Will your investments give max returns - ET

Underlying fundamentals do matter when it comes to explaining rising or plummeting stock prices. And a shrewd investor studies the fundamentals and driving forces before pumping his money into the market. A speculator, on the contrary, does not make his decision to buy or sell on the basis of factual company data. Instead, he tries to book profits in bullish markets based on conjectures, well aware of the possibility of his entire capital being washed away. Let's delve into popular investment strategies that will, to a certain degree, protect your money against complete erosion even in adverse market conditions.

Value strategy

The main idea behind value investing is to identify stocks that are currently not treated well by the market and are trading at numbers less than their actual worth. This strategy assumes that market pundits take time to realise the intrinsic worth of some companies but will do so in due course of time. A value investor puts his money in such undervalued stocks after a detailed study of the company's underlying fundamentals.

Why are some stocks undervalued? The company could be into manufacturing of products that are not exciting or alluring enough, yet are indispensable. Value investors believe that stocks of such companies would get their due attention in near future. Speculators believe that stocks trading at low prices are a bad choice. But a value investor can differentiate between the low priced stock of a company that is going bankrupt and the low priced stock of a company whose management and business strategy has undergone a complete revision.

The biggest challenge to value investing is spotting stocks that are undervalued. Value investors do a thorough study to find out if the company is not debt-ridden and has steady cash flow. Other valuation measures to detect undervalued stocks include low price-earning ratio, low price-sales ratio, rich dividends and low price-book value. It is important to note that volatility is quite low here with ample shock cushion in bear markets. Longer holding period in this strategy amounts to large income in dividends.

Growth strategy

Growth investment is a long-term strategy. The growth strategy attempts to find shares of companies that are growing and will continue to grow rapidly. Rightly estimating future growth potential of a company will yield you superior results. However, keep in mind that past growth is not always indicative of future growth potential. Further, most future growth estimates tend to be overstated and hence this strategy needs adequate caution.

It is always better to have an error or safety margin for all your estimates. While the more cautious investors bet on large cap companies, typically growth investors go in for small or mid-cap companies that have more room to grow. Price earnings and growth or the PEG value is a superior measure for screening stocks. PEG value less than one is considered a good pick.

Momentum

Momentum investing is a short-term holding strategy that works well in bull runs. Momentum investors seek to double or triple their money in a matter of few months. While they do not often go in for thorough stock analysis, they base their picks on stocks with rapid earnings growth, positive earnings growth, forecast and solid price chart.

Momentum investors prefer stocks that are trading high volumes and at high rates. Such stocks are the ones that are favoured by the market today. With high volatility and short holding periods, investors must be aware of tax implications on profits booked. Earnings per share rank measure a company's EPS growth relative to the entire market.

4 habits that make stock market investors rich - Value Investing Series I

Advisor


I came across a book called "Rich Dad Poor Dad" by Robert Kiyosaki. Its on the best seller list for quite some time. This book contains gems for investors like you and me and for everyone wanting to know more about "money".


Investor


Then let us know about making money.


Advisor


Yes. The author in this very lucidly written book says that in life, when you desire to fly an aircraft you must and therefore you do "learn" flying aircrafts. When you wish to enjoy a bicycle ride, you must and you do "learn" how to ride a bicycle. Maybe you will fall several times before you finally succeed.

But a lay investor who wants to make money on the stockmarket tends to just pick up the phone, speak to his stockbroker, buy a stock and starts dreaming of becoming rich. That is not the way the rich investors who become richer with every passing day go about investing into stocks.

The rich follow the same principle of "learning" to ride a bicycle or flying an aircraft. They therefore first "learn" to "invest". They learn all there is to know about the art of investing in stocks. All about the stocks they wish to buy and only then do they take the plunge.

Above all, they keep practicing what they have learnt. They keep sharpening their saw. This single factor of learning before hand separates the rich investors from the poor investors, says the author.


Investor


What is the other gem on investing you found in the book?


Advisor


There are several. The next is the author's comparison of Stock Market with the Super Market.


Investor


That's an odd one. Could you elaborate please?


Advisor


Yes. The author says that when Super Markets reduce the prices of the goods and announce a "sale", customers flock into the stores and buy up every little item and build up at home piles of grocery, soaps, etc.

But when Stock Markets reduce the prices of shares and announce a "crash" every investor rushes in to "sell" and runs away from the market.

Again, conversely, when Super Markets raise their prices, customers shy away and refrain from buying till the next "sale"; but when Stock Markets announce rising prices, every investor rushes in to "buy".

This is not the way, again, the rich investors behave. They follow the same principle of buying at the Super Markets. They buy stocks only when the Stock Markets crash. Ask Warren Buffet or John Templeton.


Investor


These two ideas, though simple, are no doubt educative. Do you have any other gems to share?


Advisor


Yes. As I said earlier, the author has several.

The next one, the author says, is `investing is knowing your assets'. When you move your money from your bank account in order to `invest' you are putting your money into assets like shares, real estate, deposits, etc.

The rich never keep their wealth in the form of liquid money in a bank account. They always keep acquiring assets while the poor acquire liabilities, which they mistakenly believe are their assets.

The author, citing the scene in America, says that acquiring your house through a bank loan on the mortgage of your house is acquiring a liability. The same goes for paying for groceries through credit card.


Investor


Please go on. It sounds interesting.


Advisor


In life, according to the author, what is important is not how much money you `make' but how much of that money you succeed in `keeping' and `multiplying'. The rich know how to keep it because they know how to invest it. Money well invested is money well kept. Good investing is often more rewarding than good earning.


Investor


Any more such gems.


Advisor


Yes. "Real money is made when you `buy' an asset and not when you sell that asset" is yet another gem from the author.


Investor


This one surely needs elaboration.


Advisor


Yes. What the author conveys is that the "price" of the asset when you buy is the sole determinant of your profit on that asset when sold. If you buy that asset cheap, your profit on sale is obviously larger.

The message from the author is simple. Be careful of the price you pay when investing in an asset. Don't rush into buying any investment at any price. Wait till the prices come down the way Super Markets announce sales.


Investor


In other words, do as the shoppers do at Super Market Sales.


Advisor


Yes.

Failproof investing principles Warren Buffet bets on - Value Investing Series - II

Your reviewer enumerates below these twenty-four ideas with his comments for your ready reference:

1. Choose Simplicity over Complexity

When investing, keep it simple. Do what’s easy and obvious.

If you don’t understand a business, don’t buy it.

2. Make Your Own Investment Decisions

Don’t listen to the brokers, the analysts, or the pundits. Figure it out for yourself.

Become a value investor. It’s proven to be a very rewarding technique over the long term.

3. Maintain Proper Temperament

Let other people overreact to the market.

To succeed in the market, you need only ordinary intelligence. But in addition, you need the kind of temperament to help you ride out the storms and stick to your long-term plans. If you can stay cool while those around you are panicking, you can surely prevail.

4. Be Patient

Think 10 years, rather than 10 minutes

Don’t dwell on the price of stocks. Instead, study the underlying business, its earnings capacity and its future. If the question is, “How long will you wait?” – “If we’re in the right place, we’ll wait indefinitely” says Buffet.

5. Buy Business, Not Stocks

Once you get into the right business, you can let everyone else worry about the stock market.

Business performance is the key to picking stocks. Study the long-term track record of any company that is on your buy list. Buffet looks for following five main things before investing in a company.

(i) Business he can understand

(ii) Companies with favorable long-term prospects

(iii) Business operated by honest and competent people

(iv) Businesses priced very attractively

(v) Business with free cash flow

Don’t think about “stock in the short term.” Think about “business in the long term”.

6. Look for a Company that is a Franchise

Some businesses are “franchises”. Franchise generates free cash flows.

7. Buy Low-Tech, Not High-Tech

Successful investing is rarely a gee-whiz activity. It’s less often about rockets and lasers and more often about bricks, carpets, paint, shaving blades and insulation.

Do not be tempted by get-rich-quick deals involving relatively complex companies (e.g., high-tech companies). They are the most unpredictable in the long run. Look for the absence of change. Look for the business whose only change in the future will be doing more business, e.g Gillette Blades.

8. Concentrate Your Stock Investments

A the “Noah’s Ark” style of investing – that is, a little of this, a little of that. Better to have a smaller number of investments with more of your money in each.

Portfolio concentration – the opposite of diversification – also has the power to focus the mind. If you’re putting your eggs in only a few baskets, you’re far less likely to make investments on impulse or emotion.

9. Practice Inactivity, Not Hyperactivity

There are times when doing nothing is a sign of investing brilliance.

Be a decade’s trader, not a day trader.

10. Don’t Look at the Ticker

Tickers are all about prices. Investing is about a lot more than prices. It is about value. It is about wealth.

Abstain from looking at share prices every day. Study the playing field and not the scoreboard. Know the value of something rather than the price of everything.


11. View Market Downturns as Buying Opportunities
Market downturns aren’t body blows; they are buying opportunities.

Change your investing mind-set. Reprogram your thinking. Learn to like a sinking market because it presents great buying opportunity. Pounce when the three variables come together. When a strong business with an enduring competitive advantage, strong management, and a low stock price come onto your investment screen.

12. Don’t Swing at Every Pitch
What if you had to predict how every stock in the Standard & Poor’s (S&P) 500 would do over the next few years? In this scenario you have very poor chance of being correct. But if your job was to find only one stock among those 500 that would do well? In this revised scenario you have a good chance.

A few good investments are all that is needed.

13. Ignore the Macro; Focus on the Micro
The big things – the large trends that are external to the business – don’t matter. It’s the little things, the things that are business-specific, that count.

It’s possible to imagine a cataclysm so terrible that the markets would collapse and not bounce back. Externalities don’t matter – and you can’t predict them, anyway. And what can you do about them? Focus on what you can know: the workings of a good business.

14. Take a Close Look at Management
The analysis begins – and sometimes ends – with one key question: Who’s in charge here?

Assess the management team before you invest. A investing in any company that has a record of financial or accounting shenanigans, (creative accounting, accounting jugglery). Weak accounting usually means weak business performance. Strong companies do not have to resort to tricks.

15. Remember, The Emperor Wears No Clothes on Wall Street
Wall Street is the only place where people go to in Rolls Royce to get advice from people who take the subway.

Ignore the charts. A value investor is not concerned with charts. Invest like Benjamin Graham. Graham told investors to “search for discrepancies between the value of a business and the price of small pieces of that business in the market.” This is the key to value investing, and it’s far more productive than getting dizzy studying hundreds of stock charts.

Offer documents of most mutual funds say – in small print – that past performance is no guarantee of future success. Buffet says the same thing about the market: If history revealed the path to riches, librarians would be rich.

16. Practice Independent Thinking
When investing, you need to think independently

Make independent thinking one of your portfolio’s greatest assets. Being smart isn’t good enough, says Buffet. Lots of high-IQ people fall victim to the herd mentality. Independent thinking is one of Buffet’s greatest strengths. Make it one of your own.

17. Stay within Your Circle of Competence
Develop a zone of expertise, operative within that zone.

Write down the industries and businesses with which you feel most comfortable. Confine your investments to them.

18. Ignore Stock Market Forecasts
Short-term forecasts of stock or bond prices are useless. They tell you more about the forecaster than they tell you about the future. Take the time you would spend listening to forecasts and instead use it to analyze a business’s track record. Develop an investing strategy that does not depend on the overall movement of the market.

19. Understand “Mr. Market” and the “Margin of Safety”
What makes for a good investor? A good investor is one who combines good business judgment with an ability to ignore the wild swings of the marketplace. When the emotions start to swirl, remember Ben Graham’s “Mr. Market” concept, and look for a “margin of safety”.

Make sure that you also understand Buffet’s concepts of Mr. Market and the margin of safety. Like the Lord, the market helps those who help themselves. But, unlike God, the market doesn’t forgive those who “know not what they do”.

Bide your time, and wait for Mr. Market to get depressed and lower stock prices enough to provide a margin-of-safety buying opportunity.

20. Be Fearful when Others Are Greedy and Greedy When Others Are Fearful
You can safely predict that people will be greedy, fearful, or foolish. Trouble is you just can’t predict when or in what order.

Buy when people are selling and sell when people are buying.

21. Read, Read Some More, and Then Think
Mr. Warren Buffet spends something like six hours a day reading and an hour or two on the phone. The rest of the time, he thinks.

He therefore advises get in the habit of reading. The best thing to start is to read Buffett’s annual reports and letters. Finally, restrict your time only to things worth reading.

22. Use All Your Horsepower
How big is your engine, and how efficiently do you put it to work? Warren Buffett suggests that lots of people have “400 – horsepower engines” but only 100 horsepower of output. Smart people, in other words, often allow themselves to get distracted from the task at hand and act in irrational ways. The person who gets full output from a 200-horse-power engine, says Buffett, is a lot better off.

Make sure that you have the right role models. Strive for rational behaviour, good habits, and proper temperament. Write down the habits, practices and philosophies that you want to make your own. Then be sure to keep track of them and eventually own them. Financial success is a “matter of having the right habits”.

23. A the Costly Mistakes of Others
This is self explanatory and need no comments!

24. Become a Sound Investor
Buffet says that Ben Graham was about “sound investing”. He wasn’t about brilliant investing or fads and fashions, and the good thing about sound investing is that it can make you wealthy if you are in not too much of a hurry, and it never makes you poor.

To become a sound investor, you need to develop sound investing habits. Always fight the noise to get the real story. Always practice continuous improvement.

It’s less about solving difficult business problems, says Warren Buffet, and more about a ing them. It’s about finding and stepping over “one-foot hurdles” rather than developing the extraordinary skills needed to clear seven-foot hurdles.

12 principles of speculation strategies in stocks - Value Investing Series III

Enumerated below are twelve major principles and sixteen minor ones with brief comments by Kanu Doshi on each of them:

First Major Axiom: On Risk

“Worry is not a sickness but sign of health. If you are not worried, you are not risking enough.”

Adventure is what makes life worth living. Every occupation has its aches and pains. The rich have to worry about their wealth. But, if there is a choice between remaining poor and worry-free, the selection is obvious. It is better to be wealthy and worried than to be worry-free and poor. Minor Axiom I:

“Always play for Meaningful Stakes.”

If you invest Rs. 1000 and your investment doubles, you have only Rs. 2000 and are still poor! So if you want to be rich, you must increase your stakes. Minor Axiom II:

“Resist the allure of diversification”.

Firstly, diversification negates the earlier principle of playing for meaningful stakes. Secondly, it may keep you where you began so that your gains on few will cancel out the losses on the other few. Thirdly, it entails keeping track of many more items leading to confusion and occasional panic.


Second Major Axiom: On Greed

“Always take your profit too soon.”

Lay investors having made the investment tend to stay too long on it out of greed for higher profits. But, one must conquer this weakness and book profits soon. If one is less greedy for more profits one will take in more. Don't stretch your luck. In effect, it suggests, SELL sooner than later. Minor Axiom III:

"Decide in advance what gain you want from the venture, and when you get it, get out. Decide where the finish line is before you start the race".
This is self explanatory and hence needs no comment.

Third Major Axiom: On Hope


“When the ship starts to sink, don't pray, jump”

This axiom is about what to do when things go wrong. Learn how to accept a loss. One should accept small losses to protect oneself from big ones. When the market starts falling, sell, take your money and run!

Minor Axiom IV:

"Accept small losses cheerfully as a fact of life."

Expect to experience several smaller losses while awaiting a large gain.
Fourth Major Axiom: On Forecasts


"Human behavior cannot be predicted. Distrust anyone who claims to know the future, however dimly."

The story of a monkey throwing darts on the stock exchange page of a newspaper, to select the companies to buy, and coming out a winner is too well known to be recited. Recent news from London, further proves the truth, when an untrained chemist's stock selections, in a widely publicised contest open to all and sundry, registered higher appreciation over several full time highly qualified fund managers' well researched selections. Human events cannot be predicted by any method by anyone and, hence, don't trust anybody's predictions.

Fifth Major Axiom: On Patterns


"Chaos is not dangerous until it begins to look orderly."

The truth is that the world of money is a world of patternless disorder and utter chaos. This axiom is a commentary on Technical Analysis - a branch of investment strategies based on charts and patterns. The fact is, no formula that ignores own intuition's dominant role can ever be trusted.

Minor Axiom V:

"Beware the Historian's Trap".

This is based on the age old but entirely unwarranted belief that history repeats itself. Minor Axiom VI:

"Beware the Chartist's Illusion".

Life is never a straight line. Let us not be hypnotised by a line on a chart. Minor Axiom VII:

"Beware the Co-relation and Causality Delusions."

Don't be taken in by coincidences in the market. Minor Axiom VIII:

"Beware the Gambler's Fallacy."

There is a gambling theory which suggests that one should put small stakes initially and test their luck, and if these turn out well one should go for big stakes on the dice table. But this is not correct. It only shows that winning streaks happen. But nothing is orderly about it. You can't know how long it will last or when it will strike.


Sixth Major Axiom: On Mobility

"A putting down roots. They impede motion".

You may feel socially comforting to have roots. But in financial life, roots can cost a lot of money. Have a flexible approach while investing. This axiom implies a state of mind. Minor Axiom IX:

"Do not become trapped in a souring venture because of sentiments like loyalty and nostalgia."

Do not develop emotional attachment to your investment. You should feel free to sell when desired. Minor Axiom X:

"Never hesitate to abandon a venture if something more attractive comes into view."

Never get attached to things, but only to people. Otherwise it hits your mobility. Never get rooted in an investment. You should remain footloose, ready to jump away from trouble or into a profitable opportunity as and when circumstances demand.


Seventh Major Axiom: On Intuition


'A hunch can be trusted if it can be explained.'

A good hunch is something that you know but you don't know how to recognise it. When a hunch hits you, try to locate some data in your mind for any familiarity. Then only should you act on it.

Minor Axiom XI:

'Never confuse a hunch with a hope'.

Be highly skeptical. Examine every hunch with extra care.
Eight Major Axiom: On Religion and The Occult


'It is unlikely that god's plan for the universe includes making you rich'.

You can't only pray that you should be made rich. You will have to work at becoming rich. Mere prayers will not suffice.

Minor Axiom XII:

'If Astrology worked, all astrologers would be rich.'

This is self explanatory. Don't trust predictions. Minor Axiom XIII:

'As superstition need not be exorcised, it can be enjoyed provided it is kept in its place.'

In your day-to-day financial matters, act rationally. But, when buying a lottery ticket, give it a full play to amuse yourself.
Ninth Major Axiom: On Optimism and Pessimism


'Optimism means expecting the best, but confidence means knowing how you will handle the worst. Never make a move if you are merely optimistic.'

In poker and a lot of other speculative worlds, things are never as bad as they seem - most of the times they are WORSE.

Confidence comes not from expecting the best but from knowing how you will handle the worst. Optimism can be treacherous because it makes you feel good.

Tenth Major Axiom: On Consensus


'Disregard the majority opinion. It is probably wrong'.

It is likely that the Truth has been found out by a few rather than by many.

Minor Axiom XIV:

'Never follow speculative fads. Often, the best time to buy something is when nobody else wants it.'

This is the best way to get a good stock cheaply.
Eleventh Major Axiom: On Stubbornness


'If it doesn't pay off the first time, forget it'.

If at first you don't succeed, try and try again and you will succeed in the end. This is good advice for spiders and kings but not for ordinary persons with regard to financial matters. Every trial is a costly error.

Minor Axiom XV:

'Never try to save a bad investment by averaging down.'

If the price of the stock goes down after your purchase don't buy more to bring down' the average cost of your total holding. Investigate why the price went down rather than put good money in a bad bargain.
Twelfth Major Axiom: On Planning


'Long-range plans engender the dangerous belief that the future is under control. It is important never to take your own long-range plans, or other people's seriously.'

This is self explanatory and hence needs no comment.

Minor Axiom XVI:

'Shun long-term investments.'

If possible try to a long-term investments. The author noticed that the Swiss group never took a long-term view of their stock purchases. They always sold out as soon as their targeted profit was achieved.