The Good Bad and Ugly

Market has corrected in recent times substantially and there are few trends which are driving the markets in near term like Global Energy Prices, Inflation trends, Impact of Monsoon on Inflation, Leading economic indicators (cement dispath, Auto sales etc), Interest rate / Bond yield movement, Valuation of Sensex, FII Investment trend and Profit Margin situation of Sensex Companies & Future Expected Trend. We are at a stage where a 5% to 10% correction in the stocks can turn investors bullish. We will discuss the reasons for that here. We were picking few quality names in Indian consumption stories, coupled with few export oriented companies which have long way to go. We will continue to add them in our portfolio. Infact, a few names become so attractive that, we have advised subscriber to invest upto 15% of their portfolio into these stocks. Why not, Concentration in quality names, leads to wealth creation as we have seen in last 20-30 years.

 

There are stocks in the market today that are quoting at 60 pe and those wih 20 pe. It is the nature of the market to overrate companies that are showing high growth rates and punish those that have temporary setbacks and not growing as much. There is a glamour element in stock markets just as in Bollywood. A fundamental investor should screen through those companies that are undervalued in such-times due to temporary growth hurdles but are likely to increase their profits soon. The best ones who can show this behavior are the sector leaders who are in the unpopular phase of growth. They generally have the best people and resources to turnaround. Benjamin Graham calls them unpopular large companies’ model.

This is a “low risk and high probable way” to increasing your wealth. This looks obvious but is difficult to practice as it requires a mindset change, patience and belief that money is not going to be made overnight. It requires you to not be fully dependent on the markets and that you should have a full time occupation that will distract you from the regular moves and moans of the stock market.

It serves our interest to remember that valuations are relative to the times we are in, the mean growth of the industry and other sentiments. So it is impossible to develop a model where you buy low and then sell high, as the discovery of high or low is only possible in hindsight.

Which are the companies that are sector leaders and going through a temporary phase of low growth? Who are most likely to get back to high growth? Are they cyclical businesses or secular growers?

Email us for a copy

research@learninvest.in

When The Risk Goes Down

We have witnessed a sudden fall in the market over the last couple of week. It has gone down nonstop making an amendment to its bullish trajectory and worrying market enthusiasts. Some might have jumped to hit the exit   button while seeing some stocks correct as much as 30%.

If an investor has never seen a bear market, he might be deluded to believe he was a long term investor with thinking rooted in logic. Overnight he can pack his bags and leave the stock market.

Markets follow life, every high has a low and every boom will end in a bust. The vice versa is also true and as an investor we take advantage of the second scenario only, always. A stocks worth is not measured by its price but by the value of the business. When the price goes lower, the risk also goes down. What better situation can an investor have?

An investor is the one who owns a business for generations and not get worried of the price as the value of the business does not change that frequently. There were many businesses that are well run and recommended recently by many analysts, many of them have corrected by upto 30%. If you did believe in them, this is the time to act.

Let not the errors of omission make you poorer than the errors of action you have taken this far. When the risk reduces, take them as the odds are in your favor.  One would never know how far it can fall, but if you see value and you are willing to own the business like its owners, then lap it up. You will never go wrong by waiting it out.

Long Term is NOT Lazy term

Most people misunderstand Long term. It does not mean that you buy and forget only to return later after many years. Long term only means to take advantage of compounding. Long term investing means to know the business so very well, you have visibility to the micro and macro economics of the stock and the industry. It means more work, more knowledge and not really a patient attitude borne out of laziness or unwillingness. It means greater responsibility.

There are many philosophies to investing and one needs to choose what suits his mental makeup. Not every philosophy will work well universally as the brain composition and wiring is different to different people. It is true that only 7 out of the original 30 stocks of 1980 Sensex are alive today. The 23 other businesses have vanished. This is what long time does to businesses. Century Mills form the Birla group was a market leader and darling of the stock market in the 80s much like todays' Infosys or L&T. Who would have then thought such a leader from an impeccable business house would vanish from the radar.

How do you then protect your self from such changes? By closely monitoring the business environment and the stock. By being in touch with reality and making changes when things go wrong. The strategies that are created looking at the past will not work for the future. Change will be the constant and the pace of change can only get faster in the information world. The stock market is not for people unwilling to  put work. You need to protect against the risks and that will take care of the returns. Building a portfolio of diversified stocks is a first step. A discipline for regular monitoring and being prepared to make changes to the portfolio is another.

A stock as an asset has a unique value but is perceived differently by the bidders in the stock market and hence the one who pays the most gets it. Winners curse says that the buyer of a stock either over pays for it or the value of the stock is lesser than anticipated by the buyer. So beware of the competitive arousal that can do an investor in. A bull market is a preparation for the next bear market. Invest gradually over a period of time. The market is going to be around for a long long time although we can’t say that for the individual businesses in it.

When Donkeys can Fly

There is a mood in the market today that every stock will spike irrespective of their quality. This is the time most people who are entering the race late  will witness euphoria and fear at the same time. People will sell fast believing that profit is temporary. It requires great courage to hold on to wonderful businesses even when there is not much happening on the surface. Most of the the spike in stock prices happen in spurt over a short period of time which is not known.

The market it self has gone by 100 times in 30 years which is the average of index stocks. Specific stocks have done much better. So hold on to best stocks with patience, never sell, have courage to hold and not book profits

Best returns come when good business are bought at an early stage before the general markets get a whiff of it. Buy small companies when that are not popular and show high growth , high roe and have attractive valuation.  We need to distinguish between growth and longevity of growth.

We held on to Cera since 4 years now and we bought the stock around Rs 200 level.

Here is what we wrote then

"I am right now investing in a very small sanitary-ware company. its a small cap available at cheap valuation. It is not tracked by analysts thus available very cheap. They are growing at a good pace and have a very strong balance sheet. I believe it will get to 3X to 4X in as many years. The company sailed through global recession, profitably. It has never given up profit margins for top line growth – speaking volumes about their focused approach and business acumen. There’s not a single year during which they have witnessed a de-growth. "

We sat tight on it and the investment has gone up by more than 10 times in 4 years. Some times market surprises us positively and we accept it with both hands. When you have no convincing idea, it is better to preserve cash and wait for that idea that will be multibagger.

Currently we have identified small companies which have the attributes to make in big in the future and are taking some positions, will add over time and share details at an opportune occasion. 

This Stock That is Not for All

I start with an interesting story of A drugs

While the company has grown its earnings and profits on a 5 year cagr basis by about 25% and eps by about 30%, it has not been a continuous increase. It had stunted growth for a few years and an occasional flat or slight negative growth. This reflects the nature of dealing with small caps while this may not reflect yet of an ‘arrived’ company or a very capable management. Small cap companies can exhibit in-consistent growth but can prove to be a multibagger over long run when the management matures and get their business into mainstream. 

If you look at A Drugs, say you invested Rs 100 a stock it remained in that range for 2 1/2 years until about June 2012, then it doubled its range and stayed at around 200 for many years until Jan 2014. As the bull market roared, it broke the range and climbed nonstop to 900 in about 10 months. Essentially an investor needed to have patience for 4 whole years seeing the money only flat or at best double and then for the wait he was rewarded 10 times in just 10 months.

A very good lesson while dealing with small caps. 

We need to identify businesses run by outstanding management with a high level of integrity and trust. What is the point in having a management that has incredible passion to success but are adopt wrong ways to grow, they will go down one day as we saw with Satyam. I would prioritize management Integrity as the top most trait for a successful stock.

Quality of business and growth in earnings come next. A capable management can grow companies even during times of adversity and we can see them in the ROE and ROCE over a historic time range.

Every time I prospect a business that has potential to grow and advise an investor, the only question invariably is how long one has to hold and how much will it multiply?

When we make an investment without understanding the underlying business or its prospects, we lack in conviction. How can we hold on to a stock when we lack in conviction? We will run out patience and finally out of luck. The only way out is to unlearn then learn and invest. Unfortunately I do not see institutions engaged in teaching how to invest in stocks. The few that offer, pass on tips or leads at best. The current state of the industry is bringing fatal damage to itself and the investors. Its a place of middlemen and gamblers.

An aware investor might say that stocks are not meant for him after he really understands what it entails to be successful. To me that is perfectly fine as it is a conscious and well informed decision.

A few enticing events attract our attention to the pharmaceutical industry, if you are interested in a copy of the same please email research@learninvest.in or ram@learninvest.in

5 Stocks that are ready to Zoom

Frankly there are no such stocks to offer. Such has been the caption in ads of brokers who are taking advantage of the bull markets witnessed in last few months. Why are you in a hurry to deploy cash when you have a lifetime to do it? Why are you in  a hurry to invest when you were doubting all these days? This is a good time to start buying but not to burn out. What you start today should be a marriage that lasts a lifetime. Just as you would invest and manage in a relationship through its highs and lows, so also you need to persevere in stocks.

One of the most beautiful messages I heard recently was, the whole world is the sum total of results of the actions of a few individuals who have realized and actualized their full potential. We can count the people who have made a difference around be in business or in social enterprise. Many of us may not be able to achieve that in this lifetime, this is the harsh reality. But what we can indeed do is to be aware of that fact and also be aware of those gifted individuals and partner with them. That's to me what the stock market provides as an opportunity. It is definitely not a platform to park your limited and time bound surplus cash with the hope of making a killing in a few months. As Thomas Phelps puts it, Fortunes are made by buying right and holding on. An average investor would sell his stock once it appreciates by 30% and then he looks for another idea. He does so to avoid the regret of losing his potential gains, should the stock go down. The market requires a lifetime of dedication and patience.

A stock is bought for a future value that you can fairly predict today. The future is may be 10 or 20 years from now, so you actually get it for a small percentage of its final value at vesting. Honestly this is over simplifying investing, as there are many variables during this period including emotions, cycles and business changes that can happen over the long term. Hence it is paramount to monitor them and make course corrections if required, but broadly that should remain our main job as investors.

Recently I was meeting an investor retired from a PSU who was asking me what ideas I was working on. He seemed fairly knowledgeable about the markets and he was aligned to my philosophy of business like investing. We got talking and then I asked the seemingly middle class person about his holding. When he revealed the figure, I was pleasantly shocked and asked him how he managed to do that, to which he replied ‘I never sold’. Most investors ask me why they would invest if they can’t sell, or if they can’t book profits. I go back to the basis of business like investing. If you were running a very profitable and successful hosiery unit, would you sell it? How does it change when you hold the stock? Hold to your stocks as long as their earnings are increasing year after year. Anybody who does not believe in this philosophy is looking at stock market as a gambling den or purely to keep himself busy.

Investing is a boring profession. You are better at it if you have other occupations that can keep you busy.

Blogs that may be of interest

How our attitude determines our wealth

The 60:40 Ratio

How important is it to pick the right stock in comparison to bearing the right attitude?

You could have invested in the best companies but without developing the right attitude, you would rarely gain from these stocks. One might end up selling at the wrong time and lose out on all the potential gains. Wonder how many people would have ridden on our stock recommendation CERA when we invested in it at 200 levels? it’s been a multibagger of 8 times. Frankly not too many people made money as most sold in fear, when it at best doubled. On the other-hand people who wanted to be part of a promising sector, a well managed business would have held on to it. I still hold because I consider my self a business man who has invested in a sanitary-ware business, because I am confident that the management of CERA will deliver growth in earnings and I will sell only when one of these changes. Thus I stop seeing stock price movement as a need to buy or sell. For that matter, if I want to start a business in another fledgling sector, I would rather look at an existing franchise rather than build it up grounds up. 

A word about management, they are the people who make it happen. So one needs to be very cautious before trusting your business with them. if you look around in your own place of work, you can see how some people can bring magic to the results, some exclusive set of minds who have ability to execute their plans well and evolve constantly in all conditions. Invest with them. We have examples like Dilip Shanghvi or Sunder Genomal, you will rarely go wrong by trusting in their ability to execute.

When I looked at how people waited for months to get their bullets delivered, I had already missed investing in a great brand, but I caught up later as I saw during my recent long weekend outing, the craze and pride that bikers have for their hobby together with a spendable income. I believed the opportunity for the company was large and they can exhibit consistent growth into the future even with a current market cap of Rs 35,000 crore. The stock market provides a great opportunity to set up your business in no time. What would you do if you were to set up a business? You would study the industry, or follow your domain expertise, talk to people in the industry, verify details and once you are convinced you would make your financial outlay.

Investing in stocks is no different to setting up your business. When you approach stocks with this mindset, it becomes business like investing. What I refer to as building a right attitude. This is far more important than identifying the best stocks. Today we are in a world of information overload, so all data are available. Yet very few make money in stock market, it is because there are no institutions to train on building the right attitude.

This blog in a humble contribution in building the right attitude to investing.

We are still holding on to Our Kiler Stock, it has only doubled 

email for more information ram@learninvest.in or research@learninvest.in

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

Other blogs that may interest you

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