Month: November 2014

How to determine size of bet ?

There are two schools of thoughts lets contemplate over them

Balanced diversification

Rohit Chauhan – On his blog [Emphasis Mine]

My bet or size of the position is generally 2% or 5 % and a max of 10% if my level of confidence is very high. However I am not into portfolio balancing. So if my best idea has done well and is now say 20% of my portfolio and I think is still undervalued, I let it run and remain in the portfolio. The only time I would sell would be if the fundamentals of the company deteriorate or the company becomes highly overvalued

Concentration

Warren Buffet – 1965 letter to Partners [Emphasis Mine]

I am willing to give up quite a bit in terms of levelling of year-to-year results (remember when I talk of “results,” I am talking of performance relative to the Dow) in order to achieve better overall long-term performance. Simply stated, this means I am willing to concentrate quite heavily in what I believe to be the best investment opportunities recognizing very well that this may cause an occasional very sour year – one somewhat more sour, probably, than if I had diversified more… Read the rest

Case Study – Value Companies – Noida

Valuing companies is a combination of art and science The DND Flyway (Delhi Noida Direct Flyway) is an eight-laned 9.2 km  access controlled tolled expressway which connects Delhi to Noida, an industrial suburb area. It was built and is maintained by The Noida Toll Bridge Company Ltd which we will try to value in this post

We discussed few valuation methodologies for a fast grower like CERA in previous post in today’s post we will try to value a slow grower /annuity kind of business

We will use below methods

Company Type Valuation model Basis Driven by Assumptions
Slow Growers Average PE Value Method The company is valued at its average PE for last 5 years Earnings Implicit assumptions that company would trade at average PE
  Economic Value Method Current EPS is converted to perpetuity with model discount factor Earnings Share is treated as perpetual bond
Liquidating business/ Cyclical / No growth business Graham Number Theoretically, the maximum price that a defensive investor should pay for the given stock Earnings To be used in bear phase for cyclical business
Fast growth Companies Graham Intrinsic Value The formula as described by Graham in the 1962 edition of Security Analysis Earnings The
… Read the rest

Case Study – Value Companies – CERA

Valuing companies is a combination of art and science – CERA sanity ware is a fast growing consumer focussed bathroom solution company in India, which we will try to value in this post

Before valuing any company answer these basic questions, this will enrich your research

 

  1. Do you understand the business ? Is this an industry you are comfortable talking about ?
  2. What does the company do to make money ?
  3. Is company taking undue advantage of any of its stakeholder ?
  4. Will Company be in business for next 5 to 10 years ?
  5. What is the competitive advantage of the business ? (Moat)
  6. Does company has ability to raise prices ?
  7. Is the product differentiated ? Corollary to the above question ?
  8. Is management honest and competent ?
  9. Is the business capital-intensive ?
  10. Is the business doing mindless imitation of peers ?
  11. Are debt proportions for company meaningful ?
  12. Is it selling for substantially less than they’re worth, or B) that the intrinsic value of the business was going to grow at a compound rate which was very satisfactory

Then equip yourself with various valuation methodologies to answer question 12, I use below as guide, and its evolving … Read the rest

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How to Time markets ?

Before you pull out the gun and knock my head off even for suggesting to time market, let me tell one such experience where discipline and patience has helped me to time market

Lets begin – Cicra Feb 2011
I had accumulated decent savings in short term debt funds and hence I started to look for opportunities in stock market, My strategy was to look where the smart money is investing in small and mid cap space, so I started digging holdings of successful mutual funds , funds which had given more than 18% CAGR return for last 5 years
Quite a few funds were shortlisted, next I sorted these funds with least expense ratio and then chose five funds in order of highest 5 year CAGR returns.
The subsequent exercise was to determine stocks owned by these funds, a minimum of two funds should own a company to make it to final evaluation list, you can read this method in a detailed post I did some time ago
Final list looked liked this

IPCA-1

Do I under all of the above business?

Obviously no so chemical companies – Bayer, Tata Chemichals, Zuari,UPL were first shown the door followed by Mining … Read the rest

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