The Hindu Business Line : ‘Technical analysis cannot guarantee profits in markets’

, a technical analyst and member of the panel of global executives for the McKinsey Quarterly, addressing students of the Department of Management Studies at IIT Madras.

Mr Rajat K. Bose

Our Bureau

Chennai, April 6 Technical analysis, which is becoming popular with the younger generation, does not guarantee profits even to great technicians. Knowledge of the stock markets is the key to success and emphasis should be on managing trading risk while technical analysis can help you control things, said Mr Rajat K. Bose, a technical analyst and a member of the online panel of global executives for The McKinsey Quarterly.

He was speaking at an Investment Workshop organised by the Department of Management Studies (DoMS), IIT, and the BL Club. Contrary to the general perception, he said, there has been a de-emphasis on mathematics in technical analysis because people were more interested in making money. Mr Bose defined technical analysis as a study of markets or company performance on price charts, with price and volume being the basic raw data needed for analysis. There were three types of market trends, namely, uptrend, downtrend, and sideways movement, he said.

Selection of counters to trade should be based on parameters such as risk averseness of the investor, size of risk capital (money, on loss of which an investor would not lose his sleep), liquidity of the counter in question, volatility of the scrip and the lot size. Investors should exercise caution while investing in falling scrips. Further, they should decide their stop losses level in advance and stick to them.

The second session at the workshop was addressed by S.P. Tulsian, a long-time member of NSE. He spoke on Fundamental Analysis and various aspects that could help investors in valuing a company and decide on its investment worthiness.

Explaining each component of EBIDTA viz. interest, depreciation, taxation and amortization, he rated EV/EBIDTA as a strong indicator of the core strength and stability of a company, EV being the enterprise value. Companies with high EBIDTA were good investment avenues. DCF (discounted cash flows), he said, was also an important indicator and one should discount the profitability of current as well as future projects of a company.

While the EV/sales ratio was a valuable indicator of enterprise value, market capitalisation was a weaker parameter for measuring enterprise value, since the latter does not consider the debt component of the company while EV does.

Fundamentals were extremely important for a stock. This is the factor, which if strong, should keep the long-term investor invested in a stock, Tulsian said.

He considered liquidity of a company as important as its fundamentals as that is the factor that drives the market. This was in effect particularly for the period of August 2007 to January 2008, when the Sensex really spiralled ahead.

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