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.
