term horizon can look at Tinplate of India, a Tata group company, which has pioneered the manufacture of tinplate in India and today is the largest manufacture in India with a market share of 40%. The Company has foreign and domestic consumer groups.

The Company’s tinning line products contribute about 90% to its turnover, 75% of which is generated from the domestic market. The balance accrues from exports from West Asia, South East Asia and neighboring countries The Company has firmed up plans to augment the capacity of its manufacturing plant from 1,80,000 tons to 3,80,000 tons by the year 2008. The proposed expansion is to be implemented at a cost of $ 52 million which is to be funded from internal accruals and debt.

The company has a 40% share of the Indian market for tinplate. The company plans to augment the market share from the current level of 40% to 60% going forward. Also, the company is planning to continue its strategic thrust on exports to specific end users in niche markets in South East Asia, West Asia and Europe. In 2005-06, about 25% of the company’s revenue was accounted for by exports.

The company was in the red a few years back has achieved a turnaround and is now embarking upon a path of growth and transformation aimed at increasing market reach and leading the value chain for providing cost-effective, innovative and convenient packaging solutions for edibles. The packaging industry is poised for rapid growth in the years ahead based on the retail story and companies operating in this segment are expected to stand to benefit immensely. Therefore, those investors seeking long term returns could invest in well-managed packing companies.

We are of the opinion the investors may seek advice of experts but they should also make some of their own study about the stocks. With every company’s details are now a days are available on the Internet. Therefore it is not difficult to gather the information before making an investment.