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 :
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– 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.
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An intelligent investor must take the responsibility upon himself to ensure that he never loses most or all of the capital whilst investing.  
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– The Risk is not in the stocks ~ Guess what ~ It is in ourselves.
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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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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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March 2010

Costly Investment Mistakes to avoid at all costs-Part II

Costly Investment mistakes Part 2, Investment Planning, Financial Planning, Stocks, Mutual Funds Investing, Life Planning, Goal Oriented Planning.

In the process of investing, one often makes mistakes.

Here are some of the most common investing mistakes which investors generally make and some of which even I had made in the earlier part of my investment years

Of course, learning from the mistakes, continually, the investing experience has truly been rewarding experience. You can alsocultivate good habitsof investing by avoiding the following mistakes.

This series is in continuation to the earlier post which contains the first 3 common mistakes committed by investors. You can read the Part I here. (Costly Investment mistakes to avoid at all costs – Part I)

This post will throw light on the following common mistakes generally committed by investors:

#4. No “Homework” before getting into Investments, and learning costly lessons afterwards: Lack of understanding
Doing what’s right is not the problem. It is knowing what is right.

This mistake is akin to putting the cart before the horse. Adequate homework needs to be done before investing in any financial products (eg: Stocks, Mutual Funds, Real Estate, ULIP’s, Child Insurance Plans, PPF or even FD’s for that matter) .

You should understand the products well, understand the risk-reward ratio, understand the expenses

involved, tax implications, and do not easily buy an investment just because someone wants you to buy it. You need make sure that the investment objective and risk tolerance are compatible with your investment goals.

Even the world’s greatest investor Warren Buffet core philosophyis to not investin business models which hedoes not understand. Obviously, being the world’s most successful investor,there is wisdom in what he says.


#5. Not getting the basic difference between Saving and Investments


Many investors do not understand this basic principle. Getting this right is one of the key principles to wealth generation.

Savingis when you try to build funds for some needs, like maybe purchasing a house or going for overseas vacation. Once the adequate target is achieved, you withdraw the whole amount (Capital engaged + Income generated from the capital involved), and then spend it. Then you have nothing left and the process of investment needs to begin all over again.

For building wealth, the above strategy does not work. This is where the process of investment needs to be understood. (This strategy is similar to preached by worlds famous investors like Benjamin Graham, Phil Fisher, and Warren Buffet etc.)

Investmentis when you try to build funds with the help of assets which in turn also produce income year after year. In this you invest in assets like shares and property. The income generated can be taken out whenever needed or reinvested. However themajor portion of the capital stays put. It stays there to keep growing and compounding which in turn producing more and more income every year.

This process will take a lot of time. It requiressolid discipline and immense patience. However , as the years go by , the additional income stream from investments can supplement your earning potential to a large extent.

To be contd Part III. You can read part III of the series here. Click here for Part III