Investment Planning

January 2017

The Golden Rules for Investing

10 rules for investing, Risk, Compounding, SIP, Greed, Fear, Taxes, Tips, Value Investing, Personal Finance, Financial Planning

The Golden Rules of Investing are essentially a common sensical approach which largely comes down to the emotional aspects such as Discipline, Patience, Greed & Fear. 

Remember these 10 golden rules of Investing.

1. Risk is inevitable – What is Risk?  Understanding Risk is the first part and then learning to Manage it. 
2. Start early – Benefit from compounding. Einstein has acknowledged Compounding as the 8th wonder of the world.
3. Have realistic expectations – Greed is bad. How much is too much. You never know what is enough, until you know what is more than enough.
4. Invest regularly – Not even God can time the markets. Timing/Forecasting the markets is an illusion.
5. Stay Invested – Be a marathon runner. Markets tests patience and rewards conviction.
6. Don’t churn your investments – It only increases costs. If you like gambling, go to a casino. For serious investing, stay put.
7. Spread your corpus – Each investment class is important. Don’t put all your eggs in one basket. 
8. Sell your losers – Hope doesn’t make money, Wisdom does. We are biased against actions that lead to regret. People attach too much weight to gains and losses rather than wealth. 
9. Hot tips usually burn your investments – Avoid them. Remember the reverse of TIP is PIT. So a tip usually dumps you in a PIT almost always. 
10. Taxes are important – But not at the cost of a bad investment. Only Death and Taxes are certain, true ~ But don’t make bad investments just to save tax. Don’t be Penny Wise Pound Foolish.

Happy Investing

June 2016

Types of Investors – What type are you?

Types of Investors , Conservative, Aggressive, Risk taker, Risk Profiling, Risk Averse, Savers, Specialists, Speculators

I came across this good article at http://www.threetypes.com/philosophy/investor-types.shtml and wanted to share. It essentially discusses the various types of Investors viz : Savers, Speculators and Specialists and then goes on to explain how becoming a Specialist, is something which generates immense wealth over lesser periods of time , but which also requires tremendous efforts on the part of the investor.

Go ahead and decide which type of investor you are and then invest accordingly. Enjoy Investing…..

Savers

Savers are those people who spend the majority of their life slowly growing their “nest egg” in order to ensure a comfortable retirement. Savers explicitly choose not to focus their time on investing or investment strategy; they either entrust others to dictate their investments (money managers or financial planners) or they simply diversify their investments across a number of different asset classes (they create “a diversified portfolio”). For those who create a diversified portfolio, their primary investing strategy is to hedge each of their investments with other “non-correlated” investments, and ultimately generate a consistent annual return in the range of 3-8% (after adjusting for inflation). Those who entrust their money to professional money managers generally get the same level of diversification, and the same 3-8% returns (minus the management fees).

Savers seek low-risk growth of their capital, and in return, are willing to accept a relatively low rate of return. While there is certainly nothing wrong with striving for consistent returns, what the Saver is doing is really no different than putting their money in a Certificate of Deposit, albeit with slightly higher returns. The bulk of Savers are investing for long-term financial security and retirement. They start saving in their 20’s and 30’s by putting money in 401(k) accounts, mutual funds, and other diversified investments, and in 30 or 40 years, they have enough to retire on.

Savers rely in a single force to grow their capital: time. Because their rate of return is generally consistent, a Saver’s primary mechanism to achieve wealth is to invest and wait. In fact, Savers often use The Rule of 72 to calculate long-term investment growth and plan their retirement. While passive investing is an almost surefire path to a comfortable retirement, it also generally means 30-50 years of work to get to that point.

Speculators

Unlike Savers, Speculators choose to take control of their investments, and not rely solely on “time” to get to the point of financial independence. Speculators are happy to forgo the relatively low returns of a diversified portfolio in order to try to achieve the much higher returns of targeted investments. Instead of just spreading their money across stock funds, bonds, real estate funds, and a variety of other asset categories, Speculators are always looking for an investing edge. Perhaps they get a hot stock tip and try to cash in on the next Google. Or perhaps they hear about all the real estate investors who have made a bundle flipping houses, so they go out and buy the first run-down house they see.

Speculators recognize that they can have higher returns than Savers, and are willing to do or try anything to get those returns. They’re not scared to throw some money in an Options account and try their hand at derivatives trading; or run out and buy a bunch of inventory from a wholesaler they know and open up an eBay selling account. Speculators are always looking for the next great investment; for them, it’s all about being in the right place at the right time, and taking a chance on getting rich. If today’s investment doesn’t work out, there will always be another one tomorrow. (more…)

December 2015

How to avoid investing in MisManaged Companies – Understand Balance Sheet

How to avoid investing in mismanaged companies, Misallocation of capital, Successful Investing Tips

Most investors keep looking for the magic investing mantra which can keep compounding returns. Many burn their fingers by getting into wrong companies. The first step of successful investing and to avoid investing in MisManaged Companies is to Understand Balance Sheet of a company.

A balance sheet, also known as a “statement of financial position,” reveals a company’s assets, liabilities and owners’ equity (net worth). The balance sheet, together with the income statement and cash flow statement, make up the cornerstone of any company’s financial statements. If you are a shareholder of a company, it is important that you understand how the balance sheet is structured, how to analyze it and how to read it.

Here is a great starting point from Investopedia to understand reading a balance sheet. Another article talks about the due diligence that should be followed before choosing a stock to invest is another checklist which the investors should always keep handy when doing a first cut analysis before giving a ‘pass’ and research further.

Bala writes about a wonderful article on Misallocation of capital  which gives examples of why to avoid investing in companies which misallocate capital.

When you start looking at a balance sheet, a quick first cut analysis can help you eliminate researching further if you come across these common account red flags…

The Indian stock market, in aggregate, carries a relatively high risk that a minority shareholder will not realize the value in a listed firm because the controlling shareholder (or promoter as they are known in India) will appropriate value for himself, leaving little on the table. The risk is higher relative to certain other stock markets mainly because of limited regulation. In addition, lax enforcement indirectly encourages such behavior. Kimi writes on how one can avoid such landmines in his elaborate article peppered with examples.

Successful investing is all about avoiding the companies/ sectors/ industries which are mismanaged and going aggressively after the good ones…As Charlie Munger famously said “Tell me where I’m going to die, that is, so I don’t go there.”…..

Happy Investing….

October 2015

May 2015

Understanding Systematic Transfer Plan (STP) & Benefits !!!

Systematic Transfer Plan Benefits, Equity Investments, Strategy , Tactical Allocation

Systematic Transfer Plan refers to Mutual Fund investment method where an investor is able to invest lump sum amount in a scheme and regularly transfer a fixed or variable amount into another scheme. Transfers are usually made from debt funds to equity funds if the market is doing well and vice versa if the market is not performing well.     

Why should one opt for STPs?

  • Time-saving: Instead of selling equity mutual funds units first and then waiting for sale proceeds before re-investing into any other scheme, STP provides you smooth transfer of your funds from one scheme to another of the same fund house. Its saves you time and reduces the cost due on transaction front
  • Consistent returns – Money invested in debt fund earns interest till the time it is transferred to equity funds.                                                                                           The returns in debt fund are higher than returns from savings bank account and assure relatively better performance. (more…)

May 2013

Understanding the various terminologies used in Debt Markets!!!

Understand the various terms in Fixed INcome, Debt Market, What is Repo Rate, Reverse Repo, Yield to Maturity, Modified Duration

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The debt market in India consists of mainly two categories—the government securities (g-secs) markets comprising central government and state government securities, and the corporate bond market. The g-secs are the most dominant category of debt markets and form a major part of the market in terms of outstanding issues, market capitalization, and trading value.

In order to finance its fiscal deficit, the government floats fixed income instruments and borrows money by issuing g-secs that are sovereign securities issued by the Reserve Bank of India (RBI) on behalf of the Government of India. The corporate bond market (also known as the non-gsec market) consists of financial institutions (FI) bonds, public sector units (PSU) bonds, and corporate bonds/debentures.

Listed below are the various terminologies used in the fixed income market:

Coupon: A coupon payment on a bond is a periodic interest payment that the bondholder receives during the time between when the bond is issued and when it matures. Coupons are normally described in terms of the coupon rate, which is calculated by adding the total amount of coupons paid per year and dividing by the bond’s face value.

Maturity: Maturity refers to the term of the bond i.e. the date on which the issuer has to repay the principal amount to the bondholder.

Yield to maturity: The Yield to maturity (YTM) is the internal rate of return or the discount rate at which the sum of all future cash flows from the bond (coupons and principal) is equal to the price of the bond. (more…)

December 2012

Start saving for retirement as early as possible

Start saving for retirement as early as possible, magic of compounding , Invest early, Retirement planning tips, Investment planning tips.

Chains of HABIT are too light to be felt …. until …… they are too heavy to be broken ~Warren Buffet

Saving and investing for a prosperous retirement is a basic financial hygiene habit, which if postponed to a later date, can have disastrous and painful financial implications… Take a look.. Numbers don’t lie…

X, Y and Z are salaried individuals working for a reputable Company  and they all plan to retire at the age of 60.

X is 30 years old and is married with one child. He has set himself a retirement fund target of Rs. 1 crore.

Y is 40 years old and is married with two children. He has also set himself a retirement fund target of Rs. 1 crore.

Z is 50 years old and has also set himself a retirement target of Rs. 1 crore.

X has 30 years to achieve his target, Y has 20 years and Z 10. Assuming the return given by their investments is 12%, the following table shows the monthly investments that all three men will have to make if they are to achieve their retirement targets.

Age Years left Retirement fund target Annual return expected

Monthly investment required

X 30 30 Rs. 1,00,00,000 12%

Rs. 3,277

Y 40 20 Rs. 1,00,00,000 12%

Rs. 10,975

Z 50 10 Rs. 1,00,00,000 12%

Rs. 45,060

As we can see from the above table the more time the individual has to invest, the lower the monthly investment amount required to reach the target will be. So it is always a good idea to start saving for retirement as early as possible.

So, start investing early, it makes a hell lot of difference. And if you are in your golden years and had not planned in your hey days ~ the least you can do is advise your young loved ones to do so.. Stay wise..

 

Who Pays for your coffee ~ Bargaining Power ~ Ricardian Model ~ Economics

Ricardian Model , Undercover Economist, Who pays for your coffee, Economics & Value Investing, Bargaining Power, Scarcity, Premiums, Marketing , Branding

I was reading the article  Who Pays for Your Coffee? the other day, an interesting take on the concepts of scarcity and bargaining power.

We learn the reasons behind why people pay premium price for the coffee in the morning trip (American Morning’s …that is…)… Interesting .. Ricardian Model of rents, scarcity, bargaining power and pricing… Read on..

A resource (which could be land, brand , car..or for that matter stocks etc..)  which is in demand and which is also scarce will have the bargaining power and get a high premium.

The author uses the example of coffee bars located at stations having huge volume of commuters to drive home the point of the power and the strength of scarcity of resources and the bargaining power of the resource owners.

The exclusive coffee bar at the station is scarce. And so is the station location. The coffee bar has bargaining power over customers for high coffee prices. The station owners have bargaining power over coffee bars for high rent. 

However, the Bargaining Power does not come by just owning the resource. It comes because of scarcity. This viewpoint forms the crux of the article. If the scarcity shifts so does the bargaining power.

Businesses which hold the bargaining power today due to a combination of owning resources, demand and scarcity may go out of favor in future if there is a shift in scarcity which could be because of changing economic environments, changing customer tastes, rapid technological shifts or competition. An important factor to consider in investing, is to not only keep an eye on the past performance of a business / sector but to have vision to sense the future direction as well.

However, in real life the shifts in bargaining power and relative scarcity are often very slow. These shifts also have profound impact on lives of people. And most of the analysts miss this completely.

 In economics, Basic principles and patterns that operate behind seemingly complex subjects can be used as models. These models have been used to explain other complex phenomena in real life.

The article goes on the explain Ricardo’s model of meadowland which expounds on the concepts of scarcity of resource, bargaining power and shifts in bargaining power. It also explains the concept of relative value pricing and marginal land.

For example, although common sense says that the high rent causes the high prices coffee, the application of Ricardo’s model reveals that It is actually the willingness of customers to pay high prices for coffee which sets up the high rent and not the other way round.

The economists try to focus on underlying process, understand the patterns of scarcity in order to unearth developing shifts of bargaining power.

Would be interesting to look at investing in stocks from this angle as well

November 2012

Need for Investing early & Power of Compounding!!

Power of Compounding, Investing at an early age, Illustration, Stocks, Mutual Funds, Bonds, Gold,

Well the above mentioned information is pretty basic math. And most of well educated adults would have solved these compounding problems by Class VI, Secondary School. 

Then, why do most of the people miss out on the above basic calculation when it comes to personal investing & money management?

It is similar to other aspects of life to a certain extent. For eg:, Everyone knows  that eating healthy food , staying fit, regular exercising etc. is good for healthy and happy life . But most of the people fall for junk food consistently or religiously spend time lazying in front of Idiot Box etc.

I think that most people underestimate the tremendous power of simplicity & on simple and good things of life in general. Also, it requires a lot of discipline, patience, consistency & conviction. Realize though, that Simplicity is ultimate sophistication.

Discipline and Patience are virtues which requires a lot of mental toughness. It is people with these virtues, more important than Intelligence or IQ, who successfully achieve their goals and much more than what they initially set their eyes on.

Moral : Markets and Life test patience but reward discipline and conviction.  Happy Long term Investing

 

October 2012

Returns from various asset classes for the period 1979-2012

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Returns from various asset classes for the period 1979-2012
Investment
Returns in %(average annual)
Rs 10,000 invested in 1979 becomes in 2012
 
Bank deposit
8
1,36,902
Gold
8.7
1,75,000
PPF
9
 1,87,285
Stocks (BSE sensex stocks)
16.5
18,50,000+ Tax free Dividends (@ Sensex Level 18500)
Over Long terms, Equities have outperformed, the other asset classes by a handsome margin. However, having said that it requires tremendous patience, discipline, good advise, serendipity  and avoiding some costly mistakes in between to achieve those returns. 
 
The ERLI Principle sums it up very well ~ Invest :
 
– Early
– Regularly
– Long term perspective
– Intelligently
 
More on Investing Process and Costly Mistakes to avoid.

Measures of Risk ~ Equity & Debt

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Measures of Risk, Performance, Mutual Funds , Stocks, Standard Deviation, Variance, Beta, Modified duration, Credit Risk, Interest Rate Risk, Weighted Average Maturity  ,Yield Spread,

Investors generally focus on the returns of any asset. They largely ignore the risk factors and most importantly are ignorant of the measures of risk. 

And so, the real Risk comes from not knowing what they are doing ~ Warren Buffett

This post talks about the measures of risks in equities & debt. The awareness of the measures of risk is extremely helpful in designing a comprehensive financial plan, investing, asset allocation etc.

Fluctuation in returns is used as a measure of risk.

Therefore, to measure risk, generally the periodic returns (daily / weekly / fortnightly / monthly) are first worked out, and then their fluctuation is measured.

The fluctuation in returns can be assessed in relation to itself, or in relation to some other index. Accordingly, the following risk measures are commonly used.

Variance

Suppose there were two stocks, with monthly returns as follows: Stock 1: 5%, 4%, 5%, 6%. Average=5%  & Stock 2: 5%, -10%, +20%, 5% Average=5%

Although both stocks have the same average returns, the periodic (monthly) returns fluctuate a lot more for Stock 2. Variance measures the fluctuation in periodic returns of a asset, as compared to its own average return. This can be easily calculated in MS Excel using the following function:

=var(range of cells where the periodic returns are calculated)

Variance as a measure of risk is relevant for both debt and equity.

Standard Deviation

Like Variance, Standard Deviation too measures the fluctuation in periodic returns of a scheme in relation to its own average return. Mathematically, standard deviation is equal to the square root of variance.

This can be easily calculated in MS Excel using the following function: =stdev(range of cells where the periodic returns are calculated)

Standard deviation as a measure of risk is relevant for both debt and equity schemes.

Beta

Beta is based on the Capital Assets Pricing Model, which states that there are two kinds of risk in investing in equities – systematic risk and non-systematic risk.

Systematic risk is integral to investing in the market; it cannot be avoided. For example, risks arising out of inflation, interest rates, political risks etc.

Non-systematic risk is unique to a company; the non-systematic risk in an equity portfolio can be minimized by diversification across companies. For example, risk arising out of change in management, product obsolescence etc.

Since non-systematic risk can be diversified away, investors need to be compensated only for systematic risk. This is measured by its Beta.

Beta measures the fluctuation in periodic returns in a scheme, as compared to fluctuation in periodic returns of a diversified stock index over the same period.

The diversified stock index, by definition, has a Beta of 1. Companies or schemes, whose beta is more than 1, are seen as more risky than the market. Beta less than 1 is indicative of a company or scheme that is less risky than the market.

Beta as a measure of risk is relevant only for equity schemes.

Modified Duration

This measures the sensitivity of value of a debt security to changes in interest rates. Higher the modified duration, higher the interest sensitive risk in a debt portfolio.

The returns in a debt portfolio are largely driven by interest rates and yield spreads.

Interest Rates

Suppose an investor has invested in a debt security that yields a return of 8%. Subsequently, yields in the market for similar securities rise to 9%. It stands to reason that the security, which was bought at 8% yield, is no longer such an attractive investment.

It will therefore lose value. Conversely, if the yields in the market go down, the debt security will gain value. Thus, there is an inverse relationship between yields and value of such debt securities which offer a fixed rate of interest.

A security of longer maturity would fluctuate a lot more, as compared to short tenor securities. Debt analysts work with a related concept called modified duration to assess how much a debt security is likely to fluctuate in response to changes in interest rates.

In a floater, when yields in the market go up, the issuer pays higher interest; lower interest is paid, when yields in the market go down. Since the interest rate itself keeps adjusting in line with the market, these floating rate debt securities tend to hold their value, despite changes in yield in the debt market.

If the portfolio manager expects interest rates to rise, then the portfolio is switched towards a higher proportion of floating rate instruments; or fixed rate instruments of shorter tenor. On the other hand, if the expectation is that interest rates would fall, then the manager increases the exposure to longer term fixed rate debt securities.

The calls that a fund manager takes on likely interest rate scenario are therefore a key determinant of the returns in a debt fund – unlike equity, where the calls on sectors and stocks are important.

Yield Spreads

Suppose an investor has invested in the debt security of a company. Subsequently, its credit rating improves. The market will now be prepared to accept a lower yield spread. Correspondingly, the value of the debt security will increase in the market.

A debt portfolio manager explores opportunities to earn gains by anticipating changes in credit quality, and changes in yield spreads between different market benchmarks in the market place.

Weighted Average Maturity

While modified duration captures interest sensitivity of a security better, it can be reasoned that longer the maturity of a debt security, higher would be its interest rate sensitivity. Extending the logic, weighted average maturity of debt securities in a scheme’s portfolio is indicative of the interest rate sensitivity of a scheme.

Being simpler to comprehend, weighted average maturity is widely used, especially in discussions with lay investors. However, a professional debt fund manager would rely on modified duration as a better measure of interest rate sensitivity. 

More on Mutual Funds

How to deal with value traps ~ Graham Logic

How to deal with value traps , Benjamin Graham Logic, Value Investing, Margin of safety, Investing Principles

Value Investors look out for good/great companies trading at low multiples (be it earnings/book or cash flow). Investors looking for bargain may get attracted to stocks trading at low multiples for a considerable period of time. 

Value trap occurs when the investors lock into the stock at low multiples and the price discovery never happens and the stock price does not budge.

This may happen for any reason such as the whole sector being looked down, or the company / sector in trouble or truly the market not discovering the potential of the stock, inability of the company to withstand competition/technological changes, inability to generate consistent profits etc. There could be many reasons for a value trap happening.

Question is , how should the investor proactively manage the positions in such a situation. 

Benjamin Graham has Stock selection criteria & avoiding value traps

According to Benjamin Graham ~ If the stock does not give you 50% in 3 years, sell it – its most likely a value trap. Nice rule to deal with uncertainty 

As with any investment decision, thorough evaluation and research is required to avoid value traps

Value Investing

September 2012

The twelve most silliest things people say about stock prices ~ Part II

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The twelve most silliest things people say about stock prices

As I have mentioned earlier in my blog post, I have been reading ‘One up on Wall Street’ ~ Peter Lynch. The book is a classic and a must read for people interested in value investing.This Part II is in continuation to Part I (first 4 points) which you can read here

Thank you Peter Lynch for your witty points… Enjoy (points 5 through 8)….

5. Eventually they will come back

Peter Lynch gives examples of RCA which never came back even after 65 years. Companies which belonged to Health Maintenance organizations, floppy disks, double knots, digital watches, mobile homes etc could never come back.

In today’s fast paced world of technological changes, there is even a higher chance of companies fading away much faster. Intelligent investing is all about recognizing the changes happening in the industry and then exiting from the stocks, if the fundamentals no longer justify a stake in the business.

As John Keynes has so very rightly said: “When the facts change, I change my mind: What do you do? Sir”

Many investors in this category are stuck with Indian Stocks reeling in High Debt, slowing economy & pressures from Bank are unlikely to come back anytime soon. (Rcom, Rpower, Suzlon, DLF etc.) Many of these companies will have to restructure (or sell off non-operating assets, non core businesses in order to breath freely)…

Suzlon Chart (languishing at all time lows below Rs 20):

The twelve most silliest things people say about stock prices , investing mistakes, Peter Lynch, suzlon, One up on wall street book review, stock investing

6. It’s always darkest before the dawn

There’s a very human tendency to believe that things that have gotten a little bad can’t get worse.

Near home, people who are holding on to Moser Baer have not seen the stock price appreciate a zilch over the past decade.

Moser Baer Chart over the past few years :

Moser Baer Stock Price, Worst Stock Performance India, Investment Mistakes, Technology Stocks, Investing , Trading

Similarly the oil marketing companies have given no returns to the investors over the past decade. (Of course, part of this is due to the policies of the government of regulated oil prices in India).

Sometimes, it is darkest before the dawn, but then again other times is always darkest before pitch black.

7. When it rebounds to Rs 100, I’ll sell

In my experience, no downtrodden stock ever returns to the price at which you decide to exit.

When the stock of Suzlon was falling freely in early 2009 onwards, many investors got sucked into the stock at various levels above Rs 100. Subsequently, the stock kept on going South.

In the equity markets, the investors in general are always in a hurry to take the profits off the table. However when, it comes to taking out the losses, they rely on HOPE.

Again, here when we talk about taking out the losses, it is of the companies which are weak on fundamentals.  In case of Suzlon, currently trading at Rs 18, unless a miraculous turnaround happens, it might not see the 3 digit mark for a fairly long time to come.  The whole painful process may take a couple of years, maybe a decade. And all along you have to tolerate an investment you don’t even like.

Relying on luck way too often in the markets is a sure way to lose money in the long run. If you are less confident on the company, you ought to be selling the stock.

8. The ‘I knew it, If only I could have bought the stock, I could made so much money’ statement

So many investors make this classic mistake.

‘ I knew it…. Colgate, Pidilite, Hawkins, Jubilant Foodworks, HDFC, Titan, Tata Motors etc would rise….If only I could have bought the stock, I could made so much money’ statement’

They torture themselves every day by perusing the ‘Ten biggest winners on the markets’ and imagining how much money they’ve lost by not having owned them.

However the funny thing, the money is still in the bank . They have not lost a penny. This may seem ridiculous thing to mention. But it is notional. Regarding somebody’s else’s gain as your losses is definitely not a productive way to investing in the markets.

In fact, it can lead to blunders, trying to catch up buying stocks which they shouldn’t be buying, and buying the stocks at higher prices in order to get over the guilt. And guess what, this results in real losses.

Part I is here, Part III is here

Benjamin Graham’s 14 Investment Points for Value Investing

Benjamin Graham is widely considered the Father of Fundamental Analysis. Of course, Warren Buffet is his most famous disciple.  Fundamental analysts attempt to study everything that can affect the security's value, including macroeconomic factors (like the overall economy and industry conditions) and individually specific factors (like the financial condition and management of companies). Graham has authored 'Security Analysis' & 'The Intelligent Investor' which are considered cornerstone books in the field of Investments, Analysis for Investors.   Here are Graham’s 14 Investment Points, the crux for successful investing :  1.Be an investor, not a speculator. 2.Know the asking price. 3.Search the market for bargains. 4.Determine if the stock is undervalued. 5.Regard corporate figures with suspicion. 6.Don’t stress out. 7. Don’t sweat the math. 8.Diversify among stocks and bonds. 9. Diversify among stocks. 10. When in doubt, stick to quality. 11. Use dividends as a clue for success. 12. Defend your shareholder rights. 13. Be patient. 14. Think for yourself.  Happy Investing.Benjamin Graham is widely considered the Father of Fundamental Analysis. Of course, Warren Buffet is his most famous disciple.
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Fundamental analysts attempt to study everything that can affect the security’s value, including macroeconomic factors (like the overall economy and industry conditions) and individually specific factors (like the financial condition and management of companies).
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Graham has authored ‘Security Analysis’ & ‘The Intelligent Investor’ which are considered cornerstone books in the field of Investments, Analysis for Investors.
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Here are Graham’s 14 Investment Points, the crux for successful investing :
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1.Be an investor, not a speculator.
2.Know the asking price.
3.Search the market for bargains.
4.Determine if the stock is undervalued.
5.Regard corporate figures with suspicion.
6.Don’t stress out.
7. Don’t sweat the math.
8.Diversify among stocks and bonds.
9. Diversify among stocks.
10. When in doubt, stick to quality.
11. Use dividends as a clue for success.
12. Defend your shareholder rights.
13. Be patient.
14. Think for yourself.
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Happy Investing.
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The twelve most silliest things people say about stock prices – Part I

The twelve most silliest things people say about stock prices , investing mistakes, Peter Lynch, One up on wall street book review, stock investing.

The twelve most silliest things people say about stock prices

As I have mentioned earlier in my blog post, I have been reading ‘One up on Wall Street’. The book is a must read for people interested in value investing.

Peter Lynch brings to us his experience and packs with a punch of humor, wisdom, timeless principles and wonderful examples of all kinds of businesses. Towards the end, there is a chapter on 12 silliest things that people say about stock prices with examples of US Stocks.

I could relate so many similar examples from the Indian Stock markets and so this post and my thoughts are on the 12 silliest things (& most dangerous) things, which people say about stock markets.

I will bring this in 3 parts… Part I is here. Have fun. It is eye opening

1. If it’s gone down this much, it can’t go further down

I’d bet the shareholders of Satyam (now Mahindra Satyam), Suzlon, Reliance Communication (RCOM), Reliance Power (Rpower), DLF etc were repeating this phrase just after the stocks kept dropping. The phrases which people use are “I am a long term investor”, “You have to be patient in stock markets”, “These are blue chip companies”. During the unraveling of the Satyam scam the shares fell to 11.50 rupees on 10 January 2009, their lowest level since March 1998, compared to a high of 544 rupees in 2008. Investors purchased at various levels on the stocks way down.

There is simply no rule hat tells you how low a stock can go in principle

2.  You can always tell when a stock hit bottom

Peter Lynch says ~ Bottom fishing is a popular investor pastime, but it’s usually the fisherman who gets hooked. LOL

RCOM (and many other erstwhile super stocks with weak fundamentals) bottom was never successfully found by investors. Over the past 4 years these stock has successfully managed to do create only new bottoms.

If it is a turnaround story, then there has to be a solid reason to pick a stock. For eg: the balance sheet shows Rs 50 as Cash per share and the stock trades at Rs 53. Even then, the author mentions that the stock might take years to pick up steam.

3. If it’s gone this already, how can it possibly go higher?

This is one of the favorites of the analysts who frequent the News Channels. However consider the stocks like Asian Paints, Titan Industries, Page Industries, Hawkins Cooker , Trent Industries or Pidilite Industries etc.  These stocks have strong fundamentals and strong earnings & profit growth. They continue to beat the markets quarter on quarter. The fundamentals catch up with the price and so the market values them slightly higher than the rest.

Many investors do make the mistake of parting away with the stock just when a strong uptrend in underway. In reality successful stock investing is & should be a boring activity. However investors go in for action in the hopes of getting the stock at a lower price. Unfortunately, in case of fundamental stocks, that never happens. Recently, Hindustan Unilever has moved from 350 to almost 500+. Many investors whom I know have already parted with the stock at 400 levels and they are ruing the fact.

4. It’s only Rs 3 a share: What can I possibly lose?

How many times have you heard people say this? People assume that buying a Rs 8 share is less riskier than buying a Rs 50 stock.

Case in point .. Kingfisher airlines, Indowing Energy, Sujana Towers, Moser Baer etc. All these high flying stock of 2007 Boom phase are trading in single digits for last 2 years now 

The fact of the matter is that whether the stock costs Rs 50 or Rs 5, if it goes to zero you still lose everything. If it drops to 50 paise, the results are only slightly differen

The investor who buys at Rs 50 loses 99% wheras the investor who buys at Rs 3 loses 83% ~ hardly a consolation. Lousy cheap stock is just as risky as lousy expensive stock if it goes down. So investing in a Rs 50 stock or Rs 3 stock does not matter. The reason for buying the stock should be based on the fundamentals of the company.

.. Read Part II & Part III