Showing posts with label satisfactory return. Show all posts
Showing posts with label satisfactory return. Show all posts

Saturday 5 September 2009

Beating the Market – Opinion


Friday, June 19, 2009
Beating the Market – Opinion

Stock Market is a ground where players play all kind of “speculative” games to win, though they do not necessarily know who they are fighting with. Most of the retail investors try to get ahead comparing themselves with other investors and mutual fund managers who in turn compete with “Mr. Market” to enhance their reputation and performance. But they fail to understand that the fund managers and key investors have far more information, time and money to beat the market and even then vast majority of them fail to do it consistently.

Legendary investors like Buffet and Lynch did it in the past and are still doing it. But people like them are very few and the unique style they follow has not been mastered by anyone else. It’s true that they are giving tips like “Buy Low, Sell High”, “Long Term Investment”, and “Balance Sheet Analysis” etc…But what exact analysis they do before selecting a particular stock is unknown and even Buffet has admitted his failure in couple of dealings last year. So, beating the market is an arduous task and personally I would not waste my energy to match the market and few other people who are less than 0.001% of investor population.


All I would be interested in doing is to analyze the key parameters and business potential of various companies as good as I can and buy stocks that would not make me cry down the road. Of course I will be happy if my portfolio beats the market and I will take it, day or night. But taking undue risk, spending too much time brooding over how my neighbor could make more money than me or trying to become a millionaire in 2 years by investing in the so called “multi-baggers” will all be efforts in vain more often than not.

Strategy to Keep Yourself Happy

Satisfaction is an individual thing and for many people, no matter, how much return they get, still they will be found wanting. It’s natural of human beings to behave in such a manner but we have to learn quickly enough to understand that there is a cost involved in putting undue pressure on ourselves, which we do not count. Making money, getting good returns and beating the market are all desirable things but we should not lose our peace in doing that.

How many people did not curse themselves that they did not invest when the SENSEX was around 8000? If I conduct a poll (I am sure one is on the way), I am sure there will be only one answer. So, the main thing for us is to find the “Satisfaction Point” in terms of investment returns and here is my “Satisfaction Point”.



My Satisfaction Point


I get satisfied when I do the following no matter how much return I get. But believe me; I am close enough to most of the fund managers and even the market. I do not spend lot of time in searching stocks and thinking about it and I follow fairly simple approach.

I invest only when stock markets decline significantly and other people start selling.


I buy stocks that show continuously growing “Quarter to Quarter” earnings with less than the market PE.


If markets go down continuously, then I continue to average till I exhaust 60 % of my intended investment.


If the market plummets like the one we saw in March 09, then I buy for at least 30% of my intended investment.


My intended investment amount in fact rises when the stock markets reach unbelievable lows.


I look for companies that do not show any prospects for failure and businesses that can be sustained over a period of time.


I look for companies that do not have many straight competitors.


Finally I just keep watching my returns when the stock markets go up.

My overall portfolio has given the return of about 30% (Started investing when the SENSEX was around 17000 last year) and I do think that’s not bad. But my new portfolio which I started investing when the SENSEX were around 8000 - 10000, has given me 60 % return which is not bad either and I am not far away from the market performance. Markets have gained 45% from 10000 levels and 80% from 8000 levels. If we calculate exactly with my investment period, market return would be somewhere around 60% to 65 % and I am quite close to it. I have not lost a night’s sleep for all this and still could come close to it by doing what I said above. Though my return is in lakhs and not in crores, I definitely think that it can be achieved with the same approach, but with increased risk taking ability and guts. If you can do it with lakhs, I do not see any reason why you can’t do it with crores.

Some people can argue that if I have invested in selective stocks I could have earned in multiples which I agree. Even I bought “YES BANK” for Rs.42 and now it is traded for Rs.133 with an increase of 216 %. But my portfolio contains other stocks too which did not appreciate as much as stocks like Yes Bank. For example, I bought Asian Paints for Rs. 750 and now it is Rs. 1100, an increase of only 46%. Of course there are so many ifs and buts that could have made a difference. If I had bought HDIL when it was Rs. 62, I could have made 500 % return, but I did not want to invest heavily in the real estate sector. Likewise, there are so many examples. Aban Offshore was available for Rs. 220 and it went up to Rs.1100, an increase of 500%. But you can’t rely on just one stock if you are a serious investor and that’s the reason my portfolio return is 60 % which is in line with the market performance. That’s a good enough return for me for the time I spent and I can definitely say that’s my satisfaction point.

Conclusion: Make sure you do all the right and simple things in making a buy decision and continue with your defined approach. Do not get worried about the portfolio performance by comparing yourself with other investors or fund managers. If you buy when others are selling and remain cautious when the market bounces back, then you have a fair chance of getting a market return if not beating it. Even if your portfolio gives 40% overall return and it is 15 % lesser than market return, there is no need to lose your sleep over it as your portfolio still returned decent profit which is higher than what you could have earned in other form of investments. So, the point I am making is, whatever return we get after making a decent effort should satisfy us and I refer it as the “satisfaction point”.


Kumaran Seenivasan

http://www.stockanalysisonline.com/



Read more...


http://www.stockanalysisonline.com/2009_06_01_archive.html

Friday 1 August 2008

Investment, speculation and gambling

It is commonly thought that investment, is good for everybody and at all times. Speculation, on the other hand, may be good or bad, depending on the conditions and the person who speculates.

It should be essential, therefore, for anyone engaging in financial operations to know whether he is investing or speculating and, if the latter, to make sure that his speculation is a justifiable one.

Investment, speculation and gambling (Security Analysis, Ben Graham.):

1. Graham defined investment thus:
An INVESTMENT OPERATION is one which, upon THOROUGH ANALYSIS, promises SAFETY OF PRINCIPAL and a SATISFACTORY RETURN. Operations NOT meeting these requirements are speculative.

The difference between investment and speculation, when the two are thus opposed, is understood in a general way by nearly everyone; but it can be difficult to formulate it precisely. In fact something can be said for the cynic's definition that an investment is a successful speculation and a speculation is an unsuccessful investment.

The failure properly to distinguish between investment and speculation was in large measure responsible for the market excesses and calamities that ensued, as well as, for much continuing confusion in the ideas and policies of would-be investors.

2. Graham's addition criterion of investment: An investment operation is one that can be justified on BOTH QUALITATIVE and QUANTITATIVE grounds.

Investment must always consider the PRICE as well as the QUALITY of the security.



Main points:______________

INVESTMENT OPERATION: rather than an issue or a purchase.

PRICE: is frequently an essential element, so that a stock (and even a bond) may have investment merit at one price level but not at another.

DIVERSIFICATION: An investment might be justified in a group of issues, which would not be sufficiently safe if made in any one of them singly.

ARBITRAGE AND HEDGING: it is also proper to consider as investment operations certain types of arbitrage and hedging commitments which involve the sale of one security against the purchase of another. In these rather specialised operations the element of SAFETY is provided by the combination of purchase and sale.

THOROUGH ANALYSIS: the study of the facts in the light of established standards of safety and value, including all quality of thoroughness.

SAFETY: The SAFETY sought in investment is not absolute or complete; the word means, rather, protection against loss under all normal or reasonably likely conditions or variations. A safe stock is one which holds every prospect of being worth the price paid except under quite unlikely contingencies. Where study and experiences indicate that an appreciable chance of loss must be recognized and allowed for, we have a speculative situation.

SATISFACTORY RETURN: is a wider expression than "adequate income", since it allows for capital appreciation or profit as well as current interest or dividend yield. "Satisfactory" is a subjective term; it covers any rate or amount of return, however low, which the investor is willing to accept, provided he acts with reasonable intelligence.

_______________


For investment, the future is essentially something to be guarded against rather than to be profited from. If the future brings improvement, so much the better; but investment as such cannot be founded in any important degree upon the expectation of improvement.

Speculation, on the other hand, may always properly – and often soundly – derive its basis and its justification from prospective developments that differ from past performances.

GAMBLING: represents the creation of risks not previously existing – e.g. race-track betting.

SPECULATION: applies to the taking of risks that are implicit in a situation and so must be taken.

INTELLIGENT SPECULATION: the taking of a risk that appears justified after careful weighing of the pros and cons.

UNINTELLIGENT SPECULATION: risk taking without adequate study of the situation.