A growing company versus a non-growing company
Given the choice, you should choose to invest in a company that is growing its revenues, earnings, and free cash flows over time. This company continues to grow its intrinsic value and over time, you will be well rewarded for investing in it.
Is investing into growing companies the same as growth investing?
Let us illustrate using company Y. Company Y is a company that is growing its revenues, and earnings 15% per year, consistently and predictably for the last 10 years.
At certain times, Company Y is available at a P/E of 10. Buying Company Y at this stage is a bargain. It is available at a bargain price. This is value investing. If you use PEG ratio of Peter Lynch, it is available at a PEG ratio of 10/15 which is < 1.
At other times, Company Y is available at a P/E of 20. Buying Company Y at this stage is not value investing. Those who buy at this P/E may feel they are also buying a bargain, as they projected that the earnings of Company Y is going to be great and the growth in earnings higher than the 15% per annum in the past. Maybe they projected that the earnings will be growing 30% per year. This is growth investing. If you use PEG ratio of Peter Lynch, it is still available at a PEG ratio of < 1 (= 20/30).
Thus, is there a difference between value investing and growth investing, from a bargain perspective? There appear to be 2 sides of the same coin. Those buying into the stock using these strategies are of the opinion they are buying a bargain.
However, there are differences too. Historically, value investing has outperformed growth investing when assessed over a long time frame of investing. But beware of such analysis. Among the value investing stocks selection, many of the companies did not perform as expected and the fundamentals tanked. Likewise, those stocks in growth investing, projected to grow at high rate and bought at high P/E, failed to deliver the growth and did not perform as expected.
Let us learn from Buffett. Stays with the company that you understand. This company must have business with durable competitive advantage. Its management must have unquestionable integrity. Finally, buy them at a fair price.
Yes, search out for the growing companies. I too love such companies. Above all, emphasizes the quality of the growth of business and its management. Finally, look at the price (valuation). Whether it is value or growth investing, buy growing companies at reasonable price (GARP).
Thursday, 22 October 2015
Tuesday, 6 October 2015
Pareto Principle: 80-20 rule
Lets first understand the definition of 80-20 rule; according to Wikipedia the definition is:
The principle was suggested by management thinker Joseph M. Juran. It was named after the Italian economist Vilfredo Pareto, who observed that 80% of income in Italy was received by 20% of the Italian population. The assumption is that most of the results in any situation are determined by a small number of causes.
Now let's understand this definition in the language which is simple for you and me.
“20% of work delivers your 80% happiness and output.”
In the financial terms even this rules apply. Your 80% of income is produced by your 20% of activities. In your companies also 80% of the revenue is generated by 20% of products. Surely, this is not hard and fast rule but this can be applied in different ways like suppose in your company 80% revenue is generated by 20% of employee. The ratio can differ but it might be somewhat like 80-20.
Now lets try to apply this rule to Value Investor: In share market you hear a lot of news, every minute, every hour and every day. Some things happen in any part of any country and these news channel will surely try to connect it with economy from different perspective; that’s their role so I am not blaming them. But if you observe them carefully you will find that for a value investor in the long term only 20% of these news will might deliver his or her 80% results. So, as a value investor you must focus on those 20% of news which would be really helpful to you.
Monday, 5 October 2015
Investing, the greatest business in the world.
Enhance Your Investing Returns By Not Swinging At Every Pitch
Summary
Building a core concentrated portfolio of 3-5 stocks is very advantageous over buying 20-30 individual stocks.
Not swinging at every investing idea will not only enhance returns but it will let you focus on building positions in your bests ideas.
Some of the richest investors in the past have gotten rich by putting all of their eggs in one basket or in 3-5 small baskets.
"I call investing the greatest business in the world, because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike on you. There's no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it". -Warren Buffett