Some comments regarding sectors/companies, I have written in the course of replying the quarries of friends through FB message box.
1. Micro-finance companies are performing well till now. However, these companies' performance heavily depends on the policy of the central bank as they get funding from commercial banks which is highly subsidized in rate of interest. We could see this as escape route for commercial banks not to invest in priority sector but to get hefty return as investment in Micro-finance companies. Hence, for long term investment, these companies could be more vulnerable. But, for trading, they are fine.
2. Insurance companies are less understood. Their balance sheets are difficult to read for many investors. Hence, the rate of dividend, particularly bonus share part and possibility of rights shares are the parameters people understand easily. Hence, it is absolutely necessary for long term investors to understand the mechanism how insurance companies operate through and to enhance capability to know the performance indicators of the insurance companies. For trading, it is still fine again.
3. Hydro-power companies lack effective regulatory mechanism. The large hydro-power projects may suffer from Melamchi syndrome and many take several years for completion. Upper Tamakoshi could suffer from such syndrome. If a company has majority government shares, it could suffer from Radha Gyawali syndrome, means gross political interference like in Chilime. If it has been promoted by crooks, you could again loose money. This phenomenon could be called as NB Group syndrome like in NHPC. Some glimpses of this syndrome could be already seen in other companies also. The sector overall is not only profitable but very good for long term investment. Hence, long term investors should be better informed on such probabilities and should diversify their portfolio so as to mitigate any bad happenings.
4. Small companies of any sector could be targets of syndicates to increase or decrease prices and to control management. Hence, who holds shares of such companies should keep close watch.
5. Companies with foreign investment could be better managed. However, their primary interest is dividend in cash. Bonus share is further investment for them, hence, they are not inclined to bonus shares. Therefore, if you put money in Standard Chartered Bank, you should be mentally prepared to get cash dividend as high as possible and some nominal dividend in the form of bonus shares. Let's be aware and let's not be frustrated.
6. Banking is well regulated sector, but it is service sector. The highs and lows in regard to performance of a company in this sector is quite normal. This is high risk sector than real sector like hydro-power. Predictability in this sector is much less than in real sector companies. We have already seen some development banks and finance companies perishing. Even, commercial banks have gone to near collapse. KIST and Grand are two such examples. Prabhu could suffer one day badly as it has been eating contaminated cheap foods like KIST and Grand. Alternatively, it could do wonder if it could use KIST and Grand as nutrient rich fertilizer. However, it is more risky option anyway. Hence, long term investors should take into account that that banking sector companies also should be scrutinized properly.
In summary, we should develop our capacity and capability and should invest after basic understanding of the sectors and the companies. We should be clear if we are trading or investing for long.
For trading, understanding trend and behaving accordingly is more important than going through all short of analysis. Even rumor could be best utilized, though small traders have limitations in manufacturing and spreading rumors as truth. However, when big traders start some drumming, we could very well utilize that window of opportunity to buy or to sell. Technical analysis, to some extent, also may help to understand the trend. To be a good trader in Nepali market, at least for the time being, we should have a political analyst within us or with us. This will give us some additional advantage.
For long term investors, in my experience, there are three critical factors - 1. fundamental analysis of the company, 2. risk distribution (portfolio management) without stretching too much, and 3. courage to buy when the market is going down, particularly, sharply and holding the shares for long.
Note: The above mentioned opinions are not new as these are copied and pasted here from my mail box with some contextualization.
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