Category: Investing Process

Use brokerage reports to gain insights

It has become fashionable for investors to slay brokerage reports and broking community as whole, while there is no denying fact that sell side analysts often have incentives to churn out report after report to keep the client trading, However we can’t discard the good work done by brokerage community, some of the brokerage houses certainly do a fair leg work and follow-up on their recommendations.

I think we as investors can benefit by using one simple principle – Separate Fact from Fiction

So how do we do it ?

Inquisitiveness will help us, in this post I would run an example using an ICICI Direct and Dolat Capital report on IPCA laboratories to demonstrate how we can leverage on good work done by these brokerage houses. Interestingly one brokerage is recommending sell while other one is recommending buy – Love these situations 🙂

Let’s begin download copies from here & here, and to gain maximum from this post keep those reports and read them in tandem with content below

First up commentary on,

Operating Margin

ICICI

EBITDA margins increased ~314 bps to 24.7% (I-direct estimate: 24.0%) mainly on the back of an improvement in gross profit margins and

… Read the rest

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

Ready to Shop stocks ?

Are you shopping stocks ?

My previous video post “Selection by Rejection” was inspired from the learnings in “Beating the Street” by Peter Lynch

Shopping stocks

Why retail stocks ?

  1. Easy to understand business
  2. You can wait for business to prosper before jumping the gun and buying. I will give you an example

Go watch this

From 1962 to 2010 Walmart opened – 0 to 4393 stores

Now Walmart was and is an exceptional company, however the point is people could have invested in Walmart in 1972,1982,1992 or even 1995 and still would have made multi bagger returns. See the chart below showing returns from as late as 1995

The stock has been a six bagger in last 19 years , even after story being completely known across internationally and I am discounting the huge dividends it pays each year

Shopping stocks

Where to find these stocks ?

The best place to go for shopping stocks especially retail stocks would be your nearest shopping mall. Many of the biggest gainers come from the places that millions of consumer visit all the times. Given this was not possible for me I started with BSE website and list of companies listed on BSE. I was … Read the rest

Select stocks by rejecting

Charlie Munger said Invert always invert, while selecting investments use powerful rejection criterias to remove unwanted research. In this video we show how by spending less than 30 minutes you can reject a lot of department stores companies to invest.

Watch this

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Unable to access link click here

I will update reasons for selecting thumb rules in my next post… Read the rest

Learn top down Investing

Top down investing is one of the methods used by investors to identify opportunities. What is top down analysis – read this investopedia link to familiarize yourselves with this approach , In short the diagram below depicts the approach

Top Down investing

Putting top down analysis in practice –  Download this excel , it has all active securities that currently trade on BSE. Now lets see how to use this sheet to do top down analysis

Step 1 – Identify the economy which is growing fast – In this case we stick to India as we intend to invest in Indian stock markets

Step 2 – Identify sectors that are growing fast in economy, now this is little tricky, We have to be aware what is happening around us,  you need to read articles like this and reports like this to know what sectors / industries are doing well

Step 3 – Once you have identified sectors, pick sector whose business is easy for you understand and one which you can explain to a school boy.

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How to select stocks like Peter Lynch ?

Peter Lynch  deserves a place in the hall of fame with his average returns of 25+% per year during his 13 years tenure at Fidelity Magellan Fund.  In one phrase his investment style can be summed as “buy what you know” Although it is very difficult to quantify his philosophy as a rule of thumb, however after reading his classic best selling book ” One up on wall street”  reader do get an insight into his stock selection method. Putting together 5 key tenets below

1. High growth – Earnings drive prices, companies growing fast have to be bought to make inflation beating long term returns on invested capital. Lynch always liked high growth companies however he was wary of very high growth companies as their could be earnings manipulation, he avoided companies growing at 40%+

2.  Price earnings growth – The price/earnings to growth (PEG) ratio is used to determine a stock’s value while taking the company’s earnings growth into account, and is considered to provide a more complete picture than the P/E ratio. Lynch considered stocks quoting at PEG < 1 as attractive, they fitted well in his theory of growth available at reasonable prices (GARP)

3. Low … Read the rest

How to really use expert advise ?

If you read Sheena Iyengar’s fantastic book “The Art of Choosing”  you will understand that in areas where we don’t have expertise we should seek advise to make decisions. Given that financial literacy in not taught in schools and most of the people pick investments like clothes, investing definitely fits the above bill.

But a lot of times financial experts have ulterior motives read earning cut from brokerage houses and almost no accountability for their public predictions. Add to that asset prices change daily and plethora of information is dished on our table, we just can’t keep track of how experts have fared.

Warren Buffet said “Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway”

Is all expert advise on financial investments garbage ? – No

They are experts and they can read financial information and make sense of it, however as I noted above they have keep to making predictions to make sure trader keeps buying or selling so that brokers continue to make money. It is a vicious cycle.  There is a concept that quality of your predictions go down when … Read the rest

Identify – 10 investment ideas in 60 minutes

Circa 2011

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In investment lexicon smart money is referred to as institutional money of foreign financial institutions (FIIs) and domestic financial institutions (DIIs) which is invested in capital markets.

Investopedia explains smart money as
 
 

Because insiders and better-informed speculators typically invest more, smart money can sometimes be spotted by greater than usual volume, especially when little or no public data exists to justify it. Knowing who the smart money is and when and where they’re investing can be of great benefit to retail investors who want to ride the smart money’s coattails.

 
The highlighted part in elucidation got me operational, how can
… Read the rest

The most amazing way of finding new stock ideas – PP !!

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One day  while waiting in a hotel lobby for a conference on capital markets  Freida bumped into me. “Hey how are you doing ” ,

I am rocking as usual – You say, What have you been up to these days and what brings you here ?. Freida still  playing with her locks, ” I am here to attend this conference hoping to get few tips to invest in markets” That sounds interesting. Freida almost immediately ignoring my remark “You  have been in markets since the time I know  you – give me some hot shot ideas to put money and make a windfall ” Ah ! I don’t
… Read the rest