WHAT CAN BE A PROBABLE BOTTOM OF INDIAN STOCK MARKET?

We have seen a sharp fall in the market these days. Now, everyone has a question that what can be a probable bottom? where we should start buying? Bottom of the market already made? Should we buy or will we have missed out this opportunity? Yes, Nifty has reached to the fair value zone but pendulum never stayed at the middle zone it will go extreme to both the direction. So, we have seen upside extreme and now have to see downside extreme move.

Before starting answering the above questions, here, I am requesting you to read my old article which I had posted on 4^th August 2019. In that article, I mentioned regarding market fall. Please first go through that article because the current article is a continuation of that article.

THE INTELLIGENT INVESTOR – 3 – A CENTURY OF STOCK-MARKET HISTORY

Now, if we analyze current fall then we can say that Indian corporate and GDP has witnessed a limited growth in the past. Also, Covid-19 virus has disrupted the entire world economy. Majority of the economy has started giving a revival package but if we look at the speed of the spreading of Covid-19 and death of the people then it is very painful for us as well as the economy.

Our PM has announced with the 21 days lockdown to fight against the Covid-19. We have taken this step well in advance so that we can able to control the situation, because if the situation will go out of control then we do not have a proper infrastructure for citizens to cure.

I have taken a few data from HDFC Bank India growth outlook 2020, cost of lockdown.

By looking at the above data and havoc of Covid-19 in the world, it is essential to go for the not only lockdown but to declare an emergency in India. Now, let’s go to the economic impact of this mayhem. People can oppose that government of the majority of the economy has started announcing a revival package. But We have to think that it’s not a financial crisis where you pump liquidity into the system and things will start recovering. It’s taking the lives of people so what will change after the liquidity get infused. People try to save life rather use those liquidities. So, disruption can take time to revive. If this problem can worsen it will be led to a financial crisis which is still pending to come. It’s just my thoughts, don’t know what can happen but this thing looking worse than any financial crisis.

If the normal situation has come where growth remains subdued then the market can remain in range but here this difficult situation can hamper the earning badly.  we have to understand that our states of India are equivalent of the many of the country where corona has done huge damage. Here, the world economy gets hamper, trade around the world hamper, supply chain get disturbs, corporates have to fund fixed cost, they only can manage variable cost through the lockdown.

Many of the articles and reports indicating towards global recession and as intense as the recession of 1929. I don’t know that will happen or not but I only can pray that such will not happen because it will take many further issues with many of the lives. Let’s not getting into the debate and do some number crunching which is always my favourite.

Current, Nifty EPS is ~Rs.444 so proceed with the calculation based on that. I am assuming current EPS will remain same for FY20 and all degrowth will account in FY21 and FY22 (if the situation will not come to the control then FY22 will also go for a toss).

I have taken the bank rate as an SBI FD rate after the rate cut.

Now, if we look at the earnings yield to bond yield ratio then it has reached at the 1.03x in the current period. If we take same EPS and take that ratio to the worst happen during the 2008 – financial crisis then it was 1.11x so nifty level come to the 8000 but Covid-19 will going to hamper earning growth and might be a new level of earning yield to bond yield ratio can come, which I have taken a range of 1.25 to 1.50 with a different scenario.

If things will be in control in coming few days then might be 5% degrowth can be possible and then market also maybe get stable at the old worst level of earning yield to bond yield ratio – 1.11x to 1.25x. But if things will get more worst then now and continue with coming 1-2 months then 10% degrowth in earning can be expected. I have made a study in S&P500 of USA and in that market earning yield to bond yield ratio has reached around 3x in worst level which I am not considering as of now. If we see that then past falls in the market have accounted for ~50% fall from the top so that that will also come to ~6215 level.

Now, another point is that earnings growth always essential for generating returns in the market. So that market can be remaining in the range till no sign comes for earning growth revival because, on the hope of earnings growth, the market has already run a lot.

I have posted an article on WHAT CAN BE A PROBABLE RETURN FROM SENSEX IN COMING 10 YEARS? a way back and where I have taken SENSEX level after 10 years on worst earning growth of 3.50% came at 43547 on P/E and 57678 on P/BV based. So, if earning growth cannot revive then the market can remain in range for a longer period. But from the current base, we can have a good chance of making a return in the range of 4-7% CAGR in the index overcoming 10 years. Tax cut reform will also aid in earning growth coming forward. We only have to pray that situation will not worsen from here and for that we have to stay at home, stay safe and fight against Corona.

#Stayhomestaysafe #Stayhomesavelives #Fightagainstcorona

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

The Intelligent Investor – 8 – The Investor and Market Fluctuations

When we have invested in the bonds then that will get little fluctuation to the market price. But when we have invested in the common stocks then it will have a wider fluctuation to the market price. So that we need to be ready financially and psychologically for upcoming fluctuation into our common stock investment. It is easy to advise for not doing a speculate but hard to follow it. Fluctuation and behavior of the market attract us to make a speculative decision. So, if we want to make a speculative decision then keep aside some amount of money as considering that we are going to lose it through speculation.

We need to take a benefit from the swing of the market pendulum rather than getting trapped into it. And we can take a benefit by way of timing to the market or through pricing.

We cannot predict the direction of the market consistently and if we start predicting a direction then we end up as a speculator, not as an investor. People want to buy during the bear market where everyone else is selling and sell during the bull market where everyone else is buying. But people are tending to do the reverse, the majority of the people buy at high / during a bull market and sell at low / during a bear market.

Similar has happened during the year 2017, people have seen a bull market from the year 2014 to 2017 and they started believing that this will never be going to end and stock prices keep on going higher and higher.

1^st, 2^nd and 3^rd point has been explained to the previous articles of the same series.

One of the optical and data networking products company

IPO of the company came at Rs.257 so that MCap was ~Rs.2367cr which was at the EV/EBITDA of 14.09x in FY17 and stock price rose to ~Rs.437 in FY18 which was at EV/EBITDA of ~26.33x. The company has incurred losses in a few years and came to profit since FY2016.

One of the publication company

The IPO of the company came at P/E of 33x and EV/EBITDA of 16.59x.

Day-to-day or month-on-month fluctuation to the market does not make investors richer or poorer. But what will happen for a longer period that will impact the wealth of investors. We need to keep distance ourselves from the crowd rather than go with the crowd. Also, we need to focus on emotional stability over an investment journey which helps us a lot. The normal investor gets trapped with greed as the market starts advances, but at the same time, intelligent investors booked a position of overpriced issues and parked those funds to bond, he will re-balance his portfolio.

Owning a common stock means we are a part-owner of the business, but due to the advancement of the stock market operation, investor’s mind gets diverted and they are getting more engaged towards the stock prices. They forget that stock price fluctuation should not be focused but they have to focus on the value of the businesses, quality of the businesses and progress of the businesses. Stock prices bring distance between business and us. If a person is making an investment for a longer period, but getting fluctuated as stock prices get fluctuate then he does not know for the emotionally stable and matured investors. Matured and intelligent investors do not focus on the price quotation every second but they focus on the underlying business. As businesses show successes it becomes popular among the people and it will command more premium, its mood swings with the market, etc.

We need to focus on earning the power of the business with the asset value of the business. But we should avoid paying higher to the assets as well as to the earning, otherwise, we need to be stay affected through the market fluctuation.

One of the telecom company

(Source – Thoughts on Thoughts blog)

The company looks very cheap based on the financial metrics and assets base, but if someone who does not have paid attention to the business of the company and earning the power of the business then—

One of the gelatin company

The company has some uncertainty and raw material problems but having a stable business. The company was traded at ~Rs.66 cr of MCap with having investment + cash on the balance sheet was worth of ~Rs.70+ cr so that entire business was available at free due to uncertainty. The company has delivered a decent return with also deliver Rs.10/per share as a dividend.

Few critics of value-based investing tell that such an approach does not work with the listed companies due to the ample amount of liquidity available. Such liquidity and stock market platform provide a daily opportunity to the participants to make changes to their holdings.

Many a time, Mr. Market ready to pay overpriced for the business and sometimes, He is ignoring too few of the businesses. We need to stay away to getting trapped from the Mr. Market mood swings. Mr. Market also behaves like a human being because prices of it and the behavior of it direct through human involvement as a market participant. We need to control our emotions based on our experience and belief over a while. We should stop overpaying attention to the market.

If we are doing a business then daily price fluctuations will not be going to disturb us and we do not make a change to our holdings. Price fluctuations only provide an opportunity to buy a business at a favorable price and sell when Mr. Market shows a higher price of the business.

The main distinction between speculators and investors is their attitude towards the market. A speculator is willing to make profits by way of market fluctuations whereas investors are willing to hold security at a suitable price and market fluctuations do not important for them. Market prices are just for our conviction so that taking benefits of it or to ignore it depends on us.

Stocks or a bond, the Market price will remain to fluctuate over a longer-term period. Good company with good management gets recognition into the good market price and bad management will get bad market price recognition.

Mr. Graham has explained the liquidity concepts which is suitable for the current scenario. The fund manager purchases few stocks for the portfolio, then the market starts moving upwards which attracts the investors to put more money. Now, due to the additional fund inflow, the fund manager has to buy a similar stock to the additional fund which brings stock prices to the dangerous level. Now, as the market falls, investors ask for the withdrawal of the fund and fund manager has sold out stocks to make the payment which leads to further fall to the stock prices. So here, they buy at high and sell at a low price. Our brain makes a pattern that similar has happened during the last time so it might be going to happens now also. And many times, our brain creates a pattern when there is not the availability of any pattern.

What we should need to do for the better than average return –

Our behavior is most important to get an above-average return. By controlling ourselves, we can stop ourselves from becoming our enemy. When we have made any prediction and that proven right then we become addicted to own predictions.

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

LEARNING INVESTMENT LESSONS FROM MOVIE BADLA

previously I have written a post on learning investment lessons from movies such as “Chal Man Jeetva Jaiye”, “Dangal”, “3 Idiots”, “Rajneeti” and “Sanju“. Now, I am going to write a few investment lessons from another movie “Badla”. Badla movie has learning which can help us to make stronger our investment decisions.

• Focus on every detail

Extract from the movie – When we see to the movie, Mr.Bachchan put a huge emphasis on each and every detail, though detail is minor or important. And on the basis of those detail, he tries to solve out the entire story. He has collected all detail, data rather to getting emotionally trapped. Further possibilities of different stories, opinion, decision etc. will be based on the detail which Mr.Bachchan has collected.

Co-relation in real life – We need to put the focus on the each and every minor detail. We should not avoid any of the detail. We do not know which detail is useful to us, have a huge impact and we have avoided it. When we are analyzing any of the company and avoided a few information, then we may avoid a piece of much useful information too. So that we should make a checklist and keeps on improving our checklist for the covers each and every detail.

• Never trust anyone before knowing the person or ability

Extract from the movie – Ms.Taapsee has not put trust in Mr.Bachchan while discussing the entire story and providing detail to him for solving her case. She has made a discussion on the points which are common and given half information only.

Co-relation in real life – Similar with the investment field also, we get any information, many tips, etc. but we should not put trust on them before knowing the person and ability of them, otherwise we may end up with losing our entire capital also.

• Always focus onto the different possibilities -“Kya main wohi 6 dekh raha hu jo tumne muje dikhaya, ya woh 9 jo muje dekhna chahiye tha”

Extract from the movie – We have seen to the movie that Mr.Bachchan has built up different possibilities which might happen during the different situations or different possibilities for the same situation. Also, he has created doubt on the information provided to him. He has connected the different information available with him and created different stories which also can be possible on the basis of information rather rely upon the story which was communicated to him.

Co-relation in real life – Similarly with the investment also, we do not rely on the information and story getting communicated to us. But we should check what can be the different possibilities for the similar information provided to us. We try to build different possibilities and check what can happen when other possibilities will occur, what will be the results, does our investment will survive, our original hypothesis will prove right, etc. Whenever we do not think the different possibilities of the prevailing information then we believe whatever communicated to us and we may miss with the scenario which can be totally different from our original hypothesis.

• Make proper homework

Extract from the movie – We have seen to the movie that Mr.Bachchan has completed with his homework before meeting to the client. He has collected all the information, evidence, prepare different pieces of evidence, etc. Due to his efforts, he has never lost any of the cases, also he succeeds in getting true information from Ms.Tapsee.

Co-relation in real life – We also need to do proper homework before making any investment decision. This homework protects us from any of the unforeseen events, losing capital, getting false information, stuck into the trap, etc. Due to the proper homework, we can able to generate an above-average return with minimizing the risk associated with investments.

• Do not behave as “Tum jo bataogi wohi mere liye sach hoga (I will put trust on whatever you say)”

Extract from the movie – Mr.Bachchan initially told that he will put trust onto the information which communicated to him through Ms.Tapsee. But after that, he has also created doubt on the information provided by Ms.Taapsee. He has analyzed information rather to blindly believe in the information.

Co-relation in real life – We need not put the blind trust on the information getting communicated to us by the management of the company. We have to create doubt on the sayings, information for reaching the proper conclusion and decision. If we believe blindly on the information given to us then we may get trapped into it and end up with making a losing investment decision.

• Woh murkh hota hai, jo sirf sach ko hi janta hai par sach aur juth ke farq ko nahi janta

Extract from the movie – Very well said by Mr.Bachchan. Mr.Bachchan has understood the difference between truth and lie which has helped him to identify what actually the truth is. And a lie is not able to make him a fool.

Co-relation in real life – If we just know what truth is but does not know that difference between truths and lie then it has a higher probability that we get trapped to the lie which was communicated to us in the mask of truth. No one can make us fool through speaking a lie in the mask of truth. If we are not able to understand this different then people present us wrong information in the mask of truth and we believe it which impact us very badly.

• Hume jo sach lagta hai, jaruri nahi ke voh sabko lage

Extract from the movie – Ms.Taapsee told that she is always speaking the truth but Mr.Bachchan told that it is not necessary that truth is not that what we feel and that is not necessary that everyone else consider it as truth also, the truth is what we can prove. Judge also believe in the truth which we can prove.

Co-relation in real life – We believes that truth is what we are believing and everyone else also believes in the same manner. But it not necessary that what we believe is only the truth, but the truth is what can be proved. When we have made an investment to any of the company and we believe that company is good, it will able to perform well, etc. but that does not necessarily work as truth and everyone else also believe the company is good and perform well. But the truth is when a company can able to prove it and perform well.

WARREN BUFFETT’S LETTER – 1996

Warren Buffett’s Letter – 1996

Acquisitions

Kansas Bankers Surety (KBS)

The company is an operating into the business of insurance which has a presence in 22 states, decent underwriting record with Don Towle as a manager. They made a deal to acquire a company at $75 million.

FlightSafety International

The company is the world’s leader in the training of pilots. The company operates in 41 locations, outfitted with 175 simulators of planes ranging from the very small, such as Cessna 210s, to Boeing 747s. About half of the company’s revenues are derived from the training of corporate pilots, with most of the balance coming from airlines and the military. They made an acquisition at $1.5 billion.

We need to prepare a list of the errors which can be dangerous for the health of our investment and work to avoid those errors. If we work on the avoiding mistakes then we can win 50% of the battle.

List of mistakes which I have experienced during my investment journey –

• Never ignore the true value of the company—Every business has some value and that we should not have to ignore. If we commit such a mistake then the market will defiantly punish us. Be careful with the true worth of the company and only buy it when it falls below its true worth. And if business not available below its true worth then ready to missed that opportunity. Loss of opportunity is better than the loss of capital.
• Don’t buy HOT —-If we buy the hot business such as recent trend, new IPOs, business on which everyone is bullish etc., then we must have to exit it at the proper time. So if we aren’t able to exit at the proper time then it’s better to let it go such opportunities. If we buy HOT then that HOT will BURN our portfolio.
• Buying a high leverage business — We need to avoid a business which has a huge borrowings, such borrowings can kill the business and also kill our investment journey.
• Using the wrong valuation method — Every business will not get valued with a similar valuation matrix. We need to identify the nature of the business and then value a particular business. Such as we should not use the valuation matrix of growing non-cyclical business for cyclical business, should not use the valuation matrix of assets light business for assets heavy business and vice-versa. If we made such a mistake then whether we might miss a decent investment opportunity or we might lose our capital.
• A mistake of buying a story, not a fundamental — I have never ever made such a mistake because I am a hard-core lover of numbers. But I have seen many of the people who always focus on the story and also which is very trending to the market. I believe that without the support of numbers, no story can survive for long. In the year 2014-15, Logistics stocks due to GST gets a trending story but due to lack of good numbers, the story gets failed. People generally avoid numbers due to lack of understanding of it. I firmly believe that “Stories are for kids, not for investors.”
• Investing without a process and philosophy — I can overcome this mistake at the initial period of my investment journey and that is only because of my guru – Neeraj Marathe Sir (who always believe on having a process and philosophy for making an investment). I have seen many people who spent lots of time into the market but they do not have any process or philosophy. They change their philosophy as they meet various people. If we do not have our own process and philosophy for making an investment then we will not able to create a successful investment journey. I also learn from my guru that we must have our philosophy in a written format so that we can refer it over a period of time and stop ourselves from occurring a mistake.
• Not using a checklist — We should have a checklist for a business, industry, financial, management etc. so that we can focus on the points to study and also not forget any point to study. I am using a checklist for the last 3 years and I can say that having a checklist helps me a lot. My checklist keeps on improving as my experience grows.
• Making an investment decision with disturb mind — We should avoid making an investment decision while our mind is disturbed. Disturbance in mind will end up with the faulty investment decision and which can be harmful to our wealth.
• Cloning a well-known investors/fund managers — Again I can overcome this mistake at the initial period of my investment journey and again credit goes to my guru. If we have our process and philosophy then we will not try to clone others. I have seen many people who have spent 10-15-20 years to the stock market then also not having any process and philosophy & they clone others. Many of the people have cloning as their investment philosophy because they love to use shortcuts. I always remember the quote of my guru –

When Company does not have an opportunity to reinvest earnings at a higher rate than the company should distribute those earnings to the shareholders so that they can use it somewhere for getting a higher return. If the company does not have a good opportunity to reinvest earnings and then also company does not distribute earnings as a dividend then we need to be careful with a company (Question on the capital allocation decision of a management or earnings can be manipulated or business always needs a huge capital to sustain only).

Examples – No/Low growth high dividend payout

Examples – No/Low growth low dividend payout

We need to check the above-mentioned factors in the company where we have made an investment and where we want to make an investment. Most important is to gain a market share. The company cannot able to gain market share, though the company has a competitive advantage then that competitive advantage not useful for us. We should not focus on the leadership position of the company rather need to focus on the companies which focus on the manufacturing, distribution, packaging and product innovation. Market leadership can be changed if the company does not focus on the mentioned points.

According to Mr.Buffett, paying a higher price does not risk for the good companies compared to paying higher prices for the bad companies.

Let me take an example of one the biggest wealth creator company of the Indian stock market—

If someone has bought this company during the March-2000, at the high price of around Rs.431 then after the 16 years of the period, he gets returned at 7% CAGR. And if enter to the similar company at the low price of around Rs.275 during the March-2000 then after the 16 years of the period, he gets a returned of 10% CAGR (*Considering all-time high price for calculating returns). Though revenue has grown at 30% CAGR, Operating profit grown at 27% CAGR and Net profit also grown at 27% CAGR during the same period with supported by a good management team. During March-2000, the company was traded at 64x P/E at the low price of Rs.275 and this multiple is common nowadays.

When management of a good business diverts their focus into the business which is not performing well then such decision of the management affect the performance of the business.

Example – We have seen examples such as liquor manufacturer enter into the airlines business, airport contraction business has diversified into the power business.

Mr.Buffett has also mentioned the Circle of Competence concept –

Control on our temptation, control on our emotion towards our investment is essential to survive and create wealth from our investment.

Warren Buffett’s Letters 1957 – 2012

LEARNING INVESTMENT LESSONS FROM MOVIE “SANJU”

Previously I have written a post on learning investment lessons from movies such as “Chal Man Jeetva Jaiye”, “Dangal”, “3 Idiots” and “Rajneeti”. Now, I am going to write a few investment lessons from another movie “Sanju”. Sanju movie having very negative comments regarding the reliability of the story but not be go deeper into it. This movie has a very inspirational story and as well as many lessons which we can implement in our life & in our investment career.

• We need a mentor who helps us with identifying right or wrong decision

Extract from the movie – We have seen in a movie that Sanjay Dutt having a many up and downs in life and during those tough time Mr. Sunil Dutt has helped him with proper guidance. Due to his guidance and support, Sanju can achieve success. Many times, we require a proper guidance which can help us with making a difference between right or wrong decision.

We have seen in a movie that whenever Sanju get confused, Sunil Dutt has shown him a way to get out of such a situation. He has supported him, encourage him to achieve success. Sunil Dutt has encouraged Sanju to make a right decision and also support when Sanju got stuck into worst situation. Books also in our life work as a mentor. When we do not have a mentor, we can take a help of books which help us with a selection of the right decision. Mentor help us to come out from the struggling situations where we are not able to find out the proper way.

Co-relation in investment life – Our investing life is as similar, we require a true mentor who helps us with a proper guidance and supports us in identifying a right or wrong decision. Whenever we get confuse he can help us with his wisdom which can uplift us to the next level. If we do not have a proper mentor then we should select books and try to learn from it. I had a conversation with few of a successful investor and they told that they did not train by a mentor but they read books from Graham, Phil Fisher, and letter of Buffett and prepare themselves for an investment journey.

• Drugs and suicide are not a solution to any problem

Extract from the movie – We have faced many problems in our lives and we have to fight with those problems, not give up against those problems. Many a time, people do not just give up against problems, they also start taking shortcuts for getting solutions for staying away from problems such as alcohol, drugs & suicide. Shortcut never provide us with a permanent solution against problems, also its effect badly to our loved ones. We have to fight against those problems and solve it permanently. We have seen in the movie that Sanju has started to take drugs or choose to commit suicide to come out of the difficult situations but that did not provide him with a permanent solution. When he decided to fight against difficult situations then he got a proper permanent solution. I can say it from my experience, I have also faced a few situations which are similar to the movie, I also got depressed but I chose to fight rather take a shortcut. And I am sure many of us chose to fight rather to give up. Fight against difficult situation seems easy compared to short cut but always provide us a proper permanent solution.

Co-relation in investment life – Similar to our life, we have also face difficult situations in our investments career. Many of us face it, fight against it rather take a shortcut. We failed during our investment career many a time, our investment might work worst, and it might not perform as we have thought. If we learn from those difficult situations, increase our efforts to become stronger and decide to fight for the success of our investment career, then we can achieve success in our investment career also. Those who are not able to fight against difficult situations, they choose to take shortcuts such as leaving of investment field (suicide from investment career), taking investment ideas from others, getting dependent on others’ tips (such work as a drug for us). If we take a advice from the mentor for building our investment career more stronger and enhance our efforts to become stronger then it will be a permanent solution for the difficult situation during our investment career. We grow stronger, our investment decisions improve wiser when we face difficult situations and fight against it, learn from it.

• Sometimes music / other than core work helps to heal us

Extract from the movie – Whenever we are depressed or found it difficult to focus on our core activities then it is better to work something else which can help us to getting heal from our depression and with it, we need to keep on trying to get back to the focus on slowly to our core activities. When we are depressed, distracted or disturbed then it will be difficult for us to get back our focus on our core activities. So that first, we should try to come out of the depressed situation. This really helps us to get back our concentration and become normal from depressing situations. I usually listen to music, do a workout or take a sleep which has to help me a lot to come out of the depressed situation and I can able to again focus on my core activities. We have seen in the movie that whenever Sanju got disturbed, distracted from his acting career, Mr.Sunil Dutt has helped him with music and music has healed his depression.

Co-relation in investment life – Similarly when there is a depressing situation for us in our investing career then rather be getting panic, we should focus on the some of the activities which make us feel better and relaxed. This will reduce our stress, heal our depression so that we can again focus on the investing activities. We have faced such situations many a time during our investing career, investment does not work as we assumed, all assumptions are in place but still not perform in a manner it should perform, etc. These all make us depressed and if we continue to focus on investment with such a depressed mind then there will be a higher chance to make a huge error, bigger blunders. It is better first to be normal and be relaxed then need to again focus on investing activities. Many a time, Small happiness do big miracles. And making a temporary distance from core activities will help to come back with more strength.

• Need a good circle of buddy

Extract from the movie – We have seen in the movie that Jubin has the spoiled life of Sanju. Due to Jubin, Sanju has started taking drugs & became abdicated to it. Whereas Kamlesh has helped to Sanju for coming out of his drugs abdication and also supported in tough time. If we have a good circle of buddy then they help us to put forward our views and get right views from them. They do not show selfish behavior to us but they provide us a view which is right for us, not views which feel us good. They make a debate with us on views, opinions which create stronger decisions, stronger execution. So that we need a friend like Kamlesh not like a Jubin.

Co-relation in investment life – Similar to the investment field, we need a circle of a good friend who told us which kind of mistake we have made, who support us during our difficult time, who can make a debate with us on our investment ideas which make our decision stronger. This helps us to make a wise investment decision rather than a biased decision. We have to differentiate who provide us a right view and who provide us a view which makes feel us good. If we stay with the wrong circle of buddy then we always get biased views, they provide us a view which we want to hear. Such views feel us good but not build us wiser. Many a time, we may be missed some important points and if we have the good circle of buddy then we can make discussion with them, we get proper views. I learn that such circle should not be huge, we have few buddies, maybe a max circle of 3-4 members.

• People will comment negatively, they are judgmental. Shut their mouth with success

Extract from the movie – We have seen in the movie that people, media has made negative comments regarding careers, drugs addiction, consider him a terrorist, etc. But Sanju has made a comeback and achieve a success. Media has put a question mark on his career, also everyone considers that he is finished & never able to come back to his earlier success. He has put efforts to develop himself and come back to his earlier success.

Co-relation in investment life – Such kind of negative comments, we also get during our investment careers. When our investment ideas do not perform well, we have made some mistakes, we face the difficult time to get proper investment ideas; then we get criticism from people. Many negative comments we get from people, but rather getting depressed with those comments; we need to put efforts on our career. We should focus on putting efforts into our career rather than responding to people. We need to work on identifying our mistakes, learn from it and put efforts to build us wiser. We should work on identifying good investment ideas and build a good portfolio which helps us to create a wealth. Such wealth creation is a response to all negative comments made to us, rather to replying with words to everyone. Negative comments should work for us as a motivation to develop ourselves rather depress us. And if we found useless negative comments from people then need to remember ustaad no. 3 from the movie – “Kuch toh log kahege logon ka kaam hai kahena, chhodo bekaar ki baton mein kaheen beet na jaaye rainaa”

• Always hope for the best days coming after worst days

Extract from the movie – We should not give up by experiencing difficult days whereas we should hope for the best time. Our life also works in a cyclical manner, we have worst days also and best days also but never one remain forever. We have seen in the movie that Sanju became a drug addicted but after proper treatment, he again became normal. Also, he has faced many failures in acting career but after putting efforts, be able to achieve success.

Co-relation in investment life – Many a time in an investment career, we faced difficult days but we should put an effort also during those days with the hope of best time is on the way. Sometimes our investment does not work in terms of stock price but all our assumptions for investment are in place then we have to keep faith and hope for the best and have a patience.

• There is another side of the story, do not just blindly believe in whatever we see or hear

Extract from the movie – We have seen in the movie that Anushka Sharma has played a role where she does not believe blindly to any of the information. She searches for the evidence, truth, and meet people who can help her to reach for truth. If she believes in the information which was given by Jubin then she is not able to reach the truth of the story. But she takes his information as a starting point for an investigation and searches what is the truth.

Co-relation in investment life – It is very essential for us to not believe any of the information blindly. We always look at the information suspiciously and try to find out evidence for the information. If we blindly believe on the information and those information proves wrong then we may incur a huge blunder with our investments. We have to see the story from different angles then only we identify and reach the conclusion that whether it is correct in the way it seems on the first instants. As an investor, it is our duty to check the available information to us rather believe in it and make an action.

If we trust ourselves then we can achieve success in our life.

SIMPLE IS BETTER – ISSUE -7 – OUR LIFE AND INVESTMENT

I have talked about compounding and benefits of compounding in all of the previous issues of Simple is the better series. Now, from this issue, I am going to discuss similarities between our life & making an investment and how we can learn many things in investing from our life. We also can learn many things in our life of the equity investment.

We can able to create wealth while we have a thorough understanding of the business and the phase in which it is operating. We need to work hard on an understanding of the business for protecting damage to our wealth and also as an investor, we are becoming a partner of the business not an owner of a piece of paper.

For Detail Issue, Click here —> SIMPLE IS BETTER – ISSUE -7 – OUR LIFE AND INVESTMENT

BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “UNDERSTANDING RISK”

For making any investment decisions, we have to be dealt with the future, which is uncertain in nature. So, that when there is an uncertainty, then there is an involvement of risk and we cannot escape from the risk. We must have to focus on asserting risk while making any investment decisions.

When we focus on the return of the particular instrument, then we have concentrated our focus on half of the movie and rest half will get completed with asserting risk in that particular investment.

Traditionally, we all have learned, that in making a higher return, we need to take an incremental risk.

But we think logically about the same that if we get a higher return for the taking of incremental risk than there should not be a risk. We get rewarded by the returns for taking a higher risk.

Traditional risk/return graph has communicated the positive relationship between risk and return but ignored uncertainty involved for making such returns. Additionally, traditional risk/return graph has shown a risk as similar to volatility, but not focused on the danger which is involved in the investment.

Many a times volatility cannot be an as riskier as compared to other dangerous events for our investment.

So, that risk is not a volatility in the price of stocks, but the real risk is the permanent loss of our capital. And we must have to be worried about the permanent loss of capital rather than volatility. We must have to focus on the understanding of the risk which could have the probability of erosion of our capital.

Many a times risk is not only limited to, permanent loss of capital or to volatility, some kind of risk are objective and personal in nature; such as-

1) Falling short of one’s goal

Many investors have a different need, goals and not meeting those by investment results can be the risk for the particular person.

If someone just requires meeting the routine expenses, then getting a fixed return from fixed return instrument might not be at risk for the person, but if someone who wanted to build capital for investment then such a lower return can be a risk for that particular person.

2) Underperformance

Such kind of risk is related to the investment manager. If the investment manager cannot able to generate higher returns compare to index than the investment manager might lose his clients.

3) Career risk

This is an extreme form of underperformance risk. Continuous underperformance can have resulted in the risk to the career.

4) Unconventionality

This risk is connected with a being different while making an investment idea. If unconventional idea got wrong, then there might be a risk to the career.

We buy metals, sugar stocks, etc. (at the worst time of the cycle). Instead of buying pharma, IT, Banking which is a darling of the industry. And if our stock picks up doesn’t work, then we have to face trouble and extreme risk of loss of career.

5) Illiquidity

This risk arises when investors need a money for some urgency and unable to break his investment.

Let me take an example of the cricket match for understanding a risk.

The main risk in the cricket match is to losing the match, series, etc. as similar to losing our capital in investment. If all the players play a poor game, then definitely team will lose the match and similar to an investment; if all our investment resulted in poor returns or more risk oriented than we might lose our capital or lose real value of capital.

As we have seen in Indian cricket history that Mr. Sachin Tendulkar, Mr. Rahul Dravid has played very well and created the record, they don’t always come to the ground for making a century or creating a huge score but always played well for protecting their wickets. Their focus on protecting their wicket helps them to play well for the longer period of time. And on against to them, many other players came to Indian cricket history and gone also; cannot able to stay for a longer period of time. They just have focused on making a score and sometimes due to the luck they can able to make good score but not always.

If players do not able to play well on a continues basis, then they will have lost the opportunity of staying with the cricket team (Career Risk). Also, we have seen that Mr. Mahendra Singh Dhoni has taken a many unconventional decision for the team during the match. Many of his decisions got success and many not. When he filled with his unconventional decisions, he has to face the anger of the people. This is as similar to our unconventional investment decisions and has to face anger from our clients if we filed into the unconventional decisions.

It is not necessary that we only can be incurred a loss by buying weak fundamental stocks. If we bought the comparatively lower fundamental company at a very lower price than that investment turns out to be a successful investment.

We can see that if we have bought the comparatively lower fundamentally good stock at a cheap price than this stock has generated a higher return compared to the good fundamental stocks in last 5 years.

Also, not good macro environmental promises of safety. Because too positive news brings up prices at too high and any small adverse development can be enough for damages to our wealth.

People generally tend to associate with the things that are doing well. And that investment might be able to fulfill expectations for a while and thereafter small negative event can damage much higher. Such scenario having an involvement of higher risk.

So, that value investors believe in achieving higher returns from lower risk. We have to be ready with underperformance risk while we are buying bargains and market is in a heated bull phase. We need to accept it rather than incurring losses.

Investment is dealing with the future and the future is highly uncertain. And it’s impossible to know anything about the future.

Risk means more things can happen compared to what happened in the past. Understanding of risk requires a second level thinking and it’s not an easy task. The risk of losing money is observed by one that’s similar is not observed by another one.

Read for more detail: The Most Important Thing Illuminated by Howard Marks

BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “THE RELATIONSHIP BETWEEN PRICE AND VALUE”

As we have discussed regarding value in the previous article of a Bibliophile. Now, I am going to talk about the 4th Chapter of The Most Important Thing – The relationship between price and value.

There is not an availability of any asset class which having a birthright for providing a higher return. If we bought a particular asset class at an appropriate price, then that provides us a higher return to safety.

An example of one the biggest wealth creator company of the Indian stock market—

If someone has bought this company during the March-2000, At the high price of around Rs.431 then after the 16 years of the period, he gets returned at 7% CAGR. And if enter to the similar company at the low price of around Rs.275 during the March-2000 then after the 16 years of the period, he gets a returned of 10% CAGR (*Considering all time high price for calculating returns). Though revenue grew at 30% CAGR, Operating profit grown at 27% CAGR and Net profit also grown at 27% CAGR during the same period with supported by the good management team.

If we buy such a good thing at a too high price, then we have to wait for the very long time for getting fair returns rather getting superior returns. But if we have bought junk asset class or good asset class at an appropriate value, then we can able to create a superior return.

We should focus on correctly buying an asset at a cheaper price so that we need not keep focusing on the selling decisions. Because our buying decision provides us a huge safety. Whenever we buy any stock at a cheaper price and all our calculations of intrinsic value are correct, then over a period of time, the stock price should reach its intrinsic value.

So, that One of a good idea of making an investment is to buy whenever the pessimistic situations around us which provide us a good return with proper safety. But such scenario not always comes. This means we construct our portfolio at the time of crisis, but every time, we cannot stay only dependent on the crisis for making our buying decisions.

Thus, most important are to understand the relationship of price & value. By knowing the relationship between price and value, we can able to take an advantage of mispriced valued stock and consistently create a wealth for the longer period of time. We also need to understand the Psychology of investors along with the understanding the price – value relationship because the psychology of investors can drive stock prices in the short run. But at a longer period, the price should reach its intrinsic value. So, that it is an essential for us to buy an asset at a discount from its intrinsic value.

Investors Psychology is also one of the important factors along with the Fundamental value of the security which can drive stock prices to an extreme side and that provide us an opportunity for our entry/exit. We should avoid falling into the trap with short term price fluctuation due to the psychology of investors but should take an advantage from it.

People never focus on the price at clever people make an investment. But they start herding towards the news of such deals. So, that more and more people start buying the same stock and due to the flow of buying, the stock starts rising and again more investor start buying into it and stock start rising again. Thus, psychology drives a price much more rather than its fundamental in the shorter period of time. Everyone starts creating stories after the clever people make an investment, those stories drive the price of the asset class at extreme direction.

As per the Howard Marks, there are few ways by which we can earn a profit on the investment:

• Benefiting from rising in the asset’s intrinsic value.

In this method, an investor has to predict accurately to the improvement in the intrinsic value of the assets in the future. But this task is not as easy as it seems. We even don’t know our future and we are going to predict the future of the intrinsic value which is very uncertain in nature.

• Applying leverage

Leverage means investing using borrowed money. Leverage always works as a double edged sword. It can either make you or will break you. It magnifies both gains as well as losses. So, leverage might provide us a higher return, but it can also create a threat to our own capital. Selling for more than your asset’s worth

• Selling for more than your asset’s worth

Here, we need to hope for the buyer who is ready to buy an asset at a higher price. If we are holding an asset which is overpriced or fairly priced than we need a greater fool to buy an asset from us at a higher price.

• Buying something for less than its value

In this option, we are buying an asset at the discount, from its intrinsic value. It’s just required for the proper functioning of the market and that brings an asset to its intrinsic value. This can be one of the most useful ways to make a consistent return with a safety of our capital.

Click for Video — Sultan Mirza

As we have seen in the video that Ajay Devgan has bought Guava at a very high price compared to the real value of the Guava. We have many a time experienced such kind of the irrationality among the investors who focus on story prevailing at market space rather than focus on the real value of the particular stock. We will not always able to meet Sultan Mirza (Ajay Devgan) / Irrational investor who buy an asset from us at a very irrational price. So, that we always need to focus on the buying an asset at a discount from the real value for getting a consistent return to safety.

Read for more detail: The Most Important Thing Illuminated by Howard Marks

SIMPLE IS BETTER – ISSUE -6 – HEALTH IS WEALTH

In the last five issues, I have discussed regarding compounding and its power and how we can able to take benefits of compounding for a longer period of time. But for taking a benefit of compounding, we need a time – a long time; with a good health. Otherwise, we cannot able to enjoy our wealth or might not be there to enjoy our wealth. So, that, in issue 6, I am going to discuss on our real wealth which is our health and how it is as similar as we make an equity investment. Also, additionally to improve our health and wealth which can help us in a longer period of time.

By getting the benefits of compounding our money, we can be able to become a wealthy person, but if we do not have a good health then that compounded wealth is of no use. So, that we also need to compound our strong health for enjoying our compounded wealth in a longer period of time.

For Detail Issue, Click here —> SIMPLE IS BETTER – ISSUE -6 – HEALTH IS WEALTH

BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “VALUE”

In the 3rd chapter of the book “The Most Important Thing”, Mr. Howard Marks has discussed regarding different ways to identify the value of any business.

We always make an investment at a lower price with the intention to sell it at a higher price. Means that we buy something at less price than we can able to sell.

But what is high, price and what is a low price? How to identify it? That is the main confusion for all of us.

For taking it at a simplify manner, we can say that we buy at below the intrinsic value of any assets for selling that asset at a higher price.

“Intrinsic value is the value (i.e. what the company is really worth). Different investors use different techniques to calculate intrinsic value.” – InvestorWords

Now the question is how to identify an intrinsic value? As we all know that there is a major 2 discipline to identify an intrinsic value of the company’s securities.

1) Fundamental Analysis and,

2) Technical Analysis

Technical Analysis basically studies past behavior of price and from that past behavior, person predicts future price behavior.

I am not going to discuss this study in details because it’s not suitable to me and I am not able to make decisions based on past price behavior.

Move forward to the Fundamental Analysis, which is suitable for me and am comfortable with it. But again, a Fundamental Analysis also having two approaches to making a decision for an intrinsic value.

1) Value Investing and

2) Growth Investing

We need to Valuing a company by depending on a finance resource, management, business, plants & machines, factories, intellectual properties, human resources, brand name, etc.; which all having a potential to grow earnings of the particular company. And that is what we study into the fundamental analysis.

Then what is the main difference between value investing and growth investing?

Now, let me talk about the concept of valuing the company through value investing approach.

Value Investing generally focuses on tangible assets, current earnings, cash flow for valuing a company. This concept gives less weight to the intangible assets such as human resources with talents, future growth prospects, etc.

Value Investing focus on buying a company at a cheaper value based on its financial metrics such as current earnings, cash flow, dividends, tangible assets and enterprise value. Value Investors qualify the current value of the company and buy it when the current value is much higher than trading price.

Value Investing is also known as “net-net investing” approach, where investors try to identify the company which is available at below its current asset value.

Whereas growth investing focuses on to identifying companies which having a very bright future growth prospects. Here, no focus on the current value of the company and also given more weight to the intangible assets.

Still having a confusion for selecting an approach for determining a value of the company.

If we have bought a security of a company which is available at cheaper than the current price, but at the operational level, the company is not able to do well enough, then that value cannot able to remain sustainable for the longer period of time. The value will get decompound rather than be getting compounded in the future. And that increases our probability of incurring the loss.

I read one wonderful article about the value trap company.

The company looks very cheap on the basis of the financial metrics, but if someone who do not have paid attention to the business of the company then—

An investor has lost his capital also. So, that in value investing also, we cannot escape from the future. (For detail article, Kindly visit – http://neerajmarathe.blogspot.in/2010/04/mtnl-value-trap.html)

For the growth investing

But is it such easier to perform?

Let me take an example of one the biggest wealth creator company of the Indian stock market—

If someone has bought this company during the March-2000, At the high price of around Rs.431 then after the 16 years of the period, he gets returned at 7% CAGR. And if enter to the similar company at the low price of around Rs.275 during the March-2000 then after the 16 years of the period, he gets a returned of 10% CAGR (*Considering all time high price for calculating returns). Though revenue grown at 30% CAGR, Operating profit grown at 27% CAGR and Net profit also grown at 27% CAGR during the same period with supported by good management team. During March-2000, the company was traded at 64x P/E at low price of Rs.275 and this multiple are common now-a-days.

There is a very thin line difference between Growth investing and value investing.

Value investing is more consistent in nature, but it’s not easy to find it out. It is not an easy task to valuing a company through value investing approach. I also learn this valuable learning after made the such mistake. If we don’t able to make our estimate appropriately than we might overpay or underpay to that particular security. If we overpay for some security, then we have to take support of good luck for getting some greater fool who buys securities from us at a higher price.

Also, the most important thing is not to just valuing security appropriately, but also, we need to hold it. Stock will not start moving up after we make our purchase. Stock does not know that we are holding it.

After our purchasing, many a time price will start to fall further. But we should hold to it firmly. If something good at price X then it will be more good at price X-1.

This law of demand is not really put by investors into practice in the stock market. We tend to buy more stock when the price starts moving up. But if we have done all our work properly, then decline in the price of security should not make us uncomfortable and we should also need to add more at a lower level.

Read for more detail: The Most Important Thing Illuminated by Howard Marks

Disclaimer

Above article is just my perception, and perception can be wrong. For me, my perception can be right but for others, it might be wrong.