A Simple Brief

If you cannot write the reasons you are buying a stock for, then do not buy it. I was referring to simple notes made a few years back (August 2011) when we bought a consumer stock with idealistic brand value. The personal note said that the company is growing and poised to grow at >25% for several years and its brand is desirable by millions of Indians. It’s a relatively new company with passionate promoters in an old industry that will never change, the trends of consumerism is driving its markets bigger. We then checked discounted cash flow and other financial metrics to consider valuations to make a BUY decision. The stock was then 2200 but had appreciated multifold already, almost 8 times in the previous 4 years when we bought. To the many I discussed this stock with, it had already appreciated 8 times leaving no headroom. this is a common mistake our brains will do, comparing with the past than what is possible. Behavioral scientists attribute the reason for this; we are bad at estimating future prospects so we compare with the past which makes it easy.

In the above example it was easy to look at the fact that it had run up very fast and made people believe they lost out on the opportunity and the risks are high. What was difficult was to analyze future prospects of the industry, the financial metrics as this required effort and a lot of work to be put in. We miss many opportunities due to improper comparison. Here the tendency to compare with past than what is possible. Comparison changes the value of things as a Harvard psychologist Dan Gilbert puts it. To loosely translate his example, if a great company that you believe in goes through a price correction from 9500 to 8000, you call it cheap. But if I tell you that it has moved already now to 8800, you will say it is expensive. Gilbert says 'our beliefs about what will make us happy are often wrong'.  He gives an example of how you would decide between two options of getting Rs 10,000 today and Rs 11,000 after a month. Now if you are given an option of getting 10,000 after 12 months and Rs 11,000 after 13 months, you may change your decision although the situation has not changed considerably. Our brains are developed to decide from fewer choices, if the situation gets complex we behave irrationally.

In the investing world, it is paramount to be aware of our brain's limitations and therefore  be disciplined & trust a process than our instincts. 

On teacher's day I got to listen to PM Modi speak. To  a student's question whether he aspired or ever imagined that he would become PM some day, he said he never did, he was never even a class leader . He only wanted to work with absolute sincerity. He never wanted to become ‘someone’. He exhorted students to work with dedication while enjoying what they do and that will make them someone in the path. Such a great lesson it is. 

There is so much truth in it for us and as investors there are obvious lessons too. Look for companies managed by leaders with dedication and sense of purpose; they will go on to deliver the best for shareholders.

Like in life, not all companies are created equal. I heard ‘nobody makes wealth from salary; it’s from how they invest what they save’. Move from a pay check mentality to net worth mentality.

Knowledge is wealth :The business that will grow at 25%; email ram@learninvest.in

How to know of a multibagger

Our Attitude decides our return

Our attitude decides our return. Stock market is not meant for everyone, anyone who is engaged with stocks will not make money.  People with a special attitude or those focused on building the specific attitude are likely to create wealth investing in stocks. If you do not have or can not develop the right behavior, do not invest in the markets. Those who are looking for pure returns on their invested money, like watching movements every day or what returns came about etc. are lilely to be losing money.

Will Rogers rightly say that "I am more concerned about the return of my money than the return on my money."

Its not mandatory that every one has to invest in stocks, its actually antithesis for people who are obsessed with the markets. Markets are not for everyone, understand if markets suit you...

What is the right attitude? Its Long term, which is now a cliched and over abused term. Second is margin of safety to ensure your down side is limited. This means very few investment opportunities per year and invest regularly. This seems to be contradictory: Investing regularly is time diversification. If nothing else, you may be able to buy cheaper and be rewarded better.

If you lose patience or attitude over a very long term, you can lose out on the gains. The best companies are quoting at huge valuation and may go into stock price hibernation for years at stretch. In a market frenzy like today, there is limited or no margin of safety.

Focus on building the right attitude and if the markets suit your personality and genes, stay on to be rewarded. Or move on to other opportunities.

For details on our portfolio, email ram@learnivest.in

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The Stock that rose 7 times in 3 years

Killer stock that went up 80% in 10 months

A Stock is a Business that you can See around

In a recent lecture on 'Mind your Money' that I attended, the speaker asked how much money was required to be happy. The answers were varied, from a few lakh rupees, people also wanted 100 crores to be happy. When asked how they arrived at that number, the answers were very vague, something like buying villas to seeing the world to responses that it looked big enough.

One of the best responses I have heard is that 'it depends on what you want to do with all the money?'. If you want to start a charity hospital that brings you happiness, then that is what is required. If you want to stay healthy, then you know what that takes. So the question is 'what is your life's purpose?'. Financially free is the one who does not have to work to achieve his life's goal. An investor recently said, an average Indian can lead a luxurious life with Rs 10 Lakh a year assuming he is living in his house. With a 3% tax free dividend income from equity, it would mean a corpus of Rs 3 crores to be financially free and wealthy. what I like about these thoughts is that it helps you put a method into the madness. The goals and hence the amount of money required varies based on the upbringing, peer group, culture etc. But the core is to investigate what is your life's purpose.

Many investors are scared today to invest as they feel the markets have shot up and may not move further to offer any meaningful return. When the markets were lower, they were waiting for correction to invest. When there were corrections they were worried about the sudden movement and wanted to wait for markets to stabilize. When the market stabilized, they were not sure which way it would move now. The point is we will know where the markets were only in hindsight.  

The investor's job is to keep investing systematically in stocks of sound companies that can deliver healthy growth in the long-term with superior cash flows, high ROE & ROCE, honest and competent management having MOS.The institutions involved in the stock market make the business speculative, but the investor must be very aware and guard himself against emotion and develop lifetime of patience. As an example, Sun pharma after its IPO in 1994 did not offer investors any return for almost 5 years. But when its prices started moving, the returns were abundant.  Rs.1000 invested in the IPO in 1994, has grown to over Rs. 314,000. Its run by a very competent management. 

On a lighter note, happiness and money have little in relationship. Money is like the size of your shoe. It can’t be too big or too small, or it may hurt.

Every single day, allow it to pass

 

Probably one of the best statements I have heard in investing world. When the prices of stocks increase, we rush in to buy and when they fall, we rush in to sell. Both are inverse of what we should be doing; why are we behaving this way? Is there a way out?

Yes. Once invested in the right companies, allow each day to pass, knowing only fully well that businesses need time to grow. The stock market is not the business, they happen elsewhere. The stock market purely is a platform to buy them and not a place where profits are made. Businesses make profit by executing their business well, reviewing their strategies time to time and making changes when required. So do not follow the what the stock market is telling (in terms of the price changes) instead focus on what the businesses are telling you, whose stocks you own.  are the strategies in tune, are the promoters transparent and honest enough, is the Net Profits and earnings growing every year, if so are changes to get there happening? These should consume our energy and not the stock prices alone. Prices are an outcome of those questions we ask.

We almost always overestimate our capability. When the stock price of our recent pick goes up, we congratulate our self on our ability to have foreseen. If the stock price goes down, we promise ourselves to exit if price comes back to our purchase price. There is no value we associate to the business, first when we bought the stock and then when we decide to sell.

Buy decision have to be predetermined by 'margin of safety' (on a roll of stocks that we have already filtered), which is generally appealing during a downtrend. So as a buyer we should prefer markets going down rather than going up. Our attitude towards market vagaries will decide our investing fortunes.

In the last couple of months, stocks have run up very fast. This is to the surprise of many as they stayed out of the market. Unfortunately, there are not too many stocks which offer sufficient margin of safety. Don't blindly buy because the share price has been going up. Only when the tide goes out do you discover who's been swimming naked.

A great investor once told me not to measure a stock by its price but with its market cap, this is quite a revelation. What he meant is to look at the stock as a business and by examining the market cap you are actually evaluating the size of the industry that of competitor, the growth prospects of the industry, headroom etc.

As Warrren Buffet wrote to shareholders “You don't have to be a genius to invest well. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ. To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these.”

To develop the right attitude which alone is required to achieve investing success, write to ram@learninvest.in

Check Your Stock Tolerance Level Here

Procastination

When I wrote Cash for Clunkers I freely encouraged my friends to follow the same. I even shared with them what stocks to invest in. The portfolio which I hold as is today, comprising 2 lesser stocks, is 80.17% up.  None of my friends could ride the wave. When is the best time to start investing?  Tomorrow!

This is truer if the decision involves applying one’s mind, like in investing or  if it involves arranging for papers and documentation. Making a simple commitment like paying an advance can help tackle procrastination. If the decision involves signing a cheque, people tend to procrastinate to overcome anxiety and stress in handing money over. Often when one is exposed to too many investment options, he tends to procrastinate.

The effect of procrastination can be understood with a financial implication. A person investing Rs 25,000 per month from the age of 39 will have a retirement corpus at age 60, of Rs. 4.43 Crores (compounding at 15% per anum) as compared to a person who started one year later at age 40, who would have Rs 3.78 Crores as his corpus. The effect of procrastination by one year costs Rs 65 lakhs

As a great said "Don't use the hardships of your past as excuses to deny the possibilities of your future”

A friend whom I advised investing in mutual funds as he did not have enough time, is today sitting on a 15% CAGR over a period of 5 years, that's a dream run. He took the first step to listen, trust and start. The momentum took care of the rest. Most people is today's world suffer from broken focus syndrome, there are too many distractions, interests to pursue and options available. 

Investors who did not act on our 3 great investment ideas lost opportunities to make money. Huge money.

Our Cera Idea made Rs 194 into Rs 1250 in 3 years.

The Killer Idea which we Repeated again went up 40% in 7 months.

See for yourself what procrastination can do.  The right to start is now! 

With yet another Pharma stock we have identified with great growth prospects, impeccable historic growth and a huge upside events possible. For details please mail ram@learninvest.in

Is The market Risky Today?

This is the time, when the ones who had invested in equities and held on to it, feel vindicated. The past years have been tumultuous but I personally invested continually and today my feeling is not that of but vindicated, but that of assurance. Nothing as changed in the model since I began investing more than 2 decades ago. My first investment was in 1993 or so, in the Morgan Stanley mutual fund. This was the first time such an idea was marketed and I remember public frenzy to invest in it. It was supposed to be first come first serve, people stood in long que for hours together (heard people stood overnightJ), what followed was my first learning experience. 

There is not dearth of opportunities. It’s never an opportunity missed. Since then I have attended and read numerous behavioral investing classes and books. It’s taken a long time before my old faiths were broken and new ones instilled. Looking back, I really enjoyed losing money, the wealth of information that alone has taught me is  inexplicable.

Today I stand totally confident, that equity is one of the best opportunities in our generation, provided one has developed the right mindset or philosophy. To me the most important ingredient to be successful in investing, is to develop the right philosophy. There is no other financial sophistication required. The world just comes around.

There always exists a possibility of Market making a huge advance as much as it may go in for a significant unexpected collapse, making the returns in the range of its average. Where then do we get to lose huge money? It is very difficult, a task that can only be accomplished by the over thinking monkey mind. Learn to master it and success is our way.

Coming to more mundane stuff, I am currently taking an exposure in small company which is operating in a murky industry, where there are no scruples. I stumbled upon this company surprised by the way the promoters handled this business, so very different and refreshing from the heard. This is very small cap company, hence the reward risk ratio is not very encouraging and I am hoping to see some corrections. I am fairly bullish that this is going to be a multi-bagger with zero debt on its balance sheet. More on it soon.

The markets have run up very fast in Anticipation, a normal one to follow Despair. (Please see I am oblivious here about the reason.) Does it mean the market is riskier than what it was 6 months ago? The answer to me is NO. If you say it is risky, it always was and will always be.

Other posts you may like Scratch and Win

Scratch and Win

If only life was that easy, you could scratch and live of it !

The 'belief within' though brings the magic results. Its important to develop a positive and growth attitude in everything we do including investing. Otherwise its easy to get carried away like the market highs we see now and sell-off or get away. Keep reminding ourselves, businesses will continue to invest and grow over the next many decades irrespective of election results or other noises that distract us.

Magicians talk about working the subconscious to get us winning results. Winning at investing is a mental pattern, its about how you think and its the 'believes in us' that bring the results. Successful investors create magic in their portfolio and when they talk about the returns, it looks mystery. There is a charm to their hidden stories. Al Koran recommends to roll your money notes and put a rubber band around it. It represents without beginning and without end. I have practiced this for many years, it makes your subconscious work with your intellectual capabilities.

Most often we look for formulas that have worked for others, stocks that did well for some one else, this is 'knowing bias'. if it is repeated, it must be true, we are taught. Nothing is farther than truth in investing. The world is changing at a pace unseen, so it is important to be flexible and open to newer possibilities.

just look at how different investing is from real life practices, in life you count on past experiences, in investing it is counterproductive. Again in life you strive to be the best, but in investing it is better to settle for an average performance. You don't take action in case of a crisis or you don't expect greater returns if you paid for it. None of the normal rules apply here.

For the uninitiated, those who do not follow much of what we discuss, you stand a great chance at maximizing your wealth by playing the Index Investing Game. It takes hardly anytime, needs no mastery, does not consume time. Instead of predicting which stock will go up or what sectors will do well next year, just invest in Index fund and forget about it. Most fund mangers will under-perform it anyways. Stocks will likely outperform inflation, it will go through a roller coaster ride in the short run, which can create heart burns for those who don't understand this well. But in the long run, they will offer consistent returns and create real wealth after inflation.

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