January 2017

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

value investing, Peter Lynch Quotes, Pictures, Common Mistakes, Speculation, Trading, Gains, Losses, Indian Stock Markets  “All you need for a lifetime of successful investing is a few big winners, and the pluses from those will overwhelm the minuses from the stocks that don’t work out” ~ Peter Lynch ~ One up  on Wall Street.

 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 III is in continuation to earlier parts and thus completes the twelve most silliest things people say about stock prices as mentioned in the book. 

The earlier posts cover the previous 8 points of the common mistakes committed by investors which you can read here : Part I & Part II

I hope this trilogy will help you in your investing journey.

Thank you Peter Lynch for the wonderful book and  common sensical approach to stock investing.  Enjoy (points 9 through 12)….

9. What me worry, Conservative Stocks do not fluctuate much…
Peter Lynch gives examples of Utility Companies. Two generations of investors grew up on the idea that they could not go wrong with the Utility stocks. You could just put them in safety deposit and cash the dividend checks. However with the nuclear and the base rate problems, suddenly the nuclear plants became expensive and stocks fluctuated wildly over a couple of years.

Companies are dynamic and prospects change. There simply isn’t a stock that you can own and you can afford to ignore.

Near home, FMCG Stocks have always been considered conservative stocks with relatively low beta and good dividends. However, over the past 2 years most of the FMCG stocks have considerably outperformed the index. The valuations are stretched and stocks have literally become multi baggers. Can these stocks be considered be conservative any longer? Is anybody’s guess….

10. It’s taking too long for anything to happen
“PostDivesture Flourish”, a term coined by Peter Lynch, which means that after considerably waiting for a stock to do something, you give up, and when you finally sell the stock, the price of the stock starts to flourish and move northwards.

I have experienced this when I gave up on LIC Housing Finance in mid 2009 after holding the stock for almost 3 years. The stock went up almost 5 times in the next 2 years.
Learning ~ Do not give up on the stock if all is well with the company and the reasons for which I bought the stock have not changed.

The stock markets tests patience and rewards conviction.

It takes remarkable patience to hold on to an idea / stock that excites you, but which the market largely ignores. You begin to think everyone else is right, and you are wrong. But remember, where the fundamentals are promising, patience is more often than not ~ rewarded.

11. I missed that one, I will catch the next one
This is such a common mistake committed by a large number of investors.
Page Industries is one such stock, which has given phenomenal returns to investors over the past 3 years, and continues to do so. Investors who missed out on Page Industries are trying to catch onto other seemingly similar stocks like Lovable Lingerie.

This is a mistake because the performance of Page Industries is based on various factors like the company management, capital structure, earnings growth, streamlined and strategic supply chain, brand image, brand power and brand recall value, customer loyalty, vendor relationships, pricing power etc which is difficult for another company to imitate. The other company should be judged on it’s own merit for investment purposes.

It’s always better to buy the original good company at a higher price than to jump on to the next one at a bargain price. (Same logic applies when buying real estate as well…. I will talk about my views on real estate some other time though…)

12. The stock’s gone up, so I must be right or Vice Versa.
Peter Lynch terms this as the single greatest fallacy of investing. Believing that when the stock price is up, then you’ve made a good investment. Investors confuse prices with prospects.

If you purchase a stock at Rs 100 and it moves up to Rs 105, investors take comfort from this fact, as if it proves the wisdom of their purchase. Nothing could be further from truth. Investors commit mistakes based on this fallacy ~ Either selling a good company at a loss, believing that they committed a mistake or holding on to bad apples if the prices are up post the purchase.

Remember the Stock does not know that you own it.
Unless you are a short term trade looking for 20 odd % gains /loss the short-term fanfare means absolutely nothing.
A stocks going up or down after you buy only indicates that there was someone who was willing to pay more or less for the identical merchandise. That’s it

You can read the earlier posts here :  Part I & Part II 

With this I lay to rest the 12 mistakes committed by investors with the hopes that you, can avoid these common mistakes and in the process become a successful investor.

Happy Investing!!!

October 2012

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

Prediction or Protection ~ Basis of Investing ~ Graham Style

Prediction , Analysis,  margin of safety concept , Basis of Value Investing, Stock Picking, Benjamin Graham Style, defensive Investor, Diversification

Basis of Investing

We invest in the present, but we invest for the future. But unfortunately the future is always uncertain 

  • Inflation and Interest rates are undependable
  • Economic Recessions come and go at random
  • Geo-political upheavals like war, commodity shortages & terrorism arrive without warning
  • fate of individual companies and their industries often turns out opposite of what investors expect.
Analysts and financial shenanigans keep busy forecasting and urging retail investors to invest based on projections.
As per Graham, though, investing on the basis of projection is a fool’s errand. He goes on to say that the forecast of so called experts are less reliable that the flip of a coin.
So, what is the alternative.
Graham goes on to suggest that it is in the best interests of the investor to invest on the basis of protection. 
What exactly is basis of protection? Well… It simply means
(1) Do not overpay for a stock and  
(2) Avoid overconfidence in your own judgement.
It’s a simple, yet a brilliant insight for successful investing ~ requires patience and discipline~ yet rarely followed and largely ignored by a vast majority of investors :
– First, Don’t Lose… Losing some part of the money is an inevitable part of investing, and there’s nothing you can do to prevent it.
An intelligent investor must take the responsibility upon himself to ensure that he never loses most or all of the capital whilst investing.  
– The Risk is not in the stocks ~ Guess what ~ It is in ourselves.
Graham expands this concept as the ‘Margin of Safety’ ~ which he has acknowledged as the core philosophy of his success….More on this concept, Risk, Investor Psychology and Uncertainly later…..

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August 2012

Notes: Preparing to Invest : From One up on Wall Street : Value Investing

Notes: Preparing to Invest , From One up on Wall Street : Value Investing, Stock Markets, Making Money, Bonds, Equities, Long term Investing, Deep Value Investing

These are some of my notes (worth remembering) from the wonderful book : One up on wall street ~ ‘Peter Lynch’ Part I Preparing to Invest

– Don’t overestimate the skills and wisdom of Professionals.
– Take advantage of what you already know
– Look for opportunities that have not yet been discovered and are ‘off the radar scope’ of the markets
– Invest in a house before investing in stocks
– Invest in companies, not in in the stock market (This is the Buffett principle as well)
– Ignore short term fluctuations (This is so much easier said that done… However utmost critical in my view)
– Large profits can be made in common stocks
– Large losses can be made in common stocks
– Predicting is futile (be it interest rates, economy , or movement of the markets)
– The long term returns from stocks are both relatively predictable and also far superior from long term return of bonds.
– Keeping up with the company in which you own the stock is like playing an endless game of stud poker hand
– V IMP : Common stocks are not for everyone, not even for all phases of a person’s life
– The crux of the book : The average person is exposed to interesting local companies and products years before the professionals.
– Having this edge will help you to stay ahead in the stock markets
– In the stock markets , one in the hand is worth ten in the bush.

Notes on Value Investing to be contd’ in future parts…..

June 2012

Common Multiples used in Valuation

Common Multiples ,  Valuation, EBIT, EBIDTA, ROE, ROIC, WACC, Debt, Equity Ratio, Returns, Revenues generated.
You can analyse the past, but you have to design the future
~ Edward de Bono 
A multiple is simply expression of market value of an asset relative to a key statistic that is assumed to relate to that value
Here are some of the most common multiples used in evaluating a business :
1.Earnings of the asset
–Price/Earnings Ratio (PE) and variants (PEG and Relative PE)
–Value/Cash Flow
2.Book value of the asset
–Price/Book Value(of Equity) (PBV)
–Value/ Book Value of Assets
–Value/Replacement Cost (Tobin’s Q)
3.Revenues generated by the asset
–Price/Sales per Share (PS)
5.Asset or Industry Specific Variable , specific to the industry make analysis relevant.
–Price per ton of production
–Price per subscriber
–Price per click
–In PR industry – pricing based on coverage
–Pb with sector specific multiples – One needs to be careful if industry is mis priced
We really want relationship to cash flows!!!
Comparisons which matter in Valuation
– We cannot compare profit margins ((NP margin / Gross Profit Margin)) across industries because profit margins is useful for comparing companies within an industry and not across.
– However we can compare (ROE or ROIC) across industries since ultimately investors and entrepreneurs chase return on investments, it makes sense to compare them across industries.
– But investments need not necessarily be made into the industries with highest RoE. Both RoE as well as the quantum of capital that can be deployed have to be studied.
– Similarly if two companies in the same industry have different depreciation policies and operate in different tax environments, it makes sense to use EBIT(1-t) to factor in (remove) the tax impact / depreciation impact and then compare
– This will also imply that cost of total capital should be compared to RoIC and cost of equity to RoE and the two should not be mixed and matched
More information and an Interesting note on relative valuation here

Relative Valuation ~ Primer

relative valuation, multiples, PE Ratio, EPS, EBIDTA, ROE, ROI, WACC, Cost of equity, researchRelative Valuation is Valuing an asset by comparing with prices of similar assets in market. In relative valuation the value is relative to how the market is pricing comparable firms
There are three basic steps
–Identify comparable assets
–Standardize – price of the asset or the value of equity
–Adjust for differences  
Why popularity of Relative Valuation in analyst circle?
•It is Easy to sell a story based on comparables
–Pebble beach golf – Japanese paid 750$ mn in late 1980’s
–At that time All of Tokyo real was estimated to be cost more than all of US real estate put together
–Business potential did not justify the price
–Imagine selling a DCF based valuation!!!
•Most  Assumptions and inaccuracies are hidden
•If you mess up so would have others
–You don’t want to be wrong all alone on the street
Is there widespread use ?? Of course …
•Majority of research reports are based on Relative Valuation
•Mergers and Acquisitions derive valuations based on a  multiple based prices of comparable firms.
•Many investment strategies  are based on multiple (eg: Venture Capital/PE fund investing in entrepreneurial ventures)
•Terminal Value in DCF often calculated using Relative Valuation
•DCF used to justify Relative Valuation quite often
More on Common Multiples later….