The Intelligent Investor – 15 – Stock Selection for the Enterprising Investor

Enterprising investors or aggressive investors are those who put more effort into stock selection and investment decisions. Graham-Newman Corporation was involved in the few investment classifications such as –

Arbitrage – opportunities where companies involve the reorganization, merger, demerger, etc.

Few businesses have a good quality but due to operating with the other gruesome businesses, good business does not get value. So that demerger of good business from the gruesome business will create value for the shareholders.

Details on postSIMPLE IS BETTER – ISSUE -14 – DEMERGER

Liquidation – opportunity to earn profits where the company is gone through liquidation phase, sold out of assets and make cash payments to the stockholders. Many a time, company liquidate non-core assets for improving productivity and to reward shareholders.

One of the pharma companies has sold out their business to the MNC company and rewarded shareholders with a special dividend.

Related hedges – buying a convertible bonds/preference shares and selling of stocks into which they are going to convert. Such opportunities are rare and difficult for the Indian market due to the unavailability of wide derivatives stocks.

Net current assets or bargain issues – purchasing an issue which is available below net current assets value, not giving any value for the plants, land, machinery, etc. Here, wide diversification requires.

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We should buy cyclical companies when the business cycle is depressed and due to depressed earnings valuation seems to be higher. I have explained on cyclical companies in detail in Warren Buffett’s letters series.

We can find out some of the undiscovered companies by using different types of criteria. Such a criterion helps us to filter out a few companies from the huge list. And then we need to put further due diligence, efforts for selecting or rejecting companies for an investment purpose from the available filtered list.

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Enterprise investors can make an investment into the bargain issues and to the workout or special situations (I.e. demerger, merger, buyback, divestment, etc.) where they can reap an additional profit. Special situations have a lower probability of large loss so that we can earn lower losses with a satisfactory return.

We as an investor also need to do a practice for making an investment decision. We can make paper trade and decisions which help us to improve our decision making. As we know that cricketers, musicians, athletes, etc also getting engage in the practice before the actual performance. When we are learning to drive then we do not directly drive a car on the highway but we learn at peaceful roads so that we can avoid a big accident. Similarly, we need to perform with the investment field, rather make an initial huge investment, we need to put efforts to learn investment skills. This will help us to improve our decision making, philosophy, minimization of errors, etc.

We need to focus on the ROIC rather than focus on the EPS.

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It shows us how efficiently a company is utilizing the fund to generate optimum returns. And provide us with good returns over a longer period.

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We also need to check about the management who runs the business, whether they focus on the stock price or business, do financial statements are easy to understand or full of ambiguity? what company has promised and how-much they have delivered? does top management turnover higher or they stay for the long-term with the company?

We will find out many of the answers to the above questions from the annual report.

We also can learn and improve our approach by reading the approach of other investors such as Warren Buffett, Phil Fisher, Ben Graham, Charlie Munger, Howard Marks, Prof. Sanjay Bakshi, Neeraj Marathe Sir, etc.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation. 

Read for more detail: The Intelligent Investor by Benjamin Graham, Jason Zweig

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