Invest like the masters: David Dreman
We've plumbed the minds of four great stock pickers to find your smartest investments.
Warren Buffett David Dreman Peter Lynch James O'Shaughnessy
David Dreman
This expatriate Canadian wrote the book — literally — on contrarian investing. His key finding? You can achieve great results by choosing cheap stocks that the market hates.
After graduating from the University of Manitoba in the 1950s David Dreman got his start as an analyst at his father's Winnipeg-based commodities trading firm. But Wall Street beckoned and he soon moved stateside where he has run a money management firm in Jersey City, N.J., for decades.
Dreman is perhaps best known as an author. His Contrarian Investment Strategies: The Next Generation deserves a spot on every investor's bookshelf. But he's no slouch when it comes to putting his book learning to the test and beating the market. His firm's large-cap value composite has bested the S&P 500 index by an average of 3.9 percentage points annually over the last 10 years, before fees. His small-cap value composite beat the Russell 2000 by 6.6 percentage points over the same period.
Dreman looks for stocks with low price-to-earnings ratios (P/E). These stocks are typically out of favor with investors for one reason or another. But often that's because investors have overreacted to bad news. As a group, low P/E stocks have a tendency to bounce back and perform well. In fact, Dreman calculates that U.S. stocks with the lowest 20% of P/E ratios provided average annual returns of 16.8% from 1920 to 2004, beating the market by four percentage points.
You might think that people would look at those figures and be lining up to buy low P/E stocks. The reality, though, is that investing in these firms requires courage. A good example is Dreman's investment in Altria, the cigarette company formerly known as Philip Morris. Altria has been a phenomenal performer over the long term, but it's been pummeled in recent years by tobacco-related litigation. You have to be confident in your judgment to buy a stock like Altria in the face of such overwhelming uncertainty.
Dreman's focus is on the U.S. market, but we decided to apply his methods closer to home and look for large Canadian stocks that he might like. We started with companies that earned at least $250 million from continuing operations over the last year. We then focused on stocks with the lowest positive P/E ratios. Dreman also looks for financial stability, so we required each stock to have less debt than shareholder equity as well as some revenue growth over the last three years. These criteria produced the list of 10 stocks shown in Dreman's value list. In addition to each stock's P/E and debt-to-equity ratio, we also show its dividend yield. After all, it's nice to be paid to wait for better times.
We think that low-P/E stocks will continue to earn more than their higher P/E brethren over the long haul— but such a happy result is not going to happen every year. You only have to go back to the Internet bubble to spot a period when Dreman's stocks trailed. On the other hand, low-P/E stocks usually shine during market downturns. So if you have a gloomy view of what lies ahead, you might find these stocks very much to your taste.
Dreman's value list
CompanyIndustry
Price P/E Debt/Equity Dividend Yield
EnCanaOil and gas
$52.56 6.1 0.42 0.89%
IPSCOSteel
$96.55 6.6 0.18 0.84%
E-L FinancialInsurance
$600.00 6.9 0.00 0.08%
Teck ComincoMining
$71.31 7.4 0.45 2.85%
Gerdau AmeristeelSteel
$10.31 7.7 0.34 0.90%
ING CanadaInsurance
$55.14 9.3 0.05 1.83%
Empire CompanyFood stores
$40.98 9.7 0.47 1.50%
CP RailwayTransportation
$55.23 10.6 0.68 1.38%
TD BankBanks
$66.80 10.8 0.56 2.91%
Talisman EnergyOil and gas
$18.57 11.1 0.74 0.80%
Source: globeinvestor.com, Sept. 28, 2006
http://www.canadianbusiness.com/my_money/investing/article.jsp?content=20061128_104112_4584
Saturday 5 September 2009
Invest like the masters: Warren Buffett
From MoneySense magazine, November 2006
Invest like the masters: Warren Buffett
We've plumbed the minds of four great stock pickers to find your smartest investments.
Warren Buffett David Dreman Peter Lynch James O'Shaughnessy
Want to invest like a master? Then look to the works of Warren Buffett, Peter Lynch, David Dreman, and James O'Shaughnessy. These four gentlemen are all great investors, and all of them have either written books on how to invest or, in Buffett's case, produced years of informative shareholder letters. Remarkably, none are shy about sharing their market-beating techniques. In this feature, we examine how each of these wizards thinks and we spell out what each looks for in a stock. But that's just for starters. We've also scoured the markets for stocks that our famous investors might be interested in buying right now. To provide a truly continental perspective, half of our picks come from the U.S. and half from Canada.
We think you'll find a few of these gems to be just right for your portfolio. Remember, though, that not even a great investor beats the market each and every year. To make sure that a given stock is right for you, take out your magnifying glass and examine any investment in detail before putting your money down. Remember that you should spend at least as much time thinking about what could go wrong as what could go right. After all, that's what the best investors do.
Warren Buffett
The greatest investor in history likes to buy quality companies trading at reasonable prices. Oddly enough, the firm that may best fit that description is his own,
When he was five, Warren Buffett set up a gum stand outside his home and sold Chiclets to passersby. Now 76, Buffett still knows how to make a buck. He's the second-richest man in the U.S. (trailing only his friend, Bill Gates) and is starting to give away his fortune to charity. Along the way to his billions, Buffett studied and worked with the venerable Benjamin Graham, the father of value investing, before opening up his own hedge fund in the 1950s. But most people know Buffett as the principal owner of Berkshire Hathaway, which he runs out of a small head office in Omaha, Neb.
Buffett started buying stock in Berkshire Hathaway, then a distressed textile firm, in 1962, when its shares were trading below $8 per share (all prices in U.S. dollars). Today Berkshire Hathaway is a sprawling conglomerate with large insurance operations and trades above $96,000 per share. The trip from $8 to $96,000 represents an average annual gain of about 24% over more than 40 years. Talk about the power of compounding!
In recent years, Buffett has moved away from buying publicly traded shares in favor of acquiring entire private companies in friendly transactions. Nonetheless, he continues to buy a few public stocks — usually in quality companies trading at reasonable prices.
If you want to benefit from Buffett's stock-picking acumen, the simplest route is to invest in his company. (If $96,000 for a Berkshire Class A share sounds a mite steep for your wallet, you can choose instead to pick up "B" shares for only about $3,200 apiece.) In recent years the stock has stalled, partly due to fears that Buffett may not live much longer. Nonetheless, Berkshire Hathaway is the epitome of a quality company. It trades at a below-market price-to-earnings ratio (P/E) of 14.3 and a low price-to-book-value ratio of 1.5. In our view, it's a bargain without Buffett and a steal with him.
Another way to cash in on Buffett's eye for a deal is to buy what Berkshire Hathaway has been buying. Berkshire has bought into several public companies over the past year. By delving into regulatory filings and news releases we selected 10 such stocks for Buffett's best stocks. We wanted to reassure ourselves that the stocks haven't gained too much since Berkshire Hathaway's recent purchases, so we show each stock's price appreciation over the last year. Amazingly, you can buy many of these stocks at or below the price that Buffett recently paid.
While we don't think that buying Buffett's best stocks will automatically produce 24% returns, we do think that our list is a good place for any Buffett-style investor to start looking for prospects. For more insight into Buffett's style, read his frank and funny annual letters to shareholders. You'll find a free archive of them at BerkshireHathaway.com.
Buffett's best stocks
Company Industry
Price* P/E ROE 1-yr. Gain
ConocoPhillips Oil and gas
$59.53 5.5 25.8% -14.9%
Home Depot Home improvement
$36.27 12.4 23.6% -4.9%
TycoConglomerate
$27.99 17.3 11.4% 0.5%
United ParcelDelivery services
$71.94 19.6 24.1% 4.1%
General ElectricConglomerate
$35.30 22.0 17.4% 4.8%
Anheuser-BuschBeer
$47.51 19.7 55.7% 10.4%
Wal-MartDiscount stores
$49.32 19.3 22.1% 12.6%
TorchmarkInsurance
$63.11 13.2 15.0% 19.5%
Wells FargoBank
$36.18 15.4 19.7% 23.5%
USGBuilding materials
$47.07 — — **
Source: yahoo.com, Sept. 29, 2006
*In U.S. dollars
**Recently emerged from bankruptcy
http://www.canadianbusiness.com/my_money/investing/article.jsp?content=20061128_104045_4328
Invest like the masters: Warren Buffett
We've plumbed the minds of four great stock pickers to find your smartest investments.
Warren Buffett David Dreman Peter Lynch James O'Shaughnessy
Want to invest like a master? Then look to the works of Warren Buffett, Peter Lynch, David Dreman, and James O'Shaughnessy. These four gentlemen are all great investors, and all of them have either written books on how to invest or, in Buffett's case, produced years of informative shareholder letters. Remarkably, none are shy about sharing their market-beating techniques. In this feature, we examine how each of these wizards thinks and we spell out what each looks for in a stock. But that's just for starters. We've also scoured the markets for stocks that our famous investors might be interested in buying right now. To provide a truly continental perspective, half of our picks come from the U.S. and half from Canada.
We think you'll find a few of these gems to be just right for your portfolio. Remember, though, that not even a great investor beats the market each and every year. To make sure that a given stock is right for you, take out your magnifying glass and examine any investment in detail before putting your money down. Remember that you should spend at least as much time thinking about what could go wrong as what could go right. After all, that's what the best investors do.
Warren Buffett
The greatest investor in history likes to buy quality companies trading at reasonable prices. Oddly enough, the firm that may best fit that description is his own,
When he was five, Warren Buffett set up a gum stand outside his home and sold Chiclets to passersby. Now 76, Buffett still knows how to make a buck. He's the second-richest man in the U.S. (trailing only his friend, Bill Gates) and is starting to give away his fortune to charity. Along the way to his billions, Buffett studied and worked with the venerable Benjamin Graham, the father of value investing, before opening up his own hedge fund in the 1950s. But most people know Buffett as the principal owner of Berkshire Hathaway, which he runs out of a small head office in Omaha, Neb.
Buffett started buying stock in Berkshire Hathaway, then a distressed textile firm, in 1962, when its shares were trading below $8 per share (all prices in U.S. dollars). Today Berkshire Hathaway is a sprawling conglomerate with large insurance operations and trades above $96,000 per share. The trip from $8 to $96,000 represents an average annual gain of about 24% over more than 40 years. Talk about the power of compounding!
In recent years, Buffett has moved away from buying publicly traded shares in favor of acquiring entire private companies in friendly transactions. Nonetheless, he continues to buy a few public stocks — usually in quality companies trading at reasonable prices.
If you want to benefit from Buffett's stock-picking acumen, the simplest route is to invest in his company. (If $96,000 for a Berkshire Class A share sounds a mite steep for your wallet, you can choose instead to pick up "B" shares for only about $3,200 apiece.) In recent years the stock has stalled, partly due to fears that Buffett may not live much longer. Nonetheless, Berkshire Hathaway is the epitome of a quality company. It trades at a below-market price-to-earnings ratio (P/E) of 14.3 and a low price-to-book-value ratio of 1.5. In our view, it's a bargain without Buffett and a steal with him.
Another way to cash in on Buffett's eye for a deal is to buy what Berkshire Hathaway has been buying. Berkshire has bought into several public companies over the past year. By delving into regulatory filings and news releases we selected 10 such stocks for Buffett's best stocks. We wanted to reassure ourselves that the stocks haven't gained too much since Berkshire Hathaway's recent purchases, so we show each stock's price appreciation over the last year. Amazingly, you can buy many of these stocks at or below the price that Buffett recently paid.
While we don't think that buying Buffett's best stocks will automatically produce 24% returns, we do think that our list is a good place for any Buffett-style investor to start looking for prospects. For more insight into Buffett's style, read his frank and funny annual letters to shareholders. You'll find a free archive of them at BerkshireHathaway.com.
Buffett's best stocks
Company Industry
Price* P/E ROE 1-yr. Gain
ConocoPhillips Oil and gas
$59.53 5.5 25.8% -14.9%
Home Depot Home improvement
$36.27 12.4 23.6% -4.9%
TycoConglomerate
$27.99 17.3 11.4% 0.5%
United ParcelDelivery services
$71.94 19.6 24.1% 4.1%
General ElectricConglomerate
$35.30 22.0 17.4% 4.8%
Anheuser-BuschBeer
$47.51 19.7 55.7% 10.4%
Wal-MartDiscount stores
$49.32 19.3 22.1% 12.6%
TorchmarkInsurance
$63.11 13.2 15.0% 19.5%
Wells FargoBank
$36.18 15.4 19.7% 23.5%
USGBuilding materials
$47.07 — — **
Source: yahoo.com, Sept. 29, 2006
*In U.S. dollars
**Recently emerged from bankruptcy
http://www.canadianbusiness.com/my_money/investing/article.jsp?content=20061128_104045_4328
Invest like the masters: Peter Lynch
From MoneySense magazine, November 2006
Invest like the masters: Peter Lynch
Peter Lynch
He achieved 29%-a-year gains by looking for fast-growing firms trading at reasonable prices. We've applied his philosophy to turn up 10 of today's most interesting prospects
Peter Lynch caught the stock bug in his youth while caddying at his local golf course. One of the golfers was the president of Fidelity, the huge mutual fund firm in Boston. He invited Lynch to join his firm — and the move proved to be fortunate for everyone as the former caddie turned into the Tiger Woods of investing.
How good was Lynch? Well, he coined the term "10-bagger" to describe a stock that grows to be worth 10 times its original price. Most investors would be very happy to pick a few 10-baggers in their lifetimes — but if you had invested in Fidelity's Magellan fund when Lynch started managing it, you would have nabbed a 28-bagger. Yes, a $1,000 investment in Fidelity's Magellan fund in 1977 would have blossomed into $28,000 by the time Lynch retired in 1990. That's a remarkable average annual return of 29.2%.
Aside from providing blowout returns, Lynch wrote three investment books in which he expounds on his methods and investment philosophy. His bestsellers, One Up On Wall Street and Beating the Street, are probably the most useful tomes for most investors.
As you'll discover in those books, Lynch is the most growth-oriented of our four master investors, but he still keeps a keen eye on value. To find stocks that Lynch might like, we started with what he calls fast growers. These are stocks of small aggressive companies that are growing their earnings at a rate of between 20% and 25% a year. Lynch notes, "If you choose wisely, this is the land of the 10- to 40-baggers, and even 200-baggers. With a small portfolio, one or two of these can make a career." They sure seemed to work for him.
But Lynch also keeps an eye on price and he is most interested in stocks with P/E ratios lower than their growth rates. If a company grows at 20% a year, then Lynch would only be interested if it traded at a P/E ratio of less than 20. Similarly, he would only buy a 25% grower if it went for less than a P/E ratio of 25 — hopefully, much less.
Because Lynch likes small companies with room to grow, we began by narrowing our search to U.S. firms with market capitalizations between $200 million and $1 billion (all figures in U.S. dollars). Since we wanted fast growers, we demanded earnings-per-share growth of between 20% and 25% a year over the last five years. In keeping with Lynch's rule, we narrowed our list down to these fast growers that had smaller P/E ratios than their growth rates. Lynch also prefers firms with solid balance sheets, so we stuck to companies with more equity than debt. From the short list of stocks that passed all of these tests, we selected 10 of the best prospects with the lowest P/E-to-growth ratios to be Lynch's leaders.
Of course, our list would only be the first step for Lynch, who believes in exhaustively checking out any stock he buys. His first rule of investing is, "Investing is fun, exciting, and dangerous if you don't do any work." Wise investors should take heed.
Lynch's leaders
Company Industry
Price* P/E 5-yr annual EPS Growth Debt/Equity
North Pittsburgh SystemsTelecom
$25.17 11.1 24.1% 0.24
FNB UnitedRegional banks
$18.63 10.8 23.1% 0.49
United America IndemnityInsurance
$22.47 12.0 23.1% 0.24
Center Financial Corp.Savings and loans
$23.78 14.9 24.0% 0.44
Columbia Banking SystemSavings and loans
$32.01 16.1 24.1% 0.10
Credit Acceptance Corp.Credit services
$29.68 15.8 23.6% 0.81
SchawkMarketing services
$18.22 16.2 23.4% 0.53
Nara BancorpRegional banks
$18.29 14.9 20.8% 0.24
Heritage CommerceRegional banks
$23.14 16.4 21.6% 0.39
Option CareHome health care
$13.39 20.7 25.0% 0.42
Source: msn.com, Sept. 29, 2006
*In U.S. dollars
http://www.canadianbusiness.com/my_money/investing/article.jsp?content=20061128_104144_5424
Invest like the masters: Peter Lynch
Peter Lynch
He achieved 29%-a-year gains by looking for fast-growing firms trading at reasonable prices. We've applied his philosophy to turn up 10 of today's most interesting prospects
Peter Lynch caught the stock bug in his youth while caddying at his local golf course. One of the golfers was the president of Fidelity, the huge mutual fund firm in Boston. He invited Lynch to join his firm — and the move proved to be fortunate for everyone as the former caddie turned into the Tiger Woods of investing.
How good was Lynch? Well, he coined the term "10-bagger" to describe a stock that grows to be worth 10 times its original price. Most investors would be very happy to pick a few 10-baggers in their lifetimes — but if you had invested in Fidelity's Magellan fund when Lynch started managing it, you would have nabbed a 28-bagger. Yes, a $1,000 investment in Fidelity's Magellan fund in 1977 would have blossomed into $28,000 by the time Lynch retired in 1990. That's a remarkable average annual return of 29.2%.
Aside from providing blowout returns, Lynch wrote three investment books in which he expounds on his methods and investment philosophy. His bestsellers, One Up On Wall Street and Beating the Street, are probably the most useful tomes for most investors.
As you'll discover in those books, Lynch is the most growth-oriented of our four master investors, but he still keeps a keen eye on value. To find stocks that Lynch might like, we started with what he calls fast growers. These are stocks of small aggressive companies that are growing their earnings at a rate of between 20% and 25% a year. Lynch notes, "If you choose wisely, this is the land of the 10- to 40-baggers, and even 200-baggers. With a small portfolio, one or two of these can make a career." They sure seemed to work for him.
But Lynch also keeps an eye on price and he is most interested in stocks with P/E ratios lower than their growth rates. If a company grows at 20% a year, then Lynch would only be interested if it traded at a P/E ratio of less than 20. Similarly, he would only buy a 25% grower if it went for less than a P/E ratio of 25 — hopefully, much less.
Because Lynch likes small companies with room to grow, we began by narrowing our search to U.S. firms with market capitalizations between $200 million and $1 billion (all figures in U.S. dollars). Since we wanted fast growers, we demanded earnings-per-share growth of between 20% and 25% a year over the last five years. In keeping with Lynch's rule, we narrowed our list down to these fast growers that had smaller P/E ratios than their growth rates. Lynch also prefers firms with solid balance sheets, so we stuck to companies with more equity than debt. From the short list of stocks that passed all of these tests, we selected 10 of the best prospects with the lowest P/E-to-growth ratios to be Lynch's leaders.
Of course, our list would only be the first step for Lynch, who believes in exhaustively checking out any stock he buys. His first rule of investing is, "Investing is fun, exciting, and dangerous if you don't do any work." Wise investors should take heed.
Lynch's leaders
Company Industry
Price* P/E 5-yr annual EPS Growth Debt/Equity
North Pittsburgh SystemsTelecom
$25.17 11.1 24.1% 0.24
FNB UnitedRegional banks
$18.63 10.8 23.1% 0.49
United America IndemnityInsurance
$22.47 12.0 23.1% 0.24
Center Financial Corp.Savings and loans
$23.78 14.9 24.0% 0.44
Columbia Banking SystemSavings and loans
$32.01 16.1 24.1% 0.10
Credit Acceptance Corp.Credit services
$29.68 15.8 23.6% 0.81
SchawkMarketing services
$18.22 16.2 23.4% 0.53
Nara BancorpRegional banks
$18.29 14.9 20.8% 0.24
Heritage CommerceRegional banks
$23.14 16.4 21.6% 0.39
Option CareHome health care
$13.39 20.7 25.0% 0.42
Source: msn.com, Sept. 29, 2006
*In U.S. dollars
http://www.canadianbusiness.com/my_money/investing/article.jsp?content=20061128_104144_5424
Recession type scare causes stocks to be sold down
I wrote:
"Only a recession type scare can cause stocks to be sold per share below asset values. This stock is an easy 10 bagger if you hold long enough for the next upturn in the economy."
http://caps.fool.com/Blogs/ViewPost.aspx?bpid=203897&t=01007468826027738866
"Only a recession type scare can cause stocks to be sold per share below asset values. This stock is an easy 10 bagger if you hold long enough for the next upturn in the economy."
http://caps.fool.com/Blogs/ViewPost.aspx?bpid=203897&t=01007468826027738866
Look before leaping into small stocks
10/29/99- Updated 02:09 PM ET
Look before leaping into small stocks
By John Waggoner, USA TODAY
Your neighbors are all buying stocks. So are your co-workers. Heck, the kids down the street are investing in Lemonadestand.com. You? You're sensible and have most of your money in mutual funds. But you have a little money put aside, and you want to try picking some stocks, too.
The operative words here are "a little" money. You want to spend maybe $2,500, preferably less. If you're buying in multiples of 100 shares - which can save you money on commissions - you're talking about stocks that cost less than $25 a share.
Evaluating such inexpensive stocks isn't as easy as evaluating a large stock like Intel. But it's not that much harder - and it can be rewarding.
Low for a reason
Most investors dream of buying a stock for $1 that turns into a 10-bagger - slang for a stock that gains 1,000%. But don't go that low - stocks priced below $5 a share are considered "penny stocks," and they can be dangerous. "When you get below $5 a share, the stinkers outnumber the 10-baggers," says Joel Tillinghast, manager of Fidelity Low-Priced Stock Fund.
Even stocks that sell from $5 to $20 need to be looked at closely. A $5 stock isn't low-priced by accident, says Robert Kern, manager of Fremont U.S. Micro-cap Fund. "It's that price for a reason."
And that reason is rarely a good one. In the best case, the company missed its earnings estimates for a quarter or two or is in an industry that Wall Street currently shuns. In the worst case, the company is shuffling off to oblivion. "You want to make sure you don't have complete wipe-out risk," Fidelity's Tillinghast says.
Check the numbers
So look for a strong balance sheet. Get the company's annual report and its most recent quarterly reports, either through a stockbroker or find them at the Securities and Exchange Commission's Web site, www.sec.gov.
Your first question: If sales take a serious downturn, does this company have enough money to survive the next 12 months? To get the answer, go to the balance sheet and find:
Current liabilities. This is the company's debt due within 12 months.
Current assets. This is the company's accounts receivable, cash, marketable securities and inventory - items that could be used to pay off current liabilities in a pinch.
Dividing current assets by current liabilities gives you a company's current ratio. You want this to be higher than 1, and preferably much higher. For a more conservative number, called the quick ratio, subtract inventory from current assets. Inventory can be tough to sell in a downturn.
You also should get an idea of the company's total debt vs. its total assets. In general, the less debt the better. How much is too much? It depends on the industry, Tillinghast says.
"Financial companies can support debt levels that would be terrifying to industrial companies."
Next question: Does this company actually make money? For that, look at earnings per share. Tillinghast likes to look for annual earnings-per-share growth of 10% or better. "If it's not 10% or more, I'll look for something better," he says.
And these are just starting points. You should be thoroughly familiar with the company and its fundamentals before you invest.
Different styles
Clearly, it's not easy to find a $10 stock that has no debt and 10% annual earnings growth. In most cases, that's because the company has stumbled recently. You have to figure out why the company's price might rise.
Different managers use different techniques. John Rogers, manager of the Ariel Fund, looks for stocks that are simply out of favor and should rebound. For example, HCC Insurance earned $1.57 a share the past 12 months. Like most property/casualty companies, it got clobbered this fall during hurricane season.
Analysts expect the company to earn $1.20 a share this year, which is short of expectations. But the stock's price is down more than 55% from its July 1999 high, while earnings are expected to be down only 24%. So Rogers figures it's been punished enough.
Erin Piner, manager of PBHG Limited Fund, looks for stocks with strong growth in earnings or sales. Her favorite low-priced stock, Hall Kinion & Associates, supplies staffing for Internet sites. Earnings have risen 58%, from 12 cents a share to 19 cents, and revenue is rising, too. "It's a low-priced way to play the build-out of the Internet," she says.
Most low-priced stocks are small-company stocks, and small-company stocks have been mostly ignored for years. So many of them are historically cheap. "I've never seen anything like it in the past 17 years," Rogers says.
More time and effort
Cheap or not, investing in individual stocks takes more time and effort than investing in mutual funds. Small-company stocks are often traded infrequently, which means you may have trouble selling for the last price you've seen quoted. You're also taking on more risk: There's always the chance a stock price can go to zero.
The stock picks in the chart are by some of the best small-stock fund managers in the business. But these are just starting points, and you need to investigate the stocks carefully. Otherwise, your tuition to Stockpicking University could be costly indeed. If this all seems like too much work, consider investing in a good small-cap stock fund instead.
Fishing for low-priced stocks
Finding small stocks can be tricky. Here, five pros offer some of their favorites. P-E, or price-to-earnings ratio, is a stock's price divides by its earnings per share. Higher P-Es generally show investors are willing to spend more, in the expectation of higher rewards.
http://www.usatoday.com/money/wealth/making/mmw182.htm
Look before leaping into small stocks
By John Waggoner, USA TODAY
Your neighbors are all buying stocks. So are your co-workers. Heck, the kids down the street are investing in Lemonadestand.com. You? You're sensible and have most of your money in mutual funds. But you have a little money put aside, and you want to try picking some stocks, too.
The operative words here are "a little" money. You want to spend maybe $2,500, preferably less. If you're buying in multiples of 100 shares - which can save you money on commissions - you're talking about stocks that cost less than $25 a share.
Evaluating such inexpensive stocks isn't as easy as evaluating a large stock like Intel. But it's not that much harder - and it can be rewarding.
Low for a reason
Most investors dream of buying a stock for $1 that turns into a 10-bagger - slang for a stock that gains 1,000%. But don't go that low - stocks priced below $5 a share are considered "penny stocks," and they can be dangerous. "When you get below $5 a share, the stinkers outnumber the 10-baggers," says Joel Tillinghast, manager of Fidelity Low-Priced Stock Fund.
Even stocks that sell from $5 to $20 need to be looked at closely. A $5 stock isn't low-priced by accident, says Robert Kern, manager of Fremont U.S. Micro-cap Fund. "It's that price for a reason."
And that reason is rarely a good one. In the best case, the company missed its earnings estimates for a quarter or two or is in an industry that Wall Street currently shuns. In the worst case, the company is shuffling off to oblivion. "You want to make sure you don't have complete wipe-out risk," Fidelity's Tillinghast says.
Check the numbers
So look for a strong balance sheet. Get the company's annual report and its most recent quarterly reports, either through a stockbroker or find them at the Securities and Exchange Commission's Web site, www.sec.gov.
Your first question: If sales take a serious downturn, does this company have enough money to survive the next 12 months? To get the answer, go to the balance sheet and find:
Current liabilities. This is the company's debt due within 12 months.
Current assets. This is the company's accounts receivable, cash, marketable securities and inventory - items that could be used to pay off current liabilities in a pinch.
Dividing current assets by current liabilities gives you a company's current ratio. You want this to be higher than 1, and preferably much higher. For a more conservative number, called the quick ratio, subtract inventory from current assets. Inventory can be tough to sell in a downturn.
You also should get an idea of the company's total debt vs. its total assets. In general, the less debt the better. How much is too much? It depends on the industry, Tillinghast says.
"Financial companies can support debt levels that would be terrifying to industrial companies."
Next question: Does this company actually make money? For that, look at earnings per share. Tillinghast likes to look for annual earnings-per-share growth of 10% or better. "If it's not 10% or more, I'll look for something better," he says.
And these are just starting points. You should be thoroughly familiar with the company and its fundamentals before you invest.
Different styles
Clearly, it's not easy to find a $10 stock that has no debt and 10% annual earnings growth. In most cases, that's because the company has stumbled recently. You have to figure out why the company's price might rise.
Different managers use different techniques. John Rogers, manager of the Ariel Fund, looks for stocks that are simply out of favor and should rebound. For example, HCC Insurance earned $1.57 a share the past 12 months. Like most property/casualty companies, it got clobbered this fall during hurricane season.
Analysts expect the company to earn $1.20 a share this year, which is short of expectations. But the stock's price is down more than 55% from its July 1999 high, while earnings are expected to be down only 24%. So Rogers figures it's been punished enough.
Erin Piner, manager of PBHG Limited Fund, looks for stocks with strong growth in earnings or sales. Her favorite low-priced stock, Hall Kinion & Associates, supplies staffing for Internet sites. Earnings have risen 58%, from 12 cents a share to 19 cents, and revenue is rising, too. "It's a low-priced way to play the build-out of the Internet," she says.
Most low-priced stocks are small-company stocks, and small-company stocks have been mostly ignored for years. So many of them are historically cheap. "I've never seen anything like it in the past 17 years," Rogers says.
More time and effort
Cheap or not, investing in individual stocks takes more time and effort than investing in mutual funds. Small-company stocks are often traded infrequently, which means you may have trouble selling for the last price you've seen quoted. You're also taking on more risk: There's always the chance a stock price can go to zero.
The stock picks in the chart are by some of the best small-stock fund managers in the business. But these are just starting points, and you need to investigate the stocks carefully. Otherwise, your tuition to Stockpicking University could be costly indeed. If this all seems like too much work, consider investing in a good small-cap stock fund instead.
Fishing for low-priced stocks
Finding small stocks can be tricky. Here, five pros offer some of their favorites. P-E, or price-to-earnings ratio, is a stock's price divides by its earnings per share. Higher P-Es generally show investors are willing to spend more, in the expectation of higher rewards.
http://www.usatoday.com/money/wealth/making/mmw182.htm
10 bagger over 5 years
Santa, let the Sensex hit 15000
Larissa Fernand December 23, 2005
Dear Santa
When I asked my friends what features on their Christmas wish list, I mourned their lack of imagination and creativity.
I mean, why would you ask for a perfume bottle or a pair of Levi's? Can't you go out and get one yourself?
Since you choose to make an appearance just once a year with a promise to make wishes come true, I have decided to make the most of it.
So here is my wish list for this Christmas.
Wish 1: Can you make this bull run last for at least five years?
Now, don't get me wrong. I am not for a moment suggesting that you keep the Sensex at 9,000-odd levels, with a gradual rise now and then. Can you push it to at least 15,000?
Over five years, this should not be too difficult.
All you have to do is let the Foreign Institutional Investors keep pouring money into this country. The Americans and the British were the first entrants, followed by the Germans. The Japanese are the latest. So you still have a large part of the globe to work with.
And yes, don't forget the non-resident Indian population abroad. In case you haven't noticed, they are loaded.
Simultaneously, you can work at keeping interest rates in the US really low. This will ensure that none of the above pull out their money and run to greener pastures for better returns (isn't everyone money crazy!).
Of course, there will other loose ends that have to be tied, but nothing that your ingenuity cannot overcome.
Is this bull run over?
Wish 2: Can you name the most lucrative stocks to invest in?
Now, what is the point of a bull run if I have not invested in the galloping stocks? So how about giving me the names of five 10-baggers?
You know what a 10-bagger is, don't you? Let me explain just to make sure we are both referring to the same thing. Ten baggers are stocks that have increased 10 times in value from the price at which I purchased them.
And yes, I am not looking at them turning into 10 baggers for my grandchildren. I am talking about the next five years.
Now, in case that is a bit too demanding, here is what I suggest. Why don't you orchestrate a stock market correction?
Let the Sensex fall precipitously by around 20%. At that time, I will pick up the five stocks you recommend since their prices would have fallen to dirt cheap levels. Once I have done that, the bulls can start galloping again and the bears and can hibernate for the next five years.
Come Christmas 2010, I will sell the shares, smile and pat myself on the back.
After that, the stock market can shut down for all I care.
Wish 3: Please give me some money!
Be reasonable. What good is a bull run going to do me, even if I have a list of the five best stocks, if I have no money to invest in the stock market?
How about a gift from a benign relative? This one is tough. You will have to make them benign to start with.
Better still, why not just convince my boss to give me a bonus? A million rupees should be fine.
Investing that and getting 10 times that amount in five years is perfect. If you do the math, you will realise that I am far from greedy. Investing a million and getting 10 times that amount would leave me with 10 million (Rs 1 crore).
Asking for a crore is really not too much.
Don't let the festive season empty your wallet
Wish 4: And yes, throw in a gift card
Alright, here's the last one.
I know a gift card sounds weird. But look at it practically. What I am asking for will materialise only after five years. What about now?
Just like my friends asked for perfumes and jeans, I guess the mundane must be given some amount of attention.
Now I am not asking for a gift certificate. Those are so limiting. You can only use them at a particular store. I would like a gift card -- the ones that work like pre-paid debit cards and are acceptable at all merchant establishments.
Don't sigh, it's very simple.
All you have to do is approach a bank that offers such cards (you can get your elves to do the groundwork). Kotak Mahindra Bank and IDBI Bank is where you can start. Pay the amount and you will get a card worth that much, which you can gift to me.
The bank would have tied up with either Visa or MasterCard and the person getting the card (in this case, me) can use it just like a debit card. As I spend, the amount gets debited.
The maximum limit of around Rs 25,000 would suit me fine.
Want a gift card?
And yes dear Santa, in case you feeling exhausted after reading this, I have a promise to make.
If you do give me all that is on this list, you have my word that I shall not bother you or ask for anything for the next five years.
Oops, I almost forgot!
Merry Christmas to you too!
http://www.rediff.com/getahead/2005/dec/23santa.htm
Larissa Fernand December 23, 2005
Dear Santa
When I asked my friends what features on their Christmas wish list, I mourned their lack of imagination and creativity.
I mean, why would you ask for a perfume bottle or a pair of Levi's? Can't you go out and get one yourself?
Since you choose to make an appearance just once a year with a promise to make wishes come true, I have decided to make the most of it.
So here is my wish list for this Christmas.
Wish 1: Can you make this bull run last for at least five years?
Now, don't get me wrong. I am not for a moment suggesting that you keep the Sensex at 9,000-odd levels, with a gradual rise now and then. Can you push it to at least 15,000?
Over five years, this should not be too difficult.
All you have to do is let the Foreign Institutional Investors keep pouring money into this country. The Americans and the British were the first entrants, followed by the Germans. The Japanese are the latest. So you still have a large part of the globe to work with.
And yes, don't forget the non-resident Indian population abroad. In case you haven't noticed, they are loaded.
Simultaneously, you can work at keeping interest rates in the US really low. This will ensure that none of the above pull out their money and run to greener pastures for better returns (isn't everyone money crazy!).
Of course, there will other loose ends that have to be tied, but nothing that your ingenuity cannot overcome.
Is this bull run over?
Wish 2: Can you name the most lucrative stocks to invest in?
Now, what is the point of a bull run if I have not invested in the galloping stocks? So how about giving me the names of five 10-baggers?
You know what a 10-bagger is, don't you? Let me explain just to make sure we are both referring to the same thing. Ten baggers are stocks that have increased 10 times in value from the price at which I purchased them.
And yes, I am not looking at them turning into 10 baggers for my grandchildren. I am talking about the next five years.
Now, in case that is a bit too demanding, here is what I suggest. Why don't you orchestrate a stock market correction?
Let the Sensex fall precipitously by around 20%. At that time, I will pick up the five stocks you recommend since their prices would have fallen to dirt cheap levels. Once I have done that, the bulls can start galloping again and the bears and can hibernate for the next five years.
Come Christmas 2010, I will sell the shares, smile and pat myself on the back.
After that, the stock market can shut down for all I care.
Wish 3: Please give me some money!
Be reasonable. What good is a bull run going to do me, even if I have a list of the five best stocks, if I have no money to invest in the stock market?
How about a gift from a benign relative? This one is tough. You will have to make them benign to start with.
Better still, why not just convince my boss to give me a bonus? A million rupees should be fine.
Investing that and getting 10 times that amount in five years is perfect. If you do the math, you will realise that I am far from greedy. Investing a million and getting 10 times that amount would leave me with 10 million (Rs 1 crore).
Asking for a crore is really not too much.
Don't let the festive season empty your wallet
Wish 4: And yes, throw in a gift card
Alright, here's the last one.
I know a gift card sounds weird. But look at it practically. What I am asking for will materialise only after five years. What about now?
Just like my friends asked for perfumes and jeans, I guess the mundane must be given some amount of attention.
Now I am not asking for a gift certificate. Those are so limiting. You can only use them at a particular store. I would like a gift card -- the ones that work like pre-paid debit cards and are acceptable at all merchant establishments.
Don't sigh, it's very simple.
All you have to do is approach a bank that offers such cards (you can get your elves to do the groundwork). Kotak Mahindra Bank and IDBI Bank is where you can start. Pay the amount and you will get a card worth that much, which you can gift to me.
The bank would have tied up with either Visa or MasterCard and the person getting the card (in this case, me) can use it just like a debit card. As I spend, the amount gets debited.
The maximum limit of around Rs 25,000 would suit me fine.
Want a gift card?
And yes dear Santa, in case you feeling exhausted after reading this, I have a promise to make.
If you do give me all that is on this list, you have my word that I shall not bother you or ask for anything for the next five years.
Oops, I almost forgot!
Merry Christmas to you too!
http://www.rediff.com/getahead/2005/dec/23santa.htm
How to Buy Cheap Stocks
How to Buy Cheap StocksThe name of cheap stocks might cause some confusion. The common understanding of cheap stocks is of little help to boost the assets of an investor’s portfolio. Successful cheap stock trading has nothing to do with blindly buying any stock just because of its low share price. The key of cheap stock trade is to find the undervalued stocks with promising potentials.
Peter Lynch – Master of Cheap Stock Trading
Peter Lynch is considered to be the best fund manager in the world. Under his management, the assets of Magellan Fund had increased from $18 million to $14 billion in thirteen years (1977 – 1990). Lynch’s investment philosophy is quite simple and straight forward. He believes in “Invest in what you know”, which echoes with what Warren Buffett preaches and practices “Never invest in a business you cannot understand”.
In One Up on Wall Street and Beating the Street, Lynch revealed the secret of his super performance is largely due to a series of successful cheap stock trading. Lynch coined an investment term called “10-bagger”, which refers to a ten fold return of the initial investment. Lynch had found more than a hundred “10-bagger” stocks during his career, just to name a few, Fannie Mae, General Electric, Ford Motor, Dunkin’ Donuts, Taco Bell, and Philip Morris International.
Normal investors would brag a lot if they could lay their hands on one or two of “10-bagger”, while many would never have this kind of experience in their lives. The fact that Lynch can find more than a hundred of them makes him a live legend of cheap stock trading.
Cheap Stock Trading Example with Forty-fold Return
While Lynch reigned as a fund manger, the market never ends to produce “10-bagger” stocks. Sina Corp. (SINA) is an excellent example after 2000. During the debacle of dot-com frenzy, the share price of SINA crashed from its all-time high $47.87 down to $1.07 in less than one and half year (May, 2000 – Sep, 2001), which qualified it as a cheap penny stock. Since SINA is a leading information service provider in China, during the next two and half years, SINA made a round trip back to $47.69 by Jan, 2004. For shrew investors, SINA would be a handsomely “forty bagger”, and multiply their investment portfolios many times in less than three years.
A thorough understanding of principles of value investing and Peter Lynch’s investment philosophy is indispensable to buy cheap stock successfully. For investors who rush to search for the next “10-bagger” best cheap stock, they might find their cheap stock picks aren’t cheap at all. It takes time and great efforts to buy cheap stock effectively. Be well prepared and do your homework, you might be able to add the next good cheap stock to your investment portfolio.
http://hubpages.com/hub/How-to-Buy-Cheap-Stocks
Some Ten-Baggers For You
August 2nd, 2009 at 6:31 pm
Some Ten-Baggers For You
A cognoscente is someone who has specialized knowledge. I’m not perfect. I wish that I had sold all of my stocks at the end of 2007 and started buying in March of this year. One of my 401K’s was down almost 50% last year, and a two of my stocks were down 66%. It’s always my feeling though that you need chips on the table, good or bad, or you don’t even have a chance of winning. One thing I’m proud of is that I held on to everything I had, and began a buying program in the face of the worst market since 1933. I’ll let you be the judge if I qualify as a card carrying member of the stock market cognoscenti.
If you review my blogs since I began, you will see that by and large, most of my recommendations and picks have panned out, many of them, spectacularly. I conservatively stated that most of my picks would gain 50% or more in one year, but many of them doubled, tripled and even quadrupled in the last 7 months !! If I had a lot of money to invest, I would have bought all of my own picks, but like you, I can only buy a few at a time.
You might think it’s time to sell. But you would be wrong. Let me give you some insight as to why I was so optimistic when I started.
As you know, I have been a student of the stock market and investing for over 35 years. You don’t have to work on Wall Street to be good at this game. Look at the smartest cognoscente in the world, Warren Buffet, he’s been watching from Omaha for the last 50 years and is to investing what Einstein was to Physics, a genius. What I’m getting at is the “bird’s eye view.”
As we descended into the abyss last October, everyone was asking “Is this going to be a repeat of the Great Depression ? “ I’m fully aware of the economic history behind that debacle. My answer was no. The reason for my optimism is that there was just too much money around. And there still is.
Once you take my supposition, and if you believe we’re emerging from a Great Recession rather than a Great Depression, then from my bird’s eye view, what was happening to the market was an outlier. Statisticians know what outliers are. They are temporary deviations from trend due to a cataclysmic type cause. Think of the market drop after Kennedy was assassinated. Think of September 11th. Last August, it all had to do with Treasury Secretary Paulson suddenly getting capitalist religion and deciding, wrongly, to let Lehman Brothers go under.
Let’s return to the present. Because the market has gained so much, you would think, under normal circumstances, that we’re going to have another crackdown. I don’t think we’re going to get a crackdown at all. We might get a 10 or 20% drop at some point. That mild drop (comparatively) won’t come until the outlier is erased, possibly as early as Labor Day, but more likely by the end of this year.
Cognoscenti have knowledge but to survive in the stock market, you have to have insights, hunches, or revelations. My current revelation is that we will not return to normal in this stock market until we have fully climbed the proverbial Wall of Worry. There are still too many people that are negative and think the market will drop. And the higher it goes, the more negative they get that it will drop. However, it will not drop, until they give up and transfer all their 401K money back in because they are afraid they’ll miss the next up wave.
If you are a novice to the stock market, what I’m saying to you may be contrary to common sense thinking. However, the stock market is not based upon common sense, it is based upon people’s expectations of stock supply and demand. No one explained this concept better than the great cognoscente John Templeton, on Louis Rukeyser’s old Wall Street Week program, every Friday night, at 8 pm, on public TV. What he said was, if you had an ailment and went to the doctor and got an opinion, then consulted another doctor and got an opinion, and then went to 10 doctors and got an opinion, and if all 10 of them were in consensus about your ailment and its cure, you would take that advice. However, using stock market logic, you would take the consensus of 10 stock advisers, and THEN DO THE EXACT OPPOSITE.
This is what Warren Buffet was trying to tell us last October when he said “sell when others are greedy, and buy when others are fearful”. He lent 5 Billion Dollars to Goldman Sachs for a 10% dividend forever, with warrants to buy the stock at 117. Goldman dipped down into the 60’s or 70’s, and last month they paid back their 25 billion in Tarp money, AND their stock price is now in the 160’s. And Warren is sitting on a massive unsold capital gain while he collects 500 million year after year until he decides he’d like to cash it in.
Ten Baggers
A ten bagger is a stock which goes up 10 times in price. Seem impossible ? OK, after September 11, I bought some shares of Amazon for my kids accounts at 6 dollars, and about 1 year or 2 years later I was selling them over 60 dollars per share. Amazon closed this week at 85, and I think you’re looking at another double at least by the end of next year.
Before I get to the 10 baggers which is what you do with speculative money you might lose, let me mention my personal 5 horsemen, stocks that I keep holding because they’ll probably double or triple pretty easily in the next 2 years, these are the type of stocks you can own more of without worrying about losing sleep– GOOG (Google), AAPL (Apple), Amazon (AMZN), Blue Nile (NILE), and Research in Motion (RIMM) the makers of Blackberry. Hey, I know there are also a bunch of other great stocks out there, but technology is my business and I like these particular stocks. Oh, don’t forget Brk.B that will double and you won’t lose a minute of sleep at all.
In your 401K’s, try to move your funds into International Funds, they are going to do well this next year. If you like funds, look at EWZ (Brazil), PBD (Global Clean Energy), GEX (Global Alternative Energy), and COW (Livestock Stocks).
Here are some potential 10-baggers (over the next 1-3 years) for you to consider not necessarily in priority order. I expect many of these to double by December.
OCNF – Dry Shipping , now at 1.36 a short-term double, it has a book value (if it were to be liquidated) of $11.
XTEX – Nat Gas, now at 3.39 , has a book value of $15 and pays 20% dividend
URE – a real estate mutual fund, now at 4.28 it pays 10%
CLZR – they make cosmetic surgery lasers, now at 1.13 book value $3 and no debt
ESCA – Sporting Goods, now at a buck, $6 book , looks like a quadruple in 1 year.
OBAS – Optibase, they’re into internet TV, now at $1, $2 book.
LYG – Lloyds of London insurance, now at $6, $10 book, pays 30% dividend.
SHS = Sauer Danfoss Heavy Machinery, now at $5, $6.5 book, pays 14%.
UYG – these are your biggest banks, 4.59 pays 4%
No one has enough money to buy all of these, but here are some more if you’d like to check them out.
XJT airlines 1.37 $11 book
WNC Trucking .83 $4 book
Real Estate
AHR Reit .58
BEE Hotels 1.18 $5 book
ABR Reit 1.81 $11 book, pays 53%
DDR Shopping Centers $5 , $16 book
TPGI Prop Mgt 1.37 $5 book
Oil and Gas
FTK drilling 1.88 $2.7 book
AHD Pipelines around 3 bucks, pays 7%
DPTR Nat Gas $2 , $6 book
Retail
TWMC Entertainment (owns FYE) 1.11 $7 book
FNET Toys and Games 1.15 $4 book
KDE Toy and Game Licensing 2 , $5 book, no debt
PERF umania Perfumes, 2.4 $7.8 book
Hodgepodge
MIC 4 , pays 20%
NWD .13 Asia Food and Bev
HTX Foreign Telecom 4
Remember what Cramer says, do your homework – these stocks are going to have some ups and downs, but from my birds eye view, even if they don’t become 10 baggers, some of them might double or triple, and that’s not a bad thing. You should diversify and spread some of your speculative money (10-20% of your overall) into these and I think overall, you will be rewarded.
Sorry, I am not a regular blogger, from my birds eye world I really only need to comment periodically. I only like to write when I get an inspiration. Stay tuned.
http://www.emilsblog.com/?p=24
Some Ten-Baggers For You
A cognoscente is someone who has specialized knowledge. I’m not perfect. I wish that I had sold all of my stocks at the end of 2007 and started buying in March of this year. One of my 401K’s was down almost 50% last year, and a two of my stocks were down 66%. It’s always my feeling though that you need chips on the table, good or bad, or you don’t even have a chance of winning. One thing I’m proud of is that I held on to everything I had, and began a buying program in the face of the worst market since 1933. I’ll let you be the judge if I qualify as a card carrying member of the stock market cognoscenti.
If you review my blogs since I began, you will see that by and large, most of my recommendations and picks have panned out, many of them, spectacularly. I conservatively stated that most of my picks would gain 50% or more in one year, but many of them doubled, tripled and even quadrupled in the last 7 months !! If I had a lot of money to invest, I would have bought all of my own picks, but like you, I can only buy a few at a time.
You might think it’s time to sell. But you would be wrong. Let me give you some insight as to why I was so optimistic when I started.
As you know, I have been a student of the stock market and investing for over 35 years. You don’t have to work on Wall Street to be good at this game. Look at the smartest cognoscente in the world, Warren Buffet, he’s been watching from Omaha for the last 50 years and is to investing what Einstein was to Physics, a genius. What I’m getting at is the “bird’s eye view.”
As we descended into the abyss last October, everyone was asking “Is this going to be a repeat of the Great Depression ? “ I’m fully aware of the economic history behind that debacle. My answer was no. The reason for my optimism is that there was just too much money around. And there still is.
Once you take my supposition, and if you believe we’re emerging from a Great Recession rather than a Great Depression, then from my bird’s eye view, what was happening to the market was an outlier. Statisticians know what outliers are. They are temporary deviations from trend due to a cataclysmic type cause. Think of the market drop after Kennedy was assassinated. Think of September 11th. Last August, it all had to do with Treasury Secretary Paulson suddenly getting capitalist religion and deciding, wrongly, to let Lehman Brothers go under.
Let’s return to the present. Because the market has gained so much, you would think, under normal circumstances, that we’re going to have another crackdown. I don’t think we’re going to get a crackdown at all. We might get a 10 or 20% drop at some point. That mild drop (comparatively) won’t come until the outlier is erased, possibly as early as Labor Day, but more likely by the end of this year.
Cognoscenti have knowledge but to survive in the stock market, you have to have insights, hunches, or revelations. My current revelation is that we will not return to normal in this stock market until we have fully climbed the proverbial Wall of Worry. There are still too many people that are negative and think the market will drop. And the higher it goes, the more negative they get that it will drop. However, it will not drop, until they give up and transfer all their 401K money back in because they are afraid they’ll miss the next up wave.
If you are a novice to the stock market, what I’m saying to you may be contrary to common sense thinking. However, the stock market is not based upon common sense, it is based upon people’s expectations of stock supply and demand. No one explained this concept better than the great cognoscente John Templeton, on Louis Rukeyser’s old Wall Street Week program, every Friday night, at 8 pm, on public TV. What he said was, if you had an ailment and went to the doctor and got an opinion, then consulted another doctor and got an opinion, and then went to 10 doctors and got an opinion, and if all 10 of them were in consensus about your ailment and its cure, you would take that advice. However, using stock market logic, you would take the consensus of 10 stock advisers, and THEN DO THE EXACT OPPOSITE.
This is what Warren Buffet was trying to tell us last October when he said “sell when others are greedy, and buy when others are fearful”. He lent 5 Billion Dollars to Goldman Sachs for a 10% dividend forever, with warrants to buy the stock at 117. Goldman dipped down into the 60’s or 70’s, and last month they paid back their 25 billion in Tarp money, AND their stock price is now in the 160’s. And Warren is sitting on a massive unsold capital gain while he collects 500 million year after year until he decides he’d like to cash it in.
Ten Baggers
A ten bagger is a stock which goes up 10 times in price. Seem impossible ? OK, after September 11, I bought some shares of Amazon for my kids accounts at 6 dollars, and about 1 year or 2 years later I was selling them over 60 dollars per share. Amazon closed this week at 85, and I think you’re looking at another double at least by the end of next year.
Before I get to the 10 baggers which is what you do with speculative money you might lose, let me mention my personal 5 horsemen, stocks that I keep holding because they’ll probably double or triple pretty easily in the next 2 years, these are the type of stocks you can own more of without worrying about losing sleep– GOOG (Google), AAPL (Apple), Amazon (AMZN), Blue Nile (NILE), and Research in Motion (RIMM) the makers of Blackberry. Hey, I know there are also a bunch of other great stocks out there, but technology is my business and I like these particular stocks. Oh, don’t forget Brk.B that will double and you won’t lose a minute of sleep at all.
In your 401K’s, try to move your funds into International Funds, they are going to do well this next year. If you like funds, look at EWZ (Brazil), PBD (Global Clean Energy), GEX (Global Alternative Energy), and COW (Livestock Stocks).
Here are some potential 10-baggers (over the next 1-3 years) for you to consider not necessarily in priority order. I expect many of these to double by December.
OCNF – Dry Shipping , now at 1.36 a short-term double, it has a book value (if it were to be liquidated) of $11.
XTEX – Nat Gas, now at 3.39 , has a book value of $15 and pays 20% dividend
URE – a real estate mutual fund, now at 4.28 it pays 10%
CLZR – they make cosmetic surgery lasers, now at 1.13 book value $3 and no debt
ESCA – Sporting Goods, now at a buck, $6 book , looks like a quadruple in 1 year.
OBAS – Optibase, they’re into internet TV, now at $1, $2 book.
LYG – Lloyds of London insurance, now at $6, $10 book, pays 30% dividend.
SHS = Sauer Danfoss Heavy Machinery, now at $5, $6.5 book, pays 14%.
UYG – these are your biggest banks, 4.59 pays 4%
No one has enough money to buy all of these, but here are some more if you’d like to check them out.
XJT airlines 1.37 $11 book
WNC Trucking .83 $4 book
Real Estate
AHR Reit .58
BEE Hotels 1.18 $5 book
ABR Reit 1.81 $11 book, pays 53%
DDR Shopping Centers $5 , $16 book
TPGI Prop Mgt 1.37 $5 book
Oil and Gas
FTK drilling 1.88 $2.7 book
AHD Pipelines around 3 bucks, pays 7%
DPTR Nat Gas $2 , $6 book
Retail
TWMC Entertainment (owns FYE) 1.11 $7 book
FNET Toys and Games 1.15 $4 book
KDE Toy and Game Licensing 2 , $5 book, no debt
PERF umania Perfumes, 2.4 $7.8 book
Hodgepodge
MIC 4 , pays 20%
NWD .13 Asia Food and Bev
HTX Foreign Telecom 4
Remember what Cramer says, do your homework – these stocks are going to have some ups and downs, but from my birds eye view, even if they don’t become 10 baggers, some of them might double or triple, and that’s not a bad thing. You should diversify and spread some of your speculative money (10-20% of your overall) into these and I think overall, you will be rewarded.
Sorry, I am not a regular blogger, from my birds eye world I really only need to comment periodically. I only like to write when I get an inspiration. Stay tuned.
http://www.emilsblog.com/?p=24
The multi-baggers from 10k to 20k index of the Indian Stock Market
Sunday, Nov 25, 2007
The multi-baggers from 10k to 20k
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The majority of the multi-baggers owe their stellar returns to the market “re-rating”, rather than an impressive expansion in their earnings.
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Kumar Shankar Roy
It took a little over 18 months for the benchmark index of the Indian stock market to double from 10,000 levels to the dizzying heights of 20,000. Not to be left behind, the Nifty too breached the 6000 level on November 1, from a shade below 3000 last June. One would think this would have made the job of ferreting out multi-baggers (stocks whose prices have risen several times over) easy. But could you have spotted these multi-baggers through some in-depth research into th ese companies in June last year? Maybe not!
Indeed, the list of multi-baggers over the past year and half would leave an investor confused. Street-sense says that capital goods, real-estate and infrastructure, the most fancied sectors in the stock market in the past year, would have been the ones to yield multi-baggers over the past year and a half. But there is no specific sector theme to the stocks that made it to the top. Companies from the infrastructure, capital goods and real-estate sectors are, in fact, missing from the top 20.
Unitech comes in at the 38th position in spite of witnessing its stock price rising 5.6 times. It would also have been quite difficult to catch these stocks last year, even had you pored over their financials. The majority of the multi-baggers owe their stellar returns to the market “re-rating” them (allowing them a larger price-earnings multiple), rather than an impressive expansion in their earnings. Which are the stocks heading the multi-baggers list? Is there a pattern to them? Let us find out.
Top multi-baggers
Jai Corp, Walchandnagar Industries, State Trading Co, India Infoline and BAG Films lead the list of top 10 multi-baggers since June 2006 (when the Sensex was at 10,000). These stocks naturally represent the big gainers among the 1,033 listed stocks on the NSE. Others that make it to the list are Autolite (I), KS Oils, REI Agro, Nicco Corporation and Goldstone Technologies. All these stocks had risen tenfold or more in the period under review — June 19, 2006 to November 16, 2007 (we chose these dates as they represent Sensex levels of 10,000 and 20,000 respectively).
Would you have put Jai Corp on your “buy” list last year, based on its business prospects? Maybe not. Seeking an explanation for why a Rs 19 stock in a matter of just one-and-a-half years rose to Rs 1,000, we find that Jai Corp is into such businesses as steel, plastic processing and spinning yarn facilities. But this was not why it was sought after.
The stock came into the limelight because of speculation that the promoters of a mega corporation have an indirect stake in the company and plan to use it as their infrastructure vehicle. This partly explains the stock price rising by over 67 times. The fact that only 15 per cent of its stock is freely available to the investing public may also have helped its stratospheric rise.
In the second slot, we have Walchandnagar Industries Ltd (WIL), whose story is a different one; though the fact that the stock has risen by nearly 20 times its price tag of Rs 450 in June last year. WIL is engaged in the manufacture of sugar plants, cement plants, nuclear power and space equipment and other engineering products. Notwithstanding the decent results posted by it over the past year (72 per cent profit growth), interest in the stock has been stoked by reports of indirect stake held by some influential politicians in the stock.
Apart from these, companies that operate in “sunrise” businesses and seen as offering high potential, such as India Infoline (broking), Goldstone Technologies (IPTV services), BAG Films (media), Nicco Corporation (entertainment parks) and REI Agro (basmati rice) feature in the top ten multibaggers (see Table).
Surging on ‘potential’
For five of these companies, namely WIL, State Trading Corporation, India Infoline, BAG Films and Rei Agro, earnings have risen, but their PE multiples have expanded even more, as investors have marked them up on the strength of their forays into promising new businesses. There are a couple of stocks which did benefit from a change in fundamentals.
The spike in prices of the shares of Autolite and Nicco Corporation is explained mainly by a turnaround in profitability. Nicco recorded a profit of Rs 6 crore last year as against a loss of Rs 16 crore in the year ago. Autolite, which makes lights and tubes, posted around Rs 5 crore profit, compared to a loss of Rs 3.3 crore in the earlier year. Both companies continued a sharp ramp-up in earnings numbers in the first six months of the current fiscal.
Though spotting the multi-baggers in advance was difficult, there was actually a good chance you held one in your portfolio. In the over 1,000 stocks reviewed on the NSE, shares of more than 490 companies, over half, gave a 100 per cent return between June 19 and November 17. Most of the stocks enjoyed both domestic as well as foreign investors’ attention, leading to a hefty rise in prices. Over 60 companies saw their stock price rise five-fold or more. Stocks of 12 companies multiplied 10 times or more.
Small-caps in limelight
It is a known fact that retail investors have an unexplained penchant for stocks trading at low absolute prices, and these dotted the list of multi-baggers. While the multi-baggers, in general, did not huddle close to any specific sector theme, the market-cap status of stocks did play a role.
Results showed that out of the 490 companies that doubled their value in these 18 months, 409 were small-caps, i.e. companies with a market capitalisation of Rs 2,500 crore or less. In this set of small-cap companies, the average share price rise was 3.4 times, higher than the average share price rise in mid-caps as well as large-caps at 2.4 times for each respectively.
Mid-caps are companies that have market capitalisation between Rs 2,500 crore to Rs 10,000 crore.
These results are not surprising because this period has largely seen the mid-cap (103 per cent) and small-cap indices (107 per cent) exceeding the returns of the bellwethers such as the Sensex (97 per cent) or the Nifty (98 per cent).
In the mid-cap space, around 61 companies were multi-baggers (they at least doubled in value) while only 23 large-caps (companies with a market capitalisation of Rs 10,000 crore or more) were a part of the list. This data clearly indicates that cheap stocks of lesser-known companies delivered a more stellar rise than stocks of widely-tracked, larger companies.
Parting shot
If the multi-baggers were not entirely sought after for their strong earnings growth, the stocks that fell most sharply in this period were certainly swayed to a greater extent by fundamentals. Companies such as Aztecsoft, Nova Petrochem, Thiru Arooran Sugar and Suryalakshmi Cotton Mills head the list of worst performing stocks over this period.
Other laggards include Dhampur Sugar, Celebrity Fashions, Shah Alloys, Uttam Sugar Mill, Simbhaoli Sugars and Sakthi Sugars.
Unlike the multi-baggers, whose share prices have gone up as a result of better growth potential, rather than actual earnings, the laggards appear to have declined directly in response to their profit performance.
Finally, discussion on multi-baggers from 10k to 20k would be incomplete without mention of the following companies. IFCI, despite its unimpressive financials, saw a stellar rise, following the announcement that the management had put a 26 per cent equity stake on the block. Reports of the company’s real-estate holdings and its long list of suitors helped the stock move up from Rs 9 to Rs 90, gaining a whopping 900 per cent in the process.
India may not yet be ready for Internet protocol TV, but that didn’t deter investors putting their money into IOL Broadband. From being a little known entity, the Rs 53-share gained almost 10 times its value in a matter of months, without the fundamental picture changing too much.
On the other hand, stocks such as Gujarat Mineral Development Corporation (832 per cent), Reliance Natural Resources (740 per cent), KLG Systel (500 per cent) and Welspun Gujarat Stahl (480 per cent) rode excellent earnings growth.
Fundamentally sound companies that turned out to be multi-baggers include TV18 India, Everest Kanto, Elecon Engineering, SREI Infrastructure Finance, Kotak Mahindra Bank and Larsen and Toubro.
In some cases, niche business areas attracted investors’ attention. Educomp (e-learning), Alphageo (seismic surveillance), Aban Offshore (oil rigs), Karuturi Networks (a leading cultivator of flowers), and Rolta (digital mapping) are prime examples.
http://www.thehindubusinessline.com/iw/2007/11/25/stories/2007112550750700.htm
The multi-baggers from 10k to 20k
--------------------------------------------------------------------------------
The majority of the multi-baggers owe their stellar returns to the market “re-rating”, rather than an impressive expansion in their earnings.
--------------------------------------------------------------------------------
Kumar Shankar Roy
It took a little over 18 months for the benchmark index of the Indian stock market to double from 10,000 levels to the dizzying heights of 20,000. Not to be left behind, the Nifty too breached the 6000 level on November 1, from a shade below 3000 last June. One would think this would have made the job of ferreting out multi-baggers (stocks whose prices have risen several times over) easy. But could you have spotted these multi-baggers through some in-depth research into th ese companies in June last year? Maybe not!
Indeed, the list of multi-baggers over the past year and half would leave an investor confused. Street-sense says that capital goods, real-estate and infrastructure, the most fancied sectors in the stock market in the past year, would have been the ones to yield multi-baggers over the past year and a half. But there is no specific sector theme to the stocks that made it to the top. Companies from the infrastructure, capital goods and real-estate sectors are, in fact, missing from the top 20.
Unitech comes in at the 38th position in spite of witnessing its stock price rising 5.6 times. It would also have been quite difficult to catch these stocks last year, even had you pored over their financials. The majority of the multi-baggers owe their stellar returns to the market “re-rating” them (allowing them a larger price-earnings multiple), rather than an impressive expansion in their earnings. Which are the stocks heading the multi-baggers list? Is there a pattern to them? Let us find out.
Top multi-baggers
Jai Corp, Walchandnagar Industries, State Trading Co, India Infoline and BAG Films lead the list of top 10 multi-baggers since June 2006 (when the Sensex was at 10,000). These stocks naturally represent the big gainers among the 1,033 listed stocks on the NSE. Others that make it to the list are Autolite (I), KS Oils, REI Agro, Nicco Corporation and Goldstone Technologies. All these stocks had risen tenfold or more in the period under review — June 19, 2006 to November 16, 2007 (we chose these dates as they represent Sensex levels of 10,000 and 20,000 respectively).
Would you have put Jai Corp on your “buy” list last year, based on its business prospects? Maybe not. Seeking an explanation for why a Rs 19 stock in a matter of just one-and-a-half years rose to Rs 1,000, we find that Jai Corp is into such businesses as steel, plastic processing and spinning yarn facilities. But this was not why it was sought after.
The stock came into the limelight because of speculation that the promoters of a mega corporation have an indirect stake in the company and plan to use it as their infrastructure vehicle. This partly explains the stock price rising by over 67 times. The fact that only 15 per cent of its stock is freely available to the investing public may also have helped its stratospheric rise.
In the second slot, we have Walchandnagar Industries Ltd (WIL), whose story is a different one; though the fact that the stock has risen by nearly 20 times its price tag of Rs 450 in June last year. WIL is engaged in the manufacture of sugar plants, cement plants, nuclear power and space equipment and other engineering products. Notwithstanding the decent results posted by it over the past year (72 per cent profit growth), interest in the stock has been stoked by reports of indirect stake held by some influential politicians in the stock.
Apart from these, companies that operate in “sunrise” businesses and seen as offering high potential, such as India Infoline (broking), Goldstone Technologies (IPTV services), BAG Films (media), Nicco Corporation (entertainment parks) and REI Agro (basmati rice) feature in the top ten multibaggers (see Table).
Surging on ‘potential’
For five of these companies, namely WIL, State Trading Corporation, India Infoline, BAG Films and Rei Agro, earnings have risen, but their PE multiples have expanded even more, as investors have marked them up on the strength of their forays into promising new businesses. There are a couple of stocks which did benefit from a change in fundamentals.
The spike in prices of the shares of Autolite and Nicco Corporation is explained mainly by a turnaround in profitability. Nicco recorded a profit of Rs 6 crore last year as against a loss of Rs 16 crore in the year ago. Autolite, which makes lights and tubes, posted around Rs 5 crore profit, compared to a loss of Rs 3.3 crore in the earlier year. Both companies continued a sharp ramp-up in earnings numbers in the first six months of the current fiscal.
Though spotting the multi-baggers in advance was difficult, there was actually a good chance you held one in your portfolio. In the over 1,000 stocks reviewed on the NSE, shares of more than 490 companies, over half, gave a 100 per cent return between June 19 and November 17. Most of the stocks enjoyed both domestic as well as foreign investors’ attention, leading to a hefty rise in prices. Over 60 companies saw their stock price rise five-fold or more. Stocks of 12 companies multiplied 10 times or more.
Small-caps in limelight
It is a known fact that retail investors have an unexplained penchant for stocks trading at low absolute prices, and these dotted the list of multi-baggers. While the multi-baggers, in general, did not huddle close to any specific sector theme, the market-cap status of stocks did play a role.
Results showed that out of the 490 companies that doubled their value in these 18 months, 409 were small-caps, i.e. companies with a market capitalisation of Rs 2,500 crore or less. In this set of small-cap companies, the average share price rise was 3.4 times, higher than the average share price rise in mid-caps as well as large-caps at 2.4 times for each respectively.
Mid-caps are companies that have market capitalisation between Rs 2,500 crore to Rs 10,000 crore.
These results are not surprising because this period has largely seen the mid-cap (103 per cent) and small-cap indices (107 per cent) exceeding the returns of the bellwethers such as the Sensex (97 per cent) or the Nifty (98 per cent).
In the mid-cap space, around 61 companies were multi-baggers (they at least doubled in value) while only 23 large-caps (companies with a market capitalisation of Rs 10,000 crore or more) were a part of the list. This data clearly indicates that cheap stocks of lesser-known companies delivered a more stellar rise than stocks of widely-tracked, larger companies.
Parting shot
If the multi-baggers were not entirely sought after for their strong earnings growth, the stocks that fell most sharply in this period were certainly swayed to a greater extent by fundamentals. Companies such as Aztecsoft, Nova Petrochem, Thiru Arooran Sugar and Suryalakshmi Cotton Mills head the list of worst performing stocks over this period.
Other laggards include Dhampur Sugar, Celebrity Fashions, Shah Alloys, Uttam Sugar Mill, Simbhaoli Sugars and Sakthi Sugars.
Unlike the multi-baggers, whose share prices have gone up as a result of better growth potential, rather than actual earnings, the laggards appear to have declined directly in response to their profit performance.
Finally, discussion on multi-baggers from 10k to 20k would be incomplete without mention of the following companies. IFCI, despite its unimpressive financials, saw a stellar rise, following the announcement that the management had put a 26 per cent equity stake on the block. Reports of the company’s real-estate holdings and its long list of suitors helped the stock move up from Rs 9 to Rs 90, gaining a whopping 900 per cent in the process.
India may not yet be ready for Internet protocol TV, but that didn’t deter investors putting their money into IOL Broadband. From being a little known entity, the Rs 53-share gained almost 10 times its value in a matter of months, without the fundamental picture changing too much.
On the other hand, stocks such as Gujarat Mineral Development Corporation (832 per cent), Reliance Natural Resources (740 per cent), KLG Systel (500 per cent) and Welspun Gujarat Stahl (480 per cent) rode excellent earnings growth.
Fundamentally sound companies that turned out to be multi-baggers include TV18 India, Everest Kanto, Elecon Engineering, SREI Infrastructure Finance, Kotak Mahindra Bank and Larsen and Toubro.
In some cases, niche business areas attracted investors’ attention. Educomp (e-learning), Alphageo (seismic surveillance), Aban Offshore (oil rigs), Karuturi Networks (a leading cultivator of flowers), and Rolta (digital mapping) are prime examples.
http://www.thehindubusinessline.com/iw/2007/11/25/stories/2007112550750700.htm
Best stocks to buy now are banking stocks
Monday, January 5, 2009
Best stocks to buy now are banking stocks
Amid easing of liquidity, low bond yields and expectations of long term economic revival, banking stocks are seen as the best bet for investment - both in medium term and long term.
Banking sector is expected to outperform the market giving an on an average return of 20 per cent, according to analysts.
"With softer monetary policies and consequent reduction in bank lending rates and benchmark G-Sec rates, action would shift from core income to treasury and asset quality," said Amitabh Chakraborty, president (equities), Religare Securities.
Added Chakraborty, "Slower credit growth coupled with reduced benchmark prime lending rate (BPLR) will keep NII subdued. However, fall in benchmark rate will result in reversal of mark-to-market provision and trading gain opportunities."
BPLR is a short-term interest rate quoted by a commercial bank as an indication of the rate being charged on loans to its best commercial customers.
With capital adequacy ratio of 9 per cent and tier-I capital of 6 per cent, India banks (both PSUs and private sector) stand firm in the face of worsening global banking scenario.
Said Manish Sonthalia, vice president-equity strategy, Motilal Oswal, "Indian banks are 5 times more risk averse than US banks wherein capital adequacy ratio is merely around 2% as against standard 9% in India. The debt to equity ratio of Indian banks is 10 times more than US banks."
With a healthy 7 per cent GDP growth, India still stands strong in terms of economic development, for which banks are the major drivers for funds. Among Indian banks, PSU banks are the most preferred to park money. "Because of the higher investment of 27- 28% in SLR securities, the PSU banks are a better investment bet as against private banks (25% in SLR)," states a Religare research report.
Furthermore, because of more retail loan disbursement, chances of defaults are relatively higher for private banks.
However, net non-performing asset (NPA) levels for both PSU and private banks ranges between 0.7% and 1%. "Whatever may be the current NPA level; those are manageable and banks are making enough provisions for that. NPA is no threat for Indian banks," added Motilal's Sonthalia.
Top picks from PSU banks are SBI, Oriental bank, Indian Bank, Andhra Bank, Bank of Baroda, Federal Bank etc while ICICI, HDFC, Axis are the banks which rule the roost in private segment.
CHECKOUT:
State Bank of India (SBI) - Elephant in Banking sector
ICICI Bank - BUY report from BNP Paribas Securities
HDFC - Safe Investment
HDFC - Best stock to invest in Banking sector
According to the analysts, any fresh 'buy' on these bank stocks can attract returns of upto 15-20% in a year. Meanwhile, market slowdown does not seem to have played any spoilsport for banks' financial performance. Experts are of the opinion that PSU banks are expected to post a hike in their bottom line on YoY basis.
Source: Economic Times
http://www.indianstocksnews.com/2009/01/best-stocks-to-buy-now-are-banking.html
Best stocks to buy now are banking stocks
Amid easing of liquidity, low bond yields and expectations of long term economic revival, banking stocks are seen as the best bet for investment - both in medium term and long term.
Banking sector is expected to outperform the market giving an on an average return of 20 per cent, according to analysts.
"With softer monetary policies and consequent reduction in bank lending rates and benchmark G-Sec rates, action would shift from core income to treasury and asset quality," said Amitabh Chakraborty, president (equities), Religare Securities.
Added Chakraborty, "Slower credit growth coupled with reduced benchmark prime lending rate (BPLR) will keep NII subdued. However, fall in benchmark rate will result in reversal of mark-to-market provision and trading gain opportunities."
BPLR is a short-term interest rate quoted by a commercial bank as an indication of the rate being charged on loans to its best commercial customers.
With capital adequacy ratio of 9 per cent and tier-I capital of 6 per cent, India banks (both PSUs and private sector) stand firm in the face of worsening global banking scenario.
Said Manish Sonthalia, vice president-equity strategy, Motilal Oswal, "Indian banks are 5 times more risk averse than US banks wherein capital adequacy ratio is merely around 2% as against standard 9% in India. The debt to equity ratio of Indian banks is 10 times more than US banks."
With a healthy 7 per cent GDP growth, India still stands strong in terms of economic development, for which banks are the major drivers for funds. Among Indian banks, PSU banks are the most preferred to park money. "Because of the higher investment of 27- 28% in SLR securities, the PSU banks are a better investment bet as against private banks (25% in SLR)," states a Religare research report.
Furthermore, because of more retail loan disbursement, chances of defaults are relatively higher for private banks.
However, net non-performing asset (NPA) levels for both PSU and private banks ranges between 0.7% and 1%. "Whatever may be the current NPA level; those are manageable and banks are making enough provisions for that. NPA is no threat for Indian banks," added Motilal's Sonthalia.
Top picks from PSU banks are SBI, Oriental bank, Indian Bank, Andhra Bank, Bank of Baroda, Federal Bank etc while ICICI, HDFC, Axis are the banks which rule the roost in private segment.
CHECKOUT:
State Bank of India (SBI) - Elephant in Banking sector
ICICI Bank - BUY report from BNP Paribas Securities
HDFC - Safe Investment
HDFC - Best stock to invest in Banking sector
According to the analysts, any fresh 'buy' on these bank stocks can attract returns of upto 15-20% in a year. Meanwhile, market slowdown does not seem to have played any spoilsport for banks' financial performance. Experts are of the opinion that PSU banks are expected to post a hike in their bottom line on YoY basis.
Source: Economic Times
http://www.indianstocksnews.com/2009/01/best-stocks-to-buy-now-are-banking.html
How to buy stocks ? Buy stocks with confidence
Monday, January 19, 2009
How to buy stocks ? Buy stocks with confidence
Current stock market, as we all know, is in an uncertain situation with ups and downs in stocks every week. Every investor may be wondering about how to buy a stock as buying stocks for long term investment has become difficult when there are no clear market trends.
We advise investors to keep the following factors in mind in order to make safe and sensible investments.
Stock trades at cheap brokerage and buying stocks online or online stock trading have made stock trades a very frequent practice for normal investor, they should understnad that stocks mentioned here are for long term investing and will be fruitful if they hold for longer time durations.
1. Low Debt-Equity ratio stocks
This is the ratio shows that how much equity and debt is used by the company to finance its assets. Debt-equity ratio above one shows that the company has resorted to debt for financing its assets rather than equity. If the ratio is lower than one, it means the company has a lesser debt burden. The positives of such companies are that they need only a lesser amount to be kept aside to pay the interests that arise out of loans. The fluctuations in interest rates during high inflationary situations may have little impact on the financials of such companies. So companies that have zero debt should be targeted with a medium to long-term perspective.
2. Stocks trading below their book values
Another factor to be kept in mind while investing in shares is the book value. The book value of a company is the cost of an asset minus accumulated depreciation. In other words it is the total value of the company’s assets that shareholders would theoretically receive if a company is liquidated. So, if a stock is trading below its book value, then it is underpriced, and should therefore be seen as an opportunity to make an investment in that stock.
3. Buying ‘A’ group stocks
An investor with a medium to long-term perspective can, without any hesitation, go for stocks in the ‘A’ group, even if the situation is not very favourable. Once the markets consolidate and pick up, the first stocks to move up will be the ‘A’ group stocks as they form the index. When the index moves up, obviously these stocks will be the movers. One main thing to keep in mind is that, never make your whole investment in a single sector or a stock. Instead, investors should create a diversified portfolio including more than one stock belonging to different sectors.
4. Following the averaging pattern of investment
Investors should follow the averaging pattern of investment when the markets are volatile and not giving any trends. This will put the investors in a better position. The investor has to enter the market at three or four different times which will help the investor to reduce the per share price of his holdings.
E.g. if an investor is desirous of making an investment of Rs 40000, he should invest the money at three or four different times with an investment of Rs 10000 each. When the stock which the investor wants to invest in is trading at Rs 100, he can make his first entry by investing Rs 10000 and purchasing 100 shares of the stock. When the share price comes down to Rs 80, he can make his second entry by investing Rs 10000 and purchasing 125 shares. When the share falls to Rs 70 and then Rs 60, the investor can make his third and fourth entries by investing Rs 10000 each, and purchase 143 and 167 shares, respectively. When the market moves up from lows, the average rate of the stock in the investor’s portfolio will be Rs 74.7 which will be the investor’s BEP.
The following table shows the stocks that are trading below their book value and with zero debt. Investors also can go for stocks in the ‘A’ group segment which are/are not given in the table given below. Investment should be made in these stocks in the above said averaging pattern.
Source: Geojit Securtiy research house
http://www.indianstocksnews.com/2009/01/how-to-buy-stocks-buy-stocks-with.html
How to buy stocks ? Buy stocks with confidence
Current stock market, as we all know, is in an uncertain situation with ups and downs in stocks every week. Every investor may be wondering about how to buy a stock as buying stocks for long term investment has become difficult when there are no clear market trends.
We advise investors to keep the following factors in mind in order to make safe and sensible investments.
Stock trades at cheap brokerage and buying stocks online or online stock trading have made stock trades a very frequent practice for normal investor, they should understnad that stocks mentioned here are for long term investing and will be fruitful if they hold for longer time durations.
1. Low Debt-Equity ratio stocks
This is the ratio shows that how much equity and debt is used by the company to finance its assets. Debt-equity ratio above one shows that the company has resorted to debt for financing its assets rather than equity. If the ratio is lower than one, it means the company has a lesser debt burden. The positives of such companies are that they need only a lesser amount to be kept aside to pay the interests that arise out of loans. The fluctuations in interest rates during high inflationary situations may have little impact on the financials of such companies. So companies that have zero debt should be targeted with a medium to long-term perspective.
2. Stocks trading below their book values
Another factor to be kept in mind while investing in shares is the book value. The book value of a company is the cost of an asset minus accumulated depreciation. In other words it is the total value of the company’s assets that shareholders would theoretically receive if a company is liquidated. So, if a stock is trading below its book value, then it is underpriced, and should therefore be seen as an opportunity to make an investment in that stock.
3. Buying ‘A’ group stocks
An investor with a medium to long-term perspective can, without any hesitation, go for stocks in the ‘A’ group, even if the situation is not very favourable. Once the markets consolidate and pick up, the first stocks to move up will be the ‘A’ group stocks as they form the index. When the index moves up, obviously these stocks will be the movers. One main thing to keep in mind is that, never make your whole investment in a single sector or a stock. Instead, investors should create a diversified portfolio including more than one stock belonging to different sectors.
4. Following the averaging pattern of investment
Investors should follow the averaging pattern of investment when the markets are volatile and not giving any trends. This will put the investors in a better position. The investor has to enter the market at three or four different times which will help the investor to reduce the per share price of his holdings.
E.g. if an investor is desirous of making an investment of Rs 40000, he should invest the money at three or four different times with an investment of Rs 10000 each. When the stock which the investor wants to invest in is trading at Rs 100, he can make his first entry by investing Rs 10000 and purchasing 100 shares of the stock. When the share price comes down to Rs 80, he can make his second entry by investing Rs 10000 and purchasing 125 shares. When the share falls to Rs 70 and then Rs 60, the investor can make his third and fourth entries by investing Rs 10000 each, and purchase 143 and 167 shares, respectively. When the market moves up from lows, the average rate of the stock in the investor’s portfolio will be Rs 74.7 which will be the investor’s BEP.
The following table shows the stocks that are trading below their book value and with zero debt. Investors also can go for stocks in the ‘A’ group segment which are/are not given in the table given below. Investment should be made in these stocks in the above said averaging pattern.
Source: Geojit Securtiy research house
http://www.indianstocksnews.com/2009/01/how-to-buy-stocks-buy-stocks-with.html
How to buy multi bagger stocks?
Tuesday, February 3, 2009
How to buy multi bagger stocks?
Rakesh Jhunjhunwala & Others Guidelines To You
For any investor, buying stocks which can be multibaggers are the most attractive option. Raamdeo Agrawal, Director, Motilal Oswal Financial Services owned over 10 multibagger stocks, while Sanjoy Bhattacharyya, Partner, Fortuna Capital owned over 100 baggers. And we all know about the success story of Rakesh Jhunjhunwala, legendary investor in Indian stock market.
But how does one identify a multibagger? Valuation, a company's fundamentals, a business that promises growth over time, management's integrity, rational allocation of capital etc decide if a stock is of the multibagger variety.
Explains Raamdeo Agrawal, "If you want a multi bagger, it has to be bought literally free of cost...the purchase price is insignificant to whatever is the expected value in the next 4-5-6 years." There is also another plot to this story--the market. Agrawal says a multibagger gets irrational quote from the market in three steps. It goes from being undervalued to fairly valued to being irrationally valued.
Rakesh Jhunjhunwala, Partner, Rare Enterprises, advice is that one needs to check what opportunity the business has, who are the entrepreneurs, how much capital is needed, is the business scalable, and what is the company’s valuation.
Here is a verbatim transcript of the exclusive interview with Raamdeo Agrawal and Rakesh Jhunjhunwala on CNBC-TV18. Also see the accompanying video.
Q: You had more than 10 multi-bagger stocks, what are the characteristics? How does one find 10 multi-bagger stocks? How does one start the process of thinking that the stock is going to be a 10 bagger?
Agrawal: You don’t pay anything to have multi-baggers. If you want a multi-bagger literally you have to buy free of cost, your purchase price decides your rate of return. That is a simple method.
Jhunjhunwala: That doesn’t mean that if Infosys has Rs 30 crore market capitalization, then at Rs 90 crore I should not buy it. We don’t buy it just because it has doubled. You have to see value when you buy.
Agrawal: The first fundamental thing is that you have got to buy extremely cheap and it is non-negotiable. If you want a multi bagger, it has to be bought literally free of cost. Like I could have bought Bharti Telecom around Rs 4,000-5,000 kind of valuation, today it commands a valuation of Rs 1,50,000 crore in just five years. So, when you buy these kind of things at those prices literally, the purchase price is insignificant to whatever is the expected value in the next 4-5-6 years. That is a non-negotiable kind of a trade for finding a multi bagger. Now, the market must become irrational about that stock. So, from under valuation it goes to a fair valuation and from fair valuation it goes to irrational valuation.
Q: You are too modest to say this but I know you have had 700 baggers. Where have you looked for your 100 baggers, give us intellectual hypothesis?
Bhattacharyya: Between being smart and being lucky, I know it will hurt your ego like hell because all you guys are IIM-A always ought to be lucky not smart. It seems that there are two things, which are very important. Agrawal spoke the need to buy cheap, so valuation is very much in your favour.
But two other things you must buy a business, which is of very high quality. What do I mean by high quality business is that a business which is capable of growing over time. I think in the modern lingua franca it is called scalable. I hate words like that. But I think that is what they teach you here, so scalable and the scalability doesn’t require linear inputs of capital.
In a really high quality business, which is disproportionate and where you don’t need to have equal amounts of money to finance incremental growth, that is a wonderful business. The cigarette business, the biscuit business are also highly predictable. What destroys most people is their inability to foresee change. Most of us are not as smart as we think and change can be very rapid and very destructive. So, you have got to be able to figure out change.
Unless you are Rakesh Jhunjhunwala, you are usually a minority holder.
Then, it is very important to understand, what is the agenda and the interest of the majority holder or management usually. If it’s a private equity firm which has the majority stake in the company, what is their agenda? What do they want and how well do they allocate capital? You can never have a multi-bagger if capital is irrationally allocated by the people who run the company. If they have this wild ambition that I am going to spend and earn lots of money, but I will spend even more in terms of capital expenditure and financing growth, you will have very high reported profit but zero cash flow or negative cash flow. You can never get a multi-bagger out of that situation. But you have obviously got to search for a management which has competence and then make sure that you sort of super-impose a huge dose of integrity on that and rational capital allocation. The minute that is missing you will be at risk. Your 10 baggers could reduce back to being a 2 baggers because you could wipe out 80% of your gains.
Q: Are Titan, Praj, Nagarjuna some of the great multi-baggers?
Jhunjhunwala: Titan was a retailer, it was a brand company, it always had a great business. That was a reality. So, it was a great business. In a moment of crisis and when they went into Europe, they lost money. That was a crisis primarily. To my mind what is most important for Titan is India’s prosperity. I envisaged the future and I thought Indians are going to buy far many watches, so that is how he said that the business should be great. So, in a moment of crisis you get great valuations and you envisage the future where the product could have great demand and great growth and that business doesn’t need money.
In MBA language, price is equal to EPS multiplies by P/E, so circumstance should arise where the P/E should grow and the EPS should grow. Suppose I buy a stock, which earns Rs 5. At 5 P/E and I pay Rs 25, if the earnings becomes Rs 15 and the P/E becomes Rs 20, that Rs 25 goes to Rs 300. So, the basic methodology is that can this EPS grow year-upon-year and will the P/E expand. P/E expansion is function of so many items. It is a function of size. So, many of my companies I don’t sell because I feel that P/E will expand, as their size increases and liquidity increases.
Q: Your favourite multi-bagger in your career?
Agrawal: Vysya Bank that was a very first one, second one was Hero Honda, and third one was Bharti.
Q: What has been your multi-bagger historically?
Jhunjhunwala: For me anything that gives me money is my favourite one. There is no emotion. But I think as I judge myself some of the finest investment decisions which I have taken in my life is the decision to invest in Titan, decision to invest in Crisil, decision to invest and retain my holding of Karur Vysya Bank. Now, it is14-15 years since I have bought them. But I think some investment of Rs 2,000 is worth sum I don’t know how many crores today.
Bhattacharyya: The important thing is to identifying the opportunity and then as Jhunjhunwala said is acting on it, being decisive, not getting stuck in a trap where you are perpetually seeking extra information. If you are looking to identify great opportunities, one other thing that all of you will do well is to make friends or associates with people who are called in the language of Dalal Street smart money. You have three of the smartest guys sitting here. But to say this if you have guys, who are really smart serious, thinking investors, one of the ways you will find 100 baggers is by talking to them frequently. I am not joking.
Jhunjhunwala: One important trade of any 10 bagger is there should not be any institutional ownership, it should be under research, nobody should know about it. Today also I was asking Mr. Bhattacharyya that have you researched Titan. Even if the stock have gone up 30 times, Mr. Bhattacharyya has not researched it, which is very good for Titan. I have not researched Bharti, which is very good for Bharti. The stock has appreciated so much but the amount of interest remains in the stock remains at low level. So, it should not be one of the popular not by rule but generally it is not a popular stocks and there should be deep scepticism.
Bhattacharyya: In fact one of the good test to follow is go and tell it to someone else who has experience and has been around in the market for a long time. He will laugh at you. The fact that he is laughing at you should be like a tremendous source of encouragement.
Jhunjhunwala: There are no rules. If two agree, it doesn’t mean that you don’t buy.
Agrawal: What Mr. Bhattacharyya said is a truest thing, when I like something very deeply and when he disagrees ‑ because he is my friend, I go and test with him – and when he disagrees that is going to be a multi bagger.
Q: When you look at buying stake in a company, what is the most important factor or criteria that you look at?
Jhunjhunwala: I cannot say whether the leg or head is more important or the brain is more important or the heart is more important. There are equally important factors, and any successful business is a combination of factors.
When I look at any investment or any business, I look at three-four factors. First, the external opportunity which is demand. For instance in Praj maybe because of the need of alternative fuels the demand for ethanol plants went through the roof. So, I look at the opportunity the business has.
Then I look at the entrepreneurs, I look at the capital needed, and I want to judge scalability. We could make money in Pantaloon because Kishore Biyani could scale the business. Then, it is important what you buy, it is important at what price you buy. So, I look at the valuation. I have no analysis paralysis. I judge very fast.
Q: Which are the sectors that one should invest in say for a period of one year given the current market level and fluctuations?
Bhattacharyya: My answer is not going to be a happy answer. First, you don’t buy a sector, you buy an individual company. Secondly, I don’t think one year is necessarily the ultimate timeframe because you have no idea 12 months later what the world will look like.
You are buying a business with specific players, a cast. You are buying the people who run that business; you are buying the assets and liabilities of that business, you are buying the balance sheet of the company. Within the same sector, different people have different opportunities.
So, if I were to say that the pharmaceutical sector is a great opportunity, there are different pharmaceutical companies. Say if you were buying Sun Pharma as opposed to buying Lupin, you are buying it at completely different valuations. Some sectors that are hot right now, I mean the whole world knows they are hot right now. So, the prices at which you are buying that sector reflect the hope and the enthusiasm that people have for that now.
But I don’t think that I understand anything other than what is called bottom-up. That means god lies in the details. There are specific opportunities or companies that I can tend to buy.
Agrawal: I would approach the financial sector, the large banks, which have large bond portfolios like SBI has Rs 2-2.5 lakh crore worth of bond portfolio, mark-to-market. When the yield drops you know what happens to bond prices and that goes directly to the P&L. In any case, you are buying that stock at 1-1.2 times book, insurance free thrown with the SBI stock. So, I would like to buy that for maybe 25-40% case for the next one year.
Secondly, I would say telecom. I think god communicates wirelessly. I think the telecom penetration in India is just about 25%. We are headed for 75% if not 100% in the next 5-6 years. We are going to see more than 10-15% compounded quarterly growth for the next 20-25 quarters in this country. Hence, we have a great opportunity in buying Bharti Telecom.
Q: Is there any sector you like?
Jhunjhunwala: I think that India-centric sectors will do well whether it is banking, retailing, infrastructure, all sectors that are related to India – SBI, Bharti, and Hero Honda.
Q: You were talking about recognising value in a stock. If you look at the power sector in India, there are some stocks like Tata Power and NTPC have significantly high ground assets, or whether some new companies like KSK Energy who have captive coal reserves. How do you compare these and what are the parameters that you use to identify value?
Jhunjhunwala: The first multi-bagger of my life was Tata Power. But after having earned a lot of money in Tata Power, I have promised myself I am not going to buy any power companies because after all it is a fixed return rate of return and the rate of return is 13-14%. It is a capital intensive industry. So god bless NTPC and KSK Energy. But that is not where my interest is, because I can’t think of any industry in the world where the rate of return as fixed, if it is going to give you multiple returns.
Bhattacharyya: In fact, I would like to endorse what Jhunjhunwala said. But I think of your question and I suspect it may be that how do you distinguish between companies that are asset plays, which don’t have at this stage earnings that you can identify with and see and therefore put a multiple to them as opposed to companies that have a stream of earnings.
Jhunjhunwala: But market will value them if within a comprehensible period those assets can return a stream of earnings. If I have a company whose office is worth Rs 5,000 crore, what can I do? I will wait for earnings for one, two, or five years. Nobody is going to buy that company because their office is there. Don’t forget all these coal reserves. You know what is the average value for oil reserves ‑ about USD 10-15 or maybe USD 20. You first have to say in what time period KSK Energy will get the coal reserves. If it gets it 15 years later and you bring it to present value, you come to 3% of the current market price. Then, you have value in the current coal prices. Are these prices going to last? So, therefore they may appear cheap.
Q: In the present market scenario both from an investors’ perspective and a speculators’ perspective, where would you put your money – in real estate, in fixed income, equities, or gold?
Agrawal: To tell you the truth, I don’t know any other trade. I know only stocks. So, I don’t have any other option but to buy stock.
Jhunjhunwala: We never allocate capital. We have money means it is for equities.
Agrawal: Just equities, not even cash and equities, only equities. So, when I wanted to play real estate, I bought hotel shares. I am not going to buy 100 acres here and there. I said let’s go and buy earning real estate, i.e. hotel shares.
Jhunjhunwala: I have allocated some part of my trading portfolio to debt – to buy bonds. Long-dated bonds with good yields are very good.
Q: How do you decide when to sell a multi-bagger?
Jhunjhunwala: I will sell a stock only in two circumstances: when I have limited capital and when I get an opportunity that is better than what I have now. So, if comparatively I need capital, I will sell it.
Secondly, when the perception of earnings peaks and the P/E is unsustainable. I think that is a time to sell. The earning may not peak but the expectations of hope like in 2000 everybody said Infosys’ earnings will double every year for the next 10 years. That was the expectation in the market and its P/E was at the current earnings, it was 100-150 times. So, when the expectation of earnings peaks and the P/E is unsustainable, I think that is a time to sell.
Agrawal: There are two types of stocks. One you buy forever and one you buy for a trade.
Jhunjhunwala: I strongly contest this. There is no stock forever in the world.
Agrawal: I contest that. There are clearly two types of stock. One you buy for selling and one you buy forever.
Source: Moneycontrol.com
http://www.indianstocksnews.com/2009/02/how-to-buy-multi-bagger-stocks-rakesh.html
How to buy multi bagger stocks?
Rakesh Jhunjhunwala & Others Guidelines To You
For any investor, buying stocks which can be multibaggers are the most attractive option. Raamdeo Agrawal, Director, Motilal Oswal Financial Services owned over 10 multibagger stocks, while Sanjoy Bhattacharyya, Partner, Fortuna Capital owned over 100 baggers. And we all know about the success story of Rakesh Jhunjhunwala, legendary investor in Indian stock market.
But how does one identify a multibagger? Valuation, a company's fundamentals, a business that promises growth over time, management's integrity, rational allocation of capital etc decide if a stock is of the multibagger variety.
Explains Raamdeo Agrawal, "If you want a multi bagger, it has to be bought literally free of cost...the purchase price is insignificant to whatever is the expected value in the next 4-5-6 years." There is also another plot to this story--the market. Agrawal says a multibagger gets irrational quote from the market in three steps. It goes from being undervalued to fairly valued to being irrationally valued.
Rakesh Jhunjhunwala, Partner, Rare Enterprises, advice is that one needs to check what opportunity the business has, who are the entrepreneurs, how much capital is needed, is the business scalable, and what is the company’s valuation.
Here is a verbatim transcript of the exclusive interview with Raamdeo Agrawal and Rakesh Jhunjhunwala on CNBC-TV18. Also see the accompanying video.
Q: You had more than 10 multi-bagger stocks, what are the characteristics? How does one find 10 multi-bagger stocks? How does one start the process of thinking that the stock is going to be a 10 bagger?
Agrawal: You don’t pay anything to have multi-baggers. If you want a multi-bagger literally you have to buy free of cost, your purchase price decides your rate of return. That is a simple method.
Jhunjhunwala: That doesn’t mean that if Infosys has Rs 30 crore market capitalization, then at Rs 90 crore I should not buy it. We don’t buy it just because it has doubled. You have to see value when you buy.
Agrawal: The first fundamental thing is that you have got to buy extremely cheap and it is non-negotiable. If you want a multi bagger, it has to be bought literally free of cost. Like I could have bought Bharti Telecom around Rs 4,000-5,000 kind of valuation, today it commands a valuation of Rs 1,50,000 crore in just five years. So, when you buy these kind of things at those prices literally, the purchase price is insignificant to whatever is the expected value in the next 4-5-6 years. That is a non-negotiable kind of a trade for finding a multi bagger. Now, the market must become irrational about that stock. So, from under valuation it goes to a fair valuation and from fair valuation it goes to irrational valuation.
Q: You are too modest to say this but I know you have had 700 baggers. Where have you looked for your 100 baggers, give us intellectual hypothesis?
Bhattacharyya: Between being smart and being lucky, I know it will hurt your ego like hell because all you guys are IIM-A always ought to be lucky not smart. It seems that there are two things, which are very important. Agrawal spoke the need to buy cheap, so valuation is very much in your favour.
But two other things you must buy a business, which is of very high quality. What do I mean by high quality business is that a business which is capable of growing over time. I think in the modern lingua franca it is called scalable. I hate words like that. But I think that is what they teach you here, so scalable and the scalability doesn’t require linear inputs of capital.
In a really high quality business, which is disproportionate and where you don’t need to have equal amounts of money to finance incremental growth, that is a wonderful business. The cigarette business, the biscuit business are also highly predictable. What destroys most people is their inability to foresee change. Most of us are not as smart as we think and change can be very rapid and very destructive. So, you have got to be able to figure out change.
Unless you are Rakesh Jhunjhunwala, you are usually a minority holder.
Then, it is very important to understand, what is the agenda and the interest of the majority holder or management usually. If it’s a private equity firm which has the majority stake in the company, what is their agenda? What do they want and how well do they allocate capital? You can never have a multi-bagger if capital is irrationally allocated by the people who run the company. If they have this wild ambition that I am going to spend and earn lots of money, but I will spend even more in terms of capital expenditure and financing growth, you will have very high reported profit but zero cash flow or negative cash flow. You can never get a multi-bagger out of that situation. But you have obviously got to search for a management which has competence and then make sure that you sort of super-impose a huge dose of integrity on that and rational capital allocation. The minute that is missing you will be at risk. Your 10 baggers could reduce back to being a 2 baggers because you could wipe out 80% of your gains.
Q: Are Titan, Praj, Nagarjuna some of the great multi-baggers?
Jhunjhunwala: Titan was a retailer, it was a brand company, it always had a great business. That was a reality. So, it was a great business. In a moment of crisis and when they went into Europe, they lost money. That was a crisis primarily. To my mind what is most important for Titan is India’s prosperity. I envisaged the future and I thought Indians are going to buy far many watches, so that is how he said that the business should be great. So, in a moment of crisis you get great valuations and you envisage the future where the product could have great demand and great growth and that business doesn’t need money.
In MBA language, price is equal to EPS multiplies by P/E, so circumstance should arise where the P/E should grow and the EPS should grow. Suppose I buy a stock, which earns Rs 5. At 5 P/E and I pay Rs 25, if the earnings becomes Rs 15 and the P/E becomes Rs 20, that Rs 25 goes to Rs 300. So, the basic methodology is that can this EPS grow year-upon-year and will the P/E expand. P/E expansion is function of so many items. It is a function of size. So, many of my companies I don’t sell because I feel that P/E will expand, as their size increases and liquidity increases.
Q: Your favourite multi-bagger in your career?
Agrawal: Vysya Bank that was a very first one, second one was Hero Honda, and third one was Bharti.
Q: What has been your multi-bagger historically?
Jhunjhunwala: For me anything that gives me money is my favourite one. There is no emotion. But I think as I judge myself some of the finest investment decisions which I have taken in my life is the decision to invest in Titan, decision to invest in Crisil, decision to invest and retain my holding of Karur Vysya Bank. Now, it is14-15 years since I have bought them. But I think some investment of Rs 2,000 is worth sum I don’t know how many crores today.
Bhattacharyya: The important thing is to identifying the opportunity and then as Jhunjhunwala said is acting on it, being decisive, not getting stuck in a trap where you are perpetually seeking extra information. If you are looking to identify great opportunities, one other thing that all of you will do well is to make friends or associates with people who are called in the language of Dalal Street smart money. You have three of the smartest guys sitting here. But to say this if you have guys, who are really smart serious, thinking investors, one of the ways you will find 100 baggers is by talking to them frequently. I am not joking.
Jhunjhunwala: One important trade of any 10 bagger is there should not be any institutional ownership, it should be under research, nobody should know about it. Today also I was asking Mr. Bhattacharyya that have you researched Titan. Even if the stock have gone up 30 times, Mr. Bhattacharyya has not researched it, which is very good for Titan. I have not researched Bharti, which is very good for Bharti. The stock has appreciated so much but the amount of interest remains in the stock remains at low level. So, it should not be one of the popular not by rule but generally it is not a popular stocks and there should be deep scepticism.
Bhattacharyya: In fact one of the good test to follow is go and tell it to someone else who has experience and has been around in the market for a long time. He will laugh at you. The fact that he is laughing at you should be like a tremendous source of encouragement.
Jhunjhunwala: There are no rules. If two agree, it doesn’t mean that you don’t buy.
Agrawal: What Mr. Bhattacharyya said is a truest thing, when I like something very deeply and when he disagrees ‑ because he is my friend, I go and test with him – and when he disagrees that is going to be a multi bagger.
Q: When you look at buying stake in a company, what is the most important factor or criteria that you look at?
Jhunjhunwala: I cannot say whether the leg or head is more important or the brain is more important or the heart is more important. There are equally important factors, and any successful business is a combination of factors.
When I look at any investment or any business, I look at three-four factors. First, the external opportunity which is demand. For instance in Praj maybe because of the need of alternative fuels the demand for ethanol plants went through the roof. So, I look at the opportunity the business has.
Then I look at the entrepreneurs, I look at the capital needed, and I want to judge scalability. We could make money in Pantaloon because Kishore Biyani could scale the business. Then, it is important what you buy, it is important at what price you buy. So, I look at the valuation. I have no analysis paralysis. I judge very fast.
Q: Which are the sectors that one should invest in say for a period of one year given the current market level and fluctuations?
Bhattacharyya: My answer is not going to be a happy answer. First, you don’t buy a sector, you buy an individual company. Secondly, I don’t think one year is necessarily the ultimate timeframe because you have no idea 12 months later what the world will look like.
You are buying a business with specific players, a cast. You are buying the people who run that business; you are buying the assets and liabilities of that business, you are buying the balance sheet of the company. Within the same sector, different people have different opportunities.
So, if I were to say that the pharmaceutical sector is a great opportunity, there are different pharmaceutical companies. Say if you were buying Sun Pharma as opposed to buying Lupin, you are buying it at completely different valuations. Some sectors that are hot right now, I mean the whole world knows they are hot right now. So, the prices at which you are buying that sector reflect the hope and the enthusiasm that people have for that now.
But I don’t think that I understand anything other than what is called bottom-up. That means god lies in the details. There are specific opportunities or companies that I can tend to buy.
Agrawal: I would approach the financial sector, the large banks, which have large bond portfolios like SBI has Rs 2-2.5 lakh crore worth of bond portfolio, mark-to-market. When the yield drops you know what happens to bond prices and that goes directly to the P&L. In any case, you are buying that stock at 1-1.2 times book, insurance free thrown with the SBI stock. So, I would like to buy that for maybe 25-40% case for the next one year.
Secondly, I would say telecom. I think god communicates wirelessly. I think the telecom penetration in India is just about 25%. We are headed for 75% if not 100% in the next 5-6 years. We are going to see more than 10-15% compounded quarterly growth for the next 20-25 quarters in this country. Hence, we have a great opportunity in buying Bharti Telecom.
Q: Is there any sector you like?
Jhunjhunwala: I think that India-centric sectors will do well whether it is banking, retailing, infrastructure, all sectors that are related to India – SBI, Bharti, and Hero Honda.
Q: You were talking about recognising value in a stock. If you look at the power sector in India, there are some stocks like Tata Power and NTPC have significantly high ground assets, or whether some new companies like KSK Energy who have captive coal reserves. How do you compare these and what are the parameters that you use to identify value?
Jhunjhunwala: The first multi-bagger of my life was Tata Power. But after having earned a lot of money in Tata Power, I have promised myself I am not going to buy any power companies because after all it is a fixed return rate of return and the rate of return is 13-14%. It is a capital intensive industry. So god bless NTPC and KSK Energy. But that is not where my interest is, because I can’t think of any industry in the world where the rate of return as fixed, if it is going to give you multiple returns.
Bhattacharyya: In fact, I would like to endorse what Jhunjhunwala said. But I think of your question and I suspect it may be that how do you distinguish between companies that are asset plays, which don’t have at this stage earnings that you can identify with and see and therefore put a multiple to them as opposed to companies that have a stream of earnings.
Jhunjhunwala: But market will value them if within a comprehensible period those assets can return a stream of earnings. If I have a company whose office is worth Rs 5,000 crore, what can I do? I will wait for earnings for one, two, or five years. Nobody is going to buy that company because their office is there. Don’t forget all these coal reserves. You know what is the average value for oil reserves ‑ about USD 10-15 or maybe USD 20. You first have to say in what time period KSK Energy will get the coal reserves. If it gets it 15 years later and you bring it to present value, you come to 3% of the current market price. Then, you have value in the current coal prices. Are these prices going to last? So, therefore they may appear cheap.
Q: In the present market scenario both from an investors’ perspective and a speculators’ perspective, where would you put your money – in real estate, in fixed income, equities, or gold?
Agrawal: To tell you the truth, I don’t know any other trade. I know only stocks. So, I don’t have any other option but to buy stock.
Jhunjhunwala: We never allocate capital. We have money means it is for equities.
Agrawal: Just equities, not even cash and equities, only equities. So, when I wanted to play real estate, I bought hotel shares. I am not going to buy 100 acres here and there. I said let’s go and buy earning real estate, i.e. hotel shares.
Jhunjhunwala: I have allocated some part of my trading portfolio to debt – to buy bonds. Long-dated bonds with good yields are very good.
Q: How do you decide when to sell a multi-bagger?
Jhunjhunwala: I will sell a stock only in two circumstances: when I have limited capital and when I get an opportunity that is better than what I have now. So, if comparatively I need capital, I will sell it.
Secondly, when the perception of earnings peaks and the P/E is unsustainable. I think that is a time to sell. The earning may not peak but the expectations of hope like in 2000 everybody said Infosys’ earnings will double every year for the next 10 years. That was the expectation in the market and its P/E was at the current earnings, it was 100-150 times. So, when the expectation of earnings peaks and the P/E is unsustainable, I think that is a time to sell.
Agrawal: There are two types of stocks. One you buy forever and one you buy for a trade.
Jhunjhunwala: I strongly contest this. There is no stock forever in the world.
Agrawal: I contest that. There are clearly two types of stock. One you buy for selling and one you buy forever.
Source: Moneycontrol.com
http://www.indianstocksnews.com/2009/02/how-to-buy-multi-bagger-stocks-rakesh.html
How to Select Best Stocks?
Monday, March 30, 2009
How to Select Best Stocks?
I have already posted two posts; one with best stocks for long term investment and another with best small cap stocks. Although I have mentioned the criteria that I considered while selecting the stocks, I would like to describe in detail about those factors in this article.
As we all know, there are more than 5000 companies listed in the Bombay Stock Exchange (BSE) and in my view there are at least 500 decent companies to choose from. So, as an individual investor we need to develop or follow some sort of criteria to select the best possible stocks that suit everyone’s risk profile. I did follow few things to select the stocks that I have listed in my previous posts and would like to share with you.
Criteria to Select Stocks
1) Earnings Per Share (EPS) and PE Ratio
EPS and PE are probably the most used criteria around the world in selecting stocks and it’s not without any reason. EPS and PE values are arrived from important information and that’s why people tend to use it as a single significant factor. But I would actually start with EPS and PE Values and then go on to drill down more about other factors. There is no particular PE Value you can stick with. Lower the PE of a stock (when all other things remain good), better the value. But instead of looking at current year PE, I would suggest to take the average of 10 year PE (At least 5 Yrs) and make sure the stock price is not more than 25 times of that average PE Value. Also look at the forward PE ratios to get the sense of what lies ahead.
2) Book Value
Book Value per share is the total asset value of the firm divided by the total number of shares. Looking at this value might give some confidence about the firm’s worthiness. Also book value per share would be the amount shareholders might get if a company sells all the assets and distribute the proceeds for some reason. If you are able to get good stocks with a stock price less than the book value, it would be good. But make sure you do not pay more than 1.5 times of the book value unless you have some credible evidence about any particular company’s growth.
3) Debt / Equity Ratio
If you divide the total debt by the total equity value, you get this debt/ equity ratio and it gives you the sense of company’s indebtedness. If a company has less than 1 DE ratio, then you can say that the company is in a good financial condition. So, I prefer to invest in companies with less than 1 DE ratio.
4) Current Ratio
If you divide the current assets by the current liabilities, you get the current ratio and bigger this value, better the company among peers.Because current ratio indicates the company’s ability to meet short term financial dealings and we need to make sure that a firm is in a decent position in terms of short term financial needs.
5) Profit Margin
If you divide the net profit by revenue, what you get is the net profit margin and you can calculate net operating margin and other similar values in the same way. Better the margin, better the business and we need to make sure that any particular company earns a decent margin. Select the company with better margins among the peers.
6) Return on Capital Employed (RoCE) and Return on Equity
Return on Capital Employed and Return on Equity indicates the company’s profit making ability in return to the capital employed or the equity position. Again, better the value; better the company and its business. So, peer level comparison might be helpful to select better stocks.
7) Dividend History
If a company has paid dividends continuously over a long period of time, then you can be sure of its intention to share profit with you and also the better handling of the surplus cash available. Hence, looking at the dividend history is important and might help you to make a better decision.
8) Profit Growth
Consistent and decent profit growth over a long period of time is an important factor that we need to look into if we are going to stick with that stock for lengthy periods. There is no single number to think about but we can select the stock with consistent profit growth among peers.
9) Cash Flow Details
As I wrote in one of my previous articles, cash flow is as important as a balance sheet and looking into it gives you an idea about company’s financial health including cash inflow and cash outflow. Consistent growth in cash inflow and better use of it is essential to any company’s success. Hence, carefully look at the cash flow statements (including footnotes) if you are going to invest large amount of money.
10) Business Segment and Future Potential
In stock investments, it is very important to look at the business segment in which the company operates and also the future potential of that particular business as a whole. As you might have seen, a company might be good and if the business is not doing well, it makes little sense to invest in it. You also need to consider if the business is cyclical or non-cyclical or consumer oriented or government owned etc…to get real understanding about the risk of any particular stock. If you are interested in small cap stocks, this is most important factor that one needs to consider in my point of view.
11) Size of the Company
Size of the company is positively associated with the risk potential most of the times. Conservative investors prefer to invest in large cap stocks and risk taking investors who wants to make more money invest in mid cap stocks and also the so called “Multibagger” small cap stocks. So, it really depends on the individuals risk appetite as mid caps and small caps are the ones go down much during the bear phase and go up much during the bull market. Large cap stocks usually have economies of scale benefits and they always stand to gain the volume advantage. Hence lesser volatility.
12) Competitive Advantage
Competitive advantage in the market place is essential for consistent financial performance. If a company operates in a segment where barriers to entry are huge, then you can be sure of your capital at least and your margin of safety is more. Warren Buffet calls this as “Economic Moat” and no wonder he has been so successful.
13) Brand Value or Product Differentiation
Good brand value brings customers on a more consistent basis and that’s the reason FMCG companies command higher valuation all the time. If a company produces a product which is different from others and is difficult to replicate, then that particular company will always command better valuation as investors are confident about its survival over a long period of time.
14) Goodwill
This is an intangible asset companies create over a period of time and it is gained with help from media, political support and solid client base. It usually has some effect on investors.
15) Market Scenario
Finally market scenario comes into play and no matter how big the company is and which business segment it operates, the stock price move according to the market scenario and I am sure most of the people would have good idea about it as we are witnessing once in a life time situation these days.
These are the factors I considered or consider while selecting stocks and it is not necessary to analyze a stock through all of these parameters. You can leave out some criteria for a particular company or you can give more importance to a particular factor and things like that. You can be flexible based on your risk profile. For example, I give more importance to business segment and future potential along with market scenario while selecting small caps and individuals can follow similar patterns according to their skills and risk appetite.
Kumaran Seenivasan.
Stockanalysisonline.com
http://www.stockanalysisonline.com/2009_03_01_archive.html
How to Select Best Stocks?
I have already posted two posts; one with best stocks for long term investment and another with best small cap stocks. Although I have mentioned the criteria that I considered while selecting the stocks, I would like to describe in detail about those factors in this article.
As we all know, there are more than 5000 companies listed in the Bombay Stock Exchange (BSE) and in my view there are at least 500 decent companies to choose from. So, as an individual investor we need to develop or follow some sort of criteria to select the best possible stocks that suit everyone’s risk profile. I did follow few things to select the stocks that I have listed in my previous posts and would like to share with you.
Criteria to Select Stocks
1) Earnings Per Share (EPS) and PE Ratio
EPS and PE are probably the most used criteria around the world in selecting stocks and it’s not without any reason. EPS and PE values are arrived from important information and that’s why people tend to use it as a single significant factor. But I would actually start with EPS and PE Values and then go on to drill down more about other factors. There is no particular PE Value you can stick with. Lower the PE of a stock (when all other things remain good), better the value. But instead of looking at current year PE, I would suggest to take the average of 10 year PE (At least 5 Yrs) and make sure the stock price is not more than 25 times of that average PE Value. Also look at the forward PE ratios to get the sense of what lies ahead.
2) Book Value
Book Value per share is the total asset value of the firm divided by the total number of shares. Looking at this value might give some confidence about the firm’s worthiness. Also book value per share would be the amount shareholders might get if a company sells all the assets and distribute the proceeds for some reason. If you are able to get good stocks with a stock price less than the book value, it would be good. But make sure you do not pay more than 1.5 times of the book value unless you have some credible evidence about any particular company’s growth.
3) Debt / Equity Ratio
If you divide the total debt by the total equity value, you get this debt/ equity ratio and it gives you the sense of company’s indebtedness. If a company has less than 1 DE ratio, then you can say that the company is in a good financial condition. So, I prefer to invest in companies with less than 1 DE ratio.
4) Current Ratio
If you divide the current assets by the current liabilities, you get the current ratio and bigger this value, better the company among peers.Because current ratio indicates the company’s ability to meet short term financial dealings and we need to make sure that a firm is in a decent position in terms of short term financial needs.
5) Profit Margin
If you divide the net profit by revenue, what you get is the net profit margin and you can calculate net operating margin and other similar values in the same way. Better the margin, better the business and we need to make sure that any particular company earns a decent margin. Select the company with better margins among the peers.
6) Return on Capital Employed (RoCE) and Return on Equity
Return on Capital Employed and Return on Equity indicates the company’s profit making ability in return to the capital employed or the equity position. Again, better the value; better the company and its business. So, peer level comparison might be helpful to select better stocks.
7) Dividend History
If a company has paid dividends continuously over a long period of time, then you can be sure of its intention to share profit with you and also the better handling of the surplus cash available. Hence, looking at the dividend history is important and might help you to make a better decision.
8) Profit Growth
Consistent and decent profit growth over a long period of time is an important factor that we need to look into if we are going to stick with that stock for lengthy periods. There is no single number to think about but we can select the stock with consistent profit growth among peers.
9) Cash Flow Details
As I wrote in one of my previous articles, cash flow is as important as a balance sheet and looking into it gives you an idea about company’s financial health including cash inflow and cash outflow. Consistent growth in cash inflow and better use of it is essential to any company’s success. Hence, carefully look at the cash flow statements (including footnotes) if you are going to invest large amount of money.
10) Business Segment and Future Potential
In stock investments, it is very important to look at the business segment in which the company operates and also the future potential of that particular business as a whole. As you might have seen, a company might be good and if the business is not doing well, it makes little sense to invest in it. You also need to consider if the business is cyclical or non-cyclical or consumer oriented or government owned etc…to get real understanding about the risk of any particular stock. If you are interested in small cap stocks, this is most important factor that one needs to consider in my point of view.
11) Size of the Company
Size of the company is positively associated with the risk potential most of the times. Conservative investors prefer to invest in large cap stocks and risk taking investors who wants to make more money invest in mid cap stocks and also the so called “Multibagger” small cap stocks. So, it really depends on the individuals risk appetite as mid caps and small caps are the ones go down much during the bear phase and go up much during the bull market. Large cap stocks usually have economies of scale benefits and they always stand to gain the volume advantage. Hence lesser volatility.
12) Competitive Advantage
Competitive advantage in the market place is essential for consistent financial performance. If a company operates in a segment where barriers to entry are huge, then you can be sure of your capital at least and your margin of safety is more. Warren Buffet calls this as “Economic Moat” and no wonder he has been so successful.
13) Brand Value or Product Differentiation
Good brand value brings customers on a more consistent basis and that’s the reason FMCG companies command higher valuation all the time. If a company produces a product which is different from others and is difficult to replicate, then that particular company will always command better valuation as investors are confident about its survival over a long period of time.
14) Goodwill
This is an intangible asset companies create over a period of time and it is gained with help from media, political support and solid client base. It usually has some effect on investors.
15) Market Scenario
Finally market scenario comes into play and no matter how big the company is and which business segment it operates, the stock price move according to the market scenario and I am sure most of the people would have good idea about it as we are witnessing once in a life time situation these days.
These are the factors I considered or consider while selecting stocks and it is not necessary to analyze a stock through all of these parameters. You can leave out some criteria for a particular company or you can give more importance to a particular factor and things like that. You can be flexible based on your risk profile. For example, I give more importance to business segment and future potential along with market scenario while selecting small caps and individuals can follow similar patterns according to their skills and risk appetite.
Kumaran Seenivasan.
Stockanalysisonline.com
http://www.stockanalysisonline.com/2009_03_01_archive.html
Stock Market: Act like Poor to Become Rich
How many people bought stocks when the SENSEX was around 8000? If you ask me, Yes, I bought some but not enough to tell you that I have achieved something in stock market. But I am happy that I bought something at least.
So, my point here is, why people show due diligence in price while buying household and other articles but do not show same kind of prudence in buying stocks? When people go out for shopping, they try to reduce the price as much as they can but not in case of stocks. I do not know if people would have avoided buying if there was a furniture or cloth sale with 1/8 of the price. Stocks were so cheap and many small and mid caps were available at 1/8 or 1/10 th of the price a year ago and most of the retail investors avoided it. People can ask if there was no buying then how the market went up. Market went up not because of retail investors but because of Mutual Funds, Insurance companies and Institutional Investors. May be the retail investors who bought mutual funds exactly in the first week of March, 2009 would have benefited to an extent but definitely not to an extent of what they would have got if they had bought stocks during the same period.
So, here is my rule number one.
Rule 1: Buy stocks (Of course good companies) without any hesitation whenever market is unjustifiably low. If you are in doubt, just ask yourself if you would buy cloths or furniture or laptop or house if the price is lowered 1/8 th or 1/10 th of the original price. If the answer is yes, then you should go ahead and buy stocks whenever it is available at extremely low prices. In essence retail investors should act like poor while buying stocks. If you act like poor and buy stocks, only when it is available at extremely low prices, then I do not think there is any need for analyst advice or recommendation. You just need the guts to do that.
Reason:
1. Extraordinary profit when the market is up.
2. Limited downside potential.
3. Some protection even if you have bought bad stocks.
Recent Rally
It is true that SENSEX has moved 40 % higher than what it was 6 weeks back. I feel that’s more to do with abundance of cash with fund houses and institutional investors rather than any fundamental difference in the economy. We are still getting bad news around and companies are still posting average quarterly returns with poor future guidance. Unemployment is still raising and housing market is still getting worse. Credit card default is mounting. But why the heck stocks markets moved up so fast? Of course some companies have exceeded market expectations but those are exceptions rather than rule.
I have a feeling that the market has gone up so fast and it is not a healthy sign. If the market has gone up in a measured way, then we can be sure of its upside. May be a 20 % upside in such a short time would have been appropriate given the future economic growth expectations. But 40 % in such a short time does not offer any clue to retail investors about upside or downside. Moreover it gives false hope to people and retails investors start buying after mutual funds and institutional investors create almost an artificial upside in the market and eventually they stand to lose money when the market pulls back to healthy numbers. I might be wrong here and markets might move up continuously from here on and I even wish so. But over heating market always destined to get cooled off and investors have to be at least cautious if they can’t resist buying at the peak of a rally like this. So, here comes my rule number two.
Rule 2: Do not buy stocks if the market goes up (Rally) too quickly in too short time. If you can’t resist buying in the rally, at least be cautious and safeguard your investments by investing in good stocks that has not over heated. Buying at the peak of rally might minimize the net returns over the long term.
Reason:
1. To safeguard the investments from a potential fall
2. To Maximize the net returns in the long term
3. Some protection from buying artificially inflated stocks
http://www.stockanalysisonline.com/2009_04_01_archive.html
So, my point here is, why people show due diligence in price while buying household and other articles but do not show same kind of prudence in buying stocks? When people go out for shopping, they try to reduce the price as much as they can but not in case of stocks. I do not know if people would have avoided buying if there was a furniture or cloth sale with 1/8 of the price. Stocks were so cheap and many small and mid caps were available at 1/8 or 1/10 th of the price a year ago and most of the retail investors avoided it. People can ask if there was no buying then how the market went up. Market went up not because of retail investors but because of Mutual Funds, Insurance companies and Institutional Investors. May be the retail investors who bought mutual funds exactly in the first week of March, 2009 would have benefited to an extent but definitely not to an extent of what they would have got if they had bought stocks during the same period.
So, here is my rule number one.
Rule 1: Buy stocks (Of course good companies) without any hesitation whenever market is unjustifiably low. If you are in doubt, just ask yourself if you would buy cloths or furniture or laptop or house if the price is lowered 1/8 th or 1/10 th of the original price. If the answer is yes, then you should go ahead and buy stocks whenever it is available at extremely low prices. In essence retail investors should act like poor while buying stocks. If you act like poor and buy stocks, only when it is available at extremely low prices, then I do not think there is any need for analyst advice or recommendation. You just need the guts to do that.
Reason:
1. Extraordinary profit when the market is up.
2. Limited downside potential.
3. Some protection even if you have bought bad stocks.
Recent Rally
It is true that SENSEX has moved 40 % higher than what it was 6 weeks back. I feel that’s more to do with abundance of cash with fund houses and institutional investors rather than any fundamental difference in the economy. We are still getting bad news around and companies are still posting average quarterly returns with poor future guidance. Unemployment is still raising and housing market is still getting worse. Credit card default is mounting. But why the heck stocks markets moved up so fast? Of course some companies have exceeded market expectations but those are exceptions rather than rule.
I have a feeling that the market has gone up so fast and it is not a healthy sign. If the market has gone up in a measured way, then we can be sure of its upside. May be a 20 % upside in such a short time would have been appropriate given the future economic growth expectations. But 40 % in such a short time does not offer any clue to retail investors about upside or downside. Moreover it gives false hope to people and retails investors start buying after mutual funds and institutional investors create almost an artificial upside in the market and eventually they stand to lose money when the market pulls back to healthy numbers. I might be wrong here and markets might move up continuously from here on and I even wish so. But over heating market always destined to get cooled off and investors have to be at least cautious if they can’t resist buying at the peak of a rally like this. So, here comes my rule number two.
Rule 2: Do not buy stocks if the market goes up (Rally) too quickly in too short time. If you can’t resist buying in the rally, at least be cautious and safeguard your investments by investing in good stocks that has not over heated. Buying at the peak of rally might minimize the net returns over the long term.
Reason:
1. To safeguard the investments from a potential fall
2. To Maximize the net returns in the long term
3. Some protection from buying artificially inflated stocks
http://www.stockanalysisonline.com/2009_04_01_archive.html
Buy and Hold Approach - A Personal Experience
Sunday, June 7, 2009
Buy and Hold Approach - My Personal Experience
The Title "Buy and Hold" has been the buzz word in most of the stock market books, articles and related speeches. I am sure many people have reservations about it and I would like to share my personal experience regarding this. Does this approach make sense? Does it really give decent returns?. My answer to the above two questions is a resounding Yes. Like most of the retail investors, I have read many books and articles and each one contained approaches starting from technicals and trading to speculation and fundamentals. But the legends who have made billions always advise investors to buy good stocks and hold for a long term.
We all know that SENSEX reached 21000 in Jan 2008. But all of a sudden, the market euphoria started to recede and markets reversed the trend. In the current phase, I started investing when the SENSEX came down to 17000 thinking that the markets would not go down below 15000 or 16000. This time it was different and we have witnessed one of the worst recessions in history. Many companies which were once considered to be invincible’s have ceased to exist. People panicked and economic activity came to a halt. SENSEX started reaching new lows every day.
Since, I have invested some money when the SENSEX was at 17000, I had no other option but to average the stocks I had by buying continuously as stock prices reached new lows. But what I made sure was to buy the stocks that I believed would perform well over a long term.
Readers might ask why the hell I did not sell all those at that time and buy when the SENSEX came down to 10000 levels repeatedly. Of course I would have done that, had I got the Wisdom of Solomon. Unfortunately I did not and in fact never wanted to predict the impossible. Because, if there are 10 individuals involved in the market, then it is not that difficult to sense the mood of the people and act accordingly. But the stock market is a place where millions of individuals buy and sell and I do not think anyone can predict what would or what would not happen. So, I continued to buy stocks and backed my stock selection as well as the "Buy and Hold" approach.
So, I invested in good companies and waited for appreciation. I sticked with my portfolio of stocks and continued to accumulate but I stopped investing at 13000 as I feared that markets would go down further. It in fact came down to 8000 levels couple of times. During the downtrend, some of my stocks declined even 75 % but I believed that it would eventually go up and at least reach my cost value. I started buying some stocks again at 9000 levels but that’s a separate portfolio. I always wanted to check the performance of my old portfolio. In short I started buying at 17000 and continued to average till 13000. My portfolio was down almost 50 % when the SENSEX was around 8000. Still I believed in full recovery.
Finally the time came. Recession started slowing or at least people believed that way. Bad economic news stopped coming and markets made a rebound. Indian general Elections gave the verdict that markets and investors were looking for. People started buying in heaps and Foreign Institutional Investors pumped in as if there is no tomorrow. All the stocks in my old portfolio started moving up. It has now given a 20% return which means, the portfolio has registered 120% growth from 8000 levels. So, the verdict is "Buy and Hold" approach definitely works and it will give me good returns in next 5 years.
Alternative Approach
There are still people out there to question my wisdom. Of course I too know that I could have stopped buying at 16000 and invested all my money when the SENSEX was 8000 or I could have sold all my stocks at 13000 to limit my losses and ploughed back that money at 8000 levels. There are so many ifs and buts. But according to me, if you are not sure then just hold all your stocks. Never sell stocks for a loss if you believe in those stocks. If you think you have made a mistake in stock selection, then it makes sense to sell it and buy other good stocks. Otherwise it is always good to keep rather than register a loss.
There might be a select few who could have sold at 16000 levels and invested again at 8000 levels and by now they could have made millions. But the percentage of people who does that will not even reach 0.0001 %. So, why bother about them. Just believe in your stock selection and continue to accumulate irrespective of market movements. Hold it till you get the decent returns and sell it as soon as it reaches your expected returns. If not at least we should have the ability to sense the downtrend and sell it before that.
Conclusion
There are many approaches one can take but the approach which is safe with the potential of good return is "Buy and Hold". To do that we need to do couple of things. One is to make sure that we select stocks that are essential to the economy and livelihood with strong market presence and another is not to buy at peak valuation. If we do that, then most often than not, one can reap decent returns if not the best.
Kumaran Seenivasan
www.stockanalysisonline.com
http://www.stockanalysisonline.com/2009_06_01_archive.html
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