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
Saturday 5 September 2009
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
Beating the Market – Opinion
Friday, June 19, 2009
Beating the Market – Opinion
Stock Market is a ground where players play all kind of “speculative” games to win, though they do not necessarily know who they are fighting with. Most of the retail investors try to get ahead comparing themselves with other investors and mutual fund managers who in turn compete with “Mr. Market” to enhance their reputation and performance. But they fail to understand that the fund managers and key investors have far more information, time and money to beat the market and even then vast majority of them fail to do it consistently.
Legendary investors like Buffet and Lynch did it in the past and are still doing it. But people like them are very few and the unique style they follow has not been mastered by anyone else. It’s true that they are giving tips like “Buy Low, Sell High”, “Long Term Investment”, and “Balance Sheet Analysis” etc…But what exact analysis they do before selecting a particular stock is unknown and even Buffet has admitted his failure in couple of dealings last year. So, beating the market is an arduous task and personally I would not waste my energy to match the market and few other people who are less than 0.001% of investor population.
All I would be interested in doing is to analyze the key parameters and business potential of various companies as good as I can and buy stocks that would not make me cry down the road. Of course I will be happy if my portfolio beats the market and I will take it, day or night. But taking undue risk, spending too much time brooding over how my neighbor could make more money than me or trying to become a millionaire in 2 years by investing in the so called “multi-baggers” will all be efforts in vain more often than not.
Strategy to Keep Yourself Happy
Satisfaction is an individual thing and for many people, no matter, how much return they get, still they will be found wanting. It’s natural of human beings to behave in such a manner but we have to learn quickly enough to understand that there is a cost involved in putting undue pressure on ourselves, which we do not count. Making money, getting good returns and beating the market are all desirable things but we should not lose our peace in doing that.
How many people did not curse themselves that they did not invest when the SENSEX was around 8000? If I conduct a poll (I am sure one is on the way), I am sure there will be only one answer. So, the main thing for us is to find the “Satisfaction Point” in terms of investment returns and here is my “Satisfaction Point”.
My Satisfaction Point
I get satisfied when I do the following no matter how much return I get. But believe me; I am close enough to most of the fund managers and even the market. I do not spend lot of time in searching stocks and thinking about it and I follow fairly simple approach.
I invest only when stock markets decline significantly and other people start selling.
I buy stocks that show continuously growing “Quarter to Quarter” earnings with less than the market PE.
If markets go down continuously, then I continue to average till I exhaust 60 % of my intended investment.
If the market plummets like the one we saw in March 09, then I buy for at least 30% of my intended investment.
My intended investment amount in fact rises when the stock markets reach unbelievable lows.
I look for companies that do not show any prospects for failure and businesses that can be sustained over a period of time.
I look for companies that do not have many straight competitors.
Finally I just keep watching my returns when the stock markets go up.
My overall portfolio has given the return of about 30% (Started investing when the SENSEX was around 17000 last year) and I do think that’s not bad. But my new portfolio which I started investing when the SENSEX were around 8000 - 10000, has given me 60 % return which is not bad either and I am not far away from the market performance. Markets have gained 45% from 10000 levels and 80% from 8000 levels. If we calculate exactly with my investment period, market return would be somewhere around 60% to 65 % and I am quite close to it. I have not lost a night’s sleep for all this and still could come close to it by doing what I said above. Though my return is in lakhs and not in crores, I definitely think that it can be achieved with the same approach, but with increased risk taking ability and guts. If you can do it with lakhs, I do not see any reason why you can’t do it with crores.
Some people can argue that if I have invested in selective stocks I could have earned in multiples which I agree. Even I bought “YES BANK” for Rs.42 and now it is traded for Rs.133 with an increase of 216 %. But my portfolio contains other stocks too which did not appreciate as much as stocks like Yes Bank. For example, I bought Asian Paints for Rs. 750 and now it is Rs. 1100, an increase of only 46%. Of course there are so many ifs and buts that could have made a difference. If I had bought HDIL when it was Rs. 62, I could have made 500 % return, but I did not want to invest heavily in the real estate sector. Likewise, there are so many examples. Aban Offshore was available for Rs. 220 and it went up to Rs.1100, an increase of 500%. But you can’t rely on just one stock if you are a serious investor and that’s the reason my portfolio return is 60 % which is in line with the market performance. That’s a good enough return for me for the time I spent and I can definitely say that’s my satisfaction point.
Conclusion: Make sure you do all the right and simple things in making a buy decision and continue with your defined approach. Do not get worried about the portfolio performance by comparing yourself with other investors or fund managers. If you buy when others are selling and remain cautious when the market bounces back, then you have a fair chance of getting a market return if not beating it. Even if your portfolio gives 40% overall return and it is 15 % lesser than market return, there is no need to lose your sleep over it as your portfolio still returned decent profit which is higher than what you could have earned in other form of investments. So, the point I am making is, whatever return we get after making a decent effort should satisfy us and I refer it as the “satisfaction point”.
Kumaran Seenivasan
http://www.stockanalysisonline.com/
Read more...
http://www.stockanalysisonline.com/2009_06_01_archive.html
Quarterly Results
Sunday, July 19, 2009
Quarterly Results
Stock market investors very eagerly wait for the quarterly results and I would like to through some light in this regard why it is important for the investors. Sure, we know that companies have to perform well financially but we also need to understand that it is very difficult to announce the market beating results every time. So, quarterly results are one among the many that we need to keep watching to understand the companies.
Quarterly Result
Quarterly result is the short term financial performance of a company which helps the management as well as the retail investors to understand the progress of a company. Companies typically announce the quarterly results four times a year and the results can be found in the company website or with SEBI or in any brokerage firm’s website.
Quarterly results can often be misleading and it is very important to pay careful attention. Example: Recent Quarterly result by L & T. On the outset, the result says that the company has earned Rs.27 a share for the first quarter of 2009-10 period. But if we look at the statement carefully, we can see clearly the result includes a one time exceptional gain of Rs.1020 Crores through the Ultra Tech stake sale. Excluding the exceptional gains, per share earnings would be just Rs.10 for this quarter.
Short and Medium Term Investors
Quarterly results are very important for short and medium term investors while the magnitude of importance decreases for the long term investors. It is also very important for the investors who are thinking to stay for a long term but are just starting. For the short and medium term investors, it helps to either maximize the profit or minimize the loss as the stock price shows volatility based on the result most often than not. In the short term, stock price heavily depends on the market sentiment, external forces like budget and rainfall, and company performance like quarterly results. So, if you are a short term investors, you do not want to take the risk of investing in a company whose recent quarterly income stays in the negative.
If you are a medium term investor, quarterly results help churn the portfolio. In the medium term, if we see or anticipate a bad result, then we can sell those stocks and buy stocks that are promising and are expected to announce good results. If the company is good, and we are able to anticipate the bad result, then we can sell before the result and buy it back after the result when the stock price comes down. Sometimes, great companies fail to announce good result in one quarter and prices comedown significantly. Times like those offer very good opportunity for investors to buy them at a low price.
Long Term Investors
Quarterly result again helps in many ways for the long term investors. If you are thinking to keep invested for a long term but just starting, quarterly results help you to select good stocks and build a great portfolio. But what about the long term investors who have already invested? In fact quarterly results many times are not that important for the long term investors who already invested, had they selected good stocks in the first place. But it is not always possible to build a portfolio without some average stocks. So, quarterly results help those investors in couple of ways. They can either sell the companies that have announced bad results and are expected to decline going forward or they can rejig the portfolio by selling average stocks and then invest back the money in good companies.
But if you are a long term investor, and have selected the stocks after careful consideration and fundamentals remain very strong, then you do not need to worry about the quarterly results till you reach your target price. Because, it is not possible to announce great results all the time and companies might encounter either operational or marketing or administrative difficulties in some quarters and are bound to announce bad results. But if you are a smart investor, you have to grab that opportunity to accumulate the stock rather than panicking and selling the stocks that you currently hold.
Recent Results
Most of the Indian companies have announced good results this quarter and that has made experts all over the world to believe in the so called “India story”. Companies like Axis Bank, Infosys, TCS, L&T, Opto Circuits, Colgate, Crompton Greaves, Welspun Gujarat, PFC, HDFC Bank, Indowind Energy, and Geojit, have announced decent results if not exceptional. In fact Indian companies have been announcing decent results throughout this recession period which makes me believe that the stock market might reach new highs in the next five year period. Long term investors can buy some selective stocks even now and they would be up for a good return if they stick with it. Most of the Indian companies are managed with a conservative mindset which reduces the potential risks associated with business in general. Hence, India is poised to attract more FII investments and once they start buying, our domestic funds and institutional investors will show more interest and that would be the crazy next Bull Run.
Kumaran Seenivasan.
http://www.stockanalysisonline.com/
Investment Prudence: Dividend Paying Stocks
Friday, August 14, 2009
Investment Prudence: Dividend Paying Stocks
Investors follow many different approaches towards investment and this post is for the investors who would like to preserve the capital first and gets satisfied with decent return through capital gains. In fact many legendary investors have followed this strategy and they have been mostly successful. Yes. I am talking about investing in the “high dividend paying stocks”.
What is Dividend?
It’s the portion of corporate profit paid to shareholders by a company. High dividend yielding stocks usually have high reputation among defensive investors. It’s widely believed that a company is effectively managed if the shareholders are paid dividends continuously.
Approach
The notion that high dividend yielding stocks do not appreciate much is not entirely true at least if we look at the stocks I have mentioned below. All of these stocks performed well over the year apart from paying out decent dividend yields.
Madras Cement
Graphite India
Varun Shipping
GE Shipping
Ambuja Cements
MIRC Electronics
Chambal Fertilizers
HCL Technologies
Tata Steel
Tata Tea
Lakshmi Machine Works
Shipping Corporation
GAIL India Ltd
Sesa Goa
Canara Bank
Bank of Baroda
Punjab National Bank
Hindustan Unilever Ltd
Marico Ltd
Indian Overseas Bank
If you are a long term investor and do not have high appetite for risk, then investing in the “high dividend” yielding stocks not only protects part of your capital but also gives you decent return. I will explain with an example.
Ex: Varun Shipping
Assume that you bought 1000 shares of Varun Shipping at Rs. 40 / share. Total investment comes out to be about 40000 thousand rupees. Assume that you are a long term investor and have plans to hold the stock for next five years. Varun Shipping has the history of paying Rs. 5 – 6 per share as a dividend (50 % of the face value) every year and we assume Rs. 5 / year as the dividend for next 5 years.
First Year Dividend: Rs. 5 / share (Rs. 5000 / 1000 shares). The dividend yield itself is 12.5%. Even if your Cost price was Rs.50 per share, the dividend yield would be 10 % which some stocks do not even give as a capital gain. Suppose you deposit this Rs. 5000 in a bank and you get 7% as interest. You get Rs.350 as interest and the total amount for the first year is Rs.5350.
Second Year Dividend: Rs. 5 / share (Rs. 5000 / 1000 shares). Add this amount with the first year amount. Rs. 5000 + Rs. 5350 = Rs. 10350. Interest at 7% for Rs. 10350 is Rs. 725 and the total amount at the end of second year is Rs. 11075.
Third Year Dividend: Rs. 5 / Share. Do the same calculation. Rs. 11075 + Rs. 5000 = Rs. 16075. Interest at 7% for Rs. 16075 = 1125. Total amount at the end of Third year = Rs.17200.
If we follow the same calculation, we will have Rs. 31000 after 5 years which is 78% of your initial capital investment. This will go along with the capital gains that you get because of appreciation in stock value. If we assume that Varun Shipping matches the market performance which is around 15% CAGR, then we will have Rs. 81000 after 5 years and adding that with dividend + interest income will give Rs. 112000 as the total value of the investment after 5 years. The calculation is based on a conservative approach which gives 180 % return. But if the stock performs better than the market, then the return might well go above 200 % which should make most of the investors happy.
Similar stocks are available with similar dividend yield and investors with less risk appetite may opt for these kinds of stocks and follow the above explained strategy. In fact most of the stocks I mentioned above have performed better than the market and some are even in the aggressive investor’s portfolio. So, we just need to try this approach once to see the effectiveness.
Kumaran Seenivasan
http://www.stockanalysisonline.com/
http://www.stockanalysisonline.com/2009/08/investment-prudence-dividend-paying.html
My notes: The above explanation can be used for the local Malaysian stock of Guinness. :-)
Investment Prudence: Dividend Paying Stocks
Investors follow many different approaches towards investment and this post is for the investors who would like to preserve the capital first and gets satisfied with decent return through capital gains. In fact many legendary investors have followed this strategy and they have been mostly successful. Yes. I am talking about investing in the “high dividend paying stocks”.
What is Dividend?
It’s the portion of corporate profit paid to shareholders by a company. High dividend yielding stocks usually have high reputation among defensive investors. It’s widely believed that a company is effectively managed if the shareholders are paid dividends continuously.
Approach
The notion that high dividend yielding stocks do not appreciate much is not entirely true at least if we look at the stocks I have mentioned below. All of these stocks performed well over the year apart from paying out decent dividend yields.
Madras Cement
Graphite India
Varun Shipping
GE Shipping
Ambuja Cements
MIRC Electronics
Chambal Fertilizers
HCL Technologies
Tata Steel
Tata Tea
Lakshmi Machine Works
Shipping Corporation
GAIL India Ltd
Sesa Goa
Canara Bank
Bank of Baroda
Punjab National Bank
Hindustan Unilever Ltd
Marico Ltd
Indian Overseas Bank
If you are a long term investor and do not have high appetite for risk, then investing in the “high dividend” yielding stocks not only protects part of your capital but also gives you decent return. I will explain with an example.
Ex: Varun Shipping
Assume that you bought 1000 shares of Varun Shipping at Rs. 40 / share. Total investment comes out to be about 40000 thousand rupees. Assume that you are a long term investor and have plans to hold the stock for next five years. Varun Shipping has the history of paying Rs. 5 – 6 per share as a dividend (50 % of the face value) every year and we assume Rs. 5 / year as the dividend for next 5 years.
First Year Dividend: Rs. 5 / share (Rs. 5000 / 1000 shares). The dividend yield itself is 12.5%. Even if your Cost price was Rs.50 per share, the dividend yield would be 10 % which some stocks do not even give as a capital gain. Suppose you deposit this Rs. 5000 in a bank and you get 7% as interest. You get Rs.350 as interest and the total amount for the first year is Rs.5350.
Second Year Dividend: Rs. 5 / share (Rs. 5000 / 1000 shares). Add this amount with the first year amount. Rs. 5000 + Rs. 5350 = Rs. 10350. Interest at 7% for Rs. 10350 is Rs. 725 and the total amount at the end of second year is Rs. 11075.
Third Year Dividend: Rs. 5 / Share. Do the same calculation. Rs. 11075 + Rs. 5000 = Rs. 16075. Interest at 7% for Rs. 16075 = 1125. Total amount at the end of Third year = Rs.17200.
If we follow the same calculation, we will have Rs. 31000 after 5 years which is 78% of your initial capital investment. This will go along with the capital gains that you get because of appreciation in stock value. If we assume that Varun Shipping matches the market performance which is around 15% CAGR, then we will have Rs. 81000 after 5 years and adding that with dividend + interest income will give Rs. 112000 as the total value of the investment after 5 years. The calculation is based on a conservative approach which gives 180 % return. But if the stock performs better than the market, then the return might well go above 200 % which should make most of the investors happy.
Similar stocks are available with similar dividend yield and investors with less risk appetite may opt for these kinds of stocks and follow the above explained strategy. In fact most of the stocks I mentioned above have performed better than the market and some are even in the aggressive investor’s portfolio. So, we just need to try this approach once to see the effectiveness.
Kumaran Seenivasan
http://www.stockanalysisonline.com/
http://www.stockanalysisonline.com/2009/08/investment-prudence-dividend-paying.html
My notes: The above explanation can be used for the local Malaysian stock of Guinness. :-)
3 important considerations when buying a stock
From my experience, there are three important things that influence the “health” of a stock market investor. What are they?
1)What price you paid for the stock?
2)Which company or stock you have bought?
3)How many of the same stock you bought?
Buffett: “It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price” and “Wide diversification is only required when investors do not understand what they are doing”.
http://www.stockanalysisonline.com/2009/08/investment-prudence-and-multi-bagger.html
1)What price you paid for the stock?
2)Which company or stock you have bought?
3)How many of the same stock you bought?
Buffett: “It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price” and “Wide diversification is only required when investors do not understand what they are doing”.
http://www.stockanalysisonline.com/2009/08/investment-prudence-and-multi-bagger.html
Investment Prudence and “Multi Bagger” Concept
Saturday, August 1, 2009
Investment Prudence and “Multi Bagger” Concept
Investment in Stocks has been increasingly becoming very popular and one reason that everyone invests in stocks is to make money in multiples or at least better returns than any other form of investment. But do they end up getting that “dream” return in their investment? Yes and No. Some people do and some don’t. Investors who are very prudent with “stock market” patience usually complete the race while people who just come with expectation of making in millions by investing in mushrooming “Multi baggers” or doing futures and derivative trading, end up as a sorry figure. Stock investment can be compared to a Marathon rather than 100 meter dash.
Though I have not made in millions, I do feel that my investment has generated decent returns and more importantly, I have not lost single penny during one of the most difficult investment climate in history. From my experience, there are three important things that influence the “health” of a stock market investor. What are they?
1)What price you paid for the stock?
2)Which company or stock you have bought?
3)How many of the same stock you bought?
Investment Prudence
The price you pay for the stock is the single most important factor that not only decides your short term return but the long term success as well which is why I have mentioned it first. Why? Simply because, if we buy, even a average stock at a dirt cheap price, there is a chance to end up getting a decent return. But if you buy a great company at an exorbitant price, then you have dug a grave for yourself. But to be successful in stock investment, all three has to be in harmony with each other and may be that’s the reason Warren Buffet has mentioned I quote
“It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price” and “Wide diversification is only required when investors do not understand what they are doing”.
Real Example:
Investor Name: Rakesh Jhunjhunwala.
First Big profit stock: TATA TEA
Price paid for Tata Tea: Rs.43
Selling Price: Rs.143
Number of Shares: 5000
Profit Made: 5 Lakhs (715000 – 215000)
Duration: 3 months
My Experience
I actually had a similar experience recently but I have not made 5 lakhs simply because of the third reason (How many bought).
Investor Name: Myself
First Big profit stock: YES BANK
Price paid for YES Bank: Rs.42
Current Price: Rs.160
Number of Shares: 500
Current Profit (Still Holding): Rs.59, 000 (80000 - 21000)
Duration: 4 Months
Hope you see what difference the number of shares makes. So, all I want to mention here is not to go for too much diversification. If we find good stocks at a great price, we should buy it in huge quantities without even flinching for once. Had I bought 5000 shares of YES Bank, I would be worth 8 Lakhs from YES Bank alone. But I failed to take that extra risk which now gave me a lesson and good experience.
Had investors applied the above three things in the last 1 year period, I am pretty sure they could have found many “Multi Baggers”.
The concept of “Multi bagger” has been misinterpreted by many people. I read many articles where Small Cap stocks with good business potential have been mentioned as “Multi Baggers” and that’s where I beg to differ. Multi baggers can be found among large and midcaps as well.
Multi Bagger
By definition “Multi Bagger” is a stock that goes up in price multiple times of the initial investment. So, if we apply the definition as it is, then almost half of the big companies have been the “Multi Baggers” in this recession leading up to the current rally.
Example:
GRASIM: The price of GRASIM when the SENSEX was around 8000 in 2008 November - December period was Rs.831 and current price of the same stock is Rs.2740. It has appreciated more than 3 times.
BHEL: Rs.1000 to Rs.2300, 2.3 times appreciation.
Educomp Solutions: Rs.1400 to Rs.4100, 3 times appreciation.
Aban Offshore: Rs.250 to Rs.1050, 4 times appreciation.
Axis Bank: Rs.300 to Rs.900, 3 times appreciation
Asian Paints:Rs.700 to Rs.1415, 2 times appreciation (Defensive Stock)
Tata Steel: Rs.150 to Rs.460, 3 times appreciation
Sterlite Industries: Rs.170 to Rs.650, more than 3 times appreciation
ICICI Bank: Rs.255 to Rs.760, 3 times appreciation
Jaipraksh Associates: Rs.50 to Rs.250, 5 times appreciation
So, the notion that “Multi Baggers” are found only among small caps is wrong and I hope I have provided ample proof for that. In the above 10 examples, I have purposefully left out small caps and even if we take small caps into account, not many small caps have appreciated as much as what I listed above. Hence, I strongly feel that any stock that fits into the definition of “Multi Bagger” should be considered as a “Multi bagger” and my suggestion for retail investors is to practice the three things that I mentioned in the first section which will give an opportunity to find less risky “Multi Baggers” from the pool of large caps. Only thing is investors need to grab the opportunity that "Mr. Market" presents.
Your sincere comments and discussions are invited.
Kumaran Seenivasan
http://www.stockanalysisonline.com/
http://www.stockanalysisonline.com/2009/08/investment-prudence-and-multi-bagger.html
Investment Prudence and “Multi Bagger” Concept
Investment in Stocks has been increasingly becoming very popular and one reason that everyone invests in stocks is to make money in multiples or at least better returns than any other form of investment. But do they end up getting that “dream” return in their investment? Yes and No. Some people do and some don’t. Investors who are very prudent with “stock market” patience usually complete the race while people who just come with expectation of making in millions by investing in mushrooming “Multi baggers” or doing futures and derivative trading, end up as a sorry figure. Stock investment can be compared to a Marathon rather than 100 meter dash.
Though I have not made in millions, I do feel that my investment has generated decent returns and more importantly, I have not lost single penny during one of the most difficult investment climate in history. From my experience, there are three important things that influence the “health” of a stock market investor. What are they?
1)What price you paid for the stock?
2)Which company or stock you have bought?
3)How many of the same stock you bought?
Investment Prudence
The price you pay for the stock is the single most important factor that not only decides your short term return but the long term success as well which is why I have mentioned it first. Why? Simply because, if we buy, even a average stock at a dirt cheap price, there is a chance to end up getting a decent return. But if you buy a great company at an exorbitant price, then you have dug a grave for yourself. But to be successful in stock investment, all three has to be in harmony with each other and may be that’s the reason Warren Buffet has mentioned I quote
“It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price” and “Wide diversification is only required when investors do not understand what they are doing”.
Real Example:
Investor Name: Rakesh Jhunjhunwala.
First Big profit stock: TATA TEA
Price paid for Tata Tea: Rs.43
Selling Price: Rs.143
Number of Shares: 5000
Profit Made: 5 Lakhs (715000 – 215000)
Duration: 3 months
My Experience
I actually had a similar experience recently but I have not made 5 lakhs simply because of the third reason (How many bought).
Investor Name: Myself
First Big profit stock: YES BANK
Price paid for YES Bank: Rs.42
Current Price: Rs.160
Number of Shares: 500
Current Profit (Still Holding): Rs.59, 000 (80000 - 21000)
Duration: 4 Months
Hope you see what difference the number of shares makes. So, all I want to mention here is not to go for too much diversification. If we find good stocks at a great price, we should buy it in huge quantities without even flinching for once. Had I bought 5000 shares of YES Bank, I would be worth 8 Lakhs from YES Bank alone. But I failed to take that extra risk which now gave me a lesson and good experience.
Had investors applied the above three things in the last 1 year period, I am pretty sure they could have found many “Multi Baggers”.
The concept of “Multi bagger” has been misinterpreted by many people. I read many articles where Small Cap stocks with good business potential have been mentioned as “Multi Baggers” and that’s where I beg to differ. Multi baggers can be found among large and midcaps as well.
Multi Bagger
By definition “Multi Bagger” is a stock that goes up in price multiple times of the initial investment. So, if we apply the definition as it is, then almost half of the big companies have been the “Multi Baggers” in this recession leading up to the current rally.
Example:
GRASIM: The price of GRASIM when the SENSEX was around 8000 in 2008 November - December period was Rs.831 and current price of the same stock is Rs.2740. It has appreciated more than 3 times.
BHEL: Rs.1000 to Rs.2300, 2.3 times appreciation.
Educomp Solutions: Rs.1400 to Rs.4100, 3 times appreciation.
Aban Offshore: Rs.250 to Rs.1050, 4 times appreciation.
Axis Bank: Rs.300 to Rs.900, 3 times appreciation
Asian Paints:Rs.700 to Rs.1415, 2 times appreciation (Defensive Stock)
Tata Steel: Rs.150 to Rs.460, 3 times appreciation
Sterlite Industries: Rs.170 to Rs.650, more than 3 times appreciation
ICICI Bank: Rs.255 to Rs.760, 3 times appreciation
Jaipraksh Associates: Rs.50 to Rs.250, 5 times appreciation
So, the notion that “Multi Baggers” are found only among small caps is wrong and I hope I have provided ample proof for that. In the above 10 examples, I have purposefully left out small caps and even if we take small caps into account, not many small caps have appreciated as much as what I listed above. Hence, I strongly feel that any stock that fits into the definition of “Multi Bagger” should be considered as a “Multi bagger” and my suggestion for retail investors is to practice the three things that I mentioned in the first section which will give an opportunity to find less risky “Multi Baggers” from the pool of large caps. Only thing is investors need to grab the opportunity that "Mr. Market" presents.
Your sincere comments and discussions are invited.
Kumaran Seenivasan
http://www.stockanalysisonline.com/
http://www.stockanalysisonline.com/2009/08/investment-prudence-and-multi-bagger.html
Peter Lynch Quotes
Peter Lynch Quotes
There are substantial rewards for adopting a regular routine of investing and following it no matter what, and additional rewards for buying more shares when most investors are scared into selling.
The key to making money in stocks is not to get scared out of them.
If you're prepared to invest in a company, then you ought to be able to explain why in simple language that a fifth grader could understand, and quickly enough so the fifth grader won't get bored.
In stocks as in romance, ease of divorce is not a sound basis for commitment.
There's no shame in losing money on a stock. Everybody does it. What is shameful is to hold on to a stock, or, worse, to buy more of it, when the fundamentals are deteriorating.
Stock picking can't be reduced to a simple formula or a recipe that guarantees success if strictly adhered to.
A person infatuated with measurement, who has his head stuck in the sand of the balance sheets, is not likely to succeed.
In business, competition is never as healthy as total domination.
Investing is fun, exciting, and dangerous if you don't do any work.
Your investor's edge is not something you get from Wall Street experts. It's something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand.
There are substantial rewards for adopting a regular routine of investing and following it no matter what, and additional rewards for buying more shares when most investors are scared into selling.
The key to making money in stocks is not to get scared out of them.
If you're prepared to invest in a company, then you ought to be able to explain why in simple language that a fifth grader could understand, and quickly enough so the fifth grader won't get bored.
In stocks as in romance, ease of divorce is not a sound basis for commitment.
There's no shame in losing money on a stock. Everybody does it. What is shameful is to hold on to a stock, or, worse, to buy more of it, when the fundamentals are deteriorating.
Stock picking can't be reduced to a simple formula or a recipe that guarantees success if strictly adhered to.
A person infatuated with measurement, who has his head stuck in the sand of the balance sheets, is not likely to succeed.
In business, competition is never as healthy as total domination.
Investing is fun, exciting, and dangerous if you don't do any work.
Your investor's edge is not something you get from Wall Street experts. It's something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand.
Performance of Top Glove since listing
Low Price in 2001: 0.27 (Price Range: 0.27 - 0.61)
Low Price in 2009: 3.58 (Price Range: 3.58 - 7.50)
Investing Period: 8 years
Over the course of 8 periods your investment grew from $0.27 to $3.58, its compound annual growth rate, or its overall return, is 38.14%.
Price increased 13.3 x, giving a gain of 1230%.
-----
High Price in 2001: 0.61 (Price Range: 0.27 - 0.61)
Low Price in 2009: 3.58 (Price Range: 3.58 - 7.50)
Investing Period: 8 years
Over the course of 8 periods your investment grew from $0.61 to $3.58, its compound annual growth rate, or its overall return, is 24.76%.
Price increased 5.8 x, giving a gain of 480%.
-----
High Price in 2001: 0.61 (Price Range: 0.27 - 0.61)
High Price in 2009: 7.50 (Price Range: 3.58 - 7.50)
Investing Period: 8 years
Over the course of 8 periods your investment grew from $0.61 to $7.50, its compound annual growth rate, or its overall return, is 36.84%.
Price increased 12.3 x, giving a gain of 1130%.
-----
Low Price in 2001: 0.27 (Price Range: 0.27 - 0.61)
High Price in 2009: 7.50 (Price Range: 3.58 - 7.50)
Investing Period: 8 years
Over the course of 8 periods your investment grew from $0.27 to $7.50, its compound annual growth rate, or its overall return, is 51.52%.
Price increased 27.8 x, giving a gain of 2680%.
-----
CAGR essentially smoothes out the progress of your investment over a period of time, providing a clearer picture of your annual return. However, although your investment started at $0.27 and ended with $3.58, its growth in any one year may have been quite a bit higher or even negative (if the investment ever lost money over that time). Consequently, the CAGR figure may give the impression that the investment has produced a stable return throughout its life, even if the investment was extremely volatile, fluctuating a great deal from year to year.
The above illustrates the importance of buying at a low price. Buying at a low price provides a margin of safety and magnifies the gains.
Challenges:
How can you spot a similar stock early in its business life?
Will you be able to put a large investment into such a stock?
Will you be able to stay the course without selling out, to capture all the gains from compounding at rates ranging from 24.76% to 51.52%?
Low Price in 2009: 3.58 (Price Range: 3.58 - 7.50)
Investing Period: 8 years
Over the course of 8 periods your investment grew from $0.27 to $3.58, its compound annual growth rate, or its overall return, is 38.14%.
Price increased 13.3 x, giving a gain of 1230%.
-----
High Price in 2001: 0.61 (Price Range: 0.27 - 0.61)
Low Price in 2009: 3.58 (Price Range: 3.58 - 7.50)
Investing Period: 8 years
Over the course of 8 periods your investment grew from $0.61 to $3.58, its compound annual growth rate, or its overall return, is 24.76%.
Price increased 5.8 x, giving a gain of 480%.
-----
High Price in 2001: 0.61 (Price Range: 0.27 - 0.61)
High Price in 2009: 7.50 (Price Range: 3.58 - 7.50)
Investing Period: 8 years
Over the course of 8 periods your investment grew from $0.61 to $7.50, its compound annual growth rate, or its overall return, is 36.84%.
Price increased 12.3 x, giving a gain of 1130%.
-----
Low Price in 2001: 0.27 (Price Range: 0.27 - 0.61)
High Price in 2009: 7.50 (Price Range: 3.58 - 7.50)
Investing Period: 8 years
Over the course of 8 periods your investment grew from $0.27 to $7.50, its compound annual growth rate, or its overall return, is 51.52%.
Price increased 27.8 x, giving a gain of 2680%.
-----
CAGR essentially smoothes out the progress of your investment over a period of time, providing a clearer picture of your annual return. However, although your investment started at $0.27 and ended with $3.58, its growth in any one year may have been quite a bit higher or even negative (if the investment ever lost money over that time). Consequently, the CAGR figure may give the impression that the investment has produced a stable return throughout its life, even if the investment was extremely volatile, fluctuating a great deal from year to year.
The above illustrates the importance of buying at a low price. Buying at a low price provides a margin of safety and magnifies the gains.
Challenges:
How can you spot a similar stock early in its business life?
Will you be able to put a large investment into such a stock?
Will you be able to stay the course without selling out, to capture all the gains from compounding at rates ranging from 24.76% to 51.52%?
Friday 4 September 2009
Multiple baggers in KLSE
Here is a spreadsheet of the top multiple bagger stocks in KLSE for the 10 year period from 1999 to 2009.
http://spreadsheets.google.com/pub?key=t_fTtRGB_8FXvEh7RIPU_pQ&output=html
There are only 2 ten baggers over this period, namely Top Glove and Mah Sing. A close third is IOI Corp.
All multiple baggers give dividend in varying amounts. Among these multiple baggers, DLady, PBB and PPB occupy the top 3 places in terms of dividend yields.
A doubling of a share price of $1 to $2 equates to a gain of 100%. Another doubling of the share price from $2 to $4 equates to a gain of 300%. Doubling again from $4 to $8, gives a gain of 700%.
Having a 10 bagger in your portfolio equates to a gain 900%. That means the share have at least doubled more than 3x from its initial share price, thus, 2 x 2 x 2 x ... .
It is therefore not surprising that a 10 bagger is a rarity over a short investing time frame. Moreover, a 10 bagger over a 10 year investing period (1999 - 2009) is a rare event in KLSE as per data above. Although it is possible over a very long time frame, many investors would have sold off the stocks to capture the gains much earlier.
Did you recently ride on this 10 bagger depicted below?
http://spreadsheets.google.com/pub?key=t_fTtRGB_8FXvEh7RIPU_pQ&output=html
There are only 2 ten baggers over this period, namely Top Glove and Mah Sing. A close third is IOI Corp.
All multiple baggers give dividend in varying amounts. Among these multiple baggers, DLady, PBB and PPB occupy the top 3 places in terms of dividend yields.
A doubling of a share price of $1 to $2 equates to a gain of 100%. Another doubling of the share price from $2 to $4 equates to a gain of 300%. Doubling again from $4 to $8, gives a gain of 700%.
Having a 10 bagger in your portfolio equates to a gain 900%. That means the share have at least doubled more than 3x from its initial share price, thus, 2 x 2 x 2 x ... .
It is therefore not surprising that a 10 bagger is a rarity over a short investing time frame. Moreover, a 10 bagger over a 10 year investing period (1999 - 2009) is a rare event in KLSE as per data above. Although it is possible over a very long time frame, many investors would have sold off the stocks to capture the gains much earlier.
Did you recently ride on this 10 bagger depicted below?
MEANING OF TEN BAGGER --Discussion
MEANING OF TEN BAGGER --Discussion
--------------------------------------------------------------------------------
whiteheron02-03-2006, 08:17 PM
The definition of a TEN BAGGER is "a stock whose value increases ten times"
The expression was originated by Peter Lynch , one of the greatest investors of all time
So far , so good --- but nowhere can I find any really meangingful reference to the time period allowed to score a ten bagger
A year would seem most unlikely , except in the most extreme of cases
A decade maybe --- this would seem pretty damm good
Fifty years --- one would probably expect any reasonable stock to be a ten bagger in this time , given good returns , compounding , inflation etc
So a simplistic statement does not , in my opinion , address the matter fully ( and I wont be around for another 50 years for that option anyway )
So far I have been investing ( and trading ) for under 4 years and have achieved less than a handful of 2 to 3+ baggers , and one real " bugger "
I would like to hear what others have to say on this subject
--------------------------------------------------------------------------------
Halebop02-03-2006, 08:47 PM
As you allude, I think the term is irrelevent without a timeframe.
I've enjoyed just 1 ten bagger in 20+ years of investing. It might have been something more like a 20 or 30 bagger but took around a decade to realize and several additional purchases along the way muddied the final return calculations.
Given an "Oustanding" long term investment might generate 20% per annum, it's quite a reach to achieve a 10 bagger over even a decade. So I suspect the term just resonates more with an individual than actually being any useful benchmark.
If someone can beat some meaningful benchmarks like an index they should be well satisfied. My targets include beating the All Ords and NZX year on year, beating inflation and an absolute (positive) return.
--------------------------------------------------------------------------------
Mick10004-03-2006, 09:07 PM
I had one last yr and have another couple getting close - all from 2003 investments
I'm expecting 10 baggers to become as common as mud over the next 5-10 yrs for those people invested in resources
,
--------------------------------------------------------------------------------
Lawso10-03-2006, 06:11 PM
GEN - bought @ an average of 350, sold for 35. Clearly a 10 bugger [V]
--------------------------------------------------------------------------------
duncan macgregor10-03-2006, 06:33 PM
ONLY SHARE THAT SPRINGS TO MIND IS POISIDEN. A fifty cent share that went to over $230-00 and back again in the late sixties in Australia.
macdunk.
Ps i was to bloody smart to buy in to it YUCK.
--------------------------------------------------------------------------------
Dazza13-03-2006, 03:27 PM
CAZ
10 bagger there :P
--------------------------------------------------------------------------------
Sideshow Bob13-03-2006, 04:22 PM
Think the hardest thing would be not to sell before getting 10x the buy-in price.
Know I would take the money & run well before that!
--------------------------------------------------------------------------------
kittydashwood19-03-2006, 02:49 PM
Selling down incrementally leaves you a small final slice that can easy get to ten bags.XSNX was my most recent.
--------------------------------------------------------------------------------
Mick10011-04-2006, 07:21 PM
Got another one today
BSG - accumulated on the dips in 03, 04 and 05
,
--------------------------------------------------------------------------------
whiteheron11-04-2006, 07:29 PM
Mick 100
I have had a history of getting out of winners far too early
eg BSG , purchased about 30c and cashed in at 90c
Now trying hard to overcome this tendency --- but I suppose better to get out at a healthy profit than hang on to a loser and suffer a heavy loss
--------------------------------------------------------------------------------
Mick10011-04-2006, 07:47 PM
Yeah, the idea is to get a balance WH
I'v hung on to a couple of losers far too long, TRO, CRS
I'm beginning to appreciate good stable managment more than ever with regards to my speculative shares.
BSG have had their share of problems in the early days while their main stay operations were in Georgia But they always seem to manage to turn a bad situation into a good situation - I put that down to, not good luck but rather, good managment.
,
--------------------------------------------------------------------------------
whiteheron11-04-2006, 08:10 PM
My worst experience was with GTM (now CME )
Cost me plenty , but in this game the best lessons often cost !
On the other hand I have/have had some real winners eg AWE , BHP sold too early , EXS .
MMN has been pretty good too --- have bought and sold since around 10c
Now have 15,000 shares worth about $6,600 , at a cost of negative $2,400
--------------------------------------------------------------------------------
OldRider15-04-2006, 08:17 AM
There are apparently various ideas about what the "10 bagger" tag means, can I toss in the idea that it could be as much a reflection of poor investment decisions as good ones.
If we try to be aboard winners we should be buying stocks on a steady climb, if this is done it is difficult to ever reach a 10 bagger, where the criteria is total gain is divided by total cost, for the percentage gain deteriorates on further purchases.
An example from my statistics, AVM from an initial purchase under 10c has reached 10 bagger status, however, several additional purchases leaves it well down at round four times cost.
So while feeling good over a 10 bagger, reality could be a missed opportunity.
--------------------------------------------------------------------------------
Mick10015-04-2006, 02:22 PM
quote:Originally posted by OldRider
There are apparently various ideas about what the "10 bagger" tag means, can I toss in the idea that it could be as much a reflection of poor investment decisions as good ones.
If we try to be aboard winners we should be buying stocks on a steady climb, if this is done it is difficult to ever reach a 10 bagger, where the criteria is total gain is divided by total cost, for the percentage gain deteriorates on further purchases.
An example from my statistics, AVM from an initial purchase under 10c has reached 10 bagger status, however, several additional purchases leaves it well down at round four times cost.
So while feeling good over a 10 bagger, reality could be a missed opportunity.
Not so Old rider
My definition of 10 bagger is 10 times your average buy price
I bought BSG in three parcles
2003, parcle 1 @ 19c
2004, parcle 2 @ 26.5c
2005, parcle 3 @ 47c ( this was a small parcle)
average price of 26.1c
The moral of the story - buy right and sit tight
PS, I have another one getting close - will keep you informed
,
--------------------------------------------------------------------------------
OldRider15-04-2006, 05:13 PM
Mick100:
I guess you would be happier had you purchased an even larger parcel at 47c or even another later at a higher price, to have not reached 10 bagger status yet, but be better off, and viewing the investment as even better choice.
You may well be correct about my definition, nonetheless you confirmed my real point, that averaging up on a sound stock delays reaching 10 bagger status, but this does not reflect badly on the decisions.
--------------------------------------------------------------------------------
whiteheron15-04-2006, 08:13 PM
There are many ways to look at this matter in my opinion
As I see it , just because you average up ( a good strategy on a top class stock ) does not take away from having a 10 bagger on your first or early parcels purchased , with lesser baggers on subsequent parcels purchased
Hard learned lessons have taught me that averaging up is much smarter than averaging down
--------------------------------------------------------------------------------
Lawso17-04-2006, 10:51 AM
quote:Hard learned lessons have taught me that averaging up is much smarter than averaging down
Words of wisdom from whiteheron. Unless you've done the homework and are convinced that the company concerned is still sound, averaging down is a way of chucking good money after bad.
--------------------------------------------------------------------------------
davidrob02-05-2006, 09:20 PM
Hi guys,
Four quick reflections / ideas .
(1) Ten Bagger seeking (in a 12 month framework) ....imo.... can be potentially dangerous to long term compounding results....
(2) Interesting to compare compounding say 120% increases over an average of say 12 shares, rolled over a few times, and statisticaly comparing the average median result -- to attempting to get 12 individual "10 baggers".
(3) Agree with Mick.... that "stable" management.... is as important as stock selection, in mnay respects.
(4) I think.... what Mick is probably saying -- ??--- ....... Do correct me if I am wrong.... is that what Mick is saying ....is that "money management"..... is as important a "key skill set" to wealth through shares ......as is "stock picking"....
Kindest Regards,
Robbo:)
quote:Originally posted by Mick100
Yeah, the idea is to get a balance WH
I'v hung on to a couple of losers far too long, TRO, CRS
I'm beginning to appreciate good stable managment more than ever with regards to my speculative shares.
BSG have had their share of problems in the early days while their main stay operations were in Georgia But they always seem to manage to turn a bad situation into a good situation - I put that down to, not good luck but rather, good managment.
,
--------------------------------------------------------------------------------
Bel03-05-2006, 02:34 PM
quote:Originally posted by davidrob
(4) I think.... what Mick is probably saying -- ??--- ....... Do correct me if I am wrong.... is that what Mick is saying ....is that "money management"..... is as important a "key skill set" to wealth through shares ......as is "stock picking"....
:)
Well considering the stories of other apes picking stocks just as well as fund managers then i would definately agree that knowing money management is as equal to or more important than the actual stocks that are picked.
quote:Originally posted by Mick100
Yeah, the idea is to get a balance WH
I'v hung on to a couple of losers far too long, TRO, CRS
I'm beginning to appreciate good stable managment more than ever with regards to my speculative shares.
BSG have had their share of problems in the early days while their main stay operations were in Georgia But they always seem to manage to turn a bad situation into a good situation - I put that down to, not good luck but rather, good managment.
,
--------------------------------------------------------------------------------
belgarion03-05-2006, 06:16 PM
10-baggers come most often in ....
1) recovery stocks where fear is so bad you can smell it
2) small non-mainboard companies (have excluded private companies)
3) start-ups where the business model/product is so new that people just don't get it (these can also be small non-mainboard companies too)
4) and, of course, penny-dreadfuls ...
I like 1 and 3.
--------------------------------------------------------------------------------
Dazza27-05-2006, 12:13 AM
my CAZ 10 bagger, turned out to be a 1 bagger ><
have cashed in now.
ARUO - from 1 bagger to 0 bagger ><
still holding ARUO though.
Potential 10 baggers for me at this moment:
ARUO
EXT
AEX
WMEO
UNX
TOX
BRO
just like belg said,
bro is #3
tox is #1
and the uranium are well number 4 i guess :P
--------------------------------------------------------------------------------
trackers22-08-2006, 04:57 PM
I'll never achieve a 10 bagger..
I will achieve 10 1 baggers :)
work out 10k doubled 7 times ;)
http://www.sharetrader.co.nz/archive/index.php?t-3344.html
--------------------------------------------------------------------------------
whiteheron02-03-2006, 08:17 PM
The definition of a TEN BAGGER is "a stock whose value increases ten times"
The expression was originated by Peter Lynch , one of the greatest investors of all time
So far , so good --- but nowhere can I find any really meangingful reference to the time period allowed to score a ten bagger
A year would seem most unlikely , except in the most extreme of cases
A decade maybe --- this would seem pretty damm good
Fifty years --- one would probably expect any reasonable stock to be a ten bagger in this time , given good returns , compounding , inflation etc
So a simplistic statement does not , in my opinion , address the matter fully ( and I wont be around for another 50 years for that option anyway )
So far I have been investing ( and trading ) for under 4 years and have achieved less than a handful of 2 to 3+ baggers , and one real " bugger "
I would like to hear what others have to say on this subject
--------------------------------------------------------------------------------
Halebop02-03-2006, 08:47 PM
As you allude, I think the term is irrelevent without a timeframe.
I've enjoyed just 1 ten bagger in 20+ years of investing. It might have been something more like a 20 or 30 bagger but took around a decade to realize and several additional purchases along the way muddied the final return calculations.
Given an "Oustanding" long term investment might generate 20% per annum, it's quite a reach to achieve a 10 bagger over even a decade. So I suspect the term just resonates more with an individual than actually being any useful benchmark.
If someone can beat some meaningful benchmarks like an index they should be well satisfied. My targets include beating the All Ords and NZX year on year, beating inflation and an absolute (positive) return.
--------------------------------------------------------------------------------
Mick10004-03-2006, 09:07 PM
I had one last yr and have another couple getting close - all from 2003 investments
I'm expecting 10 baggers to become as common as mud over the next 5-10 yrs for those people invested in resources
,
--------------------------------------------------------------------------------
Lawso10-03-2006, 06:11 PM
GEN - bought @ an average of 350, sold for 35. Clearly a 10 bugger [V]
--------------------------------------------------------------------------------
duncan macgregor10-03-2006, 06:33 PM
ONLY SHARE THAT SPRINGS TO MIND IS POISIDEN. A fifty cent share that went to over $230-00 and back again in the late sixties in Australia.
macdunk.
Ps i was to bloody smart to buy in to it YUCK.
--------------------------------------------------------------------------------
Dazza13-03-2006, 03:27 PM
CAZ
10 bagger there :P
--------------------------------------------------------------------------------
Sideshow Bob13-03-2006, 04:22 PM
Think the hardest thing would be not to sell before getting 10x the buy-in price.
Know I would take the money & run well before that!
--------------------------------------------------------------------------------
kittydashwood19-03-2006, 02:49 PM
Selling down incrementally leaves you a small final slice that can easy get to ten bags.XSNX was my most recent.
--------------------------------------------------------------------------------
Mick10011-04-2006, 07:21 PM
Got another one today
BSG - accumulated on the dips in 03, 04 and 05
,
--------------------------------------------------------------------------------
whiteheron11-04-2006, 07:29 PM
Mick 100
I have had a history of getting out of winners far too early
eg BSG , purchased about 30c and cashed in at 90c
Now trying hard to overcome this tendency --- but I suppose better to get out at a healthy profit than hang on to a loser and suffer a heavy loss
--------------------------------------------------------------------------------
Mick10011-04-2006, 07:47 PM
Yeah, the idea is to get a balance WH
I'v hung on to a couple of losers far too long, TRO, CRS
I'm beginning to appreciate good stable managment more than ever with regards to my speculative shares.
BSG have had their share of problems in the early days while their main stay operations were in Georgia But they always seem to manage to turn a bad situation into a good situation - I put that down to, not good luck but rather, good managment.
,
--------------------------------------------------------------------------------
whiteheron11-04-2006, 08:10 PM
My worst experience was with GTM (now CME )
Cost me plenty , but in this game the best lessons often cost !
On the other hand I have/have had some real winners eg AWE , BHP sold too early , EXS .
MMN has been pretty good too --- have bought and sold since around 10c
Now have 15,000 shares worth about $6,600 , at a cost of negative $2,400
--------------------------------------------------------------------------------
OldRider15-04-2006, 08:17 AM
There are apparently various ideas about what the "10 bagger" tag means, can I toss in the idea that it could be as much a reflection of poor investment decisions as good ones.
If we try to be aboard winners we should be buying stocks on a steady climb, if this is done it is difficult to ever reach a 10 bagger, where the criteria is total gain is divided by total cost, for the percentage gain deteriorates on further purchases.
An example from my statistics, AVM from an initial purchase under 10c has reached 10 bagger status, however, several additional purchases leaves it well down at round four times cost.
So while feeling good over a 10 bagger, reality could be a missed opportunity.
--------------------------------------------------------------------------------
Mick10015-04-2006, 02:22 PM
quote:Originally posted by OldRider
There are apparently various ideas about what the "10 bagger" tag means, can I toss in the idea that it could be as much a reflection of poor investment decisions as good ones.
If we try to be aboard winners we should be buying stocks on a steady climb, if this is done it is difficult to ever reach a 10 bagger, where the criteria is total gain is divided by total cost, for the percentage gain deteriorates on further purchases.
An example from my statistics, AVM from an initial purchase under 10c has reached 10 bagger status, however, several additional purchases leaves it well down at round four times cost.
So while feeling good over a 10 bagger, reality could be a missed opportunity.
Not so Old rider
My definition of 10 bagger is 10 times your average buy price
I bought BSG in three parcles
2003, parcle 1 @ 19c
2004, parcle 2 @ 26.5c
2005, parcle 3 @ 47c ( this was a small parcle)
average price of 26.1c
The moral of the story - buy right and sit tight
PS, I have another one getting close - will keep you informed
,
--------------------------------------------------------------------------------
OldRider15-04-2006, 05:13 PM
Mick100:
I guess you would be happier had you purchased an even larger parcel at 47c or even another later at a higher price, to have not reached 10 bagger status yet, but be better off, and viewing the investment as even better choice.
You may well be correct about my definition, nonetheless you confirmed my real point, that averaging up on a sound stock delays reaching 10 bagger status, but this does not reflect badly on the decisions.
--------------------------------------------------------------------------------
whiteheron15-04-2006, 08:13 PM
There are many ways to look at this matter in my opinion
As I see it , just because you average up ( a good strategy on a top class stock ) does not take away from having a 10 bagger on your first or early parcels purchased , with lesser baggers on subsequent parcels purchased
Hard learned lessons have taught me that averaging up is much smarter than averaging down
--------------------------------------------------------------------------------
Lawso17-04-2006, 10:51 AM
quote:Hard learned lessons have taught me that averaging up is much smarter than averaging down
Words of wisdom from whiteheron. Unless you've done the homework and are convinced that the company concerned is still sound, averaging down is a way of chucking good money after bad.
--------------------------------------------------------------------------------
davidrob02-05-2006, 09:20 PM
Hi guys,
Four quick reflections / ideas .
(1) Ten Bagger seeking (in a 12 month framework) ....imo.... can be potentially dangerous to long term compounding results....
(2) Interesting to compare compounding say 120% increases over an average of say 12 shares, rolled over a few times, and statisticaly comparing the average median result -- to attempting to get 12 individual "10 baggers".
(3) Agree with Mick.... that "stable" management.... is as important as stock selection, in mnay respects.
(4) I think.... what Mick is probably saying -- ??--- ....... Do correct me if I am wrong.... is that what Mick is saying ....is that "money management"..... is as important a "key skill set" to wealth through shares ......as is "stock picking"....
Kindest Regards,
Robbo:)
quote:Originally posted by Mick100
Yeah, the idea is to get a balance WH
I'v hung on to a couple of losers far too long, TRO, CRS
I'm beginning to appreciate good stable managment more than ever with regards to my speculative shares.
BSG have had their share of problems in the early days while their main stay operations were in Georgia But they always seem to manage to turn a bad situation into a good situation - I put that down to, not good luck but rather, good managment.
,
--------------------------------------------------------------------------------
Bel03-05-2006, 02:34 PM
quote:Originally posted by davidrob
(4) I think.... what Mick is probably saying -- ??--- ....... Do correct me if I am wrong.... is that what Mick is saying ....is that "money management"..... is as important a "key skill set" to wealth through shares ......as is "stock picking"....
:)
Well considering the stories of other apes picking stocks just as well as fund managers then i would definately agree that knowing money management is as equal to or more important than the actual stocks that are picked.
quote:Originally posted by Mick100
Yeah, the idea is to get a balance WH
I'v hung on to a couple of losers far too long, TRO, CRS
I'm beginning to appreciate good stable managment more than ever with regards to my speculative shares.
BSG have had their share of problems in the early days while their main stay operations were in Georgia But they always seem to manage to turn a bad situation into a good situation - I put that down to, not good luck but rather, good managment.
,
--------------------------------------------------------------------------------
belgarion03-05-2006, 06:16 PM
10-baggers come most often in ....
1) recovery stocks where fear is so bad you can smell it
2) small non-mainboard companies (have excluded private companies)
3) start-ups where the business model/product is so new that people just don't get it (these can also be small non-mainboard companies too)
4) and, of course, penny-dreadfuls ...
I like 1 and 3.
--------------------------------------------------------------------------------
Dazza27-05-2006, 12:13 AM
my CAZ 10 bagger, turned out to be a 1 bagger ><
have cashed in now.
ARUO - from 1 bagger to 0 bagger ><
still holding ARUO though.
Potential 10 baggers for me at this moment:
ARUO
EXT
AEX
WMEO
UNX
TOX
BRO
just like belg said,
bro is #3
tox is #1
and the uranium are well number 4 i guess :P
--------------------------------------------------------------------------------
trackers22-08-2006, 04:57 PM
I'll never achieve a 10 bagger..
I will achieve 10 1 baggers :)
work out 10k doubled 7 times ;)
http://www.sharetrader.co.nz/archive/index.php?t-3344.html
Hunting Lynch's 10-Baggers
Published January 26, 2006
by Jack Hough (Author Archive)
Hunting Lynch's 10-Baggers
PETER LYNCH SOUGHT and captured stock returns so large that he created a new terminology to discuss his winners. In his 1989 stock-picking primer "One Up On Wall Street," the former Fidelity Magellan fund manager used the word "10-bagger" to describe a stock that increased ten-fold in value. Dunkin' Donuts and Pep Boys (PBY: 8.70, +0.20, +2.35%) are examples of 10-baggers Lynch owned for Magellan. Magellan itself was a 28-bagger during his 13 years at the helm.
Lynch would seem a perfect inspiration, then, for a guru-style stock screen, one based on the investment strategies of a renowned investor. There's one hitch, though: Not all guru strategies lend themselves neatly to screening.
For example, aside from the term "10-bagger," Lynch is perhaps best known for the phrase "buy what you know." Many of his picks came from companies with products or services he used. A stock screener, of course, can't test for what you know. In fact, it does quite the opposite. A stock screener excels at judging companies based not on personal preferences, but on a cold calculus of their financial statements.
Fortunately, Lynch used plenty of hard metrics, too, and these give us some guidelines for how to build our screen. Rather than use a one-size-fits-all approach, he broke companies into six classes. These include slow growers, stalwarts, cyclicals, turnarounds, asset opportunities and fast growers. Of the last type, he wrote, "If you choose wisely, this is the land of the 10- to 40-baggers, and even the 200-baggers." Sounds like fast-growers are for us.
Spotlight Stock
Quality Systems (QSII)
Develops and markets health-care information systems that automate medical and dental practices, physician and hospital organizations, management service organizations and community health centers, among others.
Thursday's Close $79.86
Market Value $1.1 billion
Trailing 12-Month Sales $105 million
Forward P/E 47
Proj. Long-Term EPS Growth Rate 30%
Additional Data:
Earnings Financials Key Ratios Ratings Insiders
Fast growers are small, aggressive new enterprises growing at 20% to 25% a year, according to Lynch. We'll call "small" anything with a market value below $5 billion. And we'll look for companies that have boosted their sales and earnings by at least 20% apiece for the past three years, and which are projected to boost their earnings by at least 20% in their current fiscal year. Already, these demands reduce our database of more than 8,000 stocks to a mere 99.
Lynch called companies with little or no institutional ownership potential winners, and companies with scant analyst coverage double-winners. So we'll look for companies where institutions own no more than 40% of outstanding shares and are followed by no more than four analysts. That leaves 17 stocks.
Of course, our screen survivors should be affordable and financially stable. Since Lynch liked to compare companies' price/earnings ratios with their earnings growth rates, we'll do so by looking for price/earnings-to-growth, or PEG, ratios (P/E divided by long-term earnings growth projection) that are below 1.7. (The broad market's average PEG is about 1.5.) And we'll require that debt/capital ratios be no higher than 0.5.
That leaves us with a mere 11 stocks. Use our stock screener anytime to run the search for yourself. We've preloaded it into the pull-down menu of screen recipes.
Note that three of our screen survivors were 2005 picks. Pet Meds (PETS: 55.13, +0.94, +1.73%) is up a tail-thumping 56% since we called it "the most promising pick of the litter" in October (see "Such a Good Buy, Yes You Are"). Kitchen gadgeteer Lifetime Brands (LCUT), which we highlighted just last month ("The Chance of a Lifetime") is already up 8%, despite a flat performance for the market. And we really shouldn't tell you how far circuit-board maker MultiFineline Electronix (MFLX) has climbed since we described its valuation as "wafer thin" in March ("M-Flex Inside"). But if you must know: 168%, mocking the market's 8% increase.
Let's look now at another of the Lynch screen's survivors. Quality Systems (QSII) is the kind of company name that could just as easily describe a hydraulics outfit as it could a maker of hot-dog casings. In fact, it makes health-care information systems — software used by private-practice doctors and network participants to manage their patient care and billing. The company's NextGen suite tracks patient information, manages appointment scheduling and referrals, stores prescriptions and clinical images, prints bills and letters and goes after insurer reimbursements. It also prints educational materials for patients and efficiency reports for doctors.
NextGen brings in more than 85% of Quality Systems' sales — not exactly income-stream diversification. But one-product companies whose products are hot can produce stunning gains, both in their earnings and their share prices. In its second quarter, which ended Sept. 30, Quality Systems' sales and earnings jumped 39% and 56%, respectively, over the same quarter last year. Over the past year, the company has produced an operating margin of nearly 29% on sales of $105 million. The average operating margin for health-care information companies is below 5%.
Quality Systems' stock has already been a two-plus-bagger over the past year, a seven-bagger over the past three years and an 18-bagger over the past five. The trio of analysts who cover the stock expect the company to boost its earnings by 40% in its fiscal 2006, which ends March 31, and by 26% in fiscal 2007. Over the next five years, they're looking for annual earnings growth of 30%. That helps make the stock's 2006 P/E of 47 seem reasonable. Scalp the $5 a share Quality Systems holds in cash off of its $80 share price, and you end up with an even more reasonable P/E of 44. (The company is debt-free.)
Those numbers give Quality Systems shares a PEG ratio of 1.57 or 1.46, depending on whether you factor in the cash. The company's closest competitors, Cerner (CERN) and Amicas (AMCS), carry PEGs of 1.66 and 7.36, respectively. (Though in fairness, the latter number is skewed by the company's low earnings base, thanks to its recent swing to profitability.)
All told, the numbers we're seeing on Quality Systems say bag these shares before they head any higher.
Jack Hough is an associate editor at SmartMoney.com and author of "Your Next Great Stock."
http://www.smartmoney.com/investing/stocks/Hunting-Lynchs-10-Baggers-18937/
by Jack Hough (Author Archive)
Hunting Lynch's 10-Baggers
PETER LYNCH SOUGHT and captured stock returns so large that he created a new terminology to discuss his winners. In his 1989 stock-picking primer "One Up On Wall Street," the former Fidelity Magellan fund manager used the word "10-bagger" to describe a stock that increased ten-fold in value. Dunkin' Donuts and Pep Boys (PBY: 8.70, +0.20, +2.35%) are examples of 10-baggers Lynch owned for Magellan. Magellan itself was a 28-bagger during his 13 years at the helm.
Lynch would seem a perfect inspiration, then, for a guru-style stock screen, one based on the investment strategies of a renowned investor. There's one hitch, though: Not all guru strategies lend themselves neatly to screening.
For example, aside from the term "10-bagger," Lynch is perhaps best known for the phrase "buy what you know." Many of his picks came from companies with products or services he used. A stock screener, of course, can't test for what you know. In fact, it does quite the opposite. A stock screener excels at judging companies based not on personal preferences, but on a cold calculus of their financial statements.
Fortunately, Lynch used plenty of hard metrics, too, and these give us some guidelines for how to build our screen. Rather than use a one-size-fits-all approach, he broke companies into six classes. These include slow growers, stalwarts, cyclicals, turnarounds, asset opportunities and fast growers. Of the last type, he wrote, "If you choose wisely, this is the land of the 10- to 40-baggers, and even the 200-baggers." Sounds like fast-growers are for us.
Spotlight Stock
Quality Systems (QSII)
Develops and markets health-care information systems that automate medical and dental practices, physician and hospital organizations, management service organizations and community health centers, among others.
Thursday's Close $79.86
Market Value $1.1 billion
Trailing 12-Month Sales $105 million
Forward P/E 47
Proj. Long-Term EPS Growth Rate 30%
Additional Data:
Earnings Financials Key Ratios Ratings Insiders
Fast growers are small, aggressive new enterprises growing at 20% to 25% a year, according to Lynch. We'll call "small" anything with a market value below $5 billion. And we'll look for companies that have boosted their sales and earnings by at least 20% apiece for the past three years, and which are projected to boost their earnings by at least 20% in their current fiscal year. Already, these demands reduce our database of more than 8,000 stocks to a mere 99.
Lynch called companies with little or no institutional ownership potential winners, and companies with scant analyst coverage double-winners. So we'll look for companies where institutions own no more than 40% of outstanding shares and are followed by no more than four analysts. That leaves 17 stocks.
Of course, our screen survivors should be affordable and financially stable. Since Lynch liked to compare companies' price/earnings ratios with their earnings growth rates, we'll do so by looking for price/earnings-to-growth, or PEG, ratios (P/E divided by long-term earnings growth projection) that are below 1.7. (The broad market's average PEG is about 1.5.) And we'll require that debt/capital ratios be no higher than 0.5.
That leaves us with a mere 11 stocks. Use our stock screener anytime to run the search for yourself. We've preloaded it into the pull-down menu of screen recipes.
Note that three of our screen survivors were 2005 picks. Pet Meds (PETS: 55.13, +0.94, +1.73%) is up a tail-thumping 56% since we called it "the most promising pick of the litter" in October (see "Such a Good Buy, Yes You Are"). Kitchen gadgeteer Lifetime Brands (LCUT), which we highlighted just last month ("The Chance of a Lifetime") is already up 8%, despite a flat performance for the market. And we really shouldn't tell you how far circuit-board maker MultiFineline Electronix (MFLX) has climbed since we described its valuation as "wafer thin" in March ("M-Flex Inside"). But if you must know: 168%, mocking the market's 8% increase.
Let's look now at another of the Lynch screen's survivors. Quality Systems (QSII) is the kind of company name that could just as easily describe a hydraulics outfit as it could a maker of hot-dog casings. In fact, it makes health-care information systems — software used by private-practice doctors and network participants to manage their patient care and billing. The company's NextGen suite tracks patient information, manages appointment scheduling and referrals, stores prescriptions and clinical images, prints bills and letters and goes after insurer reimbursements. It also prints educational materials for patients and efficiency reports for doctors.
NextGen brings in more than 85% of Quality Systems' sales — not exactly income-stream diversification. But one-product companies whose products are hot can produce stunning gains, both in their earnings and their share prices. In its second quarter, which ended Sept. 30, Quality Systems' sales and earnings jumped 39% and 56%, respectively, over the same quarter last year. Over the past year, the company has produced an operating margin of nearly 29% on sales of $105 million. The average operating margin for health-care information companies is below 5%.
Quality Systems' stock has already been a two-plus-bagger over the past year, a seven-bagger over the past three years and an 18-bagger over the past five. The trio of analysts who cover the stock expect the company to boost its earnings by 40% in its fiscal 2006, which ends March 31, and by 26% in fiscal 2007. Over the next five years, they're looking for annual earnings growth of 30%. That helps make the stock's 2006 P/E of 47 seem reasonable. Scalp the $5 a share Quality Systems holds in cash off of its $80 share price, and you end up with an even more reasonable P/E of 44. (The company is debt-free.)
Those numbers give Quality Systems shares a PEG ratio of 1.57 or 1.46, depending on whether you factor in the cash. The company's closest competitors, Cerner (CERN) and Amicas (AMCS), carry PEGs of 1.66 and 7.36, respectively. (Though in fairness, the latter number is skewed by the company's low earnings base, thanks to its recent swing to profitability.)
All told, the numbers we're seeing on Quality Systems say bag these shares before they head any higher.
Jack Hough is an associate editor at SmartMoney.com and author of "Your Next Great Stock."
http://www.smartmoney.com/investing/stocks/Hunting-Lynchs-10-Baggers-18937/
7 Stocks That Could Be 10-Baggers
In early October, 2002, I went to visit two guys who were running a small hedge fund of about $10 million. They had been short Ford (F) and GM (GM) and a number of other stocks.
I asked them what their view of the world was. I told them I was bullish, but they laughed and said, "That’s because you’re always bullish. When are you ever bearish?" They said, "It’s about to hit the fan. We are massively short everything. America is going down."
(As an aside, both of these guys are in jail now. One wouldn’t testify against the other, so he got the larger sentence. The other guy (who was actually the boss) will be out in a year or so. The crime had nothing to do with their hedge fund but with a currency brokerage firm they had been running for 20 years that turned out to be a massive scam. The incident above was the last time I ever spoke to them, and a few weeks later, I saw that the FBI had arrested them and about 30 others in a multiyear sting operation.)
The point is, the world was falling apart in October 2002. Criminals and sociopaths were slitting the throat of America in an attempt to make money on the short side. Back then, inflation wasn’t a worry but deflation. And "Helicopter Ben" was threatening to carpet bomb the economy with dollar bills.
How does one do that? By cutting rates. By backing debt at the esoteric parts of the yield curve. By bailing out failing banks. By opening the discount window to banks and lower beasts on the financial evolutionary curve. By even buying stock in a worst-case scenario.
At the time, there were about a dozen stocks trading for less than cash. In other words, they had, for example, $100 million in the bank and no debt, were profitable and had a market cap less than $100mm. A little company called TheStreet.com was an example of such a stock.
In December 2002, I wrote an article about these stocks for the now-deceased Street Insight, which was later folded into RealMoney Silver. People laughed at me. "They trade below cash for a reason. " I was mocked. Children at my kids’ schools spit in their faces.
Five years later, many of these stocks (for example, ValueClick (VCLK)) were up more than 1,000%.
Now it’s happening again. The same sickness that convinced people that our way of life was a life gone wayward has again spread its bacteria into our heads. So here are my five stocks that I think can double, and perhaps double after that.
None of these is Microsoft (MSFT) or Google (GOOG) or Research In Motion (RIMM). Those are the debutantes at the ball. What follows are the rejects that were never even invited to the party.
Adaptec (ADPT) makes storage products. It has a $383 million market cap and $400 million net cash. The company was GAAP break-even last quarter, and non-GAAP it made $5.7 million in income. So people can buy a profitable company right now and put $17 million in their pockets with the excess cash.
It may not be so simple, but it’s still dirt cheap with a margin of safety. Steel Partners
has been buying millions of dollars worth of stock in Adaptec.
HouseValues (SOLD) has $63 million cash, a $65 million market cap and a break-even to profitable business. Good play on any sort of housing snapback and zero chance it goes out of business. Uber-hedge fund Renaissance Technologies is one of its largest shareholders.
Forget Baidu.com (BIDU). Ninetowns (NINE) is the best B2B Internet play in China. It facilitates the online process of importing and exporting goods to and from China. It has a $69 million market cap and $115 million net cash. Again, Renaissance has been loading up on this stock.
Heelys (HLYS) makes those shoes with wheels. It has a $105 million market cap, $100 million cash and no debt. It’s growing huge in Europe and is about to introduce sneakers without wheels. If anyone knows where I can get a pair of those shoes with wheels, please tell me. Apparently the demographic that most wants the sneakers is men over thirty.
If you want a stock with cash flows, check out 4 P/E Crocs (CROX). But Heelys is interesting to me because of the cash levels. And once again, our best friends at Renaissance (a fund that was up 73% last year after fees) is long Heelys.
Premier Exhibitions (PRXI), with a $100 market cap, makes the Bodies exhibit. It also run the Titanic exhibits. There are $3 billion worth of Titanic artifacts sitting on the ocean floor. Premier happens to own the rights to all of those artifacts and has already excavated $100 million worth. There are issues with where the bodies are coming from for the Bodies exhibit, but Premier settled with the New York attorney general, and it may not affect the $17 million in cash flows Premier is generating from these exhibits.
Also check out Entertainment Distribution (EDCI). It has $40 million in net cash, and the company is yours for a meager $35 million. Three of my favorites -- activist investor Chapman Capital, Daniel Loeb’s Third Point and Renaissance -- have all been loading up on shares of this company, which is essentially trading for $0. And before I forget: It is EBITDA-positive.
Zapata (ZAP) has $154 million of cash in the bank and no debt, and you can buy the entire company for $135 million. Not only that, it had $2 million in operating cash flow last year, and Renaissance is a small shareholder.
Sure, all of these stocks are ugly. They look in the mirror, and all they see is scars from a lifetime of malnourishment and poor hygiene. Don’t put all your eggs in this basket. But all it takes is one 10-bagger, and all the rest can go to zero, and you’ve just made 45% on your money.
http://www.stockpickr.com/problog/733/
In early October, 2002, I went to visit two guys who were running a small hedge fund of about $10 million. They had been short Ford (F) and GM (GM) and a number of other stocks.
I asked them what their view of the world was. I told them I was bullish, but they laughed and said, "That’s because you’re always bullish. When are you ever bearish?" They said, "It’s about to hit the fan. We are massively short everything. America is going down."
(As an aside, both of these guys are in jail now. One wouldn’t testify against the other, so he got the larger sentence. The other guy (who was actually the boss) will be out in a year or so. The crime had nothing to do with their hedge fund but with a currency brokerage firm they had been running for 20 years that turned out to be a massive scam. The incident above was the last time I ever spoke to them, and a few weeks later, I saw that the FBI had arrested them and about 30 others in a multiyear sting operation.)
The point is, the world was falling apart in October 2002. Criminals and sociopaths were slitting the throat of America in an attempt to make money on the short side. Back then, inflation wasn’t a worry but deflation. And "Helicopter Ben" was threatening to carpet bomb the economy with dollar bills.
How does one do that? By cutting rates. By backing debt at the esoteric parts of the yield curve. By bailing out failing banks. By opening the discount window to banks and lower beasts on the financial evolutionary curve. By even buying stock in a worst-case scenario.
At the time, there were about a dozen stocks trading for less than cash. In other words, they had, for example, $100 million in the bank and no debt, were profitable and had a market cap less than $100mm. A little company called TheStreet.com was an example of such a stock.
In December 2002, I wrote an article about these stocks for the now-deceased Street Insight, which was later folded into RealMoney Silver. People laughed at me. "They trade below cash for a reason. " I was mocked. Children at my kids’ schools spit in their faces.
Five years later, many of these stocks (for example, ValueClick (VCLK)) were up more than 1,000%.
Now it’s happening again. The same sickness that convinced people that our way of life was a life gone wayward has again spread its bacteria into our heads. So here are my five stocks that I think can double, and perhaps double after that.
None of these is Microsoft (MSFT) or Google (GOOG) or Research In Motion (RIMM). Those are the debutantes at the ball. What follows are the rejects that were never even invited to the party.
Adaptec (ADPT) makes storage products. It has a $383 million market cap and $400 million net cash. The company was GAAP break-even last quarter, and non-GAAP it made $5.7 million in income. So people can buy a profitable company right now and put $17 million in their pockets with the excess cash.
It may not be so simple, but it’s still dirt cheap with a margin of safety. Steel Partners
has been buying millions of dollars worth of stock in Adaptec.
HouseValues (SOLD) has $63 million cash, a $65 million market cap and a break-even to profitable business. Good play on any sort of housing snapback and zero chance it goes out of business. Uber-hedge fund Renaissance Technologies is one of its largest shareholders.
Forget Baidu.com (BIDU). Ninetowns (NINE) is the best B2B Internet play in China. It facilitates the online process of importing and exporting goods to and from China. It has a $69 million market cap and $115 million net cash. Again, Renaissance has been loading up on this stock.
Heelys (HLYS) makes those shoes with wheels. It has a $105 million market cap, $100 million cash and no debt. It’s growing huge in Europe and is about to introduce sneakers without wheels. If anyone knows where I can get a pair of those shoes with wheels, please tell me. Apparently the demographic that most wants the sneakers is men over thirty.
If you want a stock with cash flows, check out 4 P/E Crocs (CROX). But Heelys is interesting to me because of the cash levels. And once again, our best friends at Renaissance (a fund that was up 73% last year after fees) is long Heelys.
Premier Exhibitions (PRXI), with a $100 market cap, makes the Bodies exhibit. It also run the Titanic exhibits. There are $3 billion worth of Titanic artifacts sitting on the ocean floor. Premier happens to own the rights to all of those artifacts and has already excavated $100 million worth. There are issues with where the bodies are coming from for the Bodies exhibit, but Premier settled with the New York attorney general, and it may not affect the $17 million in cash flows Premier is generating from these exhibits.
Also check out Entertainment Distribution (EDCI). It has $40 million in net cash, and the company is yours for a meager $35 million. Three of my favorites -- activist investor Chapman Capital, Daniel Loeb’s Third Point and Renaissance -- have all been loading up on shares of this company, which is essentially trading for $0. And before I forget: It is EBITDA-positive.
Zapata (ZAP) has $154 million of cash in the bank and no debt, and you can buy the entire company for $135 million. Not only that, it had $2 million in operating cash flow last year, and Renaissance is a small shareholder.
Sure, all of these stocks are ugly. They look in the mirror, and all they see is scars from a lifetime of malnourishment and poor hygiene. Don’t put all your eggs in this basket. But all it takes is one 10-bagger, and all the rest can go to zero, and you’ve just made 45% on your money.
http://www.stockpickr.com/problog/733/
Subscribe to:
Posts (Atom)