The life cycle of a stock

Recently I read a very good article titled "The key to the big money" published by Mike Swanson. He is the author of the Wall Street window. His ambition was to become a history professor and was more interested with the historical events, to be precise, the behind scenes of these events. Over a period of time, he felt the need to learn economics and slowly developed interests in the financial markets.

What a nice way to enter the stock market from historical events to economics and to financial markets!!!!. The author highly recommends the book "Secrets for Profiting in Bull and Bear Markets." by Stan Weinstein and I have started my quest for that :-)

I read part 1 and 2 of the same article and I am waiting for the rest. The article put in simple terms takes you through the life cycle of a stock in the stock market. In a glimpse, it talks about the different stages a stock goes through, the parties involved, support and resistance levels of a stock, volume it trades and in the end, the average investor always loose money.

The stock price depends on the basic supply and demand equation. As the demand for the stock goes up (there are more buyers in the market compared to the sellers) the stock value goes up and visa versa. For any stock there is a resistance level and a support level. Resistance level is the level above which it’s difficult for the stock to go up and the support is the level below which it’s difficult for the stock to go down. To put it in other terms, the support is the level at which there is a great demand for the stock and hence a lot of buying will happen. So it’s difficult for the stock to come further down. Resistance is the level at which sellers are more inclined to sell the stock and hence it’s difficult for the stock to go up.

The idea here is to identify the trend a stock follows and invest depending on that. As per Weinstein, the stock has the following four phases as shown.




* - This graph is directly taken from the published article.

1) Stage 1 ** Stock accumulation **
Usually this stage is started after a long decline of the stock. During this period the stock is kind of dead, not much activity, no big news, no big volumes and the demand - supply is almost even. The big guys (insiders and the institutions) with smart money identify the potential of a stock and its bright future towards the end of this phase. Me as an average investor, doesn’t have access to the knowledge base which the big guys are having and hence ignorant about the future prospects. Towards the end of the stage, the stock moves from the average investors to the big guy’s hand. They will start accumulating and slowly you can see the volumes picking up.

2) Stage 2 ** Mark up **
Now starts the fun. During the end of stage 1, the stock starts moving up. The smart money is in and there are no sellers. This breaks the resistance levels and the stock moves up. At this point, most of the stock holding is with the big guys. As the stock moves up, the fight starts between the big guys for accumulation and the stock further goes up. Now the good news about the particular stock is out and the stock brokers/analysts put a buy recommendation. Average investor sees this and starts buying at the peak price. End of the stage 2.

3) Stage 3 **Stock Distribution**
The stock is highly priced and there are lots of individual investors (guys like me :-( ) as the buyers. As the time goes, the stock stops advancing due to various reasons like the good news about the company is forgotten, the stock is heavily priced etc. The smart folks decide to sell the stocks and book the profit. End of Stage 3.

4) Stage 4 **Stock Liquidation**
Stage 4 starts with the prices coming down. There are more sellers than buyers and price keeps falling. The average investor keeps buying at each correction thinking that it will go back up. For the average investor, the start of this stage still looks good as the companies fundamentals are good, growth prospects are healthy etc. Even the brokers /analysts have the buy recommendation on it. Phase 4 ends with the average investor holding the stocks bought at the peak. Over a period of time, the average investor sells it in panic and this cycle continues.

During this cycle, the best time to buy is the start of stage 2. The average investor doesn’t have access to the information to identify whether the stock is at stage 2 or not. We can identify this cycle by watching the volumes and looking out for the big players.

The article ends with the following logic, it’s always better to follow the smart guys instead of the analysts / brokers. I always used to select a stock taking into account the fundamentals of the company but now after reading this article, I started appreciating the beauty of technical analysis and charting. I am waiting for the next parts of the same article. Will keep you posted.

Party time

After meeting Arun, I met George at the Oberoi hotel around 9pm. We took couple of beers along with chicken Chettinad(oh!!! real spicy) and talked for a while. Talked about all crazy stuff on earth like career goals, night party adventures, personal life blah blah...
The day before, George met a guy at the Etheena club in Leela palace and got an invite for the fashion party conducted by a Bollywood actor. We went there and it was unbelievable. There was a dance going on the stage. The girls were on bikinis, totally exposed and dancing in front of high society crowd of 300 people (of course all drunk !!).There were some Russian models and other girls who flew from outside India. Guys believe me; I have seen such stuff in US but not in India. Due to some technical reasons, I cannot post the photos taken during the party but shoot me a personal mail, I will share it :-). I am surprised to see things like this happening in India. I met the some new folks, all filthy rich kids, totally drunk, spending their father’s money with some girls around. At 11.30, as per the Bangalore law, they need to close down the place and hence we decided to roll.
Night is still young and the next hot destination, Club 9. Not sure why they didn’t close down the club at 11.30pm. We had some beers and then started dancing. Met some more guys & girls. I exchanged my card with a guy who is running his own software company. They are in the process of developing a product with similar functionality as Tally. Currently he is running the office from his garage. Man, I am impressed. It takes real guts to start off stuff like that after quitting a nice job. We talked for a while and he asked me whether I freelance. I was surprised by this question. I was like, you know..I have never thought about it, but then can give a shot. Just didn’t want to miss an opportunity, but then didn’t want to commit anything. He introduced me to another friend of his. Oh god!!! I really cannot remember any of these guys name. This guy is really funny and he owns a discotheque. Can you believe that? Chit chatted for a while.
It was almost 2am in the morning by the time we left the club. Came home, browsed for a while and crashed on to the bed.

and the journey begins!!!!

I am through with my diagnostic test today. Got a score of 570, not sure whether it’s a good score to start with or not. In the diagnostic test, I was tired and then somehow wanted to finish the test. Now I have realized the importance of keeping my mind concentrated during the whole exam (4hrs).
One of the great things happened today. I met my mentor Arun. He is gem of a guy. I really don’t have words to describe him. We met at a restaurant for a casual discussion on the preparation strategies, general career advice, choosing the b schools etc. I am really impressed by this guy. He has got a huge network. We spent 4.5hrs on the same table talking. One of the interesting things which came out for discussion is "Whether we need an MBA to succeed in life". He responded with a nice statement "I am married to my career but I am flirting with my MBA". Actually if you have the will to succeed, no one can stop you. But if you need an accelerated career graph or a career shift, MBA would definitely help.In the back of my mind I always had this question, whether a 40lakh MBA is worth or not (as mentioned in the earlier post). I couldn’t see a better guy to post this question. He responded back, asking me another question. How long do you plan to work in your career? I told him, may be till the age of 35-40 and then wanted to setup my own shop. So it would be like another 30years or so. The answer to my question lied in my last statement. If I am planning to work for another 30years, there is no question of whether a 40lakh MBA is worth it or not. This MBA degree will come to be of use in every phase of your career. I have never thought about the same in this perspective. To add to this, it’s a fact that, the 80% of the wealth comes from the last 15 yrs of your career.Then the discussion slowly shifted to personal life, time management, the four quadrants discussed by steven covey in 7 habits of a highly effective people. We talked about our reading habits, the forums we visit regularly, extra curricular activities, my trading strategies and interests in the stock market. He has a blog askpsycho.blogspot.com. We ended the conversation with me thanking for his time.
With god’s grace, I hope he is successful in his career and wish him all the best in his future endeavors.

Is it worth?

Recently I read a very good article on career switching in Pagalguy and felt like scribbling my thoughts on this subject. As many others around, I am from the IT background. Nice job, well paid and pretty satisfied with the work. The amount of effort put in to get into a good b school is really huge. It will take at least an year starting from the preparation for GMAT, taking the exam, applying to the colleges, the research efforts to identify which all colleges to apply, the essays, recommendations etc. After doing all these things, there is no guarantee that you will get into a good college. MBA aspirants, I am not becoming a pessimist and don’t want to let you down. I am just scribbling my thoughts on this. There is fierce competition out there to get into a good b school esp. for Indian students from the IT background, which constitutes the largest pool of applicants in any international business school. To get an admission, I need to project myself different from my peers and need to convince the admission committee that I am the best candidate. So these are my challenges which I want to get through by fall of 2008 (knock on wood). After getting through, the challenges are to face the situations like out of job during the course time (1-2years), huge loan for financing the education and taking care of the family etc and the biggest challenge is to get a good job and everyone banks on this for greener pastures.

So coming back to the topic whether its worth and will it do any good for my career? Thinking about the 2-3years of effort, the debt and many other difficulties on my way, I still feel it WILL. It might take 5years to get out of the debt, but I still strongly believe it’s the best investment I am gonna make.
I know there are too many things to worry about, but the idea of change is what’s pushing me so hard to get through. One of my friends recently told a very casual statement while having a couple of beers; you cannot go wrong with education. I thought about this for a while and felt he is correct. I might have to live with the debt burden for another 5 years, but in the long term I feel I will taste the juice of success.
Meeting new people with the same wavelength of mine, understanding a new economy, being in a new country and above all back to the college life, these are some of the things which keep me inspired.

I am signing off with the few lines from Swami Vivekananda

When I asked god for strength
He gave me difficult situations to face

When I asked god for wealth
He showed me how to work hard

When I asked god for favors
He showed me opportunities to Work hard

GMAT GMAT GMAT!!!!!

Under the mentorship of Arun, I have started my GMAT preparations. I am finding it very difficult to achieve the target of 50 questions a day, which is like 2.5-3hrs of studies. These days I have very less office work and devote most of my time reading different GMAT forums like Testmagic, Pagalguy, Scoretop etc. I felt very enthused and inspired by reading the posts in these forums and really appreciate all the efforts of sharing information by each member. You have all the information in the net and it’s only a matter of digging it to find them out.
I want to be back in college by 2008. There are lots of schools out there and I am very confused which all to look at. Forgot to mention, I applied for SPJain institute in Dubai. This institute is well rated among the other Asian peers like NUS and Melbourne University. It’s a one year course and stream specific. During the course, you spent 6 months in the Dubai campus and next 6 months in the Singapore campus. This will give you exposure to both these economies. If admitted, I will do the MBA in Investment Banking. Finance sector is hot in Dubai as well as Singapore and hence might get placed in one of these places. On the flip side, the institute is only 2 years old and the profiles getting admitted have an average work experience of 2-3 years. With 5 years of experience, I think I will be the oldest guy around :-(
On the application front, I will be getting a response by end of this month. Lets wait and watch.

I am really worried about my investments these days. The stock market is behaving crazy for the last 2-3 days. It’s shedding around 100 point’s everyday. I thought this week would be really good as the quarter results season have started. It’s the Infosys results tomorrow and the stock fell by more than 100rs in the last couple of days. God knows what’s happening...

Day 2 of 2007

Day 2of 2007 started off with one of my colleague Sunny chawla dropping in my cube with a very interesting question.
Is this a right time to invest in the stock market? I was like.. Did I become a financial advisor :O
This is the million dollar question for which no one knows the correct answer for sure. I remembered a recently published article about the biggest crooks in the stock market are none other than the folks(analysts) who come in suites and gets interviewed on CNBC. I never listen to them as they have their own interests in each market update. To answer the above question, I feel it’s a good time for short term traders to invest as everyone is positive on the 3rd quarter results from Infosys, Satyam etc. On the flip side, the market is very volatile with a recent correction of 1000 points in 3 days and a bounce back in the last few days with Nifty touching the 4000 mark yesterday.
I am worried to put in my orders and hence adopted a wait and watch strategy. I gave Sunny a nice description on how the options market works and how to punch in orders through ICICI direct.

I learned the basics of stock market strategies from George while I was on a project in GE Asset Management, CT, USA. I remember the quality time we spent together in the Gym and in different pubs in Stamford,CT. Today, after a gap of 6months or so I am meeting him in Bangalore. We are planning for couple of Kingfisher beers tonight. About George, he is an American with a polish descent. Currently working as an analyst in Goldman Sachs and this is his first trip to India. I remember making him eat a Dosa and taking him to the temple in Newyork :-)

The next interesting thing which happened today was the tough bargain with the street book seller. I got the book "The life of Pi" for Rs 20 :-). Read the first few pages yesterday and it’s interesting.

Signing off, will be back soon. Keep checking...

Jan 1, 2007

Jan 1, 2007

At last I have decided to blog :) Hope I will be able to continue this for a long time.

Folks, to start off, Happy New Year...Hope this year cherishes all your dreams....

The day 1 of 2007 started with me reaching Bangalore from Calicut after a 10day vacation. I reached Bangalore at 5.30am and had a short nap. Woke up to see that its 8.30am and the clock is ticking...need to run to office. I made it by 10am to see the whole floor empty... Oh my god!! Is it a holiday?? I saw my manager in his cube and asked him and he confirmed it's not...browsed through all the mails and started clearing my inbox. This mail caught my attention. It’s a one to one discussion about my performance appraisal at 10.30am...what a nice way to start the New Year.

The discussion went smooth with my manager showing happiness in my performance and the challenges for 2007. Lots of new projects, new initiatives, an onsite opportunity and blah blah in pipeline... He (manager) is a nice guy and I like him a lot for his openness, cool attitude and of course for his happiness in my performance :). I had a fruitful discussion with him asking for some specific training on SQL Server 2005 and SQL Server clustering. The things which would have shocked him would be my questions on MBA. I told him that I am planning to take my MBA in Finance and whether Thomson Financials would help me in achieving that goal.

The questions were very specific with respect to Thomson’s policies on higher education

1) If I leave Thomson for my higher studies (MBA in finance), will I be given chance to come back.

2) Monitory wise does Thomson provide any help.

These questions surprised him. He will check with his Manager/HR and get back to me.

Anyways, the discussion went smooth and I got back to my cube. The rest of the day went with me taking a course on SQL Server administration from the Thomson University(Online). This was due by Dec 2006 and as usual I was late to complete it :-).
Don’t take me wrong, this is a must for closing the appraisal!!!!

The day went without any major production issues. Thanks to the clients who were out on vacation.

I was back home by 6pm. There was a red wine at home, but no friends around. Ditched the idea of drinking and started reading as I didn’t have anything else to do. There was the last couple of chapters left in Freakonomics, which I completed. One was about parenting which was very boringJ. Read an issue of The Week and Thomson inside magazine.

The first day of 2007 ended and I am signing off.

PS: - The next post will feature about my interests in stock market, MBA dreams etc.