Check your Stock tolerance level here

What does 'Risk Taking' mean to an investor? This is an important aspect to being successful in stocks and making money in the markets. Risk taking ability is the most exploited term and most equity investors believe they are high risk takers.

Knowing your real risk taking ability is crucial to be successful. To know your risk taking ability, look at your past record and be honest, how much loss have you suffered in a single stock before you sold?  In my own career as a beginner, I have held on the stocks till they have lost about 50% before I sold. There are people who have sold the moment the stock dwindled from their purchase price by 10%. Almost all investors sell at some stage when the stock price declines, to save their hard earned money as analysts on TV and News Paper proclaim gloom and doom ahead. People who have thus lost money will spend rest of their lifetime investing in Fixed Deposits trying to beat inflation.

Research has proven that investors fear making losses more than they cherish the prospects of making money, that explains the 'Risk taking Ability' and our reaction of selling at a loss.

The solution to this is widely ingrained in our investing philosophy.  The bear markets always come around and if you are invested in the right stocks, call it risk tolerant stocks, you will eventually make money in ways better than a bank FD. Our LearnInvest 9 stock portfolio is a standing example to this. They have gone through the sleep test; I have slept well at night with this allocation of stocks irrespective of market conditions. And this is because I know the business the stock represents.

This new year, we wish all the readers a very prosperous and health life ahead. Our new year gift, a Killer stock that I referred in my previous blog an Apparel Brand that is set to grow for many years ahead. Please email ram@learninvest.in to receive the report.

Selling in market high ?

Many friends called me to find out if I am selling as the market hit historic highs. The answer to this is blindingly obvious to me and to most people who have understood our philosophy, You don't make 55% (since Jan 2012) for nothing, recall my blog in Jan 2012  Cash for Clunkers.

Our decision to sell is not based on stock prices but instead on the growth prospects and other fundamental filters. The case in point is when we sold titan stocks recently because the whole business model went awry as the rbi regulated gold imports and titan lost the great advantage it had through leverage. On the other had if we had sold out Cera , again a stock we recommended to buy at 2 high levels, we would have lost out on its continual growth prospects.

I recently met up with an investor with whom I resonate in investing philosophy. He always looks at making 5 times the money in as many years. But now the most key information, he has not made a single investment in the last 2 years. He passes an opportunity unless it is very obvious, with sufficient margin of safety.

In our philosophy too, we believe once invested, money is made by waiting for the business to grow. The investor I met believed money is made when investments are done in distressed situation that offer sufficient margin of safety and the great companies are available at juicy valuations. In out constant research to identify such business gems, we found this company that was silently making a kill in its business with its product used by all and found everywhere around. Its Killer balance sheet, with no net debt, pre tax return of 65% on operating assets, continually paid dividends form operating cash flow, demonstrated continuous eps growth. And to our surprise, it offered margin of safety, something which has become difficult to find these days.

Many of my family members had disapproved of my decision to invest in stocks as they felt it was risky. Sure enough, an investor takes risk, but only when the odds are in his favour.  You need huge patience and hence you can’t have this as a primary job, as a job is an activity and you can’t have an activity of waiting. I therefore believe, investing is not supposed to be an active profession; it can be developed as a hobby that yields income. And one piece of advice, if you want to get rich in stocks, save at least 20% of your earning and invest regularly.

 When the next crisis appears in the horizon, may be in the form of a fed rollback or bad election results, most investors will rush to the exit gate. Do have cash ready to go all in, preserve your buying power till then. But for those who have bought those gems, keep holding and enjoy the roller-coaster ride. Someday you will have more than you wanted.

When Markets Welcome

Recently we picked up a few stocks which had been hit badly (during the rupee weakening episode). We also suggested these to our friends and regular members of the blog. Very unfortunately for them, the stock went down after we asked them to buy. Their reaction was that of surprise and shocked that we had gone wrong. Things can always get bad before they look better. One of the stock we bought was the work-horse HDFC Ltd, which hit a low of 560 recently and moved up 18% in a matter of 45 days. Let me admit that I could not catch the bottom of this stock, but I did buy it relatively cheap that assured me safety of capital that we generally look for while investing. This is the second time that market has given us such buying opportunity in general this year, one can't rule out a third. The lesson in this is to always preserve your buying power. Keep the power dry and  be ready to invest when the rare opportunity comes by. 

You can't make out the bottom of the stock, but when the recovery begins, the price moves up like it did in the last one month. And at that point more people want to buy those gems pushing prices even higher. The other Pharma stock that also tanked, is still around those levels we bought, making it still a great buy at these prices. Again when the recovery happens, competition from others will make it far more expensive and at those times, one could be selling. It does not matter if the stock corrects by 10% when you are so sure that the stock has a killer business underneath. All we need to ensure is that we monitor the business fundamentals continuously for the several filters we keep. If that changes, then we sell and look for new value.

Invest as if you are handing over the portfolio to your next generation, then you would look for those companies that will grow for next 20 to 30 years and small fluctuation in prices will stop bothering. Selling a stock shall not be because its price tumbled, but an irreversible damage has happened to the business, or the model is no more viable in the new economy.

Our investing mind is wired to get us into trouble investing, hence always do the opposite of what a regular mind would direct you. Contradict your action with what the impulse side of your brain exhorts you. Last 3 years have been tough to investors, especially if you had not invested in the right stocks, those who were rightly invested, have stood to benefit.

To be financially free, we need to change our mind set from net income to net-worth. We need to start the month by saving for the future financial freedom. You don't invest what is left; you spend what is left after investing. Income and wealth are two different things after all.

 

 

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Saving the Shirt

If you look at the state of our economy, the outlook seems very gloomy, the macro economy environment has deteriorated. Nothing much has changed over the last one year, the government apathy & indecision was the same, the structural imbalances remained. Still the view from outside our country about India has very negative. Interesting to observe for an investor, there are no new IPOs coming, no rush for dmat accounts being opened and the retail brooking volumes are very subdued. The valuations of some of our leading businesses have dropped off their cliff. This is certainly a great time to buy stocks of diamond grade companies. Money invested at the heights of maximum pessimism, is most likely to yield fantastic returns. However it is any one's guess, if there is further downside to the markets or it is going to recover from here necessitating a staggered investment style.

A great learning in this crash is in observing how the valuations of some very successful companies have come crashing. Some sector leaders have gone by the way side. In-spite of the tough economic environment, there are a few companies that performed better than their competitors, clearly indicating that the people running those businesses have made the difference.

Companies like TVS have gone down in the same tough environment that Bajaj auto have performed well, or look at how Infosys under-performed their peers like TCS until recently in the same environment. The point therefore is, never overpay quality, as the leaders of today and can become laggards tomorrow. Always provide for margin of safety and account for unknown variables. That’s precisely why I like today's uncertainty as they offer stocks at sufficient margin of safety.

There are stocks that are expensive, but do not deserve to be expensive, yet there are those that deserve being expensive but are available cheap. We must differentiate price and value. Old business models are getting replaced with newer ones. Unlike in the past, newer companies come in faster and exit with equal speed. Look how the telecom stocks looked revolutionary at one time, today they are languishing. The old investing wisdom will have to be refreshed to keep pace with today’s reality.

Regular readers may recall of our ready-made apparel company, with a very high p/e that almost doubled in a couple of years. So calculating future valuations and hence the margin of safety gets tricky. We can't any more say, that p/e is too high or too low unless we determine the growth and earnings into future.

I met Ashwin, an investor friend at an AGM. He believes you can't stick with one strategy for ever. When he was not maximizing returns from his investments, he analyzed what went wrong and observed he was overexposed to Indian equity. So he increased the weightage to International equity, currencies and commodity by reducing  Indian equity. He invested in equity mutual funds across North america, Latin america, ASEAN & China. He explains ASEAN fund has delivered the highest returns of about 30% in one year.  For Ashwin, diversifying across stocks or sectors is an old idea, diversifying across countries makes more sense. Investing in multiple countries reduces volatility of portfolio, and increases returns.  Always concentrate on reducing risk, returns will come, he explains. He used every tool in the kitty & is well positioned to make 18% return this year. Here is an example of risk migration to manage returns.

The old ‘buy and hold’ strategy may not just yet be the best. After all, saving the shirt is a serious business.

To know how to invest in international mutual funds, you can contact Ashwin Iddya / Ashwin or write to us at ram@learninvest.in

The 5 Year Plan

There are certain things in life that you know are mistakes because you have committed them. If you had not made those mistakes, you would have lived in doubt. If you commit twice, you are on your own.

If the caption of this blog grabbed your attention, there is a fair chance that you would have lost money in the financial markets. Take that as an allowance as the anticipation of making money is far more rewarding for that's how the brain is wired. Marketers use ‘buy one get one free' schemes to attract more customers than ‘a 50% discount' although both are same. Most popular investment avenues that attract maximum investments are created on similar lines and must be deplored. The best ones are those that do not look all that attractive, are time tested, bought but not sold and rooted in principle of compounding over long time than ‘Big Quick returns’.

Investing is part art and part science and hence the difficulty in laying down several steps to be a successful investor. It’s easier to say what can be detrimental to good investing. Meet Amrit Pal, who claims to have compounded an average yearly return of 21%+ over the past decade. Now that means an amount of Rs. 10,000 invested every month for last 10 years would be Rs. 40 Lakhs.  Ask him what his secret is and he goes 'value investing'. His approach is to buy businesses that are trading at less than its intrinsic value calculated using discounted cash flow formula. There are many websites that provide this value for many listed companies. During times distress, Amrit identifies such business which is available at least at 30% discount to its intrinsic value. Temporary setbacks lead to a crash in stock prices of even valuable companies with a durable moat. In simple terms, this is buying 100 rupee worth asset at Rs 70 or lesser. The greater is the uncertainty or setback, the bigger is the discount these companies are available at. And bigger would be the returns. Gruh finance at 190, LIC at 180 after the bribe scandal broke out was such value picks. Even our pick, Cera went through a crash when one of the promoters died pulling the stock down to 280 less than a year ago; two weeks ago it was trading at Rs. 500. The market realizes the anomaly and at some point corrects it to near intrinsic value, offering great returns. Great business gems offer such buying opportunities few times in its business cycles and it is for us to lap them up. And at those times, as Spider our proxy investor puts it - 'back up the truck and load it'.  Recently we did identify one gem which is available at 38% discount to its intrinsic value and it is one of the best managed companies in our country. It’s a matter of time before the market realizes this anomaly and offers it its due price. Here we are making an assumption that those are the businesses that pass through several of our filters and we would really want to be investing in them.

Such opportunities come far and few, and when they arrive lets recognize and take big bets. Like Amrit, it pays to keep a minimum of Rs 5 Lakh in banks as reserves for initiating purchases in special market situations. That’s when the stocks are on sale and on huge discounts, 1+1 offer so to state.

Khabari network

There is an internal network that runs the market, everything is fixed and rigged. There is plan and only known to a select few. They make the markets move as per their wishes. Its Operators who make and run the markets. This is what everyone who loses money in the market believes before he surrenders. Then there are a few who look for this Khabari network and believe if they get to the inside of this network, they can make immense wealth in no time. 

Very recently, an investing fried shared is experience. He received a sms from another contact who seemingly was ‘in the inside’ of a very secretive and powerful network. His sms read, “MMTC: EGOM to fix price at Rs. 230 per share. Meeting at 2.00 PM sure shot. Stock heading towards lower circuit.. Short MMTC.”  In simple English, the news was supposedly giving away something very confidential, that the government was planning to sell part of its shares stake at 230 lower than what was it was trading at that hour,Rs 283. My friend went for the phone and placed ‘a sell’ order for a few thousand shares at Rs 283 hoping that it would slide down and he can buy at lower prices. What had happened is that almost every investor had got this information and shorted the stock ( in market parlance, it means to sell MMTC without having the stock and hoping to buy at lower levels, same day). In a few hours another Khabar made its wave that sent shivers down all the short traders. The MMTC’s banker had rejected the offer on lower valuation concerns and in moments the stock started spiraling upwards leaving all our khabari investors in a spot, as it meant they had to buy them at higher prices to square their position. My friend bought all the shares back at Rs 310, loosing effectively about 10% in a few hours and few lakhs of money. Most investors who listened to the Khabar had lost upto 15% that day.

And now the secret. All known information (and sometimes unknown) is reflected in the stock prices. There is no one capable of rigging the market. Even the entire might of UK could not be put behind to save the British pound from the crash, an event when George Soros made his billion by shorting the British pound. Where then can individuals or a group of them hold reign of influence beyond fractions of a second. However as a fund manager puts it, it is the smart money that moves the markets. Think of smart money as the largest groups of investors like fii, pension funds and other institutions that invest billions of dollars. In the short run their emotions and outlook make the markets while in the long run their beliefs would align to the fundamentals of the stock. One of the challenges faced by retail investor is that there are large number of variables that make understanding the fundamental  of a company very difficult. Remember when every learned fund manager expected Educomp to be the next infosys and a multibagger stock. Most of them got it wrong on the issue. Satyam was yet another case where till the very end no one could predict it was led by a fraud management. I guess corporate themselves are not sure of the quality of their own management, how can then an analyst and worst off all, retail investors like us, ever get a grasp of fundamentals. There are infinite variables while evaluating a company and one can never get it right. 

I remember the dialogues in the movie 21, an MIT Blackjack Crack team. As the professor says, there are those with gifted minds, if they had been able to get beyond some of their personal mistakes that were made and yet as history shows us, some students never learn. This is the state of most of us. And not everyone can do it.

You lose only out of paranoia, fear, emotions. You don't give in to your emotions. You think logically. As the Nonlinear Equations professor in the movie said”Always account for variable change".

The investing success is based on secrets that are very simple, hence does not capture people’s imagination – invest regularly, over long periods of time, preferably in the whole market index – and let power of compounding take charge.

Risk of holding vs. selling

Digest this! The risk in holding a stock that can virtually go down to zero is lesser than the risk of selling a winner too early. I realized this when Rakesh ran a few numbers to me. He had invested in Suzlon and Ultratech cements in the December 2008. Suzlon ran down from its 2008 highs of 62 to 25 now and Rakesh lost 60% of his investment. He had also bought Ultratech cements at 366 at the same time but sold it 2 months later after it appreciated by 20% to Rs. 439. He displayed a very normal behavior of holding on to the loosing stock but selling a winner. He holds the suzlon stock even now which is quoting at around 25 unable to accept the loss. He is hoping it will regain its original purchase price and he could avert a loss.

The biggest folly that leads to investing failure is not about holding on to a looser, but the selling off a winner. On one hand Rakesh held on to Suzlon hoping some day he will be able to pare the loss, on the other hand he sold Ultratech cement after it appreciated a meager 20%. Imagine a different scenario: Rakesh had held on to both the stocks until now, and that he had invested a similar amount of Rs. 1 lakh in each of them, his Rs. 2 lakhs investment would have now have become Rs. Rs 5.60 lakhs.  (1 lakh invested in suzlon would now be Rs 40,000 while Rs 1 lakh invested in Ultratech would have become Rs 5.4 Lakhs). This is a return of (cagr) 26% pa over 4 years. This is better than inflation. Imagine you virtually held on to a looser that has dented your pride, yet your action of holding on to a gainer would have more than compensated for the losses.

Rakesh was influenced by analyst’s definition of cyclical stocks and sold the cement stock expecting a glut in the industry to hamper growth prospects of Ultratech. And he reasoned the he could buy it cheaper later. The market is filled with very knowledgeable people who can define every situation and put a reason and logic to everything they have to say. The best time to sell a stock is 'never' as long as the company shows predictable earnings growth over long term.

Short term fluctuation must be ignored as long as the company is run by trusted management and the business has long term growth prospects. The risk of selling a winner far outweighs the risk of holding on to a looser. Hence it is wiser to hold and be proven wrong. A stock can only get to zero on the downside but technically there is no limit to how high it can go. Do not get swayed by stereotype definition of when to buy, when to sell. Experts can christen their style and call them such as earning or growth generator, contra strategy, special situations, mutlibagger ideas etc. These are traps for a small investor. Invest for the long term in companies managed by trusted people, who have displayed legendary commitments, where the industry has long term prospects and businesses have an irreplaceable value, provided you buy them cheap. Rakesh should have continued to hold his Ultratech cements, business that are subject to low rate of change. Cement is a mundane product that everyone needs subject to slow rate of change, as the legendary investor said, change is the enemy of investor.

 People will always buy cooker, under garments, financial services, cement, loans unless something terribly goes wrong. There is always the risk of unknown; we could face a period of prolonged recession. Risks are real, depressions are friends of investors. If you get a chance, buy distressed businesses in a distressed industry. Eventually markets will catch up with the true value of the business.

New Hope

What does a new year hold for us investors? Nothing much. The market really does not change anything that day nor do the businesses that they represent. It is still a good time to recommit on the way we will invest rather than on what we will invest. It is incidental that it was a great investing year when my portfolio returned 57% and the index itself returned about 25%. Hindsight as they say is the best sight. Not to get carried away, let’s remember how investments are behaving matters less than how we behave. And hence in this New Year blog I would like to remind ourselves on some of the healthy and profitable investing habits.

Never invest at once all the money earmarked for equity. Invest over a period of time.

Never allocate a large portion of cash into a single stock, be diversified (say 10 stocks).

Evaluate the performance of businesses, whose stocks are owned, once in 3 or 4 months

Moderate expectation of returns, do not expect more than 12 to 14% pa and make plans accordingly

Do not invest the money in stocks that you will need back in 3 years - must give time for equity to perform.

Never invest based on tips or rumors- you will win some and loose many- its a zero sum game

If you can't commit time and resources, just invest in a mutual find or an exchange traded fund of the index

I can assure you that you have reasonable chance at investing success.

The booster dose comes from many themes we have discussed earlier; today I am studying the banking and finance space. The opportunity lies with many psu banks that are undervalued due to higher provisions, bad loans and non performing assets. However reasonable valuations and profitability make up for the low asset quality. Make sure to avoid stocks that are popular with analysts as in the long run they tend to under-perform the un-analyzed ones. Analysts avoid stocks with uncertainty that make them undervalued buys today that will go on to outperform in the long run. Remember the  Cera Example

The successful investors put a process in place and stick to them, never investing on news or impulse.

Wishing you the very best in the New Year.