Preface to the 2nd Edition
I am delighted, indeed excited, to write this preface to the second edition of my book “Stock Market Wisdom”. The first one was written during the peak of the COVID-19 period in 2020. It was a period of great gloom all over the world, more so for India as nobody knew what was in store and no one in his wildest imagination could have foreseen or endured a calamity of that type in contemporary life. The way the world responded to the pandemic, especially India, is nothing short of historic to be written in golden letters.
India managed the desperate situation boldly and with such exceptional wisdom that not only did we emerge very quickly from the crisis but we also became stronger in stature, in the eyes of the world. Our stock markets staged an incredible turnaround and grew in size and maturity to such an extent that at the time of writing this preface we have grown to become the fourth largest stock market in the world, overtaking Hong Kong and behind only US, China and Japan. Market cap has touched USD 5 trillion and investor count has steadily climbed up to around 160 to 170 million involving almost 17% of Indian households. National Stock Exchange (NSE) of India has been consistently ranked as the world’s largest in derivatives trade and NSE holds the world record of registering highest ever number of transactions in a single day. Slowly but steadily, India is graduating from a nation of savers to a nation of investors.
This augurs very well for our future. India aspires to be the third largest economy of the world in the next two to three years, from its current position of number five. Stock markets have a great role to play in this process. Strong political leadership and stable economic administration in the past couple of decades and the potential of its continuation into the future give great hopes in this aspiration of the country. Substantial investments are being made into futuristic industries like semiconductors, alternative clean energy, artificial intelligence, electric mobility and many other new emerging technologies as is evidenced by the spate of IPOs witnessed in recent times. The fact that these are accepted with open arms and subscribed multiple times by investors is proof of our right direction and great future.
Compared to the shy and primitive capital market ecosystem that we had in India few decades back, we have come a long way. Today we can boast of having one of the most sophisticated trading and settlement systems (possibly the only country with an experimental T+0 settlement), a world class regulator in SEBI, and one of the fastest growing investor bases in the world. Still, compared to the world leader, United States of America, in size, depth and variety, we have a long way to go. The good news is that we are on our way and on the right track.
I am indeed grateful to my readers, investors, and my publisher TAXMANN for the great interest and response shown to the first edition of my book. I am overwhelmed. This has given me the drive and energy to write a second edition of the book. Capital market is a very dynamic and ever-changing field, especially so in India, which by itself is the fastest developing major economy of the world. I have added the new developments in the field and the economy to all chapters of the book. I have also added chapters on Asset allocation and the way forward for the country, in addition to a number of new annexures reflecting emerging corporate developments. I hope you will find the new book useful.
HAPPY INVESTING!
T.S. ANANTHARAMAN
June, 2024
PART 1 INVESTING WISDOM
14 BONUS SHARES, SHARE SPLIT AND RIGHT SHARES
FUNDS AND THEIR RELEVANCE
19 LESSONS IN WEALTH CREATION FROM WARREN BUFFETT
TRADING vs. INVESTMENT
23
ASSET ALLOCATION
PART 2
BASICS OF STOCK ANALYSIS
25
Life Expectancy of Companies
12.1 Introduction
Value investors and even many casual investors espouse long-term investing. The question they rarely address is, How longis long-term ? Is it 5 years or 10 years or even longer? Warren Buffett famously said, ‘Our favourite holding period is forever’, 21 adding, another time, that he buys ‘on the assumption that they could close the market the next day and not reopen it for five years’.22 These are solid approaches to longterm investment.
However, we now live in a world where the only constant is change, and where change management is said to be the biggest challenge for managers. In such volatile times, the sustainability of many-perhaps all-companies is in question. As a result, long-term investors should begin thinking more about companies’ life expectancies.
12.2 Life expectancy of companies
We call companies like IBM blue chips. Early market investors bought blue chips, forgot about them for a decade (or three), then used the profits to provide for future generations. In India, some investors still swear by Dhirubhai Ambani and Azim
21.From Warren Buffett’s 1988 Letter to Shareholders, available at: https://www.berkshirehathaway.com/letters/1988. html
22.Buffett, Mary, and David Clark, The Tao of Warren Buffett: Warren Buffett’s Words of Wisdom Explained (London: Pocket Books, 2008), 141.
Premji, insisting they would never sell their shares of these companies. Many have created enormous wealth by following this time-tested practice.
The new reality, though, is that the life expectancy of companies is shrinking. The planet is stressed, its resources increasingly scarce. Technological disruptions are undermining even long-established industries. All of this has drastically changed how companies survive and grow.
Steven Denning, a leadership guru who studies companies’ survival, says that the life expectancy of Fortune 500 companies has plummeted from around 75 years in the 1950s to less than 15 years now. The Fortune 500 companies—the largest firms in the world—traditionally had the financial and technological muscle to knock aside competitors in difficult times. But their longevity is no longer a given. The fate of smaller companies could be even worse, unless they are nimble enough and smart enough to adapt to the changing conditions.
12.3 Survival of Sensex companies
The Sensitive Index of Bombay Stock Exchange, popularly known as Sensex, was first introduced to investors with the base year as 1979. The Sensex listings consist of the 30 largest, most popular, and most liquid shares quoted at BSE. The Index Committee continuously monitors the performance of these shares while scanning the market for new companies that satisfy its tough inclusion criteria. The number of companies in Sensex has always been limited to 30.
The 30 companies included in the first list of Sensex in 1979, with the weightage of the shares in the Index, in alphabetical order, are given below:
5Bombay
6Bombay
7CEATAutomobile0.83
8Century
9Crompton
FIGURE 12.1. COMPOSITION OF SENSEX IN 1979
12Gwalior Rayon (Grasim)Diversified7.00
13Hindustan MotorsAutomobile1.33
14HindalcoMetals2.39
15HLLConsumer Goods7.92
16Indian HotelsConsumer Services2.66
17Indian OrganicsMaterials1.48
18Indian RayonTextiles12.48
19ITCConsumer Goods4.44
20Kirloskar
24NestleConsumer Goods0.80
25RILMaterials2.80
26ScindiaConsumer Services1.15
27SiemensElectricals0.06
28Tata PowerEnergy1.63
29Tata SteelMetals4.71
30TelcoAutomobile7.98
Source: Parikh (2015), page 97
The highest weightage was for textiles with 23.7%, followed by materials at 13.8%, consumer goods at 13.2%, automobiles at 12%, and all other categories at 27.3%. In terms of number, the automobile sector had five companies, followed by materials at four and industrials, electrical, textiles, metals and consumer goods with three each. Earlier, the full value of the company was used to calculate the Index (number of shares issued*market price of share). Since 2003, the Sensex is calculated based on a free float capitalisation method. Free float refers to shares available for trading in the regular course. This excludes shares held by promoters, insiders, and governments. Market experts consider free float method superior to the earlier method of calculation of index as this includes only shares actively available for trading in the market. This reflects market trends in a more broad-based manner as it excludes
promoters’ holdings, which are concentrated in the hands of a few persons and are not available for trading in the ordinary course of business.
The Sensex as of 1st June, 2024 has the following 30 shares, with weights:
Source: Aditya Birla Capital. Today the maximum weightage is for banking and finance, followed by software/ technology, FMCG, and automobiles. In terms of number, banking and finance dominates with eight companies, followed by software/technology with five companies, and FMCG and automobiles with three each.
12.4 Sustainability of companies
A Business Standard analysis based on data compiled from Capitaline indicates that there was practically no change in the list of companies included in the Sensex in the first 10 years since 1986, when the Sensex was first developed. In the next 10 years after that, there were 25 changes in the scrips included in the Sensex. Changes (replacements) were more frequent since the liberalisation of the economy initiated during the nineties and this trend continued even in the pandemic times of 2020 – 23.
The size and type of companies finding a place in the Sensex has changed substantially over time. In 1991, the largest company in the Index was 100 times the size of the smallest company in the Sensex; whereas in 2024, the ratio is down to only 14 times. Furthermore, while manufacturing accounted for 96% of the Index in 1991, it accounts for only 42% in 2024. The opposite is true in services which dominates the Sensex with almost 60% share in 2024, compared to a measly 4% share in 1991.23
The topic of the chapter is sustainability of companies and the above comparison is highly relevant.
1. Only seven companies appear in both lists: Hindustan Unilever (then HLL), ITC, L&T, M&M, RIL, Tata Steel and Tata Motors (then Telco).
2. There were no banks/finance companies in the first list, but the new list is dominated by them: Axis Bank, Bajaj Finance, HDFC Bank, ICICI Bank, IndusInd Bank, Kotak Bank, State Bank of India, and Bajaj Finserv.
23. Sachin Mampatta in Business Standard 20 January 2024 quoting from Capitaline, Bloomberg and Business Standard calculations.
3. Other dominating sectors in the latest list are:
Software/Telecom: Bharti Airtel, Infosys, TCS, HCL Tech, Tech
Mahindra, and Wipro
Automobiles: Maruti, M&M, and Tata Motors.
FMCG: Hindustan Unilever, ITC, and Nestle.
4. Many of the dominant sectors of today (banking and finance, software and telecom) did not find a place in the original Sensex. The textiles sector dominated the original list but does not appear at all in the new one.
5. It is indeed hard to believe that companies like Satyam Computers, Jet Airways, Oriental Bank of Commerce, Reliance Capital, Unitech, MTNL, and JP Associates, some of which have disappeared or become irrelevant, were once part of the hallowed index.
12.5 Conclusion
The above discussion clearly shows that the sustainability of companies, even seeming blue chips, has limits. This trend is likely to persist in the years to come, as technology changes life in unprecedented ways. So when we talk about very long-term investment—the buy-it-and-forget-it strategy—we also have to reckon with the changing landscape. Our universities, banks, automobiles, and family structures may change unimaginably in the years to come. Long-term investors should understand this, reconcile themselves to the changing realities, and adapt quickly to stay ahead.
Stock Market Wisdom
AUTHOR : T.S. ANANTHARAMAN
PUBLISHER : TAXMANN
DATE OF PUBLICATION : OCTOBER 2024
EDITION : 2ND EDITION
ISBN NO : 9789364559416
NO. OF PAGES : 272
BINDING TYPE : PAPERBACK
Rs. 495
DESCRIPTION
Think stock market investing is only for experts? Stock Market Wisdom by T.S. Anantharaman simplifies the stock market, making it accessible for beginners and seasoned investors. The book breaks down complex concepts into practical lessons, guiding you to informed decision-making and sustainable wealth-building.
Empowering You to Invest Smartly
Anantharaman simplifies investing by addressing common fears:
• “Investing is too risky.” Not when you learn to manage risks effectively
• “You need to be a financial expert.” Absolutely not. Small steps lead to big gains
• “Market crashes are a nightmare.” See volatility as an opportunity to buy, hold, or sell wisely
What You’ll Learn and Gain
• Invest in Indian Markets – Explore the opportunities within the evolving Indian stock market, from selecting stocks to spotting sectoral growth
• Simplified Fundamentals and Techniques
o Fundamental Analysis – Evaluate a company’s financial health through ratios and earnings
o Technical Analysis – Use charts and indicators for smarter market moves
• Behavioural Insights – Master market psychology, managing emotions like fear and greed for disciplined investing
• Sector-Specific Insights – Navigate investments in PSUs and emerging sectors with informed strategies Practical, Real-World Lessons
Packed with exercises, examples, and case studies, the book shares:
• Success stories like Infosys’ rise and insights from Warren Buffett and Rakesh Jhunjhunwala.
• Strategies for every type of investor—beginners build a foundation, experienced investors refine their approach, and enthusiasts stay updated with market trends. Key Takeaways
• Invest with Patience – Wealth creation is a journey; discipline and long-term focus are key
• Diversify Wisely – Build balanced portfolios to maximise growth without overextending
• Leverage Market Trends – Make cycles and news events work to your advantage
• Personalised Investing Frameworks – Identify the right investing style for your financial goals
• Continuous Learning – Stay informed and refine your strategy for better results Enhanced Second Edition
Updated with new market insights, strategies, and sector trends, this edition is comprehensive for today’s investors. Who Should Read This Book?
• New Investors – Gain confidence in market basics
• Experienced Investors – Enhance strategy and insight
• Professionals & Enthusiasts – Deepen knowledge, especially within the Indian market context