All multibaggers started with small market caps One of the most loved after words in the stock

market is the multibagger. Typically multibaggers are stocks that go up a number of times. I plan to post a series of write-ups on the similarities in specific financial attributes for the multibaggers of the past ten years. I have named the series as " How to identify the next Infosys?". This is so because Infosys was a shareholder's delight not only in terms of price appreciation but with respect to other financial attributes as we would notice once other write ups are posted. I have excluded companies like Bharti Airtel, Unitech and Pantaloon Retail because they have not completed 10 years of listing. Markets capitalization also known as Market cap means the amount of money required to buy all (100%) shares of a company it is computed as the number of shares multiplied by the market price of each share. For instance if BEML Rs 900 and there are 3.67 crore shares issued the market cap would be 3.67 crores X 900 = Rs 3303 crores The market cap of a company is inversely proportional to whether that company could be a multibagger or not. In other words companies with small market caps are more prone to going up a number of times compared to companies with large market caps. In the analysis that I did for the multibaggers for the Indian stocks markets an interesting phenomenon was identified. All multibagger companies started from a base of very small market capitalization In the table below, I have presented a case for buying companies at low market caps. About 10 years back these companies were available at market caps that were less then Rs 1000 crores. The PE for quite a few of them were over 30 and the stock price kept going up because the earnings went up in all cases and the PE kept on expanding in some select cases. In the initial years of growth these companies were very different from a greater fool theory. The greater fool theory states that a fool buys an overvalued stock and sells it to a bigger fool who looks for a greater fool to dump the All multibaggers started with small market caps same. The idea is Company Price as Market Price as Market CAGR not to become the on Dec Cap * as on Jan Capitaliza last fool in the 31 1995 on that 02, tion today chain. However day (Rs 2006 (Rs unfortunate it may crores) crores) sound almost all Infosys 26.15 708 2996.75 81221 59.68 multibagger Technologies companies enter Satyam 7.12 228 737.80 23641 59.05 into the greater fool Computers mode. The better Wipro 9.13 1290 463.45 65516 48.09 ones recover while Sun Pharma 19.13 354 682.15 12635 42.96 the bad ones falter. Hero Honda 24.40 479 859.70 16890 42.78 The figure to look HDFC Bank 29.50 928 707.45 22266 37.40 for in the above Cipla 21.66 646 443.40 13228 35.24 table is column (c) Zee Telefilm 12.87 534 156.90 6513 28.41 which reflects the HDFC 135.75 3352 1205.35 29766 24.40 market cap at which these companies were available about 10 years back. Column (e) tells us the current market cap. In some cases stocks have gone up by over 100 times over the said period.

So looking at the table one can easily observe that except WIPRO and HDFC all the other companies were in a range of less than Rs 1000 crores market cap. At that time the total market cap of the Indian stock market was less then Rs 400,000 crores. Today the market cap of all the stocks has gone up by about 7 times. Therefore the yardstick to look for companies below Rs 1000 crores market cap can be extended to Rs 6,000 crores. Any ides anyone on companies with small market caps and which are ready to become multibaggers! Enterprise value = Market cap + Debt. Some companies take a lot of debt so on a market cap basis they appear cheap. In that case we look at enterprise value. On the other hand some companies have cash on their books in that case we deduct the cash from the market cap to arrive at enterprise value.. Let us say that a large cap has a market cap of US$ 750 million. It is very difficult to get a multibagger in a large cap unless you are sitting at the start of any cyclical rally. For e.g. in 2003 we could have made a multibagger out of cement or any metal but not out of Infy. So if we say a company that will grow 10 times in 10 years is it a multibagger in the true sense of the word we want to see it. 10 years is a long period of time and this means a CAGR of 26% only. There are many companies in the Cricket XI section that can do this kind of growth or even better that. So pls clarify, are you saying that chances are remote that since Pantaloon and F.T. are already large caps they will not be multibaggers going forward from current level (10 to 15 times in the next ten years) ?: These are unusual situations where the sheer size of the market is about 30 -40 times the current level of penetration. In fact we could see a 10 bagger in 5 years in both these companies if they are able to execute what they said. Here we should recall that Bharti Airtel moved from a market cap of Rs 7000 crores to Rs 100,000 crores in 3-4 years because the market itself was growing so fast. So there could be relaxations to this theory but this relaxation is more of an exception then the norm. I have an interesting observation about Market cap... Havells India sales is higher than its market cap and it should catch up subsequently...keep an eye on it.. Are there any examples like this? Just sales should not be the criteria, the margins are as important. VIP Industries (after merger with Blowplast), sales would be around 500 crores and market cap around 250-300 crores. Om Shivaya makes an interesting point. Technology Companys trade at 10 times market cap to sales whereas something like a Pantaloon trades at 1.5 times sales that is because the former have higher profit margins compared to the latter. Also the market cap should always be looked at according to the size of the opportunity. If you are in the middle of a crazy a bull run, you are likely to get the most unlikely names as wealth creators The sheer force of speculation has pushed low-profile companies high up in the wealthcreators' list. Often, companies and sectors, which do very well for a few years, stagnate in the following years.

Indeed, in every bull market, one or two sectors do extremely well where even garbage floats to the top. Since value is a function of performance and perception , a slight change in either is enough to cause prices to tumble. Over 10 years, the Sensex had gained 347%. Raising shareholder value is like mountaineering. To remain even a modest value creator you have to keep climbing. As you go higher, it gets tougher to climb the same distance. To use another common metaphor, value creation is like being on a treadmill. You have to keep running (growing) to stay where you are (to maintain value). Most people find it hard to understand that that for mature and large companies, even if 'performance is good', shareholder value may not keep rising Also, in a growing economy like India's, new sectors emerge, attracting smart capital and investment interest. Since the fastest growth is from the smallest base and there is always a fancy for new companies, investors like to bet on companies that are at the base of the mountain. How does one measure wealth creation or shareholder value? This is a basic question and the answer is simple -- it is whatever a shareholder gets out of being invested in a company over a certain period. That means the difference in market price between two periods (adjusted for splits and bonuses) plus dividends. This is called total shareholder returns (TSR). Elephants Can't Dance Market cap has nothing to do with value creation The best in the lot ONGC had a CAGR of only 20% while wealth increased 6.5 times. So the concept that elephants cannot dance should be taken with that perspective that the maximum wealth that can be created is 20% CAGR while in case of a small cap Unitech (freak buy if only someone could do it) was only 80% CAGR which made a 340 bagger on the stock. Though I have not checked it most of these gains would have been in the last 3 years. I would say that maximum wealth creation for a shareholder happens when Talent and Hard work (of the shareholder or fund manager) meets an Opportunity (of the stock). TEDies, comments/views on this please..... India Inc.: Small wonders! (equitymaster.com) It is common knowledge that India Inc. has had its dream run since the early years of this decade and this has been well manifested in the valuations accorded to them in the equity markets. While the corporate growth has been holistic with contribution from companies across sectors, select majors in each of the sectors have made their presence felt. A comparison of the compounded annual growth clocked by a sample of few sectors selected by us to the compounded annual growth in the market share of the top few companies in those sectors, gives us an interesting perspective on this. While it is a given that the low base effect has magnified the growth numbers for the smaller companies, it is also worthwhile noting that a few of the companies have displaced some of their larger counterparts in the respective product segments by clocking relatively superior level and quality of growth. The trailblazers

%Marketshare Cement (Rsm) Grasim+Ultratech* ACC GujaratAmbuja Detergents (Rsm) HLL Nirma P&GHealth&Hygeine Fabrics (Rsm) ArvindMills AlokIndustries Raymond Hotels (Rsm) IndianHotels EIH ITC Passengercars (Rsm) Maruti HyundaiMotorIndia TataMotors Ranbaxy Cipla Dr.Reddy's Steel (Rsm) SAIL TataSteel JSWSteel Software (Rsm) TCS Infosys

FY01 220,062 9.8 11.9 5.9 51,788 35.9 21.4 2.3 0.7 0.3 0.1 40,775 16.9 11.7 3.3 169,973 48.2 17.0 7.3 5.9 3.3 3.0 492,750 28.1 9.2 2.7 216,849 N.A. 8.8

FY03 234,042 11.6 10.3 6.7 44,785 43.1 21.6 2.7 0.8 0.5 0.1 39,543 14.4 9.7 4.9 189,800 44.5 20.0 11.4 368,652 8.6 4.2 4.6 618,453 27.6 11.4 3.8 278,363 N.A. 13.0

FY06 330,139 21.1 11.3 9.2 53,547 40.4 20.3 6.2 0.8 0.5 0.2 65,541 16.5 11.5 11.9 331,989 41.6 23.7 13.6 461,152 8.7 6.5 4.7 24.3 10.4 5.2 504,850 21.2 17.9

CAGR 8.5% 16.6% -1.0% 9.3% 0.7% 2.4% -1.0% 21.9% 2.7% 10.8% 14.9% 10.0% -0.5% -0.3% 29.2% 14.3% -2.9% 6.9% 13.3% 7.5% 8.1% 14.5% 9.4% -2.9% 2.5% 14.0% 18.4% 15.2%

1,483,679 1,559,295 1,689,418 2.6%

Pharmaceuticals (Rsm) 320,618

1,172,113 18.9%

Wipro 8.2 11.0 16.3 14.7% Source:CMIE Industry market size and shares - March 2007 * The market share of Grasim for FY06 includes that of Ultratech (9.4%) In case of manufacturing companies like Grasim, capacity addition (standalone as well as acquisition of Ultra Tech) and higher utilisation levels apart from better realisations and improved efficiency has helped the company report stronger numbers. While Ultra Tech was one of the major propellers of the company's growth, savings in operating costs resulting from on-going modernisation efforts, up-gradation of plants and energy optimisation have aided the gain in market share. Similar capex led volume game was the case with JSW Steel in the steel sector. In the detergent market, P&G Health & Hygiene's 'Tide' garnered better realisations as compared to peer HLL's 'Surf Excel' and 'Rin', thus scoring higher over the latter. The strong performance of the company was also on the back of focused marketing initiatives and deeper distribution. Both Raymond and Tata Motors derived the benefits of 'exclusivity' in their respective sectors by regularly launching new products and catering to a niche segment. Cipla, on the

other hand, focused on stability of revenues through its contract manufacturing business, against the volatile generic business (subject to pricing pressure) of its peers Ranbaxy and Dr. Reddy's. Players in the service sectors, like Infosys (software) and ITC (hotels), focused on expanding their capacities in terms of employees and rooms. Better pricing power in terms of billing rates and average room rentals (ARR) respectively also supported their case. The point that we wish to drive home is that while companies with bigger balance sheets, higher turnover and wider reach may offer a comfortable hedge in times of short term volatility, the smaller and equally promising entities may seize a larger chunk of the growth pie in the longer term. Thus instead of concentrating only on the blue chips, investors must also evaluate the prospects of some of the smaller entities in the sector that have an equally compelling business model, with the potential to generate higher growth and returns as compared to their larger counterparts. The catch also lies in the fact that you may find the most opportune moment to buy the Infosys' and HLLs in the making at attractive valuations! As buffet says, first decide the stock and then decide a reasonable price that you should be buying it at .. and leave all the other details like whether/when the trade gets executed to Mr. MARKET !! Om ji there is a very interesting book titled "What works on Wall Street?" I would try and post something out of it but that book has details on what are the factors to look for in winning companies as per historical averages. See unless the PE is significantly less then the growth rate we cannot term the companies as value. In all the above examples the PE's are running closer to the growth rates. A PE of 20 on a 40% growth, would that be good enough for a midcap value Basant sir? Absolutely that should be a nice matrix to get involved with. On the other hand with growth companies you can get that kind of a matrix with waiting period of 6-12 months so no big deal there except for the time lag. As long as that ratio does not get really out of shape the earnings catch up with valuations quite easily. Question is how sure we are on the visibility. Yes, visibility is quite important. At least a 3 year visibility for me. Thank you for your valuable inputs as always and thanks for that reaffirmation for a 20 PE entry for a 40% grower. In fact, this 20 PE and stuff is the job that I do last. It's like being a "construction company". Once the whole design and plan is setup for building a colony, the last part is employing the construction workers who will actually lay those bricks down. Hence, my "water purifier" system for healthy water: 1) Management filter (credibility, vision, shareholder-friendliness, transparency, aggressive): 50% of the system 2) Past growth rate filter (viewing financial reports, visiting websites for news): 20% of the system 3) Future growth rate possible: 20% of the system 4) Getting a "value-zone" price entry (Usually, try my best to keep a PEG of less than 0.5 between Forward PE and Future Growth Rate.): 10% of the system. Once something goes through all these filters, then I drink the water. Others can share their views too, so we all can learn together. Here's are excerpts from an article written by Mohnish Pabrai almost 5 years ago. Well....some arguments are debatable. --------------------------------------------------

The Danger in Buying the Biggest By Mohnish Pabrai There is a French saying: "Buy on the cannons, and sell on the trumpets!" Whether they were speaking metaphorically or not, that's exactly what Sir John Templeton did. Templeton is considered by many to be, perhaps, the greatest global stock-picker of the 20th century, so it seems worthwhile to subscribe to his proven theory of buying beaten downstocks at points of maximum pessimism. The reverse of Templeton's approach would be to buy stocks at points of maximum optimism -and a good place to find optimism is among the most valued businesses in the world. If you started with $10,000 invested in the most valuable business when the Fortune 500 list was released in April 1987 (that year it was IBM and every year thereafter reinvested the funds in the new (or same) most valued business, by 2002, you would have realized an annualized gain of just 3.3%. Over the same period, the S&P 500 delivered about 10% annualized.

The Most Valuable Fortune 500 Business (1987-2002) A strategy based on this table would have trailed the S&P Year 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Company IBM IBM IBM IBM IBM Exxon Exxon GE GE GE GE GE Microsoft Microsoft GE GE Market Cap* $89 68 70 61 75 69 78 90 92 126 170 260 419 492 407 401 Revenue* $51 59 63 69 65 103 100 40 43 46 49 56 20 23 68 73 Net Income* $4.8 5.8 5.2 6.0 2.1 4.8 5.3 5.9 6.6 7.3 8.2 10.7 7.6 9.4 14.1 16.6

*Figures in billions. Source: 1987-2002 Fortune 500 lists and Value Line While the data demonstrate the superiority of the maximum pessimism investment approach, there is something interesting at work here. An examination of the table shows that none of the most valued businesses got much beyond $100 billion in revenue or $10 billion to $15 billion in net income. Is there a natural upper limit on revenue or profitability of a business? Nature provides some possible answers. Mammals rule the world, but the largest land-based mammal is the elephant. Mammals have to eat a lot to generate energy. As a result, mammal size is bounded by the energy a given area of land can consistently supply. It is also bounded by internal organs like the heart, which have to pump blood to the body's extremities. Thus, these extremities are physically constrained from being too far from the heart, and that imposes another size constraint. Lumbering

Large businesses have their own extremities. There is a critical need to rapidly get data back and forth between the central organizational heart (CEO) and all the extremities (customers and foot soldiers). Over the last 100 years, the speed and breadth of these arteries have increased dramatically, and with them has grown the size of our largest companies. There is, however, an upper limit to senior management's ability to accurately process the various inputs regardless of the size or speed of the arteries. This limitation translates into a size constraint on most businesses. In addition, the most valued business is under constant attack from the marauding invaders who want to unseat it. This leads to what Clay Christensen, author of The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail, described as the disruptive innovation phenomenon -- against which the incumbent is virtually powerless. The Law All of this leads to Pabrai's Law of Large Numbers. The ultimate principle of this law is that one would be best off never making an investment in any business that generates more than $3 billion to $4 billion in annual cash flow and is considered a blue-chip. These businesses are very unlikely to be able to endlessly grow cash flow. Indeed, cash flows are most likely to tread water or start dropping almost immediately after your investment. A few companies will buck the trend, but they're probably not the ones that end up in your portfolio. Over the years, I've taken a pass on many supposedly stellar businesses purely on the basis of the Law of Large Numbers, and I've never regretted it. Taking insurance while playing Blackjack seems very logical, but it's a sucker's bet. Investing in the most valuable businesses around is no different. Earlier I was also a big fan of the small cap theme. But over the past 12-18 months I have realised that more then the cap it is the scale of opportunity that matters for example cap is important but not the end all. A small cap to make larger returns has to be cheaply valued relatively to a large cap. FOr example if City Union Bank and HDFC bank trade at equal valuations I would prefer HDFC bank and would buy City only if the valuations are relatively cheaper! I think that you have not been able to understand my strategy so let me repeat my investing strategy for you: A) I never hold any large caps. In fact I sold out Bharti once it hit Rs 120 (Market cap Rs 20,000 crores) after getting in at Rs 25 (Market cap Rs 4000 crores) because it was approaching a market cap I was not comfortable with. That eliminates all the established blue chip from my portfolio. I am constantly in search for emerging blue chips and not the established ones. That is why I invest in small/midcap companies. I believe that you can get the next Infosys in a small cap only. B) I hold at most between 3 and 5 companies in my portfolio. Yes only 3 to 5. Once I finish analyzing a company I ask myself one question Is the company good enough to take 20% of my portfolio. When ever I get an answer as yes the next question is OK what can I replace it with. If I get another yes I would buy that stock. I prefer putting all my money into one company but just for the event risk I have divided it into 3 to 5. Since I hold concentrated portfolios 3 to 5 companies I forecast a best case scenario with only the target price of 2 to 4 companies assuming that one will go bust and get me a zero value in the defined time span. If still the overall result looks exciting I would invest taking the mathematical premise that errors will cancel out each other (I do not know which one will under deliver and by how much).Robert Hagstorm the author of a book on Warren Buffet did a study where he found that concentarted portfolios give out better returns

I have lost many 30% to 100% returns by missing on opportunities because those companies did not fit my style of investing. But I have no regret because the ones I hold have more or less made up for that. It takes me hardly one hour to analyze a company but making up my mind (the second part of B above) takes a few days or a even a few weeks at times. This is so because I believe in concentration. C) This is how I like to zero down on a company. 1) I look at the management first. The management is the most important and lest talked about aspect of a company. 2) I like to know what business the company is into and then look at whether it is scalable. I prefer new sectors since the growth is highest there. I avoid cyclical because I cannot predict the peaks and troughs. 3) I then look at the market cap. If it is below Rs 1000 crores I think we could pay a higher PE to that company 4) I would then look at the RoE to see if the company is using its capital efficiently. RoCE is a better concept though because you could hike the RoE by using debt but not the RoCE 5) I would then compare the PE with the growth and the RoE. If there is a big difference between RoE and growth then the company does not merit investments. This is so because for a company to grow at higher rates of growth compared to its RoE it would have to dilute capital. That hurts 6) Dividend, book value is something that I look but do not base any of my decisions upon. I think that they tell you what the company has done and not what it will do. D) Once a stock is bought and the price falls without any change in fundamentals and if I have the required cash I will buy at each fall. Now I do not stop at step 1 of phase C above. I do look at steps 2,3,4 and 5 of phase C above but there is a difference in priority. That is all. For instance I like Financial technology. MCX could be HUGE but I am worried by valuations so each time I want to buy the stock I think in terms of phase B above and give it a pass. So it is just a matter of prioritizing the tools of analysis. No analysis is complete without putting all tools at work. In none of my reports will you find the valuation parameter missing because irrespective of the strategy you use the final objective is to make the stock price a slave of its earning. The question is which one are you more comfortable using when compared to the others i.e. prioritizing the tools. And finally, I have made my 30 baggers this way so I have become used to investing in this fashion.

Pantaloon retail - How I have managed to hold on from Rs 7(rights/split/dividend adjusted). Manish: You know I bought Pantaloon Retail at Rs 50. Today Rights adjusted I am getting Rs 1850 for that the journey between Rs 50 and Rs 1850 is listed below: 1) Since I did not have enough money or expertise to start something on my own I wanted to buy the right company in the high growth sectors. Retailing as a sector was poised to grow so the question was getting into the right company in the sector. 2) At that Pantaloon traded at a market cap of Rs 80 crores against a sale of Rs 450 crores and traded at a PE of 7 times so it was a case of value with growth.

3) In 2003 Kishore Biyani had declared that he would do a sale of Rs 1000 crore in 2005 and I believed in what he said. In fact I always believe in the managements projection unless they have failed in their previous targets. 4) AT that time Trent sold for Rs 150 with Rs 60 on its balance sheet as cash, paid good dividend 2.5% yield and was backed by the Tata. 5) Pantaloon had an inventory problem analysts said that there could be inventory write downs. I figured that could be about Rs 8 to 10 crores so while the issue was significant the amount was not. The problem remains till date 6) I must confess that I was not aware that this stock could go that long this fast. I did write an article on value notes stating that this stock could go up 40 to 50 times but the time zone was 2010 and not 2006. 7) The Management was not considered honest and trust worthy but I had no option. The retailers could only be played through pantaloon and Trent. Moreover the blemishes on the management were more subjective in nature. I saw that Kishor Biyani had mortgaged his personal property to take a secured loan for the company. Thought that he could not do any thing wrong intentionally showed seriousness of the promoter. 8) This is the most interesting of it: I used to stand outside the Pantaloon showroom for 30 minutes and count the number of people who walked out with Shopping bags from both Pantaloon and Westside .They are located adjacent to each other. 9) Whenever I used to take a Taxi, I used o tell the driver to take me to Westside. He showed ignorance then I would tell him to take me to pantaloon and he would immediately respond. I knew people were going to pantaloon more often then Westside. 10) I used to bite the head off the ladies in our family as to which store they shopped more from Pantaloon or Westside. 11) I used to get excited when I saw a Pantaloons bag being carried by any of the commuters and I often remarked to a friend that one day when we see this bag all around this stock could be at Rs 2000+ 12) Was never worried about what happens Kolkata might not happen elsewhere. Rather I used to extract feedback from acquaintances in other cities. Now these were the triggers for buying. How I managed to hold on is more interesting: 13) When ever I met an analyst he would tell me 3 different reasons as to why pantaloon should be sold. I panicked at 3 price levels 14) When it hit Rs 250, Rs 500 and Rs 1200. I panicked because I had never made that much money from one stock and the chance of losing what I had earned was one of the reasons to sell then anything else. 15) At each point I used to evaluate my down side and upside potential. For instance I thought that if Trent could double in 3 years and Pantaloon go down by 50% I would not look that stupid. I constantly evaluate my portfolio as a basket of stocks since it is a high risk high reward game. 16) Many times over the past three years the stock has got expensive but the sheer pace of growth is such that it kind of gets cheap a few months later. For this I must thank Fisher for his book Common Stocks and Uncommon Profits 17) For instance last month it traded at a PE of 20 times FY 07. Today after having recovered 50% from that price it trades at a pE of 30 times Fy 07. 18) I think once you have the downside levels in mind you can handle the situation much better. 19) I never looked for an ultimate target on pantaloon. That is because the company was constantly evolving. I was prepared to sell at any price if the signals were discomforting. 20) Even today I have no targets on pantaloon, just plan to take each year as it comes. 21) All through out I used to look at the market cap. The size of the opportunity is even today 300 times the market cap. In the multiplex business it is only 3 times the market

cap. By the size of opportunity I mean the total sector sales for a particular year. For instance the pantaloon, Big Bazaar Food bazaar brand could be sold at a certain percentage of their market cap and also the roll out of stores will make it an ideal acquisition target. 22) There are talks of reliance getting into retail but then there are two ways to look at it. a) The market is huge so it could absorb another 3 to 4 reliance b) Try and see that if Pantaloon is marginalized the stock could come down to Rs 800 or Rs 1000 if they carry along at their pace then the upsides are open. So it is a question of risk & reward. I do not believe that we will have a Kmart in <ST1:COUNTRY-REGIoN w:st="on">India</ST1:COUNTRY-REGIoN> before 2011. 23) Over the years the set up at Pantaloon has changed they had taken in a lot of new talent. People were leaving Rel Info and Bharti to join this company. I thought that may be these guys could not be foolish. But there were several factors the biggest being the Buy what you see that made me buy and hold it the others were only supplementing. PS: I exited Pantaloon Retail in November 2008 after making a 35 bagger! Thanks. I would put Peter Lynch above all the others. his style is very simple no discounted cash flows, no risk analysis. I mean the triggers that you can get by simply following Lynchs style are amazing. Once you have identified a business it becomes a lot easier for you to analyse the financials. I must have read One up on Wall Street over 15 times. I have underlined the important lines and prefer reading them again and again. My advice is that biographies of the best guys in business should be read like a text book not like a novel. Clearly I am too obsessed with Lynch but I like it that way since it has helped me pick some outstanding investments. No doubt Peter Lynch is best suited for our markets. But it is important for a small cap investor to read Ralph Wagner's book on investments. A Zebra in lion country. I think Ralph Wagners book on investments can give superb insights into picking and holding stocks. Never read his book but I did read about him somewhere. Will try and put in a write up on him. He has compared zebras to institutional fund managers. He says Both seek profits without taking any risks and both prefer moving in herds. well, I would like to ask just 1 thing...Dont you think the suitability of style depends a lot on the market conditions? I agree fully that first you need to make money than to protect money... However; as you make money dont you think we should get across more conservative bets. Colgate was a wonderful play in the mid-eighties, lever in the mid-nineties but for the last 5 years they have not been very kind to their investors. I believe, one has to constantly revolve with one's trading strategies. At the beginning of a bull market, one should have Peter Lynch as his/her guru but if you become a bit concerned, you should have Buffett-like or Benjamin Graham-like investment guru. People tend to think of business when the going is very good but they start worry about financials when the going gets a little bit uncomfortable. I am not trying to sound pessimistic, but I am getting not so good signals on the charts. Vivek it is very tough to change strategies. I am not aware of anyone who has been successful changing styles. Once you make money in a particular style it kind of gets into your blood.That is because you develop conviction in that style nothing else. Finally the style that suits the mind is the best. Also either you are value or growth or blended does not matter as long as you stick to your strategy. For instance value investors may not significant lose money in any stock but

their ability to make 10 and 20 baggers is limited, Growth investors may be wiped out in cretain companies but they hope to make that up some where else. The icing on the cake with growth is if you have 90% of your bets going with you. It is not difficult as long as you have a plan - written or oral does not matter. I have developed an excel spreadsheet model that tells me the fair market price of ANY stock The parameters that I use are 1) Market Price 2) Number of shares 3) EPS forward (if it can be projected) 4) PE forward 4) Market Cap/Sales 5) Dividend yield 6) price to Book 7) Management - I assign subjective marks here for instance Infy would get 10 out of 10 and an RPG co. may get 4 Tata 8 etc etc 8) Growth 9) Industry leader or not - Subjective marking is assigned here 10) Bank rate of interest 11) RoE 12) Ability to be around for 10 years - Again subjective marking. 13) Market cap The weightages differ for each of the parameter. Now this is as much math as you can do. But inspte of all this I use this model as a second line of analysis. This model told me Bharti as a sell when it was Rs Rs 25 and I made a 4 bagger from thereon.That was because there was no EPS for Bharti.It told me a target price of Rs 75 for Pantaloon when it was at Rs 50. But I just saw it but never listened. this is because this model could not think 3 years ahead which we as humans can. As for your question of wealth protection. Ships are most protected at the harbour but still they are made to take on the high seas. India is a service economy, it is known more for its services then manufacturing also if you see the gdp break down the service sector grows at 10% + each year. That is for the broad macro part on the other hand you will get new and high growth sectors (Retail, Media, Insurance, telecom, Pvt Baking)in services only. Also manufacturing is very much cyclical and you have to be nimble footed not so in services. You could buy an HDFC Bank and become Rip Van Winkle for 20 years and the company could grow 100 times (@26% CAGR) you will rarely get those kind of opportunities in manufacturing. The spreadsheet is an inbuilt collection of ratios that tend to balance each other out. Let us take 4 ratios Mkt Cap to sales Growth Price to Book Dividend yield RoE For growth companies the Mkt cap to sales would be higher and so would be the growth rate but they would lose out on Price to book and dividend yield Some companies having high book value will have low RoE since RoE = EPS/BV so they lose out there but would make up in the price to book category. I have devised it in such a fashion that I do not remain dependent upon any single ratio

Mr. Basant, I too like the services sector the most .Services as a percentage of GDP IS SHOWING A RISING TREND and that really shows the tremendous opportunities. Now it is necessary ideally to find a company with competitive advantages that will not necessarily constant requirements of large amounts of cash or at the most for a period of 3 years by which time it should sustain itself for cash. Perhaps banks, print media, TV channels, Tourism could throw up multibaggers. To take 3 instances. Transport Corporation would need to update its fleet but does it really have a strong competitive advantage? I may be wrong but I think not. So it may not be a good buy even if market cap looks appealingly low(it will take a lot of effort on the part of TCI to do well).NDTV

does not require a huge amount of cash to grow exponentially from a relatively small base, it has its audience for a decade or more and so high PE is justifiable and it may be a decent multibagger. ICICI Bank will probably grow organically to a giant banking entity in 10 years because of its competitive advantages. (I do not have ICICI Bank. The only large cap I have is ITC)This is my way of thinking. Great. Could not agree more. And even if one or two ideas fail the rest should make it up. Something like errors cancelling out each other. All service led economies have a market cap to GDP of more than 100% some run even as high as 500% . If you could get a high PE investment right it pays you in later years as well suppose NDTV trades at a PE of 40 and next year also at 40 and the year after that at 40 while ACC trades at a PE of 15 for 3 years. Invariably if you notice NDTV would have given you a 40% return while ACC 15%. The trick is to look at PEG and not PE in absolute numbers as most people do.

The biggest macro tool for doing a country analysis

Market cap to GDP Ratio.
Country Hong Kong South Korea India Taiwan Singapore Malaysia Thailand China (Mainland) Indonesia Philippines Market Cap in Billion $ 862.352 583.429 508.976 436.76 236.172 124.181 108.909 56.006 50.561 35.352 Market Cap as a percentage to GDP% 525.36 85.75 77.53 143.11 221.09 104.96 66.61 3.39 19.61 41.67
Data as in January 2006.Business Standard

Key Observations:
o o The Market Cap to GDP Ratio for a country is the same as the market cap to sales ratio for Individual companies. Service economies have a higher market cap to GDP Ratio compared to manufacturing economies. Alos note that stocks in the services sector which are much more richly valued compared to their manufacturing counterparts. Other passive factors that affect the market cap to GDP ratio are the RoE, earnings growth, macro economic policy framework, corporate governance practices etc

I guess you are referring to the percentage of the GDP that is not represented for instance agriculture is hardly represented whereas you have about more then 25% of GDP coming from there. SO these are additional kickers and need to be screened. But just think we have hardly any representation from Retailing, Insurance and Media whereas most of the developed markets are over weighted with these sectors. Once that happens the Market cap to GDP shall go up further. Hong Kong is a place which is too skewed I would think I do not follow

Hong Kong but there isnt adequate sect oral representation either in their indices or in their GDP. But even if you take the <st1:country-region w:st="on">US</st1:country-region> they are at a market cap to GDP of 100%. <st1:country-region w:st="on">India</st1:country-region>'s GDP is at present Rs 30 lac crores and should grow to about Rs 40 lac crores by the year 2010. The market capitalization of the BSE is at Rs 27 lac crores, which is 90% of the GDP. The previous high tested by the Indian system has been 67%.

Moments!

Market Cap to GDP ratio at the peak 56% 52% 90%

Market Cap to GDP ratio post the peak 32% 21% Take a guess?

The Harshad Mehta boom Ketan Pareikh tech boom During this structural boom

But on the whole service sector companies trade at a multiple of market cap to sales and market cap to GDP is a macro extension of that tool. That is something that economies and stock markets in the South east Asian countries tell us. Whenever we go above 100% we are in dangerous territory. This is because there are a few sectors that are being reflected in the GDP but not in Market cap.

We as investors are always concerned with the returns that we can make. If we could concentrate on minimizing the downside then even nominal returns from the other and one big multibaggers would make the portfolio look very pretty. My sense is that downside could be captured in two ways
1) Buy stocks with high book value and reasonable dividend yield. These stocks would protect the downside but upsides are not guaranteed because a cheap stock could remain cheap for years. 2) Buy companies that are growing at more than 25%. I will illustrate this case with an example. HDFC Bank has gone up some 25 times over the last decade. The stock always traded at a premium to its peers and will continue to trade that way. Many investors feel that HDFC Bank's PE is high and should come down. This has not happened for 10 years. even if you misjudged the pricing and got in you would have been put in a waiting period of one year and as the EPS grew the pE would have become reasonable. So stocks like these become cheap every six months. I like capturing the downside risks from stocks that tend to grow year after year and not by buying high Book value/ high dividend yield stocks. The former assures that after a waiting period your downside will become capped and then there could also be upside lickers. The growth investing strategy is very dangerous though and that is why you need to understand the companies very carefully before investing. Great question. Thank you so much for asking me this question. I do not think that there would be much of a difference between what i would want to start and what I would like to run so I am giving one answer for the two questions. 1) I do not want to be in a cyclical. Earn for 3 years and then cry for two and then earn for three. I want sustained growth. 2) No manufacturing. They always need cash. I am more interested in something that does not need fresh cash. Something like a software product company where you do not need additional doses of cash. 3) It should be consumer centric it helps in two ways a) Cuts down the recession part at least in India b) consumer centric companies do not face bad debt 4) There has to be scale. I should be able to increase revenues very fast without any time lag. 5) Do not prefer much use of technology as in technology any new product could wipe me out without a noise!

That is exactly the way I look fo stocks! I think of myself as owners of pieces of business in the stocks that I own. On a lighter note my dream job is to sell "kachauri sabji jalebi to morning walkers at 6.30 in the morning." Never heard a sweet shop/kachauri sabji walla close down! Yes, 2010 was the final point and in between we would assess the situation in 2007 -08 that would tell us as to what is coming. this is very interesting. About 3 years back I had read Jim Roger's book and there I was told that Jim retired at the age of 37- In 2010 I will aslo be 37 years old. You could call me a copy cat but co-incidentally retailing and broadcating would have reached their peak at that time or slightly before. You would agree that it is too soon to take a call as to what we would do after that since we live in an ever changing world. I would be in some growth stocks or some where where the risk reward ratio is high but favourable. Inspte of liking HDFC Bank and HDFC from the core of my heart I would not be able to buy them and rest in peace as many of my friends keep telling me. Internet could be very very big by that time. too early to take a call. but just look at this 1) Broadband could grow by upto 15 times from 1.3 million to 20 million subscribers in 2010 2) The total internet users will be 20 crores - up by 10 times till 2010. That is why I fancy TV 18.

Yes, personally I would never buy something after it moves because since my choice is so limited I am already invested into the things that I like - if the stock does not move then I keep on buying more of it. Each time in my portfolio I want at least one stock not to move because that helps me to keep loading up with incremental cash. I will tell you a very interesting thing. i first bought TV 18 in October 2003 at Rs 145 from then on it moved within the range of Rs 140 to Rs 150. Each time it moved to rs 240 I would think that now it will break out but it would not it would come back to Rs 150.... At that time I had a good exposure to NDTV at Rs 85 (July 2004 apprrx) and suddenly NDTV started moving up but TV 18 would not budge from Rs 160. AT that time I met Pronoy Roy who was taking an afternoon walk with his wife "Radhika Roy" near the Taj Bengal hotel at kolkata. I walked out of the car and we started a conversation. Initially I thought that he might not respond but he seemed more then eager to communicate. I asked him as to how he saw CNBC and he replied "CNBC is powerful That was enough for me to make up my mind and I thought of switching since TV 18 was getting cheaper and cheaper. At Rs 115 I sold off all my NDTV and converted it into TV 18 at Rs 160 odd. In 3 hours the stock was a Rs 120 and people who had sold out with me were now feeling the heat "takdir kharab hai 3 gghanta mei itna nuksan etc etc" Since I deal in single transactions I had no NDTV left to sell at Rs 120 and the stock rocketed to Rs 140 in 2 weeks TV 18 refusing to move. Soon NDTV overtook TV 18. Now from October 2003 to February 2005 TV 18 could have been bought at Rs 160 - Rs 180. I kept buying with each stock that I sold and soon I had taken a meaningful position. Suddenly the bump up came in March 2005 and in one year the stock was a four bagger with NDTV not having doubled from a price of Rs 115. What I want to say that value with growth is a deadly combination and once you have got that then take a position such that it makes a meaningful difference to your balance sheet.
Yes, it did happen Peter Lynch styleI still remember how Pronoy pointed his thumb towards the sky and..... But I would like to give due credit to him also for speaking out the truth, imagine what a normal management would have said. When I asked Pranoy that since we have four financial news papers surviving in India can we have two business channel (Profit was being launched) to survive he said yes, and we may at some later date have some regional channels doing business talk. In fact that 4 minute meeting has made me richer by quite a few. Who knows what would have happened had I not met him on the ROAD!

Why it does not make sense to get into cash partially

Of late there had been a lot of chatter about booking partial profits get 25% into cash and keep the balance 75% into equities. This strategy essentially indicates two piquant flaws: 1) that the investor is unsure about the future 2) That he is broadly bullish (75%) and partly bearish (25%) I did this calculation when many of my acquaintances went into this 25% cash business and this is what I got: 1) No one sold off at the top the chatter started well before we had made the top at around 11,000 or thereabouts 2) I have taken an investor who sells out at an index level of 11,000. 3) The portfolio size is assumed to be Rs 500,000. 4) It is assumed that: Case A: He missed the bottom. That is exactly what happened Case B: He entered at the rock bottom level of the index at 8800

Case (A)

Portfolio Value at Rs 500,000 an index level of 11,000 Strategy for A :Get 25% into cash: New Asset allocation: Cash 125,000 Equity 375,000 500,000 Subsequent fall to 20% 20% 8800 Portfolio value at 8800: Cash 125,000 0 Equity 300,000 (375,000x 80%) Equity (500,000 400,000 x 80%) Total Value at 425,000 400,000 8800 Loss from the 15% 20% top Therefore by getting 25% into cash you were able to relatively out perform the other person by only 5%. That is not what we are in the markets for.

Investor A: Switching between cash and stocks Rs 500,000

Investor B: Remaining fully invested

Case - B

Now assume that the investor has caught the cycle correctly (next to impossible) Portfolio value at Investor A: Investor B: 8800: Switching Remaining between fully

Cash 0 Equity (375,000x 80%) Equity (500,000x 400,000 80%) Total Value at 8800 425,000 400,000 Take a ride back to 531,250 the sensex at 11,000 425,000x125% 400,000 x 125% 500,000 Initial capital 500,000 500,000 Net gain made in the 31,250 0 entire process Percentage of net 6.25% 0 gain made Now why would I do all this for a mere 6.25% gain in my portfolio when the chances of missing the entire rally are far more then the odds of getting back in. What has gone wrong in the above computation? The above computation reflects a confused investor. Who is predominantly bullish (75%) and partially bearish (25%). The market never pays for confusion and chaos. More often then not this investor will never heed to his mistake and always justify why prices should fall a bit more. When prices do start moving finally he would feel comfortable in getting into those stocks that have not moved that would disturb matters further.
I normally like to look at stocks that I hold not the markets. If the stocks that I hold appear trifle over valued but the next year's growth is strong enough I wait for the stock to remain cheap.

cash stocks 125,000 300,000

and

invested

Where does the problem lie? The problem does not lie because the markets are going down. It lies in our choice of stocks. The real crash management system will have 20% of the portfolio dedicated to solid long term secular growth stories like HDFC, HDFC Bank . These stocks are least effected at the times of a crash and do recover back very fast. Investors are normally undecided as how much to allocate between the different companies. The third grade B!/B2 scrip from the BSE find more exposure then is warranted . This falls faster and harder while the recovery is slow.. If investors get worried about an impending crash the best way is to sell out of these speculative buildups and get into solid blue chips which will out perform the markets in case it decides to tank. So I would suggest that crash management systems lies in enhancing the quality of the portfolio rather then changing the asset class per se. Conclusion: Even a best case scenario would have made a gain of 6.25%. Now people did tell me that some stocks went off 50% from the top and we could have made 50% in them so in that case our existing portfolio (75%) would have been affected by 50% as well. No one, I repeat no one can extrapolate the markets behavior because the markets run on the collective wisdom of all the participants. This collective wisdom is influenced by subjective factors of fear and greed. As long as participants try to measure the tendency they would succeed but it is only when they set out an inflexible mathematical formula (like many of them did in June) they will fall to the ground.
Basantjee

Reproducing the extract of what I want to say. This is not about "crash managment" or "cash strategy" but about selling when we achieve objective: As for me, I never said we should time the market. Nobody can and will be able to time the market. You are NEVER allowed to buy at bottom or sell at tops. My point was to have profit booking strategies. Human mind goes back to the history and tries to link events. That's what lands us in trouble most of the times. RJ may not sell Pantaloon because of various reasons, his dividend yield (at his cost of acquisition) still may be more than RBI bond! By just selling a small portion, he has all the balance shares FREE! Again let me emphasize that we're all mortals and have limited resources, it is a good idea to emulate these legends. But can we control our emotions and buy when everyone is selling? How many of us bought when there was down circuit on exchange? Having said that, I have no doubts on fundamentally strong companies in India, they would continue to deliver 15-20% CAGR over the next 4/5 years and I am happy staying invested in them. My suggestion is just as you have "buy" strategies, have a disciplined "sell" strategy. It could be partial profit booking, with which your cost of acquisition also comes down and you would be able to ride further boom in that particular stock if there is steam left or if by chance you are exiting early. The "sell" decision could be based on your having achieved expected rate of return on that stock, or the markets over-pricing having run-up too much. For example, hypothetically, as per this forum's analysis AB Nuvo's fair value is Rs. 1600 against CMP of Rs. 850 taking into account value unlocking due to Idea etc which may happen in next 12/18 months. If due to irrational exuberance, market discounts the view now itself and price shoots up to Rs. 1600 before Diwali, wouldn't it be wiser to book partial profits, take our capital out? Just listen to real-life stories of "investors" whose portfolio value crashed to almost zero from Crores during dot-com bubble. We all admire Buffet, Lynch, Jhunjhunwala and wish to emulate them. They are extraordinary gentlemen. We, as small investors (I do not know about others in this forum), have limited resources. We need to have disciplined "exit" strategies. Thanks for organizing everything so well.Some how I have never tried to do a partial profit booking. Essentially that is because of these reasons: 1) You would partially book profits only when you do not know why the stock has gone up. 2) In case you do the stock has become over valued. Many stocks become overvalued and remain there for the entire length of the bull cycle. We did a discussion on infosys traded at a PE of 50+ for 3- 4 years. 3) Again if you hold a concentrated portfolio you would be able to follow the stocks in such detail that each movement in stock price could be explained whether it is being fundamentally led or market led. Please do not confuse this with trying to explain movements - I am trying to say the origin of the movement. 4) If you have a diverse portfolio then tracking each stock becomes difficult in that case we should follow the sell on each rise strategy. 5) Normal convention says not to have more then 10% in each stock and 25% in any sector. So we would need to sell when prices go up to follow the convention. But a skewed portfolio will move faster both ways. 6) I assume that normally people would like to hold 15 25 stocks across different industries and companies. In that case we should get into a partial profit booking mode. 7) In case we hold only a few and are planning for an event CAS or Retail boom then just think that had I started selling from Rs 100 I would have been out of the stock at Rs 500; average selling price Rs 250. Today it is about 7 times more.

8) I could hold on since I could research well and I could research well since I had no other stocks to research. SO you see it is a chicken and the egg race. Once you research you develop conviction and hold a few and vice versa. 9) Never followed the historic pricing method. Always thought that our purchase price becomes irrelevant the moment the trade is executed. 10) I doubt if Rakesh jhunjhunwala is playing for dividends. If Pantaloon gives dividend it will make an EPS if it does that stock will go up or at most remain so there is nothing to worry on the downside or about getting an RBI return. Once we start thinking on those lines then it means we are waiting for the stock to go down. 11) Personally I would wait for fundamentals to show negative strain before selling rather then wait for prices to rise. Yes, If they rise abnormally by say 50 times forward then one could think but with growth stocks the story gets cheaper if can get the visibility correct and stay with the sector leaders.Read about Fisher to
know more on this

12) Finally in investing we should do only those things that suit our mental make up

I would share another thought that crosses my mind each time a stock that I hold rises or falls. After looking at the stock in absolute terms I also look at it in PE or PEG terms for instance at Rs 377 Educomp traded at a PE of 24 times current year at Rs 645 it trades at a PE of 40 times current year. SO this increase in price is brought about by a PE expansion which is more often than not a onetime gain.
Now we need to look at it this way. Let us assume that the price rises to Rs 800 or Rs 1000 what happens in that case. With the present form of earnings (which cannot change unless we enter Fy 08) at Rs 800 the stock would trade at Rs 50 times current year or at Rs 1000 it would trade at 62 times current year. We now ask ourselves the simple question what happens if this stock rises to those levels and the answer is obvious that at those levels it becomes over valued on PE terms. So does this mean that we exit the stock? Again the answer is that we would not in case the view is for more than 6 months because in that period of time the market would be discounting Fy 08 (EPS Rs 30plus) and the stock would not look that overvalued. Technical chartists call this phenomenon "consolidation". FOr the initial years it is advisable to be diversified and once conviction develops it is only a concentrated portfolio that can generate BIG returns. A diversified portfolio would give more of an index related return really but one needs to be cautious before concentrating it too much since it cuts both ways. Prashant when the stocks went down like nine pins in June 2006 I was scared like a wet rabbit. Yes like every one else no matter how much experience you have accumulated there must be something wrong if you are not scared when the markets fall and you are 100% invested. I would like to confess that hwen I saw Tv 18 tank to Rs 328 I switched off my mobile and the Tv and started to divert my mind off from the market. But that cannot be done. Invariably people call up and say this has gone up to that and so on. Meanwhile that RD theory of getting into cash added to the panic. Most of my acquintances are from the RD fan club and they were laughing all the way at the Bank - I told them Ok you are in cash 35% what about the other 65% but still they appeared smarter at that point in time. I remember whjen Pantaloon went to Rs 1175 one of my inlaws called up and said " lo yeh toh ab Rs 100 ho gaya". I immediately cheacked up and found that we were still some hours/minutes from that price. he had sold at Rs 1500 odd when you sell a stock at Rs 1500 and it falls from that level you think that you are too smart not realising that it is becoming cheap with each rupee that it falls - that was my source of conviction At all points in time I decided to maintain my position I sat back and thought that let us assume that these prices stay for a year then the sheer EPS growth would make these stocks very cheap and it would have to move up again. At that time I had lost almost 45% of my portfolio from the peak and today it has recovered all of that and a few more but the point is with each passing year the recovery in price is higher

then the fall so invariabily we build a "castle of mental strength" because with rising EPS the stocks can get only cheaper. But the main point is I was worried, panicky, afraid, fearful, surprised, amazed, thunderstuck but al;l of these were a little less then my conviction so I managed to hold on. In 2004 when the markets fell in May I experienced the same thing but at that time I had not made that much money from the markets so the feeling was one of not that much to lose. One striking similarity was that in both the cases I read the October 1987 crash of the Dow Jones in One up on Wall street. And for those investors who were holding cash nothing has changed except that the cash has been deployed in dud stocks or is at the bank - safe from the vagaries of the market. Absolutely great experience shared BasantJi..... The seminal line in your that post according to me is ..... "castle of mental strength"....once again signifying all those posts of ED Seykota. and I DONT know what is an ostrich pattern.... I guess i come from a completely different school of Technical Analysis.... i dont watch those Bulls, bears, pigs and Now an ostrich. However there is a different pattern in "Elliot Wave theory" called a "Bow-tie" pattern. I heard from an elliotician friend that Nifty is in one such pattern. The confusing part of this pattern is that it could break on either direction, hence he was neutral on the market. May be he will always be neutral beoz if the market breaks "up", then it would be "overbought" and if it breaks "down" it would be "oversold" to do anything..... I would rather stay with the trend .... Note : everyone would call a Dow rally from 1000-12000 (1982-2000)....12x, however I call it from 500-12000 (1977-2000) ....24 Times. The sensex at 3000 was Dow 500 ....Sensex at 7000 (break from a Long term rising channel -Monthly line chart) was Dow 1000 If sensex were to follow the Dow ...I guess one can easily call the target. I guess one can easily see the difference in my perspective.... Investing and trading ....is a life long journey...Not an eventual destination.

In a stock market, as in any other investment, in order to evaluate how you are faring, it is important to take into consideration "opportunity loss". This is not to say that you benchmark your investment in comparison to the high flying stocks of the market and crib over it. But if one needs to compare whether one is balancing the risk to return ratios rightly. Often, we tend to concentrate too much on stock picks rather than reviewing our overall investment strategy before commencement of investment. Secondly, when I started my investments in the markets, I used to mark up each individual investment (and trade) where I lost money and try and analyse where I went wrong. I came to the conclusion that wherever I had invested on here say and especially where I did not understand the working of the company, I ended up losing money, principally as I did not understand why the stock was going up and when to exit. Over the years, this has made me tune up my investment methodology to an extent wherein I avoid any investment wherein I can myself not understand the fundamentals of that sector and stock. Very well said Basantjee. I 100% agree. I guess people find it difficult to practice because of the greed factor to make a quick buck and also because people do not want to be left out of the next momentum stock. Catcall, also very well said. It is extremely important to understand the business behind the stock to develop CONVICTION. Basant, its also because sometimes we want to show the prowess of our intellect...its not only about hearsay.... its also caused by doing analysis day-in and day-out. The problem is in arriving at a few which are likely to be the biggest multibaggers...so, in order to seek that elusive goal we go on adding new and new companies....sometimes its the appetite of knowledge which always force you to add more and more companies.....say for instance, like your team.... given a choice I

will never be able to boil down my selection to 11 companies.... thats because I have conviction for too many companies...earlier I used to have a chessboard like approach with pawn, bishops and knights.... but I gave that up... as I could not arrive at just 16 companies. Sometimes, its too much conviction that leads you to building up unnecessary diversification in your portfolio. But I must also admit here, that this style has worked for me, although I believe the real test will come in a bear market...... but I am glad to feel that I was the only client at my broker's desk when this crash happened....for some way down the line I have immense belief on my companies.... Trends and patterns become important when you wish to get in and out of stocks frequently, not if you're in it for the long haul. I guess the age old axiom still holds "Use Fundamentals to decide what to buy and technicals to decide when to buy and when you made both the decisions and acted upon it, try to sleep over it for some time"

Incidentally I re-read some chapters of P. Lynch's book over this weekend. Just wanted to re-produce one interesting thought from him (may not be relevant on this thread though): Even the most thoughtful and steadfast investor is susceptible to the influence of skeptics who yell Sell before its time to sellWeve all been taught the same adages: Take profits when you can, and A sure gain is always better than a possible loss. But when youve found the right stock and bought it, all the evidence tells you its going higher, and everything is working in your direction, then its a shame if you sell. A fivefold gain turns $10,000 into $50,000, but the next five folds turn $10,000 into $250,000. Investing in a 25-bagger is not a regular occurrence even among fund managers, and for the individual, it may only happen once or twice in a lifetime. When youve got one, you might as well enjoy the full benefit. -- Peter Lynch, in One Up on Wall Street Modestly I accept to having been an investor to these 25 baggers but believe me apart from money they give you a sense of tremendous joy and satisfaction. They also carry a silent message about the relationship between the investor and the stock and that relationship is termed "conviction". In all the time that I held on to that sacred 25+ bagger I never looked at it like most people do "my cost price is so low what can it take away from me but at all points I looked at the current market price to understand the potential loss in case the stock falls". That helped me in not being overconfident (arrogant) and also to understand the risks a bit more closely. Anyone can sit on a big multibagger with the thought that the purchase price is so low but in that case there are two possible scenarios a) They stock has a small percentage to the portfolio b) He is looking backwards rather then forward. I am interested in my cost price only as much as I am interested in the 2003 EPS of the big Multibagger that I am setting on. Over the past few years I have realised a particular thing. That no body just no body in this world will buy you a free lunch. SO even you are interacting with some of the better known fund managers across the world please be sure that while all that conversation could make you feel proud of your contacts they are actually worth nothing.
1) They would never tell you what they are bullish on until the stock has moved at least by 50%. 2) When they sell out they would raise an alarm only after exiting their position. This applies irrespective to how close or far you are to them.

See everyone has an agenda for some it could be money for some it could be passion for the others it could be something that he also does not know. My agenda is to have have

an online community of serious investors who can do their own research and share thoughts on investing. It is a kind of a situation where the user himself creates the content and benefits from the content that others have created. Now I could have started in a pay mode tried to come on TV and spoken the same thing but sometimes money is not the end all of everything. I like talking to people who want to dream big. That dream could be about anything. Equities have been a passion for me so much so that even when I meet a completelty unknown stranger on a train or in flight the first advice I give him is to start investing in equities (SIP) through the MF route.I doubt if anyone starts doing that but people who keep money in Bank FD's or PPF are actually doing sin with their money. A monthly investment of Rs 500 (Rs 17 per day) for 30 years @21%CAGR can create a wealth of Rs 1.5 crores. That means all the rickshawwallas, taxiwallas, peons,servants and chowkidaars can retire crorepatis As a MF distributor I love selling SIP plans to investors who have a longer term view. No wonder CK Prahalad says "We are not resource poor. We are only imagination poor." I think those parameters are adequate. The most important thing is subjective analysis (not in this order though): 1) Will the company exist after 5 years. Exist means it should not be closed down. 2) Earnings visibility - If EPS keeps growing year after year the stock will become cheaper year after year. 3) Business - SOme businesses like power, fertilizers do not favour super normal return. Others like oil and steel have too much external and unpredictable influence 4) This is more of a portfolio check which I do. If I have 4 ideas in my portfolio all potential multibaggers I just check up to see if after 4 years the increase in price of one of them should be equal to my total capital as on today. I assume no returns from the other three which if it happens is a super bonus.

IIM (C) did an interview with me as part of a project on the Indian stock market. These are excerpts from the project they did in the background of that interview. They have edited some of the statements to make it fit for the project! . RESEARCH FINDINGS Stock Market, a place to invest Attractive Matured Market o Investors are now less prone to manipulation and fraud. Strong fundamentals o The share prices are rising due to the growth in size and bottom-line of the company. Money making opportunities o There are lots of opportunities in the market to make money if an investor is ready to take some risk. Large pie o Scope for every investor to make money Secular boom run

o All sector stocks are rising Proxy for Indian growth story o Economic barometer Convenience o Online trading options has made it easy to enter and exit Transparent New SEBI regulations o Feels more transparent now with regular SEBI intervention Competitive Broad range of players o Retail investors contribute a very small part Lower brokerage charges o Competition among increasing number of brokerage firms Easy Access o Can follow markets and invest from office desk Higher aspirations Higher income o More money in hand to invest Satisfaction o Creating wealth is fun o Making money is a thrilling experience Stock picking criteria of selection Reliability Managements Behavior o Management should be shareholder friendly and honest (e.g. - R. P. Goenka is not shareholder friendly) Brand value o Which brands are parts of my life? o Brand value associated stocks Tata, Reliance, Colgate, Other MNCs o Companies creating brand out of commodity Airtel (telecom), HDFC, ICICI (insurance services) Heritage Stocks

o Everyone knows everything related to stocks like Colgate, so there is not much investment opportunity in stocks like that o Cream has been taken out of milk saturated stocks Affordability Price per share o If a stock is priced very high compared to fundamentals, I will have second thoughts about it Past-Performance Companys profit o I look at the last five years profit of the company in comparison to its peer firm Capital structure o I look into the debt-equity ratio of the company Financial indicators P/E ratio o High P/E ratio compared to growth makes me skeptical about the stock price increase, although its not the only factor I look for 52 week high/low o Current price of stock in respect to its 52 week high/low Business Environment Regulations o Frequent policy changes by Government in some industries keep me away from investing in that industry Cyclical business o Cyclical stocks are always very risky Sector growth o Pick up the sector, and then look at the best companies in the sector Governments Interference o Sectors like energy are dependent upon the government Governments policies o Government interference restricts the movement of stock Business opportunity o Check if the company has good business opportunities in its core function

 Market expectations o How the market perceives the future of the business Change o Buy a stock in a sector that is changing Position Sector leader o Market leaders are the safest bet Top 3 Companies o if I invest in top 3-4 companies, the risk comes down Core Competency Core Business o How the company is performing in its core area of strength? Sector Expertise o I prefer to invest in the sectors, of which I have knowledge like retail,, media. Stock X: when to buy or sell Signaling Merger and de-merger o De-merger unlocks the shareholders value o Mergers can have negative synergy in the short run

Financial & Operating Performance Results o Quarterly results are good indicators Year-on-Year growth o Consistent YoY growth makes one feel confident about the share but at the same time, cautious about the future growth prospects Operating Margin o generally, stocks of companies with high operating margin are comparatively safe. No fixed rules here though

Management Qualification o IIT/IIM graduate at the top is better equipped to manage the company Past incidents o Any past activity signaling the attitude and effectiveness of management Intuition Inadequate analyst reports o Most final decisions are based on intuitions; analyst reports can not be trusted. o Many reports in newspapers are planted Subjectivity o Subjectivity tells more than the objectivity - The interviewee here implied that management factor and gut feelings are more important than what analysts say. Initial impression o Initial good experience with a stock makes me look back at it regularly Exit 3-5 years holding horizon o Always have a holding horizon of 3-5 years
Basantji...how many baggers do u had and hold...mere naseeb mein toh kuch bag hi nahin hai Not more then 5-6 - for the entire length of the current bull run.Chronologically this is how they came. 1) E-Serve 2) Hinduja TMT 3) Pantaloon Retail 4) Trent 5) TV18

Now I also missed a lot of them. Missing is not as significant as making them is what I have learnt over the years. The most relevant one is United phorophous. The fact that I missed it is not as interesting as how I missed it. Not sure if I have mentioned it earlier but here it is: SOmetimes in 2003 Mastek came out with its terrible guidance and the stock was slamed down 50% in one day. I was still a technology fan and was exposed to Mastek in a significant way. SO when I lost 50% in one stock I was scared and panicked. In my panic I sold off Mastek which was closer to my buy price since the stock had doubled before falling 50%. To average the loss I sold United Phorophous at about Rs 130. I had bought United Phorophous at around Rs 100 in the back drop of the company making huge inroads in the US markets and I found Shroff to be aggressive decent promoters.Now there was no reason to sell United Phorophous and I laugh at myself when ever I think of that but that is what I did. United phorophous has gone up 10-12 times in the last 4 years!!!

Basantji: Thanks for sharing also your misses with your gains. Its great learning. (what to do and what not to do) Some questions on strategy A) Do you have a system of adding to your holdings on a periodical basis? (or if you sell one of your holdings) B) Do you choose price/value at that particular point as the main parameter to which holding to add to? or is it based on % of concentration? (i.e. adding more where there is less exposure) C) How high in concentration do you let one company become of your holding? (I once had it that Infosys through appreciation become more than 70% of my total holdings) Tried answering them below: A) Yes, I keep adding to the better idea. For example I mentioned earlier on this forum that I exited Trent last year nearer to Rs 900 and bought Tv18 (prior to demerger) at about Rs 610. Now that price of TV18 (Rs 610) was almost 4.5 times higher then my first investment of Rs 145. Earlier I had a mental block of not buying a stock at a substantially higher rate to my first buy but this changed one day in the course of discussion with a dear friend of mine who invests a very significant amount caross the globe - mostly into emerging markets. That person (cannot disclose name) has a very good exposure to HDFC Bank and keeps adding to this every time he gets an opportunity. he told me that his first purchase of HDFC Bank was at Rs 30 and his last purchase was at Rs 450 so the last buy was at a time when the first buy was a 15 bagger!!! That changed my concept of not buying something that has gone up in price. Unfortunately I removed that mental block only last year otherwise I could profited more from this strategy. Anyway we always keep learning!!! B) Price/Value is the main thing. Concentration is just a threat which remains there to keep me worried and on my toes but I have never reduced position just because one stock has gone up as a percentage of my portfolio. Thankfully all the stocks that I own have performed well so this problem does not arise as much as it otherwise would. C) The idea is simple. and I would quote what I wrote earlier on this forum: " This is more of a portfolio check which I do. If I have 4 ideas in my portfolio all potential multibaggers I just check up to see if after 4 years the increase in price of one of them should be equal to my total capital as on today. I assume no returns from the other three which if it happens is a super bonus." So for 4 stocks the ideal is 25% for 3 it is closer to 33%. That is my concept of getting diversification in concentartion. Sometimes I get worried whether this is the best startegy to follow but Buffet also kept American expres as more then 50% of his portfolio when the Bank got into a one off problem. But 70% is a bit risky but certainly not incorrect. Now that 70% also has to be seen in the context of a person's overall assets. if a person has just got a job and after a few months puts 70% of his investment say Rs 70,000 into Infosys then there is no cause for worry but if after years of hard work and struggle he has a huge corpus which is skewed in favour of one company then it is surely risky. So if Om had 100% in TCS and stocks was a small part of his overall assets (house, jewelleery) then it would not matter but after he gets a 20 bagger in Nucleus and then Nucleus makes up 70% of the portfolio then that weightage is risky but not wrong.

One more related question. What is a good forward p/e which you are willing to buy at which you would consider value? Is there a hard cutoff to when its unreasonable? 1. This is a somewhat difficult issue as most of the companies which we get attracted to own are growth oriented and tend to trade at high trailing multiples. 2. As future is generally unknown, hazarding a guesstimate needs to be peppered down for bringing in some conservativism and allowing for some operational underperformance. I have tended to use peg ratios etc. (and have sometimes been punished when growth does not come in as anticipated) Excellent point: The PEG ratio goes wrong sometimes. That is when we take the "g" as more then 40%. In otherwords the theory should be revisited or rewritten as: Buy a stock with a PEG of less then 1 (subject to "g" less then or equal to 40) That means a forward PE of 40 is more dangerous then anything but here also there is another exception. Companies with small market caps say less then Rs 500 crores can have a PE of more then 40 and still be profitable or companies that are yet to start contributing to the bottomline ina big way eq. GBN - most analysts have written it off but Fy 09 (forward) could be a bumper year for it so evaluating a company like GBN on PE basis could be incorrect or NDTV for that matter because the revenue from subscription is yet to come. There is yet another factor to be taken care of "visibility" so with a HDFC Bank visibility is high not so much with a software company where one missed order could spell doom for the company. This is what happened with mastek in 2003 and it lost 50% in one day. So with companies having good visibility a higher PE could be given but a PEG of less then one is the general norm with several exceptions some of them which I indicated from experience above. The PE drivers can be seen from this link. The RoE in this link actually indicates the growth because companies cannot grow at more then their RoE I have normally been buying "growth at a reasonable price" and still find it extremlly difficult to pay anything more than 15 times forward. Is this a personal genetic flaw which needs to be corrected for high conviction stories with good visibility? (normally this is only visible to me as small companies do not have such great visionary analyst ;) ) Have you successfuly entered or bought at more than 15 times forward earnings and made good returns? Very difficult to make a 10 bagger with 15 times forward. Pantaloon when I bought it was 8 times current year and Tv18 was 12 times current year but we have to look at these PE ratios in conjunction to the market. At that time the market PE was 10 times so 10 times was not as cheap as it appears now. Similarily with the market at 15 times forward 15 times now is as good as 10 times in Fy 03-04. The biggest money is made in a PE expansion and at 40 times forward the scope for such a PE expansion is limited and that is the problem - we can rely only on EPS growth from there on for capital appreciation but if we buy something at 8 times and the company's PE expands to 40 times a 5 bagger is made without any effort whatsoever - without a PE expansion it is almost impossible to get a 10 bagger in quick times (2 years) hence the desire for a lower PE company even if companies grow at 70% that PE cannot hit 70 on a consistent basis. That is because everyone knows that in the longer run the growth would taper off and the PE would come down to more reasonable levels (30-35 times) hence the possibility of losing half the capital on a PE contraction is very high. Excellent...just excellent points Basant jee. On that note, Pantaloon trades approximately at 22 PE forward, considering EPS for FY08 to be 20. Is that cheap sir? And is there a re-rating possible at all in case of Pantaloon from hereon, even though it has moved up so much past years. If yes, what would be the PE forward(normal), that it could get re-rated to. I am talking of forward, not Trailing sir. Pantaloon I think should grow at 50% minimum, so kindly answer the perating keeping the 50% growth as the benchmark.

None of the brokerages are talking about income from new businesses at pantaloon and hence they have pegged the eps at Rs 13 for FY 08. but pantalooon should trade at least at 30 times forward. in a few months we could have fy 09 as forward. Originally said By Basantji: Very difficult to make a 10 bagger with 15 times forward. Pantaloon when I bought it was 8 times current year and Tv18 was 12 times current year but we have to look at these PE ratios in conjunction to the market. At that time the market PE was 10 times so 10 times was not as cheap as it appears now. ------------------------------------------------A) Why should it be very difficult to make a 10 bagger from a 15 times forward? Is it not simply a function of one more year (time) which would make the stock cheap/reasonable ( at 15 times trailing)? Think you have addressed this thought somewhere else. I understand the point needs to be taken in context of the overall valuations in the market during our buying- but our objective is "absolute returns" and "multiplying our money as if invested today" so paying more because the market is paying more - can this not be a trap? B) You were right and farsighted in taking the initial position at 12 times current years etc. however as soon as you are re-investing in your existing success stories be it HDFC Bank, TV18, Nucleus, etc. we end up having to pay up - and the question is what is the line "laxman-rekha" in forward valuations one should not be willing to go beyond? The discipline one needs as "margin of safety" so as to not make mistakes. Now Warren Buffet clearly advocates paying a decent price for a "good" business. (versus a low price for a not so good business). So I am already assuming that in our own conviction its a "good business" as we have seen the company perform to our satisfaction over a few years. My struggle (with myself) is about having to paying much higher valuations - where I have sometimes paid "cheap" valuations earlier and where should the mental rule be in terms of forward valuations?

A) See EPS cannot grow at more then 40% CAGR for 5 years unless the company is exceptionally placed. Maybe we could have 25-30 companies in the history of the Indian stock market that have grown EPS at 40% CAGR for 5 years. The predominent ones came from the software sector and there also the growth in EPS at 40% CAGR was reflected by a handful of them for 5 years at a strech. So at a 40% CAGR a company with an EPS of Rs 1 would report an EPS of Rs 5.37 in 5 years. So we have a close to a six bagger in 5 years only on EPS alone. After 5 years the size would become the enemy and growth would taper off or PE would be around 30 times or let's say 40 times. SO a 15 PE company is now a 40 PE company that means the stock price could rise by 2.66 times because of PE expansion. So the net increase in the stock price is 2.66 x 5.37 = 14 times. See Here we are taking the best case scenario. Generally companies standing at the cusp of a structural boom retail, telecom, software, construction and having a low PE (undiscovered stock) are a fit case for a 10 bagger. Now I did not say we cannot get a 10 bagger but what I said was that it would not come in a hurry. Else HDFC bank is the best stock to by it would be a 12 bagger in 10 years but here we all want to play a one day International and finish the match in 40 overs - hence the need for a big boost to come from PE expansion.. B) You were right and farsighted in taking the initial position at 12 times current years etc. however as soon as you are re-investing in your existing success stories be it HDFC Bank, TV18, Nucleus, etc. we end up having to pay up - and the question is what is the line "laxman-rekha" in forward valuations one should not be willing to go beyond? Here it becomes a case for relatives. Let me explain this with an example. Last year when I switched out of Trent into Tv18 (prior to demerger) it was a case of selling 30 times current year (Trent) and buying 15 times current year (TV18) But I would not have switched had it not been for the lethargic management at Trent and the dynamic management at Tv18. Otherwise also I did not switch from Pantraloon to Tv18 because Pantaloon was doing all the things it could to manage its growth. But I have seen after the initial entry if the stock price goes up a it means that the story has got discovered. But I thought that since I had made a 6 bagger in Trent and if I can make a 5 bagger in Tv18 from say Rs 600 predemerger I am already ending at a 30 bagger. I like attempting for multiple multibaggers. So a 4 bagger after a 5 bagger still gives a 20 bagger with no headline news.

As the sensex goes up and our portfolio increases in value the potential for big multibaggers from existing companies diminish - and we have to adjust to that. Absolutely bang on! After 4 years if TV18 doesnt serve the purpose of being a 4-bagger after that, then we should shift to something that could be the TV18 or Pantaloon of that time. But Basant sir, considering you specialize in Retail, Media a lot, what happens after TV18 and Pantaloon get saturated. How do we as TEDdies identify the next big plays, since your circle of competence stocks would be saturated. That is when we shall need you even more for our TEAM XI new players - fresh players. 2010-2011 that time will come for sure and we should have a tentative blueprint plan for that. Competency is never a problem. Once you get interested in a stock you start learning all the things that are relevant for that particular business. But priorities change and so does the approach but broadly the investing blueprint remians the same scalable model, sector leader, anti-cyclical, honest management, visibility, favourable PEG, high RoE etc etc! "You can't make five or ten or twenty times your money if you don't hold on to stocks. Most people are delighted when a stock doubles, and quickly sell to lock in their gain. If a company is still performing, let its stock, too, continue to perform." Ralph Wanger In May'06 fall, RD said he thinks it is bear markets now. I got influenced by him and panic-ed and lost 80-90K in 3-4 days. I had some hard time in June/July. I believe that he also surprised the way market reacted (unless he has 2 faces). I don't blame him for loss it was my own weakness which led me to believe he is correct. That time was very bad time for me. Not only I lost huge money in couple of days but also could not pick some gems on which I was waiting. YES Bank touched 67, Ibulls was under 150 and RCom 170 or so. I was quite active those times but I could not pick them. Now I strongly believe that analyst have one bear face and one bull face. Time to time they keep showing different face to public in order to gain personally and this game is played since ages from NY to Ahmadabad but game is so beautifully played that still people are trapped quite easily. Very piquant remark. A friend of mine who is based out of India tells me that most of the guys who come on TV would go broke if they had to close down their subscription service not that RD does anything of that kind but it tells you that the the average Joe on the street would pay more attention if you come on Tv rather then otherwise. That May was a terrible time for RD and his fan club and it was also a tough time for me because stocks tanked as if there was no tomorrow and all his fan club members - related to me also were under my skin to sell. Not that they cared for me but they wanted another hand in their support in the hour of crisis but I managed to maintain myself . But at that time amidst that gloom and doom there were some who still beleieved we were in a boom. Surprisingly one of them was Haresh Chawla the CEO of Tv18 who told me that in the background of this kind of a growth rate it is only speculative as to how long this bearish phase would last. Now we know that it is the dharma of these TV channels to preach boom but this was a private discussion so I do not think that there was any intentional bias in those statements. But RD was so terrified at that time that he told his relatives and friends here in calcutta that confirm to me if you are in 30% - 40% cash. Even normally when the markets are down he finds it difficult to come to terms with emotion, Bubblevision has an interesting quote for that " nothing in the financial markets should ever scare us. We are merely talking capital here, not life and limb! And the markets are supposed to rise and fall. " I think this should be inscribed into the offices of all those experts who get unsettled whenever they see prices drop this happens with RD try talking to him on a week of market decline and you would know what I am talking about. Coming back to that June thing this is what a very smart investor a dear friend of mine wrote to me.I was unsettled as I had lost 35% of my wealth. This was written the day we hit 8800 on the index!

Basant, Since you are a young man, this is probably the first time that you you have lost such a large amount of paper capital in the market. It is normal to feel worried and a little scared when you see your money that you thought was your evaporate into thin air. This is an essential experience for every investor. It is important to understand that as long term investors we don't own paper or electronic stocks but parts of companies. What our neighbor wants to pay us for our stake varies day to day but if the underlying company is doing well and fairly priced we need to hold. On the other hand if price is too low we should buy more if we can afford it. At this time some mid cap stocks have become very cheap and worth buying. As you know no one including RJ can be certain about the short term direction of the stock market. On the other hand I feel that Indian markets are poised to do well over time. I continue to remain 100% invested and will remain so even if stocks fell another 30%. The underlying fundamentals are strong. In addition the enormous liquidity produced by increasing foreign investment (IBM is investing 6 billion dollars in India over 3 yearsthis will be followed by many other companies over the next few years) will lead to increasing prices of stocks. The primary risk is political ie victory of parties that have no market orientation Now it is great to write these lines at 13,300 but for someone to hold that opinion when the index was at 8800 is phenomenal. I respect this man for his views though it is really surprising that we do not own a common stock - in India. He was not comfortable with Pantaloon since the begining and Trent and Educomp we sold out together and the RBI does not let him buy TV18/NW18. We need to be in the circle of good smart people who can combine skill with emotion and thankfully I have developed a habit of disassociating myself from someone whom I think does not possess these attributes. Basantji: Thanks for sharing such a clear lesson as these scenarios will surely repeat in our investment lives. Thanks also for bringing sound minded people together so that we can help each other. As you know investment in general, is a lonely endeavour - and a sound counsel can make a huge difference. I learnt that its difficult to keep a cool head, primarilly emotionally, when the world around seems like its falling apart (as was the case in May-June - I was close to 50% down at the extreme and with some good luck -up substantially for the year). My actions were not too damaging (to myself) in fact it taught me to sharpen my concentration (in companies with high conviction) and sold all companies where I had less conviction about. The lesson here is that finally all of us are also competing against our own weaknesses. A bad sell decision coming out of unwarranted fear could be seriously damaging to our wealth building efforts. Organizing our thoughts with clear guidelines would save us in our decision making in extreme scenarios. One question I would like to ask the group is - when should one be willing to step out of the market? (even Mr. Buffett once dissolved his partnership once- think it was in the 60's) Thanks, It was difficult to give this forum a direction in the early days. Most of the people wanted a get rich quick kind of a service and it was tempting to run that short term calls section side by side (look at charts for breakouts etc) just to gain popularity but then I realised these people would be with the forum only as long as they make money and no one would have made money in that kind of an approach neither I since it was free and neither the trader. The present approach is a trifle slow but over a period of 2-3 years we can have a self help group who would not need any research report/fund manager etc to help decide what to do. BasantJi....There has been very very good Discussion today on this thread. Excellent words of wisdom! For RD and his fan club, I dont think that May was such a bad time. If I rembember correctly, he correctly anticipated a fall. However their problems began in July, when the markets turned and RD and his Followers remained bearish, surprised by the new emerging trend!!!

I must confess that I was very bearish in May-June and I had clearly thought that the Bull market was over. I was also short (Entered on 23-May). However when the markets Turned...I was reminded of May-2004 when a similar thing happened and as they say rest is History! And when it comes to fear...I just need to quote that again!!! "Nothing in the financial markets should ever scare us. We are merely talking capital here, not life and limb! And the markets are supposed to rise and fall. "

There are two classes of investors: Class A=> 1) They want to buy good growth companies that the nromal person on the street is not bothered about and looks at with suspicion but the potential is enormous. 2) This investoir feels that if the stock doubles from current levels his margin of safety is 50% and works on those principles 3) He is not bothered by dividends because he is here to make a long haul. 4) Most of the time he would discuss business model and managemnt and evaluate valuation on the potential rather then historical perspectives. 5) Book value means nothing to him and he feels that everything that the annual report contains is discounted in the price (to a large extent). 6) He looks for broad themes and wants to compare PE's to growth rates rather then interest rates. 7) He loves Lynch and Buffet and only respects Graham because he thinks Graham lived in vacuam (strong words to use but this is what he thinks). 8) He is interested in time bound programs and has two plans ready simmultaneously. What if stock A falls or does not perform till a certain deadline. He cannot wate time because he is trying to make it big. 9) Some of his stocks would become zero value and he knows it but he thinks that some would also rise multifold and the rest go nowhere. 10) These investors invest in companies and keep looking at them from a 3 year fast forward basis 11) They love to keep concentrated portfolis because diversification dilutes the cream. 12) They look at beta, alpha, standard deviation, chasrts, RSI, 200 DMA only for fun and discussion but never act on them. Class=> B Do not believe in class=> A investor and have their investing strategy in complete contrast (opposite) to the other type of investor. Bottomline: Both are trying to make some money with different strategies and I am in the Class =>A category Also, one more thing, if we go by business model logic why does a champagne indage behave so differently compared to a shaw wallace. Even UB and United Spirits are becoming non-performers. _______________________________________________________ Business model is not the only thing to look out for. I repeatedly state that one should be invested with good management.I am not sure if champ ind etc have greate managements handling their buisneses. United Spirits has made a 20 bagger for many and we would have plenty on the forum who would vouch for that. In fact this was Ramesh Damani's biggest hit in this bull run!!!

Basantji: I was wondering what emotional and mental makeup would help being a Class A investor? Here some thoughts to start and create more complete thoughts Emotionally:

1. to be handle being alone, taking a concentrated bet always requires some kind of stake in the ground mentality, which can get severely tested sometimes. 2. to be able to handle losses and even handle gains. Countless people sell when they should hold and hold when they should sell. Concentrated bets can get quite difficult to handle when they go wrong. 3. to be handle being honest with ones decisions (mistakes). Most people only talk of their winners. If the original thought/investment decision is not correct having the integrity of changing ones mind. Mental: 1. Ability to create mental excitement on business opportunities (Your 3 year view) 2. Ability to relate economic models to actual companies and see long term opportunities. (Financials etc. applied to business) 3. Mental rigour to build conviction so that one is clear on what he/she is investing in. 4. Confidence in oneself to dream and think big (about ones portfolio)
Correction: Tv18 at rs 145 pre demerger rate!!! Thanks for that. But would it have been so easy in 2003 I did not tell people that I invest in equity that is because the first reaction would be "take all the money out before it caves in". But yes we could spread some serious money around and this type of discussion actually strengthens the confidence. I am more confident of my stocks now then I was without TED - we have a ready reference for the perspectives at hand. Tell us of your experience after you go through the book! How did you buy Infy tell us briefly please? Vivek: I heard you talk about rules but please remember that there are no rules in this market - maybe that is why it is an art and not a science. In this game rules change each day and a new day starts with a new rule.We just have processes here and no rules. Also you did not indicate the waiting period for that stock which went in for an open offer. I hear you talk about protection too often but the real fundamental for investing is risk capital - protection is done better by investing in the FDR of HDFC bank rather then the bank itself Also outperformance cannot be compared by looking at one stock that goes in for a buy back/delisting out of a pack of 20. Buyback/delisting is all a game of chance rather then choice and they never give you a double but in this market we look at multibaggers. In that quest we win some and we also lose some. Correct.....but tigershrk, there are many silent winners as well....which make you rich with dividends....somebody who invested a single share in colgate in Its IPO @10, today has 51.2 shares and he is receiving 384 rupees as dividend from the same. this mean 38.4 times the investment every year. And yes, I am not including the rights imapct here as well and including that will change the result very dramatically. The capital value of Rs. 10 has also grown to 51.2*340 roughly 17500.... so imagine the returns. Tigershark, I dont need a siper winner out of 10 companies.... if I have 5 normal winners.....over a period I can equalise..... Buyback gives you double Sir......

Basantji, Pls. tell me how did you decide on a company like Bharti in 2002-3. The company's fundamentals were not that good at that time. The only thing one could judge this could have been through the forecast of Indian market and then applying to the fundamentals.

I could see the forecasting in place in posts for viceroy, dish tv on your forums. Whereas to invest in a company like Infosys, you do not need any of such forecasting skills. Infy was more of a recurring deposit where every quarter you find the result good and you invest in it. If one needs to know the total market for a segment, how one does comes to know. e.g. clinical research. we say it will be $1 billion by 2010. And forecasting does bring a good risk. It may not be absolutely correct for a company. Apart from forecasting, you have paid attention to the market cap versus sales also e.g. for Pantaloon. Do you think you exited early from Bharti? There are many agenciues that do that kind of forecasting but the ones that we can rely on are Mc Kinsey, PWC etc. For instance Mc Kinsey got the retail revolution right, Gartner was correct in estimating the mobile telephony market etc. Generally it is the business that should make sense. if the concept has made money for investors in US then it makes money for peoiple elsewhere - broadly. I could not hold on to Bharti Airtel because I looked at market cap in isolation. Normally market cap should be seen in conjunction with the scale of opportunity. Past historical performance means that everything is known to everybody generally the biggest money is made forecasting forward rather then looking backwards. For example in 2003 I thought that if markets went up everyone would be watching CNBC and bought TV 18 like crazy. Have been sitting on a 15 bagger since then! Over a period of time I have realised that we need to get just 3-4 forecasts right (with minimum downside risk) to make decent money from stocks. If we get in early it emans that the downside is limited. Caveat: low purchase prices gives nothing except mental comfort which in times of falling markets is all that an investor needs

Thanks Basantji, "Generally it is the business that should make sense. if the concept has made money for investors in US then it makes money for peoiple elsewhere - broadly." Lets take statins for example. Biocon was sitting on opportunity of patent expiry of Statins. $10 billion opportunity. and then suddenly, the price erosion occurs due to competition. For an established technology, over a period of time, its all about the prices. TCS / Infy all had long term low price advantage. Take Mercator lines. Did the same thing of buying ships at low prices. LN Mittal , Buying sick steel companies, all over the world. a) New Concepts/products- Under such cases, one can think on unique concepts like Educomp brought. or lets say companies like micro technologies or venus remedies(patenting), are doing. or investing in companies that has a product which a new one in India. Investing in Bharti was one of the reasons or Dish TV could be another. or organised retail also. b) Export driven businesses- Software services for last 10-15 years or Clinical research. c) Improved services - Retail(organised), Private Banking etc. Any thoughts?

Normally Biocon is less stable as a concept then Bharti or say a Pantaloon. That is because research plays a very important role and does not make the business similar - it just appears to be similar. On the other hand in case of retailing or DTH the business model is identically similar so the chances of a copy paste becomes far more easier.

Somehow I have always believed that the best portfolios are the ones which have minumum downside risk. These downsides originte from: 1) Low PE with a slowly rising or a not too drastic fall in EPS 2) value Play - Asset value, value of holdings, land,dividend yield, cash on Balance sheet etcthese take longer to play out.

3) Growth stocks - They become cheap with passage of time. The best ones to own because PE's are set and we need nopt wait for the market to rerate them everytime whereas in the first two categories we expect the market to do something different from what they are doing to a stock till now. I think because of the perceived risk of exchange rates Nucleus is moving from category 3 to category 1 and if it is able to show its mettle it will be rerated back to category 3. ---------------------------------------------------------Basant sir, talking about value?????!!!!!!!???????? frankly speaking, I wasnt able to locate any value any value in equitydesk XI , except that all companies have an opportunity to grow very big from their present size....however, if you talk of hard core values like book values, dividend yields, they stand no-where. Anyways, it was nice to see you talking about value concepts for I am very firmly on the camp that beleives value investing will never lead you to snap your investment career mid-way.....also value plays are very much growth oriented for value investors will pump in when they see a little downside....... All the Equitydesk XI stocks belong to category 3. I was indicating the different ways in which downside is protected in stocks - value (category2) is one of them. Mr. Basant: Here is the scenario of global storm (sub prime mess, US consumers impacted, default risk, solvency risk, recessionary pressures in developed world, risks in the system which are not being able to be measured, central banks acting with panicked urgency, markets falling like bowling pins, FII's and hedge funds in India, India linked to global liquidity, India considered risky emerging market)- where in its finality it's impacting the handful of our companies that we own in our portfolio. The stock value of our companies are going down (sometimes rapidly on an average 5%-20%), even though the underlying fundamentals of our companies are strong and their operational momentum should continue for the next 3 years. As a serious focused investor - does this whole scenario warrant any action? If yes what?

Finally the EPS will support the market. In circumstances like these dollars denominated revenue companies would be hit because there is a perception problem. We can go on discussing how good Infy or any other software company is but the point is it is getting a double whammy a) apprehension about its BFSI clients and b) Appreciating rupee. We know that when there is a cloud of uncertainty over the earnings visibility all that we get is a lower PE.
Except for that domestic infrastructure and consumption plays (retail banking, retail, media,telecom) would be ok but in the present state of affairs the market seems to have stareted discounting a mid term poll. When there is midterm poll it affects sentiment not corporate profits but we have to live with it. Many of our domestic focused companies NW18/TV18, Pantaloon etc. or companies in the infrastructure space have limited USD exposure - they seem to be going down - inspite of limited USD exposure. My question is if the global storm will have a lasting negative impact- impacting the underlying value of our businesses. As a serious focused investor - does this whole scenario warrant any action or serious worry? If yes what actions and worries to address?

Normally I worry only about the EPS and the RoE.I am never in the camp that raises cash the moment markets fall 10% maybe I have just been lucky that way but I prefer not to get perturbed though when stocks fall we do get nervous question is how much?
Companies with futures position do fall when markets fall. When the bulls unwound last summer Tv18 fell 50% from its high and then went up 6 times to another high because it kept reporting improved fundamentals so these things will happen. Now talking about TV and NW18 I would be more concerned if Reliance defers its plans for a DTH launch rather then what happens to Bear Stearns in the US. I repeat I could be wrong but having followed this style for long I find it dififcult to think otherwise. I am yet to come across any fundamental guru (Lynch, Buffet) who said that we should sell out when the Govt. falls or when the there is problem in some other country . Technical traders would do that but they go short and also cover up.

Only Time will have the right answers for the moment as I write this my thoughts revolve around what comments I would receive if this index actually falls 30% from here. Isn't this a bit contradictory? If there is a slowdown in the export-oriented companies, there will be a slow trickle down effect to the consumption plays like retail/banking. Is the Indian economy robust enough to continue as if nothing has happened if export oriented companies suffer?

Retail banking media will be affected if the software companies close down. That is not

what I am suggesting at least not within the next 3 years. What I tried to say was profits would be hit, margins could shrink and maybe investors will sell out but companies will exist. At the margin we could have small BPO units closing down but that should hardly affect the economy per se
In testing times -after some bruises i have somewhat learnt to be rational. I have normally taken a role as an owner, asking: If this was my own company 100% would the current set of circumstances lead me to take any action? In the case of IT services companies- the answer was more severe where the base line has shifted (higher costs, lower margins) and the face more upward task (competition, high employee turnover, rupee appreciating and more commoditization) - led me to take some action. In the case of other companies they still face very favourable conditions of supportive growth and trend- so I am more than happy to own and even add to my holdings. After having said that- still scary to lose 20% in three weeks! (even after many such falls) - am trying to learn to be more detached - but hell its hard!

Basant Sir, Now that your style of investing is long term .Why not real estate .Real estate is one commodity that will always be in short supply. And as a Calcatan what do you say of the Bata Real estate comming up at the kolkata .
Over a period of time businesses will outperform real estate. That is because a business man makes rent payments and salaries through which homeloan and property loan etc are serviced so if real estate outperforms businesses then all busineses will collapse bringing down real estate prices with them. Over the short period of time real estate could outperform. Areas within the 5 km radius of sector 5 Salt lake should do very well since Sector 5 is the IT destination at Kolkata. Our house falls in the 5 km space but it does not matter because in any case this hose will never be sold nor do we have the emotional disconnect to sell this house and buy a new one so it does not matter.See this thread How wealth can be created in stocks only!!!

Basant jee....do you keep LTCG, STCG taxes in mind?

You would be surprised that I pay almost no taxes - No I do not steal!!! See if I have 100 shares of HDFC bank and I sell 40 and buy say 20 shares of HDFC then this HDFC Bank becomes long term sale so tax free! Then if I have some position in Hdfc and I sell that 20 shares of HDFC for HDFC Bank again after a while then also it is a case of LTCG! Taxes are computed on first in first out basis and i do not shuffle outside my list of stocks. That helps me get away from paying ANY taxes. Normally saving taxes on large holdings is not an objective but it just happens because we never buy to sell anything in less than 12 months!

I love talking about my tech boom days. I had this sectoral approach then also but mixed it up with PE and EPS. It goes something like this. In 1997 I bought Satyam and sold off because I was making 25% in one week. Satyam used to move like crazy then. The best part (coz I learnt from it) was in the year 1999. I reentered software buying DSQ, Silverline, Pentamedia and Sri Adhikari (yes no Global and no HFCL missed it). In about 8 months I had a list of 5 and ten baggers with me. My over all portfolio was up seven times I had also invested in some non performing consumer and Pharma companies and I started to get worried. I thought that software stocks would fall and was working on the idea of converting everything to Infy and Satyam but I stopped. The red chips that I was owing traded at a PE of 100 times and the blue chips I wanted to own were at a PE of 100 times. Now I did not want to sell a low PE stock to buy the higher PE ones. As prices fell these stocks fell further so relatively their attractiveness improved . I bought more at each decline by borrowing from a Bank. But the prices kept falling and the margins had to be met by pledging more shares - since there was no surplus cash. At one point in time I had pledged all my shares and would buy new ones only if they were bank approved. Finally inevitable happened. the bank sold off my shares and credited the a/c with the balance. I learnt the most important lesson of my life 1) Always invest in the sector leader either No. 1 or No. 2 2) DO not buy any thing that you do not understand .Better to buy things that you can see. 3) If you have made a 400% on a stock you need to lose only 80% to break even. 4) Do not look at the PE alone. An investor shall not live by PE alone I have tried putting My investing strategies on a different section at this forum. Most of it has been created through reading and experiencing (losing) and hardly anything by listening.
If you could tell the future from a Balance Sheet then accountants and mathematicians would be the richest people in the world. I could be buying & selling stocks recommended here.Read the DISCLAIMER.

Normally medium terms refer to 6-12 months and anything more than 12 months is long term. Anything from the next second to 6 months is short term.

What a rupee of investment can become at different CAGRs?

Years 1 2 3 4 5 6 7 8 9 10 30% 1.30 1.69 2.20 2.86 3.71 4.83 6.27 8.16 10.60 13.79 35% 1.35 1.82 2.46 3.32 4.48 6.05 8.17 11.03 14.89 20.11 40% 1.40 1.96 2.74 3.84 5.38 7.53 10.54 14.76 20.66 28.93 45% 1.45 2.10 3.05 4.42 6.41 9.29 13.48 19.54 28.33 41.08 50% 1.50 2.25 3.38 5.06 7.59 11.39 17.09 25.63 38.44 57.67 55% 1.55 2.40 3.72 5.77 8.95 13.87 21.49 33.32 51.64 80.04 60% 1.60 2.56 4.10 6.55 10.49 16.78 26.84 42.95 68.72 109.95

I carry a copy this paper in my wallat and would suggest all Teddies to move to the bottom of the right hand corner in this chart.

One of the most important but lesser followed tools of financial analysis is the Return on Equity (RoE). Theoratically it defines how much a shareholder earns from a company's operations for each rupee of investment. Most of the service sector companies reflect high RoE's for example Infy, Wipro, HLL etc have RoE's in excess of 40%. If the growth rate of the company is more then the RoE the company will have to take on further debt to grow. It is with this premise that smart investors do not buy stocks that promise more then 100% growth. Sometimes companies manage to reflect more then 50 to 60% growth over a sustainaned period of 5 to 7 years. But that is an exception rather then a rule. It is very important to see the sector growth in which the company is operating in. Normally it is very difficult to grow more then 2 times the sector. Now the RoE is what the company can earn on the shareholder's money.Let us assume that the shareholders funds (Capital + Reserves) are Rs 100 crores so with an RoE of 25% this company can earn a profit of Rs 25 crores next year. This year the shreholders funds are now RS 125 crores (100 + 25) and on this the company can earn another 25% or Rs31.25 crores. If the company wants to earn Rs 50 crores i.e show a growth rate of 40% (40% of Rs 125 crores = Rs 50 crores) it can do so by only increasing the RoE or putting in further debt capital so that the net incremental revenue to the shareholders after deducting for the interest is positive to the extent of Rs 12.5 crore (Rs 50 crore - Rs 37.5 crore). If the RoCE is 20%(Generally it is lower than the RoE) and the interest rate 10% then the company will have to earn a post interest earning of 10% (RoCE (20%) - Inteerst(10%)). Now to earn a 12.5 crore @ 10% means that the company will have to leverage itself by 125 crores (12.5/10%). Therefore it becomes very difficult to grow at rates higher than your RoE in cases where the growth rate is substantially higher than the RoE. A company that want to grow at rates very high to its RoE is Pantaloon Retail and investors should understand the risks before jumping on.

No matter how great the talent or effort, some things just take time: you can't produce a baby in one month by getting nine women pregnant.--- Warren Buffett

90% of my wealth is made from 3 companies Tv18 group, PRIL and Trent. Buffet did mention about that punch card with 20 holes. I keep that in mind. X-Box - Dividend is something that that I never look at. Otherwise investors in Bharti would have been crying. The company never declared any dividend till date. Tyler - Buying PRIL in April 2003 was easy - very easy. The toughest thing was to hold it through 4 autumns and 4 springs!!! Buffet says that in the entire lifetime of an investor he should not buy and sell more than 20 companies. I am bulish on Retail as much as I was before, bullish on media but with the election uncertainity I fear that "mandatory CAS" might not happen and though the Ambanis and Mittals will flood the country with their set top boxes it would not be the same as getting a manadatory CAS. Now when we look at growth one more thing that we should look at is the price that we pay for that growth. If I have to pay a PE of 50 times for a 50% growth I might as well pay a PE of 30 for that 30% growth because you and me and everyone know that the 50% growth might not sustain itself and pE's will have to re-adjust downwards. I mentioned somewhere about the moneycontrol mutual fund page listings. If you see a stock like TV18 it seems to have been owed by everyone. That makes it popular. Popular stocks do not go up 5 times so if I am not playing for a 5-10 bagger I might as well curtail my expectations and play somehwere else because Risk adjusted return is all that we want to focus on. Nothing worng with the media companies as per my understanding. Raghav bahl still occupies the 2nd position in my portfolio after Kishore Biyani but slowly I started to trim a bit but will let most of the position run until a) I get cheaper and better options and b) Prices of these media companies run up to a point where they become very costly again. Now coming to the private banks while they would not grow at the fancy rates except for one or two the durability factor is very high. Also they are yet undiscovered (see the moneycontrol MF page) and the opportunity cost is not likely to be a 5 bagger therefore we could take some initial position and then keep adding whenever it seems feasible. If any of the banks go for a takeover post 2009 it would rerate the sector and set everything on fire!But the stocks that we own normally never go for a buyback it is very difficult

for a person to buy a stock and then see a buy back coming. At most it can be a matter of chance. But this chance comes like an icing on the cake.

Never believed in the takeover theory 100%. This is just like a lotery ticket.What I said was that takeovers are possible "when" is something which no one knows and "which" is as difficult as when.
At the end of the day it will be the strong efficient banks that will get takenover. No one would like to takeover a bad bank.So if the banks are growing and the profits robust at reasonable valuation we can make decent returns. This is indeed new. As valuations go up you lose that conviction element a bit because the stocks are not cheap but you do not want to exit completely because the companies could add a new business segment and that could change the valuations in 12-18 months plus there is an opportunity cost involved (this is there everyday) therefore you take some off the table not with the intent to sell because they have gone up but with an intent to try and maximize opportunities. Plus investing strategy is never fixed they are flexible. A few weeks back I never thought that I could be bullish on the private banking space but here we are. Whether we are right or wrong can be answered only in time.

Sure strategy is not static & I do not mean to say anything but to try and learn what's changed and what could work on an ongoing basis. As valuations go up- the short term upside diminishes and increases somewhat the risk part in your portfolio.
However, unless one can replace that with new more reasonably priced high conviction ideas it may also increase the risk in one's porfolio. A) Would partly selling over valued ideas - is this decreasing risk? or about replacing with reasonably priced ideas to increase returns? B) With what % of your portfolio would you do this? Whle I have tried to indicate my positions in stocks on an ongoing basis members should try and take my comments with a view that I have a vested interest in all the stocks that I make a comment on either directly or through the recommendations at this forum. Even my tagline carries this disclaimer and I would like to reiterate the same . This is so because it may not be possible for me to indicate the stocks bought/sold by me on a real ongoing basis. While the above statement is true I have a moral repsonsibility to indicate a change in my view on the stocks that I have recommended on the forum and I would surely indicate that. I am providing this statement because I get several private messages asking me to indicate the time when I sell/buy any stock which seems tough at times. The idea of this forum is to create a healthy environment for debate and discussion which we would normally do and I am committed to that. I look forward to an even more enterprising discussion on this site.

now that was my second question ... mkts have gained more than 30% from recent lows and you re adding stocks.... strange laga thoda.... bcos u re a follower of buffet and buffet says " time of max optimism is time of selling...." but then u re master of the game.... 1) Yes, it is but those stock market plays are not cheap they are at 40 times current year and everyone knows that sometime this bull market WILL end and when that ends this PE will contract. PE contraction is the second most painful thing in life after a Doctor's injection. 2) Absolutely without spin offs there is little point there. But without these multiple businesses PRIL's results would have looked better because they are dumping money in these businesses without revenue for the current year so it is tough to hazard a guess as to how the stock would have been on valuation terms if Biyani would have just been in retail. A friend whom I consider a very smart and astute investor told me a couple of days back "I just do not know how you are holding PRIL I would not have owed even a single share of that company". 1) PE contraction is the second most painful thing in life after a Doctor's injection.

----------This is perfect answer to why Bansant jee does not like commodities. Commodities businesses are subjected to many PE contraction/expansion cycles in it's life span. When a smart man speaks we have to listen and think - if not follow his actions.

The most important quality for an investor is temperament,not intellect.A temperament that neither derives great pleasure from being with the crowd nor against it
I keep trading in and out of stocks, but the technique used is TEXTBOOK - Peter Lynch's 'One up on the Wall Street' Identify No. 2, 3 or 4 players that are trading at a discount to No. 1 and sell the stock when the P/E of my stock matches that of the leader for 30 - 50% gains in 3 to 6 months. Lynch bhai mentions this in his book when he talks about 'Stalwarts' - stocks that he sells for 50 60% gains. A few examples - In 2006, ICICI Bank (inspite of owning insurance business) was trading at a P/E of 25 while HDFC Bank was trading at 30. Bought ICICI bank, and within 6 months, ICICI Bank and HDFC bank were trading at the same P/E, resulting in a gain of 50% in 6 months. - Moved the money out of ICICI Bank into UTI Bank. UTI Bank was trading at a P/E of 20 in the beginning of 2007. Got out of UTI Bank when it's P/E matched that of HDFC Bank/ICICI Bank. Time taken - 3 months. - Bharti was trading at a P/E of 40 while Reliance Communications was trading at 30, even 2 months back. If you look now, Rel Com is trading at a higher P/E than Bharti. This kind of 'valuation arbitrage' or 'P/E Matching exercise' is fairly risk free in a bullish market, when one deals with mostly large caps Actually this is what I do but not every day not even every month but once ina quarter wjhen I think that it is worth a bet. Since Banking is a new sector I am getting ina nd out of a few stocks maybe trying to get my feet wet but as you mentioned the main things that I look for while switching is that you always switch froma lower pedigree stock to a higher pedigree one and Kotak from CBoP and back again was one of those trades. About why I do it is to use the opportunity we cannot make a living by trading otherwise and trades have to be trades if the stock goes up 12% I cannot say that it wil move up a bit more.

I have seen recent exchange of views on this forum and have following to say: It is very important for an individual to first understand who am I? It is not possible to be both Investor & Trader simultaneously, because your confusion will increase since you may for short-term gains, miss out on long-term potential and vice versa. (Those who claim to be successful as both investor and trader are either lying or they are Supermen ) Once it is decided who am I?, it is very very essential to stick to the discipline/systems to be followed to carry your plans. Now coming to the most common lot amongst us: those who: do not know who they are. They are RJ one day (hold positions forever), and a pure trader the next day. Let me try to relate this to the real-life experiences I had with this lot. Some of the characteristics of this lot (call them Mungerilals, just for an identity purpose, no offence meant to anyone living or dead) are: 1. They come to the markets only when they see it is going up and after they hear about how their neighbour/colleague/boss/junior/senior/cousins/uncles have made money in this rising rally. 2. We all know and understand that buying at bottom is impossible. But Mungerilals achieve something very unique to them: BUY AT TOPS AND SELL AT BOTTOMS! Great feat, isn it?

3. Their portfolio consists of very few blue-chips, but most of junk stocks

recommended by brokers/media/analysts and also by neighbour/colleague/boss/junior/senior/cousins/uncles. 4. Most of the smart stop-losses Mungerilal applies, get triggered and then the market reverses trend! He is a firm believer that some "operator somewhere knows about his stop-losses and blames him for losses. 5. Mungerilal would immediately sell blue-chip when he sees little profit, but will hold onto junk stocks for ever. 6. Mungerilal would also be required to sell his blue-chip holdings in order to meet margin calls. This is because he is lured into F&O trading by smart brokers, he is heavily leveraged to earn quick buck. 7. On the days he is lucky (day-trading) most Mungerilals would blow that money off partying. Mind you, Mungerilals, do not take pay-outs from brokers, so what he is partying off is only for gains in books. 8. Mungerilals who are lucky on a particular day (when they make some quick buck day-trading) are easily identifiable in dealing rooms. Look for the person who is most vocal, blowing his trumpet, rendering advice to not-so-luckies. On the down days, however he would be all quiet, sitting in a corner, going out for a smoke etc etc 9. Mungerilal would be constantly looking for hot tips! Be it in media, brokers, internet, chat rooms, office colleagues neighbour/boss/junior/senior/cousins/uncles. During bull rallies they subscribe to even capital market journals/magazines. (However, during bear phase of markets who knows where these Mungerilals disappear). 10. With the advent of technology, they will subscribe to internet trading. I have seen some Mungerilals, who trade just because they have subscribed to that fancy software (marketed smartly by brokers) and because they have to pay some fixed monthly/yearly cost (again brokers are smart- they say that this can be adjusted against brokerage!!). 11. Most of the Mungerilals would also subscribe to sms services and when they see some calls being successful, follow the advice blindly by taking huge leveraged positions. 12. If a day-trading position is in loss, they will take delivery. Thats how most of the stocks in their long-term portfolio are. Typically, they would have more than 50 to 60 stocks in their portfolio. 13. Mungerilal would never buy Reliance at 900 but he would go long when Reliance is 1140+ (that too with heavy leverage) just because the broker says that its a clear break-out! 14. The relationship manager/dealer of their broker is their best friend (during bull rallies). They will be constantly in touch with this guy from 9:55AM to 3:30PM. (Timings may change due to sun outage!!). Warren Buffet says that Wall Street is the only place where people who own Rolls Royce seek advice of the ones who travel to work by subway/local trains. Now these dealers (20+ somethings) have only formal NCFM certification and have not yet seen bulls and bear cycles, so they lack experience. And moreover, they have ajob to increase trading turnover. If you don't call them they will call you and give you tips. But Mungerilal would blindly take their advice for granted. 15. They follow bulk-deals very closely. Mungerilal would easily buy a share because a particular HNI has bought it. Or sell their holding because a certain FII has off-loaded. 16. Mungerilals would have little knowledge of everything: fundamentals/PE ratio/BookValue/Candlesticks/Chart Patterns/Global Factors/Fed Meeting/Crude oil/Opec and god knows what not 17. Typically a Mungerilal would also know, by heart, Index highs/lowssupport/resistances of not only Indian market, but also Dow/Nasdaq/Bovespa/Nikkie/FTSE.Most of the Mungerilals would get up late in the night to watch CNBC and see "global cues"

18. Some adventurous Mungerilals take advice of their

punditjee/astrologer/numerologists or devise their own method like deciding longs/shorts based on colour of tie/dress of TV Anchors. 19. I have also come across a new breed of Mungerilals, especially after May06 carnage, their brokers have lured them into commodities trading on MCX/NCDEX.Then there were calls of Gold US$1400, Oil US$100, Guar Gum .and what not.Though since last weeks meltdown in global commodities market, I wonder where are they now?. Having understood these traits, we might think hmmm.even I behaved like a Mungerilal at some point of time!. Let me clarify again here that I do not have any intention of hurting feelings of anyone (either living or dead!) My sincere suggestion is that let us learn from our/others past mistakes and try not to act like Mungerilals. That would be a major success of this forum The Equitydesk
Can I make a admission " I agree with everything from the first letter of the first word to the last letter of the last word!" At some point in time I was one of these Mungerilals (though in parts)... and we know how much that hurts once we are not a Mungerilal!

Wall Street is the only place where people who own Rolls Royce seek advice of the ones who travel to work by subway/local trains. Last evening I had a classic opportunity to have interactions with lots of Mungerilals at a social function. Thanks to the Bull Run, I was lucky enough to have met so many at one place together. Mind you, the hot topics of discussion were of course Sensex having closed above 12000 and ongoing Cricket tournament in <ST1:COUNTRY-REGIoN w:st="on">Malaysia</ST1:COUNTRY-REGIoN>, in that order. I asked all of them how it feels having made tons of money due to rise from 8800 to 12000. Almost all of them confirmed that they have missed the rally. Here is a snapshot of different responses: a) the leveraged ones were so much in debt due to May06 carnage, they had no money, so could not participate. b) some were so bearish at 8800 they sold most of their blue-chips (but keeping those junk stocks for the long-term) as they believed sell signals from their trusted technical analysts. And as per some chart patterns they believed it was best to get in only below 7000. Dr.Dooms forecast also supported this view. c) few who follow EM trends, fund flows and all that stuff fundamentally said yes we also came to 30% cash (still in cash ready to be deployed!) in June because of those usual firangi experts who found <ST1:COUNTRY-REGIoN w:st="on">India</ST1:COUNTRY-REGIoN> very very expensive at 8800 compared to many other emerging economies. (The same firangis are now saying we are fairly priced at 12000!). d) One Mungerilal who has just got married confirmed he was scared to death after seeing May06 sell-off that it was not possible to allocate more money to equity as an asset class. He said my Mother-in-law is rightstock market is like gambling e) One guy who had courage to buy some stocks at about 9000 level, promptly sold it off (with some gains of course) because he was told by some analyst that there was a double top formation at 10940. He believed the prediction that markets would tank and not only retest, but breach June lowso he thought he could always re-enter at lower levels. This view was supported by another analyst following candlestickssome hammer or star formation( Our Mungerilal is very eager to light a candle on that analysts graveyard)

f) couple of HNIs proclaimed (the guys who were so rich that losses in May06 did not affect them much due to their inherited wealth) that big money is into commodities only, because of huge intra-day volatility. One of them even tried convincing all of us that yaar, whats there in equity, its only a piece of paper. In commodities you can at least feel it, see it all around us, use it (I wondered what this gentleman would do with 30Kg Silver, 1 Kg gold or 100 barrels of Oil, or worse Tonnes of Urad Dal, Guar Gum!!!). I later found out that this guy was (fortunately) short on Silver and made some quick buck as it fell from 22000 to some 18000. His rival and envious HNI, rather privately, whispered to me that the same guy has lost huge bets in Crude Oil as he was damn positive of it going to US$ 100, but it corrected to some $64, and out of over-confidence he went on averaging till it was too much to handle! I immediately remembered Charlie Mungers (Buffets partner) words: It is a wise policy to trumpet your failures and to stay quiet about your successes. g) there was another class who were of the opinion that they were not convinced because this rise was on low volume, lesser institutional participation, poor advance-decline ratio. They are sitting in some cash to be deployed at next available correction. These guys have vowed to be in only fundamentally strong companies. h) There was tragedy with one Mungerilal: He went long RIL futures, but as a hedge was short on Nifty (as suggested by some strategist). This guy booked profit in RIL, but due to greed and some forecasts of global slow down, kept Nifty short open.The last I heard was that he wanted to average his position on Nifty short.and the market is going up, up and away( His wife told me they are planning a trip to Tirupati to offer prayers) i) One Mungerilal sold off all his holdings to move into 100% cash after he heard Ahmedabad based brokerage expert analyst (who wears different hats--fundamental, F&O, technical) on CNBC that Indian demographical story/consumer driven demand is all bullsh*t, Left parties are taking us backwards, global recession is ahead.. This two minute genius talk (off-the cuff remarks) on TV, shattered all his conviction about India Story. I sincerely hope that that Analyst does not meet this Mungerilal in person(I learnt privately that this Mungerilal was talking on his mobile to one Bhai about some supaari) j) Quite a majority was satisfied that they have started to recover their cost at least with the rising prices and are promptly selling. k) One Mungerilal who is known as KING OF NIFTY OPTIONS for his various strategies (like spreads, condor, butterfly, straddle, strangle and what not) informed me that he made net Rs. 1,100 in a month during August volatility (but was quite furious that for these trades his brokerage bill ran into more than Rs.25,000, later I overheard him telling someone that he would use strangle strategy on his broker! l) few Mungerilals confirmed that they will re-invest only after the Sensex breaches the previous top convincingly with high volumes, a net positive FII inflow and strong global markets. Also this has to have supportive F&O cues like implied volatility, cost of carry, open interest etc. Consensus was that with lower brokerage (competition due to slashing by Kotak/ICICI Direct) they would be able to trade more. Majority of these Mungerilals have over the past few months formed very strong opinions about variety of matters: 1. Fed will stop at 5.50% and start cutting rates from next year. 2. BoJ may raise quarter bps. EU may be cautious in their approach. German consumer confidence index is rising.

3. Nifty, if it crosses 3800 and closes above crucial figure of 3822 (of course with high volumes, there has to be a rider---a condition), next logical (?) target is 4600. 4. Dollar is going to be weaker. 5. Rupee will be largely in the range of 43.5 to 48. 6. Biggest threat to <ST1:COUNTRY-REGIoN w:st="on">India</ST1:COUNTRYREGIoN> is twin deficits. PC will fail on FRBM. 7. Sensex will rise to a new high and then tank due to FII pull out. 8. US will attack <ST1:COUNTRY-REGIoN w:st="on">Iran</ST1:COUNTRYREGIoN>. Gold is a must buy as a hedge against war/inflation. 9. FTSE index will tank due to uncertainty over Tony Blair. 10. <ST1:COUNTRY-REGIoN w:st="on">India</ST1:COUNTRY-REGIoN> will be a economic super-power by 2020 11. Be cautiously optimistic on ONGC because <ST1:COUNTRY-REGIoN w:st="on">US</ST1:COUNTRY-REGIoN> winter severity and heating oil demand will decide the course (?). Before playing on ONGC futures, keep a watch on Wednesday US inventory data and CNN weather forecast. My friend working with a major foreign brokerage is working on co-relational movements of Crude Oil on Nymex, Exxon Mobile & BP stock on NYSE with ONGC. He will feed me with inside information with Beta of the movements. Im a bit concerned about attacks in <ST1:COUNTRY-REGIoN w:st="on">Nigeria</ST1:COUNTRY-REGIoN> on oil facilities though. 12. Oil if cannot cross US$78.40 will retrace to US$38.60, otherwise in a trading (?) range of US$42 to US$68. Bit bearish view on oil. 13. There will be a global equity meltdown (like or worse than May06) in FY07 or FY08 or early FY09. I sincerely thought that these gentlemen were getting ready for full capital account convertibility of Rupee so that they can play global markets . I had an inferiority complex and promised myself to be in touch with the times. One interesting character I met deserves a special mention: He has recently bought some version of licensed software which gives BUY and SELL intra-day signals based on some pre-defined patterns. It is being marketed by some Gujrat based company (no wonder that State has produced so many entrepreneurs!). He has been trying luck with it doing day-trading (I thought what he meant was day-dreaming). I wanted to ask him a common-sense question: if it works that way, why the hell the man who invented this would make money out of licenses, wouldnt he sit in front of the screen from 9:55am to 3:30pm to literally mint and print money? I also wanted to quote the master: Its not necessary to do extra-ordinary things to get extra-ordinary results-Warren Buffet. But I restrained myself as I do not want to hurt or discourage anyone. And as such, with my age, people do not mind me because they doubt whether I have a mind, leave alone whether it is open or not. By the way, I forgot to mention that none of these Mungerilals have read a single FY06 Annual Report of companies they hold, which they confirmed having received over the past 3 months. Two stock tips I got in this party: Consumption of whiskey, white-rum, vodka & beer as well as cigarettes seems to be on the rise. (Disclosure: Im a teetotaler, non smoker..but love and hold ITC as a very long-term bet) We all promised to meet again during Diwali for celebrating not only the festival but a magical Sensex figure (I wish to keep this a little secretwill share it only after the event!) However, during the next Diwali party I will quote this to all the Mungerilals: Even now I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children!Warren Buffet Thanks for patiently reading this long posting.

Real hard core investing is really painful. You make an investment and watch the portfolio regularly, it is the prices basically we check, we get happy when prices go up and we become sad when our stock doesnt perform in terms of price. But that is not correct as individual stk prices gain or lose due to various parameters irrespective of index levels.
Two examples- I am holding few shares of Rel Cap and Yes Bank. Rel Cap , I am holding since the price was around 300-350 and Yes Bank avg price is around 195. Now I cant buy Rel Cap because it has become expensive , however both the stks Rel Cap and Yes Bank I am going to keep in my portfolio for another 5 years, so Yes Bank still looks ok , I will buy it now, Relcap after a correction of Rs. 200-300 . Sometime you convert some RelCap to Yes and Yes to Relcap also (but in this case broker also gains a lot !!) Just my 2 cents !! You are right Investor and you know it more than me in MCDowell where you have made a bagful of money. There is nothing like long term investing. I think that the biggest money is made by holding onto positions as I write this Pantaloon retail has become a 100 bagger for me adjusted for rights/splits and dividends and ENAM has put it in the list of stocks to watch out for in the next decade. I am not boasting here but I would appreciate if people could take a slightly longer term view on things. When I bought Pantaloon in April 2003 I was expecting a 4 bagger and got a 25 bagger on top of that.

Absolutely! I hope people don't get carried away by momentum stuff happening all around. From your candid disclosures, a lesson can be learnt that long term investing is the only way to wealth creation. And as regards only making money....well there are many other ways.

Let's say a stock has gone up 10 times. Now if the stock just doubles from here, then we have a 20 bagger in the hand right? Eg: - You bought Pantaloon at Rs. 23 - The stock price goes up by 10 times to Rs. 230 - All the stock needs to do is double from here to Rs. 460, and you have a 20 bagger. Had you exited at step 2, the mega-multibagger would have been lost. I know all this is very 'obvious' to most people, but I just realized it today. It is obvious but what makes the journey a bit more rocking is that after a 10 bagger the next 10 bagger happens with enhanced commitment (exposure in terms of money) because the allocation to the potential winner increases. Hence the amount that we make gets magnified. For example if a 100 bagger just doubles from here we make as much money as we did in the journey from 0 to 100 bagger. The doubling hides all the fun and excitement which is no less than a 100 bagger.

basantji .. when good businesses get overvalued ... shud we book profit and enter later even though we are bullish on its future prospects? ... you said u r exiting from CBOP ... will enter cbop again after correction or its off ur radar now?

Normally I do not do this because invariably we will miss the stock. But in cases where I am holding marginal positions (in relation to my portfolio) I keep fiddling around because veen if I miss the stock the potential loss is insignificant because of its low weightage to start with. For me anything that is less than 10% of my portfolio is low weightage. Basant, if it is not too personal, how do you manage cash flows at home? Let's say your old laptop suddenly decides to die on you (basically, a sudden unexpected fairly large expense), how do raise Rs. 70000 required to buy a new laptop? Is it through - Selling of shares - keeping large amts of cash in savings account/liquid funds. But, yes, this is unexpected expense. But in the future, there will be a set of expected expenses (like child's education) etc. How do you plan for that? I have some other cash inflows from mf- distb etc. Basantji, Can you identify even a five bagger based on your strategy ? Just trying to get a sense of how richly valued markets are right now. Five bagger isn't a problem the point is how quick we can get it. Any bagger business should be over in 2 years or else it becomes a compounding element. Five bagger in 3 years is around 70% CAGR. A couple of the TED XI stocks could do that based more on corporate action then pure EPS. But there is no surety from these levels because the fundamental basis for a multibagger is a PE expansion!!! Based on your above remark, what is the most common reason for PE expansion. I am referring in particular to the Small caps in Private banking space. Some of the smaller players are regional in nature and currently trade at lower P/E ratios. Will the 2009 deadline for the banking sector result in some rerating Sustained PE expansion comes in companies with heavy entry barriers. What barriers to entry can we justify for a smaller PSU/regional bank. Remember nedungadi bank and Global trust Bank and United Western Bank. ALl were smaller regional banks Point taken that hese are regional banks. Canara wants to do deal with Dena to get exposure to West and NW part of the country. Someone will buy these for their strengths. I remember it quite clearly. I owned both Nedungadi and Fedral Bank. ( please do not forget this one )

Everything is based on the post 2009 scenario. Entry Barriers is RBI's watchful eye. Basically, Not everyone who wants to own a bank can. ( Tata, Birla or Ambani ) but after 2009, they will all find a way, ( reverse merger maybe ) We could possibly see a scramble for Banks the way of Telecom, Power, Infra. The smaller private banks with market caps of less than Rs 2000 crores ( roughly the $ 500 million that foreign banks would happily pay for a banking lic as per SA comment ) come with a banking lic, branches and Profitable operations. First it will be the foreign banks salivating at the market potential of the second largest market in

the world of over a billion people ( only 250 million are currently profitable customers for banks ). They will cater to their respective market segement. Like you say what happened in the west will happen here. I add would like to add " what happened in China will also happen here " The valuations of Chinese banks will be repeated in India post 2009 consolidation. Every bank worth its international name/ fame wants to do business with India's burgeoning middle class. An example of my reasoning. Dhanalakshmi Bank is the cheapest currently available at Mkt cap of Rs 400 Crores. ie $ 100 million ( give or take a few here or there) $ 100 million for Banking License, branches and profits. Has been in business for over 80 years and has a small but niche market. Lakshmi Vilas Mkt cap $ 200 million. City Union Mkt cap $ 350 million. All are profitable. These are in upper circuit almost every day. PSU banks are not something I am looking at, just private ones. Your thoughts ? Dear Basanji, Even though I am writing under My Investing Strategy I don't have the Strategy all i have is a requirement. To tell you I have great responsibility to shoulder I have a family to feed but no job to earn my bread and butter. All I have is Rs. 60,000 in Bank Account and I need very shrewd kind of Investment to multiply it to Rs. 4.5 lacs. Why? It is because I will feed my family and with rest of money I will reinvest it in Stock Market to Multiply it further. Basantji,I think this can be done. What do you think? What I need is very careful planning of Investment. The Input that I can give is: 1) Rs. 60,000/2) Time limit: One Year Desired Output is: 1) Multiply Rs. 60,000 into Rs. 4.5 lacs Basantji,Are you ready to take a challenge if yes then give me a Portfolio for investment. May be you can help a poor man like me. I am eagerly waiting for your reply. Even though I am not Basant sir, but still Bardhan jee if you have a 1-year horizon and want a 7-bagger, you would be gambling your money away. If you get it good, but if you don't, your dream of feeding your family will be gone. Anyhow, apart from this topic...I personally don't think markets oblige someone's sad story. I would highly advise you to get your mental frame of mind straight first, else markets will totally demolish you. Keep a back-up plan and be conservative in returns-expectancy...always!! I am saying all this, as a emphatic TEDdian. Please do not get offended! Yes I agree with Om , the markets can a ruthless place if one comes with such high preset expectations , yes offcourse you may get a 7 bagger or a 10 bagger but the risk associated can

also be huge. Operator driven stocks can give you 10-15 times but one never knows which one they are and considering that these are your life time savings such a high risk bet would be certainly uncalled for. Pls dont mind if I have been harsh.

Harsh, the most obvious answer to the question would be - Look for a Job. But I'm assuming there are a few reasons why that would not be feasible. If that's the case, then my suggestion would be - Invest in yourself.
Start a business of your own. Nowadays, you don't need lakhs of rupees to start off own your own - because there are so many things that can be done with low initial investment. Read this article that appeared in Outlook Money on different self-employment ideas with low initial investment. Since things have gone wrong in the past that has resulted in the situation you are in, I can give you in writing that your Rs. 60,000 invested in stocks will worsen your situation. I had Rs. 30,000 in my bank account when I lost my job 5 years back (company went bankrupt). Since I knew I was unemployable, I did give a though about 'one last gamble' of putting my 30k in stocks. Thankfully, I did not! And pardon me a bit for being a little philosophical here - remember that every individual has some problems or other - some have financial issues, others have issues at home, some have health problems while others have problems at work. But generally, most individuals come out stronger - especially if you have clarity in thought. Very well-articulated views. I agree that the biggest gains are made in business that an entrepreneur sets up and many i times one does not get a lead on what to do but when it comes it does come naturally.

Making money is short-term, creating wealth is long-term' Vikas Khemani, executive VP & co-head, institutional equities, Edelweiss
January 14, 2008 Making money is a short-term process, while creating wealth only happens in the long run. Vikas Khemani, executive vice president and co-head, institutional equities, at Edelweiss, believes this is the only mantra for young investors to become wealthy in the long-term. "I have seen most young people these days call up their friends working in a stock broking house and ask them for tips. This will help them make money in the short-term. But, on a net basis, they won't be able to take this money out," he warns all those investors trying to cash in on the recent bull market frenzy. Vikas spoke with rediff.com's Prasanna D Zore about the sectors, themes and stocks that can become help youngsters create wealth if they have an investment horizon of five to seven years. Which sectors do you think can help an investor create wealth, in say, 10 years? Ten years is too long a time period. Probably by that time you will have two cycles (ideally, any economy moves in two cycles: the up cycle and the down cycle, with each making its presence felt for at least five years or more) in place. So I will talk about a long-term horizon, which could be between five to 10 years. The sectors which we

at Edelweiss like -- with a three to five year time horizon -- are the banking and financial spaces. One has to take a structural call on whether <st1:country-region w:st="on">India</st1:country-region>'s GDP growth is going to continue at eight to 10 per cent. The answer to that is <st1:country-region w:st="on">India</st1:country-region> is likely to grow for the next three to five years at eight to 10 per cent. In this context, the banking and financial services spaces become the most important. This makes me bullish on this space with a one, two, three, four, five and possibly 10-year perspective if the growth cycle continues. Which other sector/s do you like for the long term? Given the fact that there is huge amount of opportunity, the other sectors that we like are the infrastructure and capital goods and the engineering space. As you know, India is still a hugely infrastructure-starved country and we need to build sea ports, airports, roads, improve electrical supply and all such infrastructure related sectors. Huge amounts of investments are likely to be made in building these infrastructural facilities. In this process wealth creation is going to happen for two set of people: people who are going to create these assets and infrastructure and people or companies who will enable creation of these assets. Both these sections will do very, very well in the long-term: asset owners and asset enablers. Can you elaborate on these two themes for our readers? Let us first talk about infrastructure creators or asset owners. These will be companies owning ports, airports, power plants. These companies will own assets, run them and this will be like an annuity (a business that generates fixed returns or steady cash flows every year) kind of business. For instance, somebody who will own the mines will be an asset owner; those who are operating the mines will be asset enablers. Reliance [Get Quote] Power (yet to be listed) and NTPC are building power plants so they are asset owners. But other companies in the capital goods sector like BHEL will be enabling this process of building power plants. GMR Infrastructure [Get Quote] will be building airports; but somebody has to help them to build the airport. In the process, both parties benefit a lot. However, asset enablers will yield faster results than asset owners. Do you see investors making money in the banking and financial space and the asset owner, asset enabler companies?

Absolutely! Here I must also add the domestic consumption story in India. If you are talking about a five to seven year time horizon then I am sure India's per capita income will increase, wealth creation will happen, poverty and illiteracy will go down. All these things will happen structurally. When this happens, consumption in the economy will go up and the companies that cater to the domestic consumption sector will benefit tremendously. FMCG companies, retail stories and any company related to consumerism will offer a lot of wealth creating opportunities in the coming years. Companies that would possibly benefit from the above three themes? Banking and financial services is a fairly large space and if I have to name a few companies than the first name that comes up is ICICI Bank [Get Quote]. They have captured the entire gamut of financial services and I think this bank is going to gain big time in this space. Another company that I like in this space is Axis Bank. It has done well in the last seven to eight years, and if one has to look at this bank from another five to seven year perspective, then the quality of management that Axis Bank has will help it reap the benefits of a booming Indian economy. Also, both these banks can scale their operations with great ease. Companies that attract your attention in the asset owner and asset enabler space? In the asset owner space, I would go for something like GMR Infrastructure, Mundra Port -- they own large assets which are going to yield returns over a period of time. Though there aren't many companies in this sector that are available at reasonable valuations now. Having said that, I would still want to go for GMR Infrastructure and Mundra Port as they are into a space that offers new and exciting opportunities going ahead. Right now, we are only seeing the initial phase of what is likely to come in these spaces of ports and airports. In the next few years, you can see more wealth creation happening. Other asset owners that come to mind are JP Associates. In the asset enabler space, L&T comes immediately to mind. The company has displayed an excellent track record over a period of time and they are likely to continue with that. Their organisational platform is strong and I think this company will do very, very well in the next 3-5 years. It can be a potential multi-bagger. In this space you can also consider BHEL, BEL, BEML. All these companies are large asset-enablers with good quality management

support and scalability. I am talking only about large caps here. You can also find a lot of good names in the small cap space in this theme. However, in this space, the main concern is the scalability of their business models. Otherwise, if I have to give a pick from the small cap space, then Mcnally Bharat will be a strong small cap contender in the asset nabler space. Stock picks for the long term from the domestic consumption space? Pantaloon [Get Quote] Retail is one name that can ride the boom in this segment. The management understands the retail game very well. The other story that is a part of domestic consumption story is ITC. It is a part of the FMCG sector, in the agricultural space -- which I believe also offers a huge opportunity for investment. Another name in this space could be McDowells. Your advice to young investors? Don't think you can make quick money in stocks. Don't go by tips and hearsay. It is a dangerous thing that people can do at your age. You have to understand what companies you are investing in, what is the aim of your investments is and then put your money in stocks. If you can't follow this path, then mutual fund route is better for this age group to create wealth. If you look at it, over a period of time, large part of wealth is created through asset allocation rather than stock picking. If you are able to get right your asset allocation mix then I think you have done 90 per cent of your job. My suggestion to young people would be if you are investing directly in equity, do your home work thoroughly. Read research reports, read about the company you want to invest in, gather more information about it. Then make an informed decision. Typically, I have seen most young people these days call up their friends working in a stock broking house and ask them for tips. This will help them make money in the short-term. But, on a net basis, they won't be able to take this money out. This way, they will make money but not create wealth. Making money is short-term, creating wealth is a long-term process. Will you be able to make money out of the markets using trading tips? It never happens. Creation of wealth can only happen if an investor is looking at it as a serious business. Look at it this way: People will work for 8-10 hours in their jobs and make Rs 8-10 lakhs a year. And the very same people want to make the same amount of money in a month's time purely acting on tips from their friends. From the effort and return point of view, there is some disconnect, right?

When you come to the stock market, you should come with a long-term perspective. But they don't look at what kind of input they are putting in this effort. They should ask these questions: What kind of intellectual effort I am putting in this? What kind of research am I doing? Most young investors don't do this. In my opinion, this is a very dangerous sign.
Dear Fellow TEDIANS, I am really glad that you people are so much concerned about me at least that's what is visible from your reply. Regarding my last question floated here about finding a 7-bagger people are of different opinion about my way of thinking.Some are advising me to find a job, some are sending me the links to a new Bussiness plan. Friends,I am jobless since last five years I started in capital market with just Rs.12,000/- (I borrowed from my Father) I have multiplied it into 6 times within a period of six months you guys must be wowing on that but do you know how i have multiplied. Simply by doing Intraday Trading this is really special skill and given a time frame I will multiply it into six/seven times more.Infact By doing Intraday trading you can earn more than those Multibaggers.Multibaggers are for the people who don't want to do anything after making the investment. To give you an example Reliance Equities Head Mr. Madhusudan Kela started with mere Rs. 15 crores and now he is worth Rs. 30,000 crores with in period of 7years.Now calculate his rate of multiplication factor (Yes 2,000 times with in a period of 7 years) Another example that I want to quote is that of Mr. Warren Buffet He is valued at $ 34 Billion. Now the question that needs to be asked is are we fools or are these people more intelligent than us?The answer is I am sorry to admit "we are stupid?" Look at these people they are ordinary men like us but the difference lies in their choice?Now if we can emulate their success story we can end up earning at least half of their fortune and I am giving 50 percent discount to an invisible factor called X. Capital and stock Market is all about making money the one who makes more is called the Intelligent Investor. Now you people will ask me if I am so good at Intraday day then why I am opting for Multibaggers.Well the asnwer is I want to grow at 14 times within one year.How?The logic is very clear I will put my Rs. 60,000 in a stock that can give me 7 times and also by doing Intraday I will multiply it by 7 times. That's why I am asking for the portfolio that can give me the returns. Guys,I am asking one thing from all of you...Pls. co-operate with me we all will be very rich. I am sending you two links one is on Mr. Warren Buffet and second is one Mr. Madhusudan Kela. We launch a massive Research on these Guys as to what they are Buying and How do they think the answer to our success lies in there not by giving the links about what should I do. Basantji,I will need your permission to start a new topic altogether for researching on Mr. Warren Buffet and on Mr. Madhusudan Kela.My objective would to analyse them through microscope as to what they are upto now.How they think?What they are buying etc... I am eagerly waiting for your reply. Bardhan jee,

No more wisdom from my side. I am highly unknowledgeable compared to you I am 100% sure of it. Good luck to you. Anyhow, I would just like to make an observation: Patience and Observation. Have you had the patience to go through TED(this website's) topics and observed any information on Buffett or Kela and how they multiplied the wealth? The answer to the above question is the answer you are seeking. As I said at the start I am highly unknowledgeable compared to you after reading your previous post and hence I shall stick to the slow way of making money. Good luck to you. DO NOT MAKE THE BLUNDER OF LOOKING AT PENNY STOCKS ONLY. Look at the business that your stock is in, whether it be smallcap or midcap. If you see that: 1) Business model is great and it is hugely scalable. 2) Management is top-class, integrity-wise and track-record wise. 3) Looking at domestic stories, rather than export-oriented ones would be better. Good Business Magazine: 1) business-standard online website has paid memberships. Good. 2) Economic Times. Good 3) LiveMint online website. Good.

Good Article about calculating present value of future cash flows. Admin may transfer this post to appropriate thread.

Present Value for Pretenders

By James Early May 25, 2004

Something about things automotive and financial entices men and women -- OK, especially men -- to pretend to know more than they do. Seldom outright fraud, the human equivalent of this behavior usually takes the form of glossing over details as a given when they aren't.
If this describes your relationship with the math behind present value, don't worry -- the basics of present value, as you're about to see, are embarrassingly simple. No need to pretend anymore, friend. After this series, you'll be able to look at a company's cash flows just like our Motley Fool analysts-- er, at the very least, you'll be able to understand how cash flows form the basis for a company's value and inform your future reading. Choices, choices You'd rather have a hundred bucks today than my promise to give you a hundred bones in a year, right? Of course. But how much more than $100 could I promise to give you in one year to make it hard to decide between that Benjamin now and my promised $100-plus a year later? If you're an investor, you might intuitively think of the return on dull-but-risk-free U.S. Treasuries as an absolute floor. If Uncle Sam offers 3% a year, a sketchy freelance writer will have to do better than $103 -- a lot better. Whatever extra return you demand from me over that risk-free rate is termed a risk premium, and is more an estimate than a precise calculation. So your telephone psychic thinks you'd better demand the 3% Treasury rate plus an extra 10% from me, totaling an unlucky 13%. If you agree with her, the value of $100 to you now and that of my promise of $113 in a year should be pretty similar (i.e., you'd have a hard time deciding between the two). Now I'm going to go out on a limb and predict that if you're equally happy with a dollar from me now and a promised $113 from me in a year, you'll be similarly content to get a promise from me of $128 in two years. How did I know?

I just took 13% of $113 and added that $15 to (year one's) $113 to get year two's $128. Remember, to you, either promise -- $113 in one year or $128 in two -- is worth the same $100 today: The present value of either is $100. Multiplication compounds, division "uncompounds" What if we had to do a lot of these calculations? We'd skip the rigmarole above and just multiply any given year's figure by 1.13 to get the next year's equivalent value. To get to $128 this way, we could either multiply year one's $113 by 1.13, or we could multiply our original (year zero) $100 by 1.13 times 1.13. Actually, we'd be doing the same thing. So if I wanted to promise you something three years hence that equates to $100 today, I'd have to give you $100 times 1.13^3. See the pattern? Let's see if you do. And let's depart from this easy-to-work-with $100 figure: After four years, I'll give you a sum equal to $262 times 1.13^4. What's its present value, assuming the same 13% "discount" rate we've been using? It's $262. "My kid could do this," you're thinking. I won't argue. But do notice that you divided by 1.13^4, or the intimidating-looking formula (1 plus discount rate)^# of periods, to undo the multiplication. So what's the present value of a promised $1,000,000 in 60 years if your discount rate is 15%? Divide your million by 1.15^60 to get $228. In other words, if you're 16 and working a summer job at McDonald's (NYSE: MCD) or Wendy's (NYSE: WEN), throw just $228 in the market. Theoretically, if you're able to do 15% per year -- a few points better than the Standard & Poor's 500 -- you'll have a cool million when you're 76, just from your little $228. No promises on this one, but you get the idea. Multiple cash flows Now let's say you've won the lottery and will get $1 at the publicity ceremony tomorrow, plus $1,000,000 per year for five years, starting a year from now. In present-value terms, the $1 is worth its full value, but everything else, less. Since it wasn't the Washington, D.C., lottery, we can reduce the risk premium and use a conservative 6% discount rate this time on account of municipal reliability. Divide the first million by 1.06^1 to get $943,396. Divide the second by 1.06^2 to get $889,996, and so forth, noticing that you'd require more and more in the future to "equal" $1,000,000 now, but since you're not getting any extra, that same amount is "equaling" less and less now the further into the future it's promised. For closure, $5 million over five years has a total present value of $4,212,364 at a 6% discount rate. Oh, add your buck, too. The mighty, yet fickle, discount rate Up until now, I've ducked and dodged the topic of discount rates. Surely, investment professionals -people who know what they're doing -- must have some obtusely brilliant way of divining actual discount rates, not the sloppy estimates we're spitting out. Well, they don't, but they try. First, though, pretend you've got an imaginary financial instrument similar in all respects to U.S. Treasuries. A discount rate already exits -- the yield on a comparable-term Treasury. In reality, comparisons are not straightforward, so the financial community turns either to straight approximations like we've used (8% to 16% is a common range for U.S. equities) or to more "precise" methods like the famous capital asset pricing model (CAPM). Leapfrogging its complexities and criticisms, I'll tell you that CAPM basically derives a stock's aboveTreasuries risk premium (remember the extra 10% from me the psychic wanted?) by first estimating a general risk premium for the S&P 500 (5.5% or 6% above Treasuries is typical), then multiplying that "market" risk premium by a given stock's "beta," a number you can get from financial websites like Yahoo! (Nasdaq: YHOO) Finance and Microsoft's (Nasdaq: MSFT)Moneycentral that relates a stock's movement to that of the market. Once you've multiplied beta by the market's risk premium, add the product to the risk-free Treasury rate to get the total discount rate for your stock. To understand beta, think of fashion. The "norm" -- what the masses are wearing, and comparable to the S&P 500 financially -- in any given trend has a beta of one by definition. Those taking trends to the extreme have fashion betas above one (two or higher is possible), while trend-opposite rebellious teenagers and oblivious retirees would have negative fashion betas. People like me, whose insipid wardrobes show minimal awareness of trends, have fashion betas near zero.

Beta's contribution is measuring the additional "risk" (really just historical volatility) -- or the diversification benefit -- of adding a stock to your market-resembling diversified portfolio. Held alone, a low-beta stock may be risky, but its addition to your portfolio should reduce your overall volatility -- the volatility you're concerned about. Still, beta's not without its faults, an obvious one being that the future might differ from the past. The moral of the story here isn't that the financial community is misguided in its discount rate approximations. The moral is that discount rates are approximations, and one would be misguided to assume otherwise. And one last thing about discount rates -- present value models are very sensitive to changes in them, especially over long time periods. Remember our 16-year-old burger flipper? If he earns 10% returns instead of 15%, his $228 will be $69,453 in 60 years instead of $1,000,000. Still not bad, but what a difference! All dressed up and nowhere to go... for now. Sure, it's nice to be familiar with the foundation of finance for its own sake, but we'll have to wait till next time to work on finding the next Starbucks (Nasdaq: SBUX), Cisco (Nasdaq: CSCO), Dell (Nasdaq: DELL), or Wal-Mart (NYSE: WMT). For now, why not showcase your newfound knowledge on one of the Fool's discussion boards (like Investing Beginners) or read more about discounting in this classic Fool article? Fool contributor James Earlyis a former Cadillac mechanic and hedge fund analyst. While he won't disclose his own pretensions, he will disclose that he owns none of the stocks mentioned in this article. The Fool has a disclosure policy. Source : Fool.com
Another on Free Cash Flows.

Foolish Fundamentals: Free Cash Flow

We talk about free cash flow a great deal around here, and with good reason. It is the gold standard by which to measure the profitability of a company's operations. Free cash flow is not perfect, but it is more difficult to manipulate than net income or earnings per share (more on this later). For this reason, it is also likely to be lumpier than net income. Caveats aside, free cash flow gives an investor an idea of how heavy or light a company's business model is and how clearly it shows a company's ability to reward investors. What is free cash flow? Free cash flow is not "free" in the traditional sense of the word. A company can generate plenty of free cash flow, but it might not actually hand it out for free -- companies do have to reinvest in their businesses to generate free cash flow. That said, free cash flow is what a company has left over at the end of the year -- or quarter -- after paying all its employees' salaries, its bills, its interest on debt, and its taxes, and after making capital expenditures to expand the business. A real-life example Free cash flow is unbelievably easy to calculate, and both of the pieces you need to make the calculation can be found on the statement of cash flows. Every company files this statement in its 10Q and 10-K filings with the Securities and Exchange Commission, and in its annual reports. The formula is as follows: Cash flow from operations - capital expenditures = free cash flow You can see the math below. I have used Constellation Energy Group (NYSE: CEG) as an example. Free Cash Flow FY 2006 FY 2005 FY 2004 Cash flow from operations $525,300 $627,200 $1,086,800 - Capital expenditures ($962,900) ($760,000) ($703,600) = Free cash flow ($437,600) ($132,800) $383,200

Figures in thousands. Data provided by Capital IQ, a division of Standard & Poor's.

In its most basic form -- and sometimes that is all that's necessary -- that is a free cash flow calculation. You can make the calculation more sophisticated by backing out one-time items and removing any benefits a company is receiving from stock options and counting as an operational benefit. (Hint: They're not operational.) But starting with the most basic calculation and looking over a period of four to five years will give you a good idea of how well a business has performed. It's what you do with it that counts As great as it is to find a company with strong free cash flow, the metric itself really lets you peer into only the operational profitability of a business. What a company does with its free cash flow is just as important as whether it exists in the first place. Companies that simply hoard their cash or spend it aimlessly on acquisitions will likely do more harm than good to your portfolio. As an investor, you're much better served by looking for companies that take their free cash flow and put it toward share repurchases when their shares are below their intrinsic value, or better yet, toward a regular cash dividend. The beauty of being an income investorand receiving a cash dividend is not only that you get a guaranteed tangible return, but also that you have the option to reinvest the money received in more shares of the same business, or in another opportunity. The point is that you get to decide how the cash is allocated. Just make sure that the company pays out a portion of its free cash flow as a dividend, but doesn't pay out more in dividends than it generates in free cash flow. Foolish final words As investors, we all want companies that generate or will eventually generate free cash flow. This is as true for currently unprofitable high-growth stories as it is for more mature companies. The only thing a stock price represents, after all, is the market's estimate of the future free cash flows that a business will generate. Katrina Chan updated this article, which was originally written by Nathan Parmelee. Neither of the contributors owns shares of any company mentioned. The Motley Fool has a strict disclosure policy. Source : Fool.com

Experience
At 91, the man Warren Buffett famously dubbed a "superinvestor" is still picking unloved stocks
Walter Schloss has lived through 17 recessions, starting with one when Woodrow Wilson was President. This old-school value investor has made money through many of them. What's ahead for the economy? He doesn't worry about it. A onetime employee of the grand panjandrum of value, Benjamin Graham, and a man his pal Warren Buffett calls a "superinvestor," Schloss at 91 would rather talk about individual bargains he has spotted. Like the struggling car-wheel maker or the moneylosing furniture supplier. Bushy-eyebrowed and avuncular, Schloss has a laid-back approach that fast-money traders couldn't comprehend. He has never owned a computer and gets his prices from the morning newspaper. A lot of his financial data come from company reports delivered to him by mail, or from hand-me-down copies of Value Line, the stock information service. He loves the game. Although he stopped running others' money in 2003--by his account, he averaged a 16% total return after fees during five decades as a stand-alone investment manager, versus 10% for the S&P 500--Schloss today oversees his own multimillion-dollar portfolio with the zeal of a guy a third his age. In a day of computer models that purport to quantify that hideous and mysterious force called risk, listening to Schloss talk of his simple, homespun investing methods is a tonic. "Well, look at that," he says brightly, while scanning the paper. "A list of worst- performing stocks." During his time as a solo manager after leaving Graham's shop, he was a de facto hedge fund. He charged no management fee but took 25% of profits. He ran his business with no research assistants,

not even a secretary. He and his son, Edwin (who joined him in 1973), worked in a single room, poring over Value Line charts and tables. In a famous 1984 speech titled the "The Superinvestor of Graham-and-Doddsville," Buffett said Schloss was a flesh-and-blood refutation of the Efficient Market Theory. This hypothesis holds that no stock bargains exist, or at least ones mere mortals can pick out consistently. Asked whether he considers himself a superinvestor, Schloss demurs: "Well, I don't like to lose money." He has a Depression-era thriftiness that benefited clients well. His wife, Anna, jokes that he trails her around their home turning off lights to save money. If prodded, he'll detail for visitors his technique for removing uncanceled stamps from envelopes. Those beloved Value Line sheets are from his son, 58, who has a subscription. "Why should I pay?" Schloss says. Featured in Adam Smith's classic book Supermoney(1972), Schloss amazed the author by touting "cigar butt" stocks like Jeddo Highland Coal and New York Trap Rock. Schloss, as quoted by Smith, was the soul of self-effacement, saying, "I'm not very bright." He didn't go to college and started out as a Wall Street runner in the 1930s. Today he sits in his Manhattan apartment minding his own capital and enjoying simple pleasures. "Look at that hawk!" he erupts at the sight of one winging over Central Park. One company he's keen on now shows the Schloss method. That's the wheelmaker. Superior Industries International (nyse: SUP - news - people ) gets three-quarters of sales from ailing General Motors (nyse: GM - news - people ) and Ford. Earnings have been falling for five years. Schloss picks up a Value Line booklet from his living room table and runs his index finger across a line of numbers, spitting out the ones he likes: stock trading at 80% of book value, a 3% dividend yield, no debt. "Most people say, 'What is it going to earn next year?' I focus on assets. If you don't have a lot of debt, it's worth something." Schloss screens for companies ideally trading at discounts to book value, with no or low debt, and managements that own enough company stock to make them want to do the right thing by shareholders. If he likes what he sees, he buys a little and calls the company for financial statements and proxies. He reads these documents, paying special attention to footnotes. One question he tries to answer from the numbers: Is management honest (meaning not overly greedy)? That matters to him more than smarts. The folks running Hollinger International (other-otc: HLGAF.PK - news people ) were smart but greedy--not good for investors. Schloss doesn't profess to understand a company's operations intimately and almost never talks to management. He doesn't think much about timing--am I buying at the low? selling at the high?--or momentum. He doesn't think about the economy. Typical work hours when he was running his fund: 9:30 a.m. to 4:30 p.m., only a half hour after the New York Stock Exchange's closing bell. Schloss owns a prized 1934 edition of Graham's Security Analysishe still thumbs through. Its binding is held together by three strips of Scotch tape. In the small room he invests from now, across the hall from his apartment, one wall contains a half-dozen gag pictures of Buffett (the Omaha sage with buxom cheerleaders or with a towering stack of Berkshire Hathaway (nyse: BRKA - news - people ) tax returns). Each has a joke scribbled at the bottom and a salutation using Schloss' nickname from the old days, Big Walt. Schloss first met that more famous value hunter at the annual meeting of wholesaler Marshall Wells. The future billionaire was drawn there for the reason Schloss had come: The stock was trading at a discount to net working capital (cash, inventory and receivables minus current liabilities). That number was a favorite measure of value at Graham-Newman, the investment firm Schloss joined after serving in World War II. Buffett came to the firm after the Marshall Wells meeting, sharing an office with Schloss at New York City's Chanin Building on East 42nd Street. Schloss left the Graham firm in 1955 and with $100,000 from 19 investors began buying "working capital stocks" on his own, like mattressmaker Burton-Dixie and liquor wholesaler Schenley Industries. Success drew in investors, eventually rising to 92. But Schloss never marketed his fund or opened a second one, and he kept money he had to invest to a manageable size by handing his investors all realized gains at year-end, unless they told him to reinvest. In 1960 the S&P was up half a percentage point, with dividends. Schloss returned 7% after fees. One winner: Fownes Brothers & Co., a glovemaker picked up for $2, nicely below working capital per

share, and sold at $15. In the 1980s and 1990s he also saw big winners. By then, since inventory and receivables had become less important, he had shifted to stocks trading at below book value. But the tempo of trading had picked up. He often found himself buying while stocks still had a long way to fall and selling too early. He bought Lehman Brothers (nyse: LEH - news - people ) below book shortly after it went public in 1994 and made 75% on it in a few months. Then Lehman went on to triple in price. Still, many of his calls were spot-on. He shorted Yahoo (nasdaq: YHOO - news - people ) and Amazon before the markets tanked in 2000, and cleaned up. After that, unable to find many cheap stocks, he and Edwin liquidated, handing back investors $130 million. The Schlosses went out with flair: up 28% and 12% in 2000 and 2001 versus the S&P's --9% and --12%. The S&P now is off 15% from its peak, yet Schloss says he still doesn't see many bargains. He's 30% in cash. A recession, if it comes, may not change much. "There're too many people with money running around who have read Graham," he says. Nevertheless, he has found a smattering of cheap stocks he thinks are likely to rise at some point. High on his watch list (see table)is CNA Financial, trading at 10% less than book; its shares have fallen 18% in a year. The insurer has little debt, and 89% of the voting stock is owned by Loews Corp. (nyse: LTR - news - people ), controlled by the billionaire Tisch family. He says buy if it gets cheaper. "I can't say people will get rich on it, but I would rather be safe than sorry," he says. "If it falls more, I won't worry about it. Let the Tisches worry about it." Schloss flips through Value Line again and stops at page 885: Bassett Furniture, battered by a lousy housing market. The chair- and tablemaker is trading at a 40% discount to book and sports an 80cent dividend, a fat 7% yield. Schloss mutters something about how book value hasn't risen for years and how the dividend may be under threat. His call: Consider buying when the company cuts its dividend. Then Bassett will be even cheaper and it eventually will recover.
If only he had waited a bit to buy wheelmaker Superior, too. It's been two years since he bought in, and the stock is down a third. But the superinvestor, who has seen countless such drops, is philosophical and confident this one is worth book at least. "How much can you lose?" he asks. Source : Forbes.com

I am sure all of us have gone thru this at some stage in out investing career. More than anyone else, I am sure Basantji can identify with this.

Investing = Waiting
By Selena MaranjianMarch 10, 2003

"The waiting is the hardest part Every day you get one more yard You take it on faith, you take it to the heart The waiting is the hardest part..." -- Tom Petty, "The Waiting" You've been a good Fool. You discovered an intriguing company (perhaps it was presented to you as an investment idea in The Motley Fool Select or The Motley Fool Stock Advisor) and you took your time studying and thinking about it before taking any action. You crunched some numbers, compared it with its competitors, evaluated its financial health, growth prospects, and valuation, and liked what you saw. Finally, you took some of your hard-earned dollars and plunked them into a handful of shares in the company. Let's call it Dodgeball Supply Co. (ticker: WHAPP). Hours go by You're suddenly stricken with self-doubt. You consider selling immediately. Wait!

Have faith in yourself. If you did your due diligence, and studied the company well, then you should have had some solid reasons for buying the shares. Don't ignore the holding completely from now on, but don't obsess over it, either. Give the seedling time to grow. Perhaps develop some other interests! Might I suggest modern board games and card games? There are scores of new ones released each year, many of them exceedingly fun. These are not like Monopoly -- they typically play in an hour or less, feature varying degrees of luck and skill, and keep everyone involved up to the end. Learn more by perusing the BoardGameGeek website, especially its many lists of good games. Check out myriad game reviews at Funagain.com, too, and explore the rich frequently asked questionson games in our discussion board community. (Some unintimidating favorites of mine so far: Bohnanza, Lost Cities, 6 Nimmt, Through the Desert, Blokus, and TransAmerica. Some great but more complex games: Puerto Rico, Princes of Florence, Union Pacific.) (I'll offer some more suggested new hobbies throughout the rest of this piece.) Days go by Perhaps you, like T.S. Eliot's neurotic hero, J. Alfred Prufrock, measure out your life with coffee spoons. If so, then many coffee spoons come and go. (Perhaps it's more like a long line of empty Starbucks (Nasdaq: SBUX)cups.) One day, you read that a company insider, perhaps even the CEO, is selling some shares of Dodgeball Supply. Uh-oh! You panic. You clutch your heart. You grab your phone and prepare to call your broker. Wait! That's not a good reason to sell. Remember that there could be many reasons why the insider sold his shares. These days many corporate bigwigs receive much of their compensation in the form of stock (or stock options). When that's the case, they'll have to sell shares now and then in order to generate some cash. Insider sales are not necessarily a corporate death knell. Of course, if you see many insiders selling a big chunk of their shares, all around the same time, then that doeslook kinda bad. (Insider buying, meanwhile, is generally a green flag of some sort. Bigwigs will rarely buy shares if they think their company is about to burst into flames.) Take your mind off investing a bit. Find a drive-in theater to begin frequenting. There are still a bunch left. Or buy and sell stuff at the massive eBay (Nasdaq: EBAY) marketplace-- you might be surprised at what you'll find there. (Some items I've noticed for sale: mink handkerchiefs, Indo-Persian chain mail helmets, nursing uniforms, rare ceramic dental floss dispensers, beachcomber metal detectors, teeth-bleaching kits, the 1850 census from Bexar County, Texas, compressed helium gas regulators, beard trimmers, socket wrenches, ravioli molds, and pretzel warmers.) Weeks go by Your shares in Dodgeball Supply increase in value by 10%! (Perhaps this is due to rumors that the Olympic Committee is considering adding dodgeball as a new Olympic event.) Your heart starts beating rapidly again. Should you sell? Should you buy more?? Wait! Relax. Take a deep breath. Remember that it hasn't been too long since you studied up on the company, and not much has changed for it, except the new possibility of even faster growth. You had expected the stock to double for you in a number of years, so the fact that it has jumped up a bit shouldn't stress you out. Should you buy more shares? Probably not. Let's say that you invested 10% of your available funds in WHAPP. If so, then you probably don't want to buy even more, as you'll likely end up overweighted in one company. Maybe it's time to pick up another new hobby. Consider taking flying lessons, perhaps. You can learn more on our General Aviation discussion board, and at the Federal Aviation Administration(which also offers an Acrobat-formatted document on how to start flying). If you'd rather save money than spend it, consider the secret sport of dumpster diving. Learn more on our Dumpster Diving discussion board and at these websites: The Dumpster Lady, Dumpster Diving: Treasure and Trash; Dumpster Diving tips from New Hampshire; and Dumpster Diving for Profit and Passion. Months go by Dodgeball Supply announces that its highly anticipated newest offering, the Z-2000 ball, featuring the latest in rubber technology, will debut a month later than expected. At fault is a late shipment of supplies, due to a fire at a supplier's plant. You break out in a sweat. You feel a stroke coming on.

You rush to your computer, to get a quick stock quote. It's down half a point. You think maybe you should sell. Wait! Think about the issue at hand for a minute. Will this one-month delay really change the future of the company? Is it an insurmountable problem? Does it reflect serious problems at the company? No, no, and no. Some news stories should make you stop and rethink whether you want to keep holding a stock. But this isn't one of them. Patience, Fool. Time for a new diversion, perhaps? Consider keeping tropical fish. As one fan explained to me, "There's something marvelous about creating an artificial environment, filling it with life, and then maintaining it and watching it develop. When well cared for, aquariums can be a great source of relaxation, entertainment, and education about ecology, biology, and the aquatic world in general." Learn more at Aquaria Central and The Beginner's Tropical Fish WebRing. (Allergic to fish? Try gardening! Get more information in our Gardening discussion board and at National Gardening.) Years go by If you've made it to a year and beyond, and you're still holding those shares in a company you still believe in, then congratulations! Here are some final thoughts: o
You do need to keep up with Dodgeball Supply and all your other holdings. But try to be proactive, rather than reactive. Read the quarterly earnings reports and follow each company's health and progress as revealed in financial statements. Pore over the annual reports. Read discussion board posts about the company and follow it in the news. (Google News can help you mightily with that.) The more you know, the fewer surprises you'll encounter. Don't let other attractive companies turn your head, unless they're significantly more attractive than what you own. Trading frequently in and out of companies will generate commission fees and -- if you're lucky enough to make a profit -- taxable short-term capital gains. Do consider selling -- for the right reasons. These include: (a) You find a much more compelling investment, (b) You need the money now, (c) You will need the money within a few years, (d) You no longer believe in the company's strength and growth prospects, (e) You realize you don't know enough about the company, (f) You think the holding is rather overvalued, and (g) The reasons you bought it are no longer valid. Don't let investing take over your life. To do it well usually does take some time, but aim for a balanced life of work, profit, fun, family, friends, etc. Overdose on investing now and you might burn out before you develop a sustainable and profitable approach and routine. Keep learning. Here's a big list of resources that might come in handy as you learn more about investing. And another list, covering some corners of Fooldom that might be of great interest or use. Consider bookmarking and revisiting these pages.

Fool on! Source :fool.com

Are You Ready to Invest?

By Mary DalrympleJanuary 23, 2008

You're fired up to become an investor and make millions, but are you really ready? See whether you fit into one of these investing profiles. 1. "I've maxed out my credit cards, but I keep up with the minimum payments every month." If you're looking at the stock market as an easy path to riches that will wipe out your piles of consumer

debt, look again. Rarely is investing more profitable than paying off debt that you know will cost you double-digit interest rates every year. Attack your consumer debt, and then invest. Unless you want to give yourself an early heart attack, invest only with money that you know you don't need for at least five years. Don't invest the money you need for debts, medical needs, mortgage payments, utilities, or dog food. Don't even invest money that you hope to spend on a vacation or home improvements next year, unless you don't mind that the vacation gets canceled and the home improvements get postponed. You're ready to invest when you have cash that you don't need for five to seven years, and that you don't mind subjecting to some risk for the opportunity to make money. 2. "I have an hour every day, and two on Sunday, to devote to market charting and stock picking." By those criteria, no one with a job, or a family, or even a stamp-collecting hobby could become an investor. You don't need a ton of time, and you certainly don't need to watch the market's day-to-day gyrations. But you do need some time. You don't want to leave your money on autopilot, unless you've planned your investments that way. If you're struggling to find 30 seconds at the end of the day to brush your teeth, buy an index fundand forget about it. You're ready to invest when you can regularly commit a little time to learning about and overseeing your investment choices. 3. "I inherited $10,000 from my Aunt Mabel and want to make a killing right now by dumping it all into penny stocks." To become an investor, you need to be ready for the long haul. If, like the rest of us, you haven't inherited a pile of money or won the lottery, you need to have the stamina to build your investments little by little. You also need to be prepared to forgo instant gratification. Consider some top-performing stocks over the past decade, such as Hansen Natural (Nasdaq: HANS), Celgene (Nasdaq: CELG), and Green Mountain Coffee Roasters (Nasdaq: GMCR). Each is worth more than $30 for every $1 you invested, and Hansen has returned more than $200 to the dollar. But here's the catch: It took 10 full yearsfor these stocks to earn those returns. You're ready to invest when you have long-term investing goals and the patience to wait. 4. "I have an M.B.A., C.P.A., C.F.A., and B.F.F. after my name." You don't have to be a financial whiz or management guru to become a good investor. You just need a good dose of common sense and the will to learn a thing or two about stocks. If that's the case, you've come to the right place. At your fingertips, you'll find a guide to the basics of investing and a step-by-step guide to investing foolishly. Now you're ready! Source : Fool.com A 200 year history of stocks, bonds and gold In a study conducted in the U.S.A it was found that over a longer period of time Stocks outperformed all asset classes, followed by bonds then gold. Bonds were the most consistent while stocks and gold were erratic. Gold never did enough to beat inflation while bonds did only slightly better. The following table indicates how stocks have been the best performing asset class over the past two centuries: US Markets Nominal Return 1802Starting Ending Annual 2001 Wealth Wealth Return Stocks $1 8800000 8.32% Bonds $1 13975 4.88% Bills $1 4455 4.29% Gold $1 14.38 1.3% US Markets Real Return 1802-2001 Stocks $1 599604 6.88% Bonds $1 952 3.5% Bills $1 304 2.9% Gold $1 0.98 -0.001% Dollar $1 0.07 -1.3%

US Markets Total Return 1925-2002 Small Company Stocks Large Company Stocks All Company Stocks Long-Term Government Bonds Bills Inflation US Markets Total Return 1982-2002 Stocks Real Estate Gold

$1 $1 $1 $1 $1 $1 $1 $1 $1

6816 1775 3311 59.7 17.5 10.09 10.94 4.36 0.76

12.1% 10.2% 11.1% 5.4% 3.8% 3% 12.7% 7.6% -1.3%

Source: Ibbotson Associates and Jeremy Siegel, Wharton Business School

Key Observations: One dollar invested and reinvested in US companies since 1802 would have accumulated a total nominal return of nearly $8.8 million by the end of 2001 The inflation adjusted return of that dollar would have been early $600000. Inflation takes away $8.14 millions or 1.44% (8.32%-6.88%) of annual return. Clearly inflation is our biggest threat to creating wealth. Treasury Bills fared slightly better by providing 3.5% and 2.9% of inflation adjusted real rate of return. Over a period of 200 years Gold and the Dollar with real rate of returns at -.001% and -1.3% moved more or less in line with inflation. In other words you could not have become rich by buying these asset classes. Inspite of the data provided above why is it so that the typical Indian fancies gold, bonds and real estate to equities? There are no clear cut answers and some soul searching that I did led me into the following conclusions: 1) Since stock quotes are available on a day to day basis they manage to create maximum amount of fear and panic amongst investors. 2) Liquidity in stocks is another reason for people to get out early . Almost all of us have ancestral homes running into more than 50 years and sometimes going as high as 70 to 100 years. The reason why we held on to them was there were no two way quotes available from 9.55 to 3.30 on all week days. Compounding works O.K for shorter periods of time, but creates magic over the long term. No wonder Einstein called it the eighth wonder of the world. 3) Gold has become a symbol of emotional bondage we often relate to gold with a sense of historical nostalgia the old wedding ring, the first bracelet that your father gifted you. These are things that we do not sell and the first stock that your father gave you was sold the moment it went up 20%. So the point that I am initiating this debate on is that stocks are the only way to long term prosperity and it would make sense for investors to take some risk create more space for stocks in their asset allocation model the next time they sit with their Financial Advisor.
Basant really bad to know that you have exited Yes Bank....You used to have firm belief in it...difficult to understand what changed your view on this so soon.... By the way after exiting Yes Bank....may i know what u invested in??? As for me i have added more of Yes Bank at these levels....Looks to be a great investment and dont see any need to panic and exit....

I replaced Yes Bank with Titan.I sold because of the fear of the unknown. When you hold a few stocks there is very little space for betting on uncertainity.I am not sure what would come out but let us play the Devil's advocate and assume that there is a hit:

a) The Market will refuse to give the Bank a higher discounting of 4 to 6 times Price to BV. b) We are not sure of the loss it could be as low as Rs 10 crores and on the higeer side the figure is imaginary. Yes Bank has a networth of Rs 1300 crores and if a portion of this is knocked out it would reduce the banks chances of growing faster - you need cash to generate EPS. c) Assuming that the management recovers the full amount results in the folowing quarters could be adjusted for treasury income that arises because now no one wil buy/sell these derivative products which add significantly to fee income. d) Finally if the RBI thinks that Yes made some bad selling of Forex products it could penalise it by not giving fresh branch licenses; approvals etc. remember how HDFC bank was held back because of the demat case when RBI did not give them licenses to open up. e) If the stock price does not move holding back talent would be a big issue because Yes bank provides a lot of Stock options to its employees and hence cash component would have to be increased. I could be wrong so please do not base your decision on these assumptions. I have no idea whether they make sense or not but whenever I am in doubt I stay out - Cannot bet big in uncertainity. Rana Kapoor said on TV that retail inevstors are panicking if that indication was on me surely we are panicking but look at the volumes which are mind blowing. The two options before the shareholders of yes Bank are: a) The stock goes back to Rs 250 within 4 weeks of Fy08 results if no untoward incidents are reported. b) We look at a scenario which is worse then what it is right now. In other words It is tough to bet without risk capital!

Normally I would believe any management but if you assume the japanese Yen to move to 90 to a dollar then whether it is a good or abad management everyone will face the music. This is what i read on Sunday at Prof J.R Verma's blog and it really changed my mind: In his 2002 annual report, Buffet famously declared that derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.. He also wrote that When Charlie and I finish reading the long footnotes detailing the derivatives activities of major banks, the only thing we understand is that we dont understand how much risk the institution is running. Don't get me wrong but ask yourself whether all this is worth the risk? Thanks for your update. If we are going to avoid financials, then what sector do you think is the best bet for participating in India growth story. Any better stocks in financials which are not affected by this. So far i am planning to invest into financials. I need to change my approach. Looking for direction. The first rule in investing as professed by Buffet is not to lose money and the second rule is not to forget rule number 1. The bigger banks like hdfc and axis will be relatively stable. I opted out for hdfc bank and titan. Maybe the bigger bank will grow at 20pc slower then the smaller one but such wild swings should not be there. All said and done this is what I feel not necessarily what will happen.

Basant Sir-I have a question for you....as you mentioned earlier that you remanin 100% invested always.
Than at times like this when stock markets are bottoming out.. 1) What do you do after the flow of fresh funds gets exhausted (Do you recommend borrowing or taking loan to invest further.) Consider this scenario:

2) Suppose you have 50% investment in Voltas (and currently the stock is down 30%) At the same time stock like Titan(say a more prospective stock than Voltas) falls say to 600(50%)..how do you manage your portfolio than? Do you book loss in Voltas and move to Titan. 3) Please let me know what is the right strategy that one should adopt in cases like this? Considering you also have another stock which is in Profit say Pantaloon(10%)..will you consider a stock in Profit to sell and negate your losses in other 4) Simply stay on sidelines and take a vacations and wait for Market to return back to normal. Please let me know how you handle this situation ..it will benefit us extremely. seniors please chip in. Normally I take a position and then do not keep changing it too often. If ever there is a drop in the price of one stock with the others not dropping I move a bit into the stock that has gone down only if that stock has a lower exposure in the context of my overall portfolio. About being fully invested it works both ways so I bear the pain and also enjoy the gain. Making a 30% cash call and investing in a set of stocks that have gone down 50% still puts you back 35% from the top. My objective is to try and see where my companies would be in 2-3 years and invest only if there is a chance of making a 50%CAGR in that process we can handle some losses. I have realised that over time if one can be sure of a company growing its EPS at the same rate as it was doing for the past couple of years then the chances of making serious money is very high. The best defensive stock isn't ITC or the HUL but the one that can grow its EPS with predictable ease over the next 12 quarters! While I am not a big proponent of shuffling stocks but in investing always stick to what your gut tells you to do. As Buffett says ' a public opinion is no substitute for thought'. Dear Friend Welcome to this forum and wish you a wonderful investing journey .There is enough resource material in this forum on topics related to investing and start spending few hrs every day digesting the same .We are all here continuing to learn through sharing . I suggest u start first reading this book: Stocks to Riches" by Parag Parikh, that gives a basic info on the psychology of investing in stock markets. It is available in most of the books shops and priced at Rs.195/- or so . Once you finish this you can pick up other investment classics from Buffet / Graham / Peter Lynch etc .

'I am bullish on the market'

Mumbai, October 21, 2003: 'I think the correction will continue for some time,' says Ramesh Shrichand Damani. Radha : sir i have ongc150@602 and bpcl@327 can i have ur call Ramesh Damani : Hello everyone. Thanks for joining. Let's start. ONGC appears well priced to me, BPCL looks good. samy : Sir, Is it the right time to enter IT Edu sector? If s pls guide Ramesh Damani : I think so however we have few players other than NIIT. chanda : you are very candid now BEL,,SONA STEERING SBI RELIANCE your call please hold or sell ot trade????? Ramesh Damani : I like SBI and BEL of the ones mentioned. I own it. anupta : Sir today i added SBI @ 490 tisco @ 340 morgan stanley GF @ 13.20. Did i bought those too early? Sir I have 200 hpcl @ 365. Shall i still hold them or convert

them to sbi tisco morganstanley Gf etc. What is yor view on HPCL now.Is it worth holding now or we should exit it. Ramesh Damani : I think the correction will continue for some time. It seems like a first full-blown correction. ankit : Sir,I am holding 1500 sh of E-Serve.Results are out.Whats your view on it. Good or excellent? Ramesh Damani : Sequential results were poor. Corresponding results were good. However, I still am worried about margins due to rupee appreciation. narayan singhi : i have 1000 godrej consumer at 120 should i convert it with godrej ind or not please tell me Ramesh Damani : I like and hold both shares. No preferences. chanda : goodyear{i] pl advise i have them at 54? now it is 45? Ramesh Damani : I think we need to give them 3 or 4 quarters to turn around. It takes time. udday : Sir, can we hold Opto and Macmillan at the current levels? They both were strong in this falling market? Ramesh Damani : They look good to me. vikas2 : What happened to E-SERVE , why it has fallen after result. How do u analyse result specially MARGINS which u wanteed to look Ramesh Damani : Margins are to worry about till the rupee stops appreciating. They may have hedged exposure for the current time so we can't say. Radha : sir ur call on tisco,tata power ranbaxy,sbi,hdfc bank,cipla as iam holding this stocks please advice Ramesh Damani : I like and own Tata Steel, Tata Power, SBI and HDFC. Rambaxy will do well and I would hold on. BASANTMAHESHWARI : I hold a decent quantity of Pantaloon since the Rs 50 levels. I would like you to answer this one.Should I partially sell so as to make the cost of holding nil or should I just ride the retail boom The pressure to sell partially is very high but then one may miss the real ride..The McKinsey story on retailing seems to be getting better each day.I also hold Trent .Do you have trent by any chance. Ramesh Damani : I was not comfortable with Pantaloon at 50 so I am unlikely to be comfortable at current rates. I would be careful in it. ankit : Sir, Re E-SERVE..Is it a hold @ this level or to boob partial profits? My average cost is Rs 430/share Ramesh Damani : If you are scared by dip in margins as I am expecting, book some profits. vikas2 : Macmillan, Mcdowell and Infotech results are due tomorrow. What are your expectations Ramesh Damani : McMilan should pose good results. McDowell never does. As afr as Infotech is concerned, I have no idea. BASANTMAHESHWARI : I bought McMilan at Rs 243 levels and wish to buy more should one wait for the results.I will hold it for 1 to 2 years no problem on that.Is the current year expected EPS Rs17 and 04 Dec expected 27.Please comment. Ramesh Damani : My sense is they will do around Rs 20 this year and between Rs 26Rs 28 in Dec 2004.

BASANTMAHESHWARI : ABout eserve A very interesting article in the Hindustan times yesterday says that Rajan&Suman Raheja hold about Rs 50 crore worth of eserve and Satish Raheja about 14 crs.Would you add at these levels or just hold on. Ramesh Damani : They have been holding it for sometime. They lease space to e-serve also. I would not buy at these levels. Ahmedabadguy : Sir Mcdowell anyway don't show good result..Specially now when glass prises are higher..Do you see another not so great result can knock off 15-20% prise from current levels????? Ramesh Damani : They could. However, as I keep saying this stock is for those who look at market cap and not question on earnings. rajesh_ : Sir,Out of Mcdowell and UB which is looking attractive. pl give yr preference. What % you have invested in Liquor stocks. Ramesh Damani : UB is cleaned up and pure player on beer. McDowel is still in play and a restructuring story. rajesh_ : PLease comment on prospects of Apollo Hospitals, Goldium International and VST.Should I hold on or book profits Ramesh Damani : I would hold on to them. vikas2 : 3 yrs back Mcdowell and UB holdings were in 300 range. What is the prime reason for current rate as even during that time also profits were not much specially in Mcdowell Ramesh Damani : Restructuring. Radha : sir ur call on cipla please hold or exit Ramesh Damani : Hold. chanda : if cv lcv dm co.. do well so shoul tyure co.. but as the roads have become better tyre co. may lag behind?? goodyear [i]??? Ramesh Damani : No, vehicle sales will increase. BASANTMAHESHWARI : Ramesh babu is management the only concern at Pantaloon. IO saw their cash flow statement it seems to be negative and would turn around in the second half of 05.Is there speculative element to the pantaloon rally also could you be more open if you may? Ramesh Damani : Take a look at segment wise results and see if they make sense. gopal : sir, godrej industries has low volumes . how will be the results of it . Ramesh Damani : Don't buy it for q-on-q results. This is a large company at a substantial discount. Hold it, it will pay good dividends and over time appreciate. vikas2 : Tata Honeywell : Why u want to hold it when others can give better return. We want to know your logic which will certainly help us investing with patience Ramesh Damani : This call hasn't worked out and I sold some part of my holding. However ITES business is doing well and the controls business should turn around with a surge in capex. rajesh_ : Sir, are you bullish on markets? What is yr advice on markets. Stay invested or book partial profits Ramesh Damani : Market is in full blown correction. It will last more than a few days, however, I am bullish. Ahmedabadguy : Sir my little experiance of graph watching shows mcdowell prise remained more or less 35-55 rs. range for last 2-3 years (very narrow band)and should give atleast 200% return in a year time when it the stock starts moving up.Hopefully

wait for that upmove is over and q on q higher tops will be acheived.. Ramesh Damani : I hope you are right. It will happen but not at a time convenient to us. prabhav : Have you followed Onward Tech, they have purchaase banking bus.. from Kale and their results will be out tommorrow. Dont you think it is a good turnaround candidate. Ramesh Damani : I am sorry I have not seen the results. May be next time I will comment. saxviv : sir please answer : sir would you prefer hindalco or tisco.. if tisco then why? Ramesh Damani : Tisco because I understand the steel cycle better. ankit : Sir,In yesterdays Business Std there was a quote by some unknown author,re discovering a multibagger....It's like discovering Madhuri Dixit in her teens...Whats your next "Madhuri"..other than Macdowell(she is having a bad manager/Mallya ? Ramesh Damani : Great question, I keep my eyes and ears open and will let you know.I need to leave early today. See you next week. Bye

From my limited experience on bear markets I try to give examples from the 2008 situation as it appears to me:
1) Sectors which move the fastest and the fiercest in the bull markets lose the most in the ensuing bear market.real estate, Infra, Power, financial services (brokerages, NBFCs), Reliance stocks. 2) Companies that are leaders in a bull market do not see their prices come for years in the ensuing bear market. For example ACC and Tata Steel in 1992 took a decade to see their old prices. Other 2nd line darlings like Lloyd Steel, Kakatiya cement, Swaraj Mazda etc are nowhere to be seen. Unitech and DLF could esist but I would like to see companies like Parsvanath, Purvankara etc many of whom will be wiped out. In 2000 we had DSQ, HFCL, Silverline, Pentamedia etc 3) People look at how far it has fallen from and start averaging. Instead of this they should look at the valuations. 4) All companies with questionable accounting practices wash their dirty linen as markets fall. So companies growing at 100% CAGR could suddenly start growiing at 40% in a few quarters and then finally show degrowth. 5) Point (4) happens because it becomes too costly for the management to keep cooking books when prices are not responding to supposedly good fundamentals in the short run. 6) But the market cap of such stocks will evaporate long before the companies start showing bad results. It happened with Infy in 2000 as the company grew more then 100% for 4 quarters and the stock price lost 80% in about 18 months! 7) Bear markets do not distinguish between blue chip and penny stocks. M&M fell 83% in 2001 from Rs 25+ to Rs 28; Infy Wipro,Satyam can be called as part of tech meltdown but Tata Motorts fell from Rs 300 in 1999 to Rs 70 in 2001! 8) It pays to stick with quality companies/sector leaders in non cyclical industries. 9) All new bull markets have new leaders because at every price you will have new sellers in the old favourites stocks which people think that they should sell just because they are breaking even.Cement, Steel in 92, EOUs in 94 and tech in 2000 never had it so good for them again. 10) I have seen two bear markets one in 1992 and another in 2000 and the portfolio destruction is maximum. People who make money are the ones who a) Cut losses b) Stop averaging c) DO not look at how high the stock has fallen from d) Patiently invest in companies whose EPS is bound to grow. P.S: People who buy during the market are the ones who make a killing in the next bull market but what we buy is more iomportant then at what price we buy ?

Basant sir i have a question

Whenever u talk about 'BUSINESS MODEL' which parameters / points u look at and decide which is the best model ? Not necessarily in order but these are the various facets that constitutes a business model. there could a a few others but these are the points which I look for. 1) Scalable - size of opportunity 2) Cyclical or non cyclical 3) Entry Barriers - Moat 4) Govt regulated or not. 5) Capex or non capex 6) Whether such a model has been successful elsewhere in the world? 7) consumer or industrial oriented Companies with large cash balance on unstated objectives are an avoid since they make the balance sheet heavy without any operating income.

Akash Prakash: India in 2009

Akash Prakash / New Delhi Aug 27, 2008, 01:10 IST

The odds are the markets will bottom out before the middle of next year. The current consensus on India is very negative, and it is difficult to find a real bull among major market participants. Almost everyone is underweight India in a regional or even broader emerging markets context and we have already seen outflows of over $7 billion. Trading volumes have collapsed, investor visits reduced and the hype around the India story almost totally dissipated. Analysts trying to market the India story keep reporting total disinterest among the investor base, and raising new money for India is extremely difficult. With such a sea change in sentiment it would be helpful to remember as to how we got here in the first place. While financial markets globally are in turmoil, India has had some specific issues. The India story got derailed for three or four main reasons: Inflation spiked and forced the RBI to tighten aggressively, effectively choking growth and hitting corporate profitability. Growth expectations had to be revised downward for the first time in five years; The unanticipated surge in oil prices blew a huge hole in both the fiscal and current account; The government in its desire to get re-elected began to pursue suboptimal policies; viz. The farm loan waiver, higher than recommended pay hikes, industry level price controls, inability to cut subsidies, etc.; Paralysis on economic reforms; Valuations were stretched and there was excessive hype. Now let us look at all these factors as we move into 2009, especially mid 2009. First of all, we will have a new government in place with hopefully a five-year term. Given the fiscal mess the new government will inherit, and the present government being in its first year, the chances of serious, meaningful reform are bright. A first-year government with a slowing economy and fiscal stress will have the cover it needs to get things done, whether it be reducing subsidies or disinvestment. Also from a practical viewpoint, as long as any coalition at the Centre is independent of Left support, it is difficult to imagine it getting more bogged down on fundamental reform than the UPA. Given the disappointment on this front in the last four years, any policy action will be a positive catalyst. The penchant on the part of the new government to keep doling out freebies and playing to the gallery will also be reduced. The further we are from elections, generally the more responsible is government economic decision making. Secondly, it is highly unlikely that commodity prices will have the type of parabolic moves we have seen this year, especially in oil. Even if prices begin to go up again, on a higher base the impact of price rises will be muted. The lagged impact of the RBI tightening will also have totally played out and thus the inflation rate will most likely be around 5 per cent. With inflation under control and most monetary variables in check, the RBI will be about to

commence an easing cycle. The new government will also be more focused on getting growth back on track, rather than remaining focused on reining in inflation at all costs. Economic growth ultimately drives employment and tax revenues and no government can ignore this. Bond yields will have peaked and credit growth will start to accelerate again, especially retail, as the market recognises the peak in rates for this cycle. GDP growth will start accelerating and we should exit the year at an 8 per cent trajectory again. Thirdly, independent of where oil prices go, the year ending March 2009 will mark the peak in India's macroeconomic vulnerability to rising oil prices. At 9 per cent of GDP, oil imports will naturally drop to below 6 per cent by YE 2011, due to the start-up of the RIL and Cairn oil and gas fields over the coming 12 months. (This will happen even if oil stays above $105). While Cairn will help the balance of payments, RIL gas will improve both the BoP and also the fiscal, through lowering costs for fertiliser/power plants and thus subsidies. Longer-term, both will also yield substantial revenues to the GoI through taxes and profit oil. By the time we hit mid-2009, assuming the markets are still at today's levels, we would be trading at about 12 times (March 2010 earnings), which is not really expensive considering that return on equity will be above 20 per cent, and earnings will have started to positively surprise and re-accelerate. We would also have had an 18month correction, more than enough time for corporate India to catch its breath, cut costs and consolidate. Just from a mathematical perspective, earnings will be accelerating as we move into 2010, purely from the coming on stream of the RIL and Cairn fields and their impact on the corporate earnings base. India is going through a cyclical slowdown, part of a normal business cycle and not a fundamental break from its trend growth rate of 8 per cent. Such a slowdown is important to remind people of cyclicality, temper overheated growth plans and forcibly reintroduce risk into the equation. Markets are leading indicators and normally bottom out a few months before the business cycle itself. Given the strong possibility of the RBI easing by mid 2009, and the economy and earnings bottoming out, markets should have a positive backdrop to 2009. The difficulty will be in the performance of the markets in the interim till we get into early-mid 2009. Have markets and investors fully discounted the risk to earnings? How much more can PE multiples de-rate in the face of high and potentially rising bond yields? Will the RBI be too aggressive in its zeal to kill the inflation beast? What if oil goes to $150? We also have to accept that India can totally blow it, with a small possibility of a highly fragmented coalition coming to power in 2009, which will lack cohesion in economic policy making. The odds are the markets will bottom out before mid-2009; one has till then to pick stocks, do the work and get your portfolio aligned for the next cycle. The key will be in finding which sectors will lead the market this time, for if history is any guide market leadership will move away from the capital goods/power and infra plays that led the market till January 2008.

Time to get stock-specific

MARKET INSIGHT
Devangshu Datta / New Delhi Sep 21, 2008, 00:49 IST

It does take a lot more labour than targeting sectors, but thats the only way out when markets are directionless. The numbers mentioned in conjunction with the US blowout are huge. The Fannie Mae and Freddie Mac exposures are in the trillions. Lehman has $600 billion in assets, Morgan Stanley has several hundred billion more, AIG slightly less. Its difficult to tell what the bill will add up to until the bailouts come through and the grisly details are added up. The impact on India is difficult to assess in quantitative terms, though its obviously negative. The initial panic reaction of FII sales and 2000-3000 jobs being lost on Dalal Street is not such a big deal. Finance is a very cyclical industry jobs are lost every so often. In the past 9 months, the market has also adjusted to the concept of continuous sales by portfolio investors. A bear market in itself is not a catastrophe. A couple of industries could be hit very hard. Indian banks have overseas exposures they are cagey about how much. The real estate industry was depending on FDI. That will not come through, at least not in the expected timeframes. There has already been a drying up effect noted where private equity flows are concerned. Every

listed company with large FII stakes has seen a drastic revaluation. This is the tip of the iceberg. The really big losses will be the deals that dont come through in the next couple of years. Indias growth trajectory through the XI Plan (till 2011 -12) depends on external investments. Infrastructure alone is expected to swallow upwards of Rs 600,000 crore and roughly three-fourth of that was supposed to come from private funding. If those investments are not available, GDP growth rates may be revised drastically down. In 2002-03, when the last real recession bottomed out, GDP dipped below 5 per cent. At that time, the Indian investment-consumption mix was skewed about 40:60 in favour of consumption. In 2008-09, its more like a 50:50 split so the lack of investible resources could hurt even more. The other thing is, the Indian economy is now solidly integrated with global trends now. There are no insulated safe-havens any more. This is easily verifiable. Every sector has lost ground in the past fortnight. The highlyleveraged sectors and the ones dependent on foreign funding have done worse than others. But nobody has done well. It is also difficult to think of an industry that doesnt have some exposure to overseas trends. Given that growth is uncertain, this is a value investment scenario rather than one of growth. The valuation fiends will point out that the correction has still not brought prices down to levels where stocks look attractive. Actually given that growth projections are being written down, prices could fall a long way before valuations do become attractive. The principles that Benjamin Graham laid down during the depression catered to low and uncertain growth projections in the simplest way. Graham assumed growth would be zero and every business that he invested in would go bankrupt. He was only interested in companies that would sell for a higher breakup value than the stock price. That is, the price to book value ratio was 1 or less, in the companies Graham targeted. During the great depression, perhaps half the US market was available at such valuations. Unfortunately this is not true and never going to be true of a modern, service-oriented economy like India. Book values in India are much more notional and price-book value ratios have usually been in the range 01.7-2 even at market bottoms. Another way to seek insulation is through the medium of cash-flow analysis. A company with positive cash-flow can support itself. Companies that are cash-flow negative may often be great growth businesses. But they are vulnerable in situations like this where investment dries up. Unfortunately there are very few Indian businesses that are cash-flow positive either. In some cases, such as with the telecom majors, this is because they have pumped their profits into rolling out new networks in the hope of future growth. In other cases, such as with the PSU refiners, they are cash-flow negative because they are essentially bankrupt. The few companies that are cash flow-positive are liable to ride out the recession better. You would have to examine stocks on a bottom-up case by case basis. But this could be one metric that outperforms the market.

I've heard this theory when the index was at 2800 and all the way to 21,000 and now at 14,000. Actually one needs to be stock specific all the time else buy and index fund. exactly....and especially if one intends to make a career out of equities. Sectors may outperform but when the clock reverses, only the good survives whereas the opportunists simply vanish with no one to shed tears for them except the hapless investors....

The mid and small caps stocks are just cracking. So, it might be a good idea to slowly start accumulating. This looks like a phase of capitulation which, usually, signals the bottom. I am not suggesting that these stocks cant go down further, but for me there is enough value to start nibbling on them :-)
Finally some sense on the forum rather than the bizarre discussion on price points and getting jittery when stocks fall 50% and optimistic when they double.

As Om Shivaya said "With due respect" to all that "respect" I urge those respected souls to focus more on corporate fundamentals and industry dynamics rather than talk about prices every time. Before I made a 15 bagger in Tv18 prices fell 40% from the intermittent peak at least 4 times, it fell 45% from the peak for Trent at least 2 times so just focussing on falling prices and then reworking strategies just because prices have fallen is something of hindsight thought. Yet we are the first to talk about Buffett and the likes. The debate should be more on fundamentals rather than prices going up and down 20% that is because in the latter case the business channels are doing a terrific job and we add no value to the discussion. No, at one point I would also be the crowd and that is my greatest fear (reason for caution) but mindlessly arguing about prices gets us nowhere. If companies report bad results which do not seem a onetime affair then we should sell such stocks but just talking about how we would buy at an index level of 11,999 and not at 12,001 (below 12k) is something which has never appealed to me. Another thing which I mentioned on the first page of this thread is that with 3-4 stocks I expect one of them to perform in line with my expectations and that recovers the capital for me over a 2-3 year period so I could go wrong on the others and if all 3 -4 work then we hit jackpot (which is a rarity or a white swan). The objective of the forum is not to talk about prices but about those triggers that affect prices so if Nagarjuna construction(hypothetical example) falls by 30% in 4 weeks there could be a fund selling on the basis of redemption pressure; there could be someone shorting; there could be something which we do not know and is temporary how can you let that event dictate your investing strategy. When markets fall midcaps fall the hardest and recover later to the market. The chances of getting caught in a high growth midcap is also high but we have to understand that midcaps do create returns over the longer period of time which are higher to the Sensex returns. It is not that I do not panic when stocks fall but my panic is restricted to fundamentals deteriorating so I will call up people to find out if the business is on track because stock prices are slaves to earnings - over periods of 9-12 months. Another thing which I do is get a credibility check on the management from people who know them. For instance I was in Gurgaon last week and my brother in law used to work in a senior position in Tata Steel and I tried running a credibility check on the various Tata Directors so that I could really extend my discussion with them in the AGMs into more meaningful manner. As Janak once told me "Its important to check whether management kahi lallu to nahi bana raha hai". Finally its all our money and we are entitled to do whatever we feel like with that.

Akash Prakash: A time of confusion

Akash Prakash / New Delhi Oct 08, 2008, 00:46 IST

It still seems that early to mid-2009 is when equities will conclusively bottom. Current market conditions are quite extraordinary, to put it politely. I have never seen such fear, panic and confusion all at the same time. One has seen bear markets before but the sheer pace and velocity of this plunge has been breathtaking.

One is also caught between two conflicting instincts. On the one hand, given the extent of damage and fear around, every contrarian instinct one possesses is shouting out to buy. Everyone has heard about buying when there is blood on the streets and fear all-pervasive. How can things get any worse? Also, are we not supposed to be buying when governments finally give up and actively intervene to shore up the financial system? I snt a large financial institution going bust the indicator everyone was looking for? All indicators of fear and capitulation are flashing green. For anyone believing in mean reversion, your first instinct will be to buy and buy aggressively now. However, one continues to remain hesitant, and it is important to understand why.

 First of all, this is new and uncharted territory for everyone participating in todays markets. None of us has ever seen a credit contraction and deleveraging cycle of this magnitude. As we have never seen this beast before, one tends to be more cautious in facing it. When the mean itself is unclear, playing regression to the mean is a little difficult. We have lived through two decades of global credit expansion, and are not used to credit being simply unavailable. There is a clear sense that this crisis has now spiralled out of control and become global in nature. It is also very difficult for anyone to dimension just how bad things can get. Never before has someone like GE found it difficult to access short-term funding markets. The credit freeze has to have forced all companies to reassess business, and consumers are running scared. We are most likely about to enter a very serious economic downturn, and most investors still do not seem prepared. This will be a consumer-driven recession and far worse then anything most current investors have seen. Analysts still expect earnings to grow in 2009, when they will probably fall 20 per cent. We have still to print even one negative quarter of GDP growth in the US, yet already 760,000 jobs have been lost and earnings are down 30 per cent (entirely due to financials).While we have seen the mother of all credit collapses, we are still in the very early stages of the consumer credit deterioration associated with an economic downturn. In prior recessions in the US, 60-65 per cent of the market and corporate profits decline tended to occur during the recession itself could this still be ahead of us? It is only now in the past month or so that the US economic data has turned decidedly negative. If the recession is only now beginning then we may have a lot more downside ahead. Valuations are also not yet cheap enough on a cyclically adjusted basis, with longer-term earnings-based measures not yet in value territory. While most probably all the actions undertaken by the Fed and other authorities globally will work eventually in unlocking financial markets, the consequences of these measure not working is extremely dire. We have no choice but to assume that the Fed and Paulson will be effective (what choice do we have?), but the story may not end with the troubled asset relief programme (TARP) plan. We could see a lot more measures needed and many unintended consequences, for truthfully, the authorities are making decisions on the fly. With such adverse repercussions to a negative outcome, one must be conscious of tail risk (a small probability of a very negative event actually happening). Given what happened to Lehman and AIG etc, investors can be forgiven for being more focused on tail risk than normal. One is also very uncertain about the endgame in terms of how the attitude of banks, regulations, investors etc towards emerging markets (EMs) will play out post this deleveraging cycle. Will investors still be interested in playing EMs, when the US itself is becoming cheap? How will flows eventually play out? How will investors attitude towards risk assets change? Even from an Indian context, while the commodity bust is going in our favour, and we have probably seen the peak in the monetary tightening cycle, earnings risk is still all-pervasive and the weakness in governance a serious overhang. We run large fiscal and current account deficits and have very limited room for fiscal manoeuvre. A country which needs FDI desperately to fund its current account, cannot afford to have a repeat of Singur or Posco. This is also our first credit cycle with significant retail leverage. It probably makes sense to wait for some normality to return to the credit markets before one can become more aggressive. This may be one time when, given all the uncertainty, it may be worth giving up some of the upside in return for safety. Even after we see some unlocking of the credit markets, equities will still give us enough time to participate. To track the credit unlocking, one will need to see the TED spread, LIBOR and corporate spreads normalise. We will see of course trading bounces, and given the panic, one should appear very soon, but it still seems that early-mid 2009 is when equities will conclusively bottom. I think investors should control their contrarian instincts, and recognise the lack of clarity in the environment and possibility of extreme outcomes. Capital preservation still seems to trump the need to aggressively position oneself for capital gains in the immediate short term. In his recent investment in Goldman Sachs, isn't Buffett getting 10% pa dividend? That's what he says. He is 85% Benjamin Graham and 15% Phil Fisher. I am 100% Phil Fisher, No textiles, aviation and bad businesses for me. Earnings Season: Here We Go Notwithstanding the 50 bps (basis points, 100bps =1%) CRR cut by the Reserve Bank of India (RBI) and easing off of P-note restrictions by the stock market regulator Securities & Exchange Board of India (Sebi), the Indian benchmark index Sensex doesnt seem to be going anywhere. The reason is simple once the dust settles on these issues, the focus will shift back to fundamentals. And fundamentals appear to disappointing, at this point in time. Agreed sentiments are playing a key role on the world markets. Nobody is in a mood to look at fundamentals. Traders, speculators and investors all want to sit on cash selling off whatever portion of their portfolio they can offload. Valuations seem to be hitting newer lows every other

day. Should you be a value investor then? The answer seems to be in the negative. For one, the CNBC TV18 8-year equity model suggests some pain left before the market appears to bottom out. Hereunder is the table with historical anecdote. CNBC TV18s 8-Year Equity Model The 1992 Cycle Peaked Apr 1992 40% correction Jul 1992 (3 months) Bottomed Apr 1993 @ 60% of peak level Sensex PE at bottom 10x (4-quarter trailing) Back to previous high Oct 1999 6.5 years from bottom to reach Apr 1992 highs CNBC TV18s 8-Year Equity Model The 2000 Cycle Peaked Feb 2000 40% correction Oct 2000 (8 months) Bottomed Sep 01 @ 58% of peak level Sensex PE at bottom 10x (4-quarter trailing) Back to previous high Jan 04 4.25 years from bottom to reach Apr 1992 highs CNBC TV18s 8-Year Equity Model The 2008 Cycle Peaked Jan 2008 40% correction Aug 2008 (8 months) EXPECTED Bottom @ 60% of peak level = 8320 level EXPECTED Sensex PE at bottom 10x (4-quarter trailing) Concerns -World economy slowing down - FIIs selling, liquidity drenching out -Risk premiums on the way down -Inflation issue -India Inc.s earnings slowing down -Top line growth is primarily price growth, not volume -Inventories on the rise Conclusion India is NOT decoupled from the world The model has proved itself time and over again. An earnings check also confirms the above concerns. Once this turmoil is addressed, the market would certainly get temporary relief. It is then that the equity market the world over will shift focus back to earnings. And they arent going to cheer the equity market. Let us concentrate on India earnings. The top line is expected to remain flattish for large companies, but many small and mid size will definitely take a hit. The trend will definitely continue in the coming quarters. The conclusion therefore is that there is no immediate relief. As far as large companies are concerned, a flattish top line would be largely due to price growth rather than volume growth. But, this trend may not continue for long. Sooner, rather than later, even the large companies would not be able to pass on the rising costs to the end consumers. That would hit the top line to an extent, but the bottom line would be hit badly. On the other hand, small and mid size companies will not be able to sustain the price growth for the coming quarters, some perhaps not even in this quarter. So fundamentals are definitely looking weak overall. There is no point looking at sectors. Its a bad time to follow a bottom up approach. Having said that let us look at the Sensex EPS. For beginners, FY09 EPS at Rs 1,050 is far-fetched. With the slowdown in the earnings in Q1, Sensex EPS had inched closer to Rs 850. But, the two changes in the Sensex made matters worst. The market capitalization rose, but the profits

declined. So, EPS at the end of first quarter was Rs 825. A 10-15% rise in the remaining three quarters will inch the EPS to just about Rs 910-950. That pegs the Sensex at 13x FY09 earnings. Look at the box above and you would know that on that earnings, in a risk averse environment, the Sensex is expensive. Moreover, Indias risk premium to other emerging markets is also on the decline. The conclusion therefore is that earnings are not going to help boost sentiments. Its a further reason to short the market. And till the time FIIs are not buying again, dont buy any of the bullsh*t that your brokers might tell you. Remember, in the 1930s the Dow tanked 90% from its peak only to see those levels 25 years later. Economists following Keynesian Theory tell us the 5point Keynes suggested for the 1930s Great Depression replaying exactly now. (Click here for more:). If things get out of control, it may just blow up a deep hole in your wallet.

No silver lining...
MARKET INSIGHT
Devangshu Datta / New Delhi Oct 12, 2008, 00:31 IST

For value buying to come in, markets may have to slip by another 15%. By all accounts, the current financial crisis is the worst since the Great Depression of 1929-37.

It is certainly altering global trade patterns, and the financial industry will never be the same again. Its quite likely the global economy will go into stagnation or even recession as the IMFs latest advisory suggests. Other experts have revised estimates downwards through the last three quarters. Once the July-September numbers flow in, another global GDP projection downgrade is likely. Even worse, there is a huge liquidity crisis. The buyers and lenders of the last resort, the US government and those of the other First World nations, are running out of funds. You have a paradox so much forex has gone into US debt, the dollar has appreciated. When that trend reverses, it could get more painful. The current crisis is a payback for a Faustian bargain. Previous Fed Chairman Alan Greenspans policies helped mitigate Asian Flu and the Russian crisis, contributing to several years of unprecedented global growth. But that growth turned into the largest bubble in history. Bubbles eventually deflate and the bigger the bubble, the more painful the process of deflation. Right now, sound balance sheets matter more than profits. Every company, which is leveraged up and cashnegative, will struggle. Companies with low debt and cash reserves can ride out the storm. They can even buy cheap assets and develop new business avenues. That is what the Indian IT industry, for example, will have to do. There will be even greater consolidation in growth industries, like telecom, that need external capital. Telecom needs enormous investments over the next three years to roll out more networks and induct new technologies. The growth and profit records of Indian telecom businesses are excellent. So the better-managed companies will find investments flowing in even if there are stringent conditions attached. Cyclicals will take a long ride through a dark tunnel. The entire value chain is affected. Theres no demand for end-products. (Cars, high-end retail, white goods, housing). That has meant a drop in demand for commodities. Revival will come only once commodity prices have got really low; users have passed on input cost-cuts; and consumers have started buying again. In these situations, valuations need to capture sustainability rather than growth prospects. Look for low PE ratios and high dividend yields. The third classic measure of sustainability is a low market cap to net worth ratio that is, a low price-book value (PBV).

Unfortunately, India is an emerging market and emerging markets typically dont have low PBVs. Taking these three standard metrics, we know that in recessions and bear markets, Indian markets have bottomed at Nifty price-book values of around 2.5, PEs of 10-11 and dividend yields of close to 2 per cent. By those standards, the current numbers are edging closer to the green zone, but they are not there yet. The PBV is 2.9, the price earnings (PE) ratios are just above 15 and the dividend yield is about 1.6 per cent. Current estimates suggest the forward PE is about 11 that implies analysts are still seeing over 25 per cent earnings growth. That could well be revised downwards once Q2 results are in. Even otherwise, the light is amber for investors rather than green. If you are getting selective, use the market bottom numbers as a primary filter before making specific picks. Quite a few companies trade at PEs lower than 10. Fewer have PBV ratios lower than 2.5. Very few also offer dividend yields of 2 per cent-plus. Once you have that basic list, start looking at more criteria such as low debt, positive cash flow. Only after that you can move into the grey areas of specific business characteristics, management quality, etc. The fact is very few Indian companies will pass the initial mechanical filters. Far more of them would have made the investment-grade in 2005 or even 2006. That reinforces the feeling that the market may fall further. Alternatively, it will take a long time to recover. If earnings estimates are met, and prices dont change, the market would start looking attractive in t he first six months of calendar 2009. It would have to fall another 15 per cent to be a genuine value buy.

The best way to get started is to read a lot. You can start by reading books on people who have made it big. That gives you the experience of learning without losing. Though investing is 50% skill and 50% emotion the first 50% isn't too hard to acquire it is the nest 50% that really tests us. Company specific websites have annual reports which normally carry 10 year B/Ss of the company.

Basant Sir, Could you please explain what you meant by plan B? Plan B is if you own Stock A and for some reason Stock A seems that it will not deliver for the next 2-3 years and that its business has become affected then one needs to take the loss and move to another scrip. This other scrip(s) need to be identified beforehand so that an investor knows where he has to go. I call this Plan B. That is where the scale of opportunity or the market size comes into play. For example if you are holding a company which is working in a segment with huge scale of opportunity then there is every likelihood of the revenue growth staying though the trend could slow down in tough years. But holding a company for 1-2 year isn't the best thing around unless there are major earnings disappointments and valuation excesses stocks should normally be held.

Basant Ji , what do you make of the current situation ? There seems no end to this mayhem . If FIIs keep pulling out their money like this the market will keep falling like this , and as past the Fall and rise in the markets is because of FIIs . They might return to the Indian markets again , but when is the biggest question ?

No one has any answer in times like these fundamentals get overshadowed by the sentiments, liquidity and emotions I wish it were simple to focus on company earnings but that is what I am trying to do. I just try and see what kind of earnings my companies will deliver in a couple of years (Fy10) and that is the only way to keep the confidence high and the conviction running! When emotions & liquidity are running the market, we have to be prepared for a longer time-wise correction. I don't think FY10 will see normalcy restored. The pull-out of funds itself will spill over to end of FY09 - and given the severe crunch at home (read US), they're soaking the funds real fast - i read somewhere AIG has already used up the bailout money allotted to them. So, we have to look at companies which can survive all this while in a difficult credit environment, and still continue to deliver earnings. High PE companies will be at added risk to drop a few more times, down the line. Earnings and earnings visibility are the best measure. It is really very difficult to remain convinced of ones decisions in light of adverse market sentiment. This is what Buffet meant by Mr Market's depressed sentiments and not being influenced by it. It is most important to survive this carnage to come out ahead and live to see another day. Dear Basant, I spent a lot of time reading investing strategies from proven people. Still i have one doubt, Is share price is slave to earnings or slave to market sentiments. For example in past bull phase one can buy any stock irrespective of fundamentals and earn a lot while in recent bear phase i am seeing many companies whose earnings growth on quarterly basis is as good as that of bull phase but their shares are not moving up, at least not as they used to be in bull phase. So is share mkt a purely matter of sentiments of group of participating people or its earning which truly reflects share to go up? Point is that whats the best investing strategy i.e. to buy when sentiments are down and wait (indefinitely) till sentiments recover irrespective of underlying fundamentals? Moreover when i look at the all the MFs they are all -ve now just because of Sensex crashing. MF are run by truly smart people (IIT, IIM) and they live their life on Dalal street, how can one say that all of them are dumb! In spite of so much smartness money comes only and only if mkt sentiments recovers or FII invests or say some good global news comes but not due to fundamentals. Any input based on your long time exp in the mkt will help to clear this dilemma. Manish, I am not as well qualified or experienced as Basantji in the markets. But in my experience, markets are a slave of earnings over a reasonably long period of time. In the short term, its more a slave of sentiment and liquidity. There are numerous instances of companies which have grown in much greater multiples than the index over a 10 year period. Look up the 10 year chart of some companies like Pantaloon, Blue Star, Sintex and you will know what I mean.

Yes i too beleived in above but if you look at the chart of Pantaloon it came down drastically while company is fundamentally same only a group of people (FII too) have sold it for pessimistic outlook. So though everything is same but prise is dropped drastically, whats the lesson here, i still wondering. Moreover whats the "over a reasonably long period of time" wait, if its gonna be a say more than 5+ yrs then i dont think its a reasonable period to wait for any investment. 2 -3 yrs max is ok though. Are you optimistic that say after 1-2 yrs period Pantaloon may bounce back to Dec-Jan level? I say no guarantee, who knows by that time some new disaster is waiting !

Dear Hiten, It looks you are able to get the point. I am not telling to wait for bull phase to start investment etc. Its true that one can never predict bull phase etc. etc. what i was wondering that outstanding gains are possible only in bull phase when herd is too optimistic and ready to pay any amount. So eventually earnings are only one

necessary pointer but its the herd which drives the stock up and investors profit depends a lot on herd also not entirely on earnings. Well i am happy that many people are ready to help me out on this issue. Lets see what Basantji has to say as final call.

Vivek's remark reminds me of an old stock market maxim "You cannot make money on borrowed conviction". Let me explain this with an example. I was an active chat participant a few year back with Ramesh Damani and like all the chat guys had picked up a sizeable quantity of MCdowell at around Rs 40. The stock refused to move and the EPS stayed where it was for a couple of quarters and my mind set is such that if the EPS does not grow I get impatient with the company and I dumped the stock and increased positions in TV18 and PRIL. Though the two stocks that I bought worked well but MCdowell became a 50 bagger from that level but I have had no regrets for that since I understood that making money on borrowed conviction is tough. It will make you enter/exit at the wrong points. After going through this post i felt your strategy is more tilted towards qualitative aspect of security analysis and totally neglects mathematical part like DCF etc. Do you feel it has no much significance? "Totally neglects" - No, but I do put more stress on the qualitative aspects like business model, capex requirements, cyclicality of the business, management etc rather than a pure PE or a DCF. But assuming all the qualitative aspects to be favourable one cannot go out and buy a stock per se that is because it could amount to buying a great company at a bad price. The numbers have to add up - somewhere. Basant ji, I am asking this question with no intension of offending you. It is just a curiosity. In Jan 2008 : 1] sensex was at 28 TTMPE and 21 Forward PE. 2]Euphoria in IPO market (rel power;FC etc) 3]Rising interest rates/crr etc 4]rising inflation 5]layman entering market for first time. These are typical text book signs of bull market top. How is it that you could not identify it and kept on favoring buy/hold decisions. No offence at all. If that happens again I am sure I would not be able to find the top. If one is looking at a top he will cash out very early and if one is not looking for a top then he will hang on a bit too late. It is better to buy cheap but not so easy to follow. Now I do not draw satisfaction that except for one person no one could find the top in India but the focus is on creating money from here on whenever the next bull market starts. Does some of FMCGs growing at 20% and quoting at historically low PEs attract you? I can think of P&G and GSK Consumer.

Amongst them Nestle is good and also Asian Paints. Proctor has a wholly owned subsidiary and moves many of the products through them but not losing capital is one facet of investing the other one is to create returns and that can be done in two ways Dividend and Capital Gains.
While these companies give back cash the net CAGR for a 5 year period is closer to or below the index and the index has much lower risk. Does anyone follow Asian paints here? If so please start a new thread on the same. A Rs 1 investment in 1985 equals Rs 900 today!!! Asian also has a good RoE and a stable growth of 20%-22%. Asian paints is a good bet as it balances dividends with growth. Some companies pay out almost all their earnings as dividends and that leaves little scope for

capital appreciation, even if it means that capital remains protected. Asian Paints has a good management and can certainly be considered by people looking at defensives. Why P&G and GSK consumer attract me. They own brands which have been around for decades and cannot be replaced at least in next decade. P&G owns Vicks and Whisper. Their other brands which are under wholly own subsidiary is low margin and lower entry barrier. P&G has shown lower growth for last couple of years as they have divested Tide manufacturing. In nutshell I would not be interested in other P&G brands. GSK consumer owns Horlicks, Viva, Boost, Crocin and Eno. Again brands which create huge entry barriers. GSK may launch more OTC products. Both have started showing 15-20% growth. No retailer has power to replace these brands. Whereas I notice Ready to Eat, Biscuits and other processed food being replaced by in-house brands.

1) There is nothing wrong in any strategy as long as one is comfortable following it but some strategies work immediately some take time to work many a times investors get restless with a strategy just because it takes time to show results hence they want to shift stocks/strategies my argument is to follow a strategy long enough to give it time to perform. 2) Concentrated portfolios needs stocks that have limited downside risk and risk is a relative term. Just because I follow a very heavy concentrated portfolio I have been able to avoid some big mistakes and also missed some big ideas but I feel comfortable holding 2-4 stocks and that is why I hold just 2-4 companies. The advantage with a concentrated portfolio is that it helps one to eliminate the bad apples (always hindsight thought) for example if one has to choose on IT stock he would always buy Infy over Wipro and Wipro over Satyam. Mungeri says that 3 is adequate diversification but that is all for theory finally I feel that unless one has made spent adequate time in the markets he should have 8- 10 stocks. 3) Yes, but HDFC Bank will grow at rates faster than MOST of the companies over the next two years with high operating leveraging kicking in also. 15-20 years in the markets is 3-4 generations take a smaller call and keep reviewing it at regular intervals.

Hello Basant, Just curious so asking. Why you are against the Value Investing? You seem to be totally against Buffet style. After all he made enormous wealth and definitely an example to follow. He is the only person who has made his living out of stock mkt. In history not a single investor is close to him and even not sure about future also. Do you think his 50 yrs of gain is just a sheer luck! He has successfully blended the value philosophy with growth so seems to make sense. Moreover he has articulated investment procedure very well while others contradict a lot in their writings. I am not biased here but this is what the facts says so have to believe.

I am indeed a Buffett student and there is nothing to suggest that I doubt anything that you have articulated. To me Value and growth are two sides of the same coin. A growth stock that is cheaply priced becomes a formidable combination. Without growth there needs to be a catalyst for the value to be unlocked or else there is no point in holding a value stock which will remain value after 3 years. If investors have to make money then the stock should not be value after 3 years without drop in earnings. Between the two I put greater emphasis on growth because if the growth can be correctly predicted then a non-value stock becomes value after 8 quarters but surely there is no substitute to buying a stock that is value (cheap) cum growth.

Sometimes the possible is better than the probable. In these uncertain times I would like to be with companies that can give me 25%CAGR with the help of some rerating when markets improve. That should add upto 40% for the next two years or so. But surely I have no guarantees but the biggest test in these times is to protect the downside, returns will follow. Bet what you would not lose because if you lose all your chips you will not be able to bet. It is with that thought that I have loaded into HDFC bank. No. of shares is immaterial when it comes to making returns we bet with capital and it is the return on and of that capital that counts. I am and remain a big small/mid cap fan but before that I want to be sure as to where I am betting. At the moment I have 5 companies under the scanner but I cannot find reasons to help me identify whey they would become expensive after I buy it (EPS keeps growing at higher rates) and till I find that I will stay with HDFC Bank and make slightly less than everyone else! My neighbour's return is to me immaterial as is his loss.

Believe me I am burning a lot of midnight oil for this but I can't find any company that can be allocated with 40% of my capital hence the stickiness to old time tested names. Now if HDFC Bank does an EPS of Rs 100- 110 in Fy11 and we get a 30 times trailing then we have achieved a 3.3 bagger in 2 years. Now everyone will accept that unless the sentiment turns bullish we cannot get a outperformance from a mid/small cap and if it does HDFC Bank will be rerated and we get the benefits of a PE Expansion. The current trailing PE is around 20 times and we are assuming a 10 points increase in PE in 2 years!!! Now if we were to buy amid cap at 6 times trail and a five bagger in 2 years then my contention is that the risk reward favours HDFC Bank. Sometimes it is better to replace the probable with the possible. What if that midcap was to tank 30% from here then a 5 bagger would give us only HDFC Bank's returns. Too many ifs and buts but that is how I am broadly thinking at the moment. Even if we take 3 years then the assumption of midcaps vs. a strong solid Bank like HDFC remains that successive EPS growth will make the stock cheap whereas for midcaps we are not sure till when the growth will happen. Basantji I fully agree with the HDFC Bank evaluation. If it grows at 30% cagr for next 3 years(10 Y historic avg is 31%), and its PE gets re-rated to 30(10 Y historic avg is 30), then we have a 3 bagger in 23 years. Can you name another 2-3 stocks of similar (not exact) potential with your research? I have following stocks under my research scanner :(figs in bracket indicate 10 y historic avg growth rates) HDFc, Crisil and L&T could repeat that performance. Infy (best is behind), ITC (Govt. regulations, RIL (commodity play and losses in new ventures), BHEL (slowing capex cycle) will find it tough to repeat their past history. In a recent report EMKAY mentioned about HDFC Bank not suing their branches to full capacity as a drawback but I take such comments as a positive because it indicates the potential for leverage going forward.

Basant: Curious to know why you think the whole of ITC will be under gov't regulations. More than 50% of ITC' revenues came from non-tobacco revenues in 2007 and that trend is growing. The nontobacco part of business is growing very fast, though admittedly margins there are still relatively low because of the capex they are making in those areas.

In the long term ITC is building very strong presence in several fast-growing areas where the advantage it has over many competitors is its fantastic supply-chain and distribution infrastructure. Order of preference: HDFC Bank, HDFC, L&T, Crisil. Yes, not 100% of revenue come from tobacco but the other businesses are in the set up stage with matured markets and tough competition Britannia or Lever so doing that CAGR might be tough. It should grow at 14%-16% though.

Bear markets, slowing GDP, rising defaults, increasing job losses , greater pessimism make investors run for more safety, and comfort. Imagine someone not selling a stock at 25 PE and raising cash when it is at a 10 PE. Well, money has to be protected or saved is what the new mantra is in town. It seems that every investor is looking at himself in isolation. That means he thinks that the US recession, sub prime woes, flight to safety and the bad sentiments of investors are known to him only and not the seller of securities. Now if the seller is also privy to such information does it mean that he has priced the same in his quote as he picked up his phone to call up the broker If he did and we believe in the collective wisdom of the market then what is the buyer waiting for? Is he waiting that once these things improve he would get a better picture for his investments and then he would put in his quote! Well if things improve we would not have these prices on the screen and therefore the new prices on the screen would reflect the improved backdrop. As they say there are no free lunches in this world and at least not in the stock market. Many would argue that we had said the same thing in September 2008 and we fell 40% in about 28 days flat! But were we pricing in a Lehman Brothers and a few other I Bankers and insurance companies going belly up? The answer is no, so the markets quickly adjusted to the news and then has not fallen since. So as things get set for another debate on whether we would test 12,500 or 7800 I am of the firm view that unless another major catastrophe happens which is inconceivable from the investors mind as on date we should not break the lows. What if we hit a GDP of 5% for Fy10? Well, in that case arent we discounting a downward revision? The foreigners are already talking of 4.4% and what if we get 5.4% or rather what if we get 3.4%. The sensex should fly depending on where we actually land up. Didnt Tata Steel rally as the results were 50% below expectations? One would have bet the stock to fall as the results started to flash but it did not, ditto with Ashok Leyland. If stocks cannot fall when

companies are declaring results that are 50% below expectations and sales are down 70% y-on-y then it means that we need a bigger mess to screw up the investor !
So before we come out with that fearful sensex prediction of 6000 or whatever always add a line as to which news will take it there to that level. That is because markets are about the odds and we

have no hindsight advantage. The only advantage is one of foresight if only we had one!
Yes, that is one question which I have been grappling through the past 7 years and more so in the past few weeks. The point is if you think about an opportunity missed in a 15 stock portfolio then an average allocation gets you 6% and if that stocks doubles you lose 6% of unrealised profit. That is not worrisome in totality though in an actual sense it is. The only real risk in holding c 2 or 3 stocks is an event related one. What if one them is Satyam and the other Asian Electronics? But if I were to ask you to put all your money in Satyam and Asian Electronics then you would show me the door!!! But I am really thinking of getting 6 stocks instead of the usual practice because the times are really uncertain but if you start looking for moat, entry barriers, RoE, PE, market cap, growth etc you can't find too many stocks. It is something like a would be groom looking for a beautiful bride and a filthy rich father-in-law!! You are still looking for 3 or 4 more beautiful brides with rich father-in-laws.

Yeah! But can't find them. The ones who are beautiful (potential good businesses) have poor fathers (earnings)

If one cannot get both in the same bride - he has to decide which is more important. To me, beautiful bride is more important than rich father. If the business has potential - its earnings are expected to rise - and the best time to buy this business is when its earnings and hence its market price is less when believers are less ...
The Rules of Bull Phase are completely different than Bear Phase - Isn't this a good topic for someone to start a new blog thread ?! In bear phase - look for the most beautiful bride with a poor father. Since the father is poor - one has to pay less to acquire the most beautiful bride - and once bull phase starts - believe me father should become richer (beyond imagination)

The Management says they should be able to chug along without getting the margins affected for the next year or so even if GDP grows at less than optimal capacity 5%-5.5% . Margin expansion though will come in Fy11 and thereafter. Mr.Basant in these tough times it is better not to believe much in management talks.....all predictions have miserably failed....with no respite in sight....shares are falling day by day as if there is no tomorrow.... It is better to hold on to cash in these tough times...waiting for some respite in markets to reenter...

There is no substitute to working with zero risk! But as they say ships are safest in the harbour but they are meant to take on the high seas. I fully endorse your view on risk but it is really difficult for diehard, passionate investors like me to think of cash I know that the past 13 months have been really bad and we have gone wrong but when I think of it we made money from this market and we have to love the market and we will probably make money again but for the moment the pain is there and increasing by the day.

Basantji, A lot of people talk the talk, but very few walk the talk. What's happening now is the exact opposite of Jan 2008. This too shall pass. We will make money again. People will look at this time and talk about the buying opportunity missed when markets turn bullish. I know a couple of bears who are cutting their positions as they say that the risk of being short is higher than the returns that they can see. I agree but times are tough and the probability of doing unnatural things very high. When I say unnatural I mean an investor selling off in fear and that is perfectly understandable because the fall has been unprecedented and maybe will hog the limelight over the next 50-100 years of economic history. But what gives comfort to the heart may not be the most intelligent thing to do. But who knows if this time is different? I am trying to look at companies with a 6-8 times trailing PE, RoE of 30%+, leaders in an economic downturn and having a payout ratio of 20%- 40%. The RoE tells you that there is growth the payout indicates that the EPS is real and could act as a downside protector and the 6-8 times trailing will indicate that the stock is supposedly cheap in case there is no earnings collapse! Trying to buy 4 -6 companies in that bracket from different industries.

Actually there is another angle to it. I am not a stud at this so could be wrong but my understanding is that Praj is something like a BHEL or a Thermax or a ABB so if ethanol gathers acceptance there could be several new entrants into this industry that will try and take away the moat from Praj. Unlike IT outsourcing where the minimum contracts starts from US $ 50k here the minimum threshold was US $ 25mn so if we have a new entrant they could have some problems scaling up but what about existing competitors all trying to raise their capacity? If there is a big demand for ethanol then the capacity suppliers would all try and increase their capacities. Over the past three years there was a shortage of engineering talent as ethanol was still being accepted but very soon we would have several companies in the space trying for slice of the pie and that leaves Praj with little protection to its moat. Now we can all stand up and say that a breakthrough in this sector will be difficult but I personally feel that only the people who are willing to take a big risk of capital wipe out should be investing in the "new" thing. We all did see what happened to Asian Electronics. Also Praj was a leader in the last Bull Run so who knows if the runners will repeat or would be changed. Just checked Vinod Khosla is worth US $ 1.4 bn and he has bet US $ 15 mn in Praj so that is a 1% bet.

Basant Sir, I have a question here....you may answer or may ignore at your personal discretion. Basant Sir, who has benefited from your having made a multibagger in pantaloon. Obviously yourself only, right.....??? But how does it help a forum which has members seeking opinion and providing opinion. I think at such a place like a public forum, we stand there in the capacity to just giving and taking advice. Our service to the forum is to be measured by how much our advice has been effective in making money for others or saving money for others. Nobody is interested in how much money we have made in stock markets. Thats a needless and rather a misguiding statistic. Basant Sir, anyone who has been in the markets for a fairly longish period is likely to have made a fairly decent money for himself. I dont see anything big there for anyone. I dont think anyone deserves a applaud for their past performance....at least, not at a forum. Our success is to be measured by how TED XI has done. At the end of the day, we need a fearless and objective exchange of opinion. Why the heck shall we get bogged down by negative opinion, if we are convinced? Very few have spoken in favour of ONGC, since the first time I scripted that post, but does it mean I will start fighting with people who give a negative opinion. Infact, the whole purpose of initiating a thread is to enlist possible negatives about that company. Of late, your new picks suggest that you are departing from your objective of leaning towards companies with scorching growth. Stocks like Asian Paints, Procter and gamble are for a very different time. they are there to conserve wealth, but when people have seen their wealth eroded by as much as 70 p.c, we should be more inclined on how we cvan help them to recoup those losses. By the way,is it necessary to subscribe to any individual's opinion before being looked as a contributor to this forum?

General Opinion: At the moment I am looking at several options to pick a few stocks so my activity on certain or stocks/sectors should not be definitely construed as my personal investment into them.
So if I am talking about transformer companies it does not mean that I will punch in an order for an Indi tech transformer. At the moment the market is full of multibaggers but all are contingent on the economy reviving so we need to buy them very cheap. About the TED XI part I have personally been an investor in most of them but hold just one of those stocks now I had clearly mentioned my intention of getting out of most of those stocks whether PRIL or Yes Bank or Axis or anything .I can hold one stock or two stocks but I cannot make a "TED 1" hence those names keep appearing. My exits have always been documented even at times when as my trades are yet to have been filled.

The best of returns are made in the most uncertain of environments and that is the time to benefit from a change in environment. My answer was to a suggestion as to how investors should allocate holding percentages depending on comments and feedbacks but as Buffett says "A public opinion is no substitute for thought" It applies to all investors and how they go about it.. Wockhardt was debt laden. If a company is debt free it indicates a) It won't go bankrupt b) Management is not over expanding c) Company is cash flow positive. I am looking at industrial companies that have at least 20% of their market cap in cash are debt free available at 5 or less times PE have shown high RoCE the management know how to get rid of the cash so that it does not act as gravity on the Return Ratios. When the PE is 3 times cyclical or no cyclical investors should buy. That is because even a 50% crash in EPS makes this stock a 6 PE stock and that isn't expensive. Of course for secular growth stories we think differently. But who said that all companies should be evaluated on the same basis.

They have to enjoy some competitive advantage also. Most of these low PE high RoCE companies are up 50% from the mid-March levels. Of course the ones that I back are the ones that have at least 10%-20% of market cap in cash on Balance Sheet. With cyclical services they are not exactly buy and hold for ever stocks. One needs to look when to exit also. Tata Motors I would not touch at all. Promoter does not know what a good asset is and what a bad one is; they have increased debt and are now sitting with international assets that are all having a tough time. With so many phenomenal opportunities around I have better options for my money. I am only trying to focus on companies who have not had an earnings collapse and are only sitting down because of a PE contraction.

Companies that have not had earnings collapse but just had a PE contraction are great buys. Have you been able identify few companies with all these excellent and stringent conditions?

Several, at Rs 160 - Rs 170 Thermax fit this condition very well, at Rs 310-320 Voltamp was also an apt pick under these stress test conditions. There are several stocks going like this in the market today. Additionally we would like to buy companies that have some kind of an un utilized or expanded capacity available that is because as the economy recovers these companies can suddenly start to produce and sell more without any time lag. Quite true Somu, except that I like to have a downside protection. A good dividend yield is an excellent downside protection. From my limited investing career (7 years) I have found that if one takes care of the downside, the market will take care of the upside. Also, if one has consistent success in this strategy, one can confidently employ large amounts of money, even borrowed money, even money of relatives and friends. On the other hand, if there is no downside protection, employing large amounts of money is a sure recipe for sleepless nights...my humble 2 cents Lets get more options to this criteria. Some stocks that came to my mind and which I passed were Sail and Sesa Goa. That is because these are commodities whose fortunes are completely linked to the global economy. We need companies whose earnings can be predicted with some degree of accuracy. Also under this method I am very clear about the exit strategy. As soon as the Pe moves from 5 to between 10 and 15 it would be time to say Good Bye. But that would be tough because

at that time the general public would be saying hello and chartists would have identified breakouts and cup and saucers and handles etc. Hi somu I personally care a lot about dividend, not because i am looking at income, but for the signal which the management gives through their dividend policy. there are managements which cannot invest in their business profitably and still hoard the cash. Alternatively if they can invest at high returns, they should give little to no dividend, but still gives good payouts. Managements who do not have a well-defined dividend policy based on their business needs, are displaying their ignorance on the importance of capital allocation regards rohit I am looking at companies which have not had an earnings collapse and most of the commodity majors have had one. Also many are laden with debt though Sesa Goa was a good bargain at Rs 70 - Rs 75 with Rs 60 in cash and cash equivalents. But yes, the pure commodities at 3-4 times PE were no brainers but one can put his money in only so many places if you spread yourself too wide and too thin you cannot bet hard and I want to bet hard if Iget convinced of an idea. Somu: Normally dividends mean nothing if the company can re-invest my capital at a RoCE higher then what I can with m dividend money. I'd rather let it be with them then ask for it back again. But most companies do not know what to do with the cash and hence spread it across uselessly. In that case I want it back but if I get a company which assures me that they will not let the RoCE drop in the following years below a threshhold and I have no alternative opportunity to create that return I'd rather ask for a zero payout then argue for dividends. Ultimately the more the company pays lesser the chances for future growth Growth = RoE (1- payout ratio). So you have companies like HUL which pay 100% and find it tough to grow at 10%. But the strange thing in investing is companies that have a high RoCE can create returns in their businesses should not pay back but they do since their incremental requirement of capital is low whereas companies that have low RoCE need more capital can create little returns in their own business and therefore should pay back but they would not since they are in perpetual requirement of capital. But shareholders of low RoCE companies would like their money back and hence a constant fight with the management to pay back more. That's theory and not followed the way it should be. But if I am buying companies that I have little understanding of what the business is about I'd rather see a dividend cheque because it helps protect downside risk.

I believe that Dividend is important at some point of time and it is the only thing which is most important. Let me give example of Ramdeo Agrawal of Motilal Oswal, He invested in Hero Honda in 1998 at the price of 35 Rs. (Not sure, may be 38 but definitely below 40). After that stock split from 10 to 2 and one bonus was issued, so his purchase price is 3.5 Rs / Share. Hero Honda pays dividend of 1000%, 20 Rs/Share since 2004. So he is getting Tax free 500% return every year. And it will continue and grow unless and until something exceptionally happens. Now if we find such company then why to worry about multibagger or PE or anything else.

Yes, I agree.The operative word is "at some point of time". But alongside that HH is also a 50+ bagger and the Net Profit has moved up significantly. PE has expanded some 5 times Dividends are an offshoot of earnings and if you see their 15 year history they had a low payout ratio in the initial years compared to the later years therefore it did not look like a dividend play in the initial years as it does (in hindsight) in the later years.

Hunt for a big brand, get it at a better fundamentals ( which include all the traditional ratios like D/CMP, CMP/BV, MCap/Turnover, good management). You will get best of both of the worlds, meaning good brand and good fundamentals, only if there is a problem. So, work this out and then take a call. Nothing is sacrosanct in this world, that high growth is good or high dividend is necessarily good. Chennai petro was paying dividends quite wonderfully but then took a body blow....same is the case with Thirumalai chemicals, tata metalliks etc. Similarly, just good growth without corresponding fundamentals, will at best be a stable investment and at the worst, the consequences can have such an impact to throw you out of the market with a totally collapsed confidence. If any of us would be a serious follower of Mr. Buffett, we would be pretty clear to hunt only for powerful brands available at wonderful prices. If we get good growth without a brand and without good fundamentals, then it should be ignored. if we get decent fundamentals with poor growth and lack of brand, it should be also ignored. If we get a big brand with either of the 2 attributes, we can put our money there.

Hello Basant Sir, Need some advice. If you look at the PSE in the Power sector like PFC and REC you will find that these companies have a good business model and also a healthy revenue visibility given the push they may receive owing to UPA coming into power. I have been researching REC and have liked its business prospects given that it is a direct beneficiary of RGGV VY. My concern started when I started crunching numbers. You see REC has a low ROE of some 10%, ROCE of 9% and a debt to equity ratio of 6.5%. These numbers have really worried me and despite my subjective evaluation have been holding me disturbed about this company. The story is no different with PFC. Now I then thought of looking at them as we do at a bank. Since these companies too would be profiting only on the basis of Net Interest Margin. But the irony is that the banks state their accounts differently than these companies. This also hampered a direct comparative study. Now could you just give me some pointer as to how to correctly value these sort of companies. Would it be ok if I look at some NBFC accounts to gain a better understanding? I have very little idea on this but RoE is a very important tool and companies that do not have a reasonable ratio should be ignored but many times companies have capacities not yet into production or funds not deployed and these things temporarily affect RoE. But on the whole Nbfcs should have better RoE because they are less regulated then Banks have no crr slr requirements but on the other side have no low cost deposits. Still they reflect better Roes because most of their incomes are non fund based.

Basant Ji, on the point of low costs deposits....I have a quick question. 1. How does one find out the cost of capital for a bank? Is there an easy way to determine it from the report? 2. Also shouldn't companies like Rural elec corp, PFC etc have a very low cost of capital given that these guys are backed by govt and hence can sell bonds at low yields? Though REC has huge NPA problems ticking away IMO. 1. Normally management do indicate cost of funds different from cost of deposits. 2. As I said i have almost zero info on these companies. I was at a conference yesterday which was attended by a fund manager of India's largest Mf and he was really critical of a merchant power trading company which is a stock market favourite. Wonder which one was he taking about as I forget to ask him the name since these companies are beyond my interest. Thanks for the info Basant Ji. Basically the Fannie Mae, Freddie Mac example (virtual monopoly + low cost funds) is the reason for my interest. But ya, the NPAs will probably continue to increase despite State guarantees etc.

If possible do share the points made by the fund manager. Hey basantjee...........i was reading sunil singhania's interview in money control where he was talking about his infra fund..............he said that this infra companies were quoting at PE of 50 or 60 pe so he doesn't mind them quoting at PE of 20 or pe of 25.............what kind of logic is that. Bull market logic. Now i guess L&T is locked at these level........since L&T will be top buy for any infra fund.........also reliance infra. Truly nostalgic!!! During bull rally, many stocks/sectors had high PE valuation. Retail sector was one of them and so is Vishal. With dwindling sales, increase in the cost of real estate, manpower and logistics problems, retail sector had tough time during last year. Vishal is also going through the same set of problems. They have cut down their expansion, closing/rationalising the existing shops based on sales, and so on. Only time will tell whether they could pass through rough phase. Hi I recall having read your article on Pantaloon in value notes. Could you throw some light on Parekh Aluminex. They manufacture Aluminium Foil containers and results have been always good with good sales and net profit growth. Promoter Mr Amitabh Arun Parekh has increased stake by 10 % since Nov 08. Current year eps should be about 25-28 and pe is about less than 4. Expansion is underway and should start reaping rewards after fy 10. Newer applications have been coming up for aluminium foils like food packaging etc. The company had done QIP placement at 225 and 262 and collected Rs 128 crores and I believe at current market price of 90 the market cap of a company with around 400 crore turnover would be about less than 128 crore. Would it qualify as a value buy and a multibagger? I am planning to accumulate the stock as it is in trade to trade segment. I do not understand ratios like RoE and RoCE etc so if you can throw some light I will be thankful.

I feel that the best way to go about mutual funds is to go for sip if at all you want to invest in mutual funds. Since you are stuck, it is a difficult call to make because nobody knows where market is headed in next few days or next few weeks. But if you feel you can beat mf managers in generating returns, you could withdraw. Investing directly into stocks has the benefits of being able to choose stocks of your conviction without the constraints which fund managers have e.g i can invest in only one stock or only 3 stocks if i feel like doing it whereas a fund manager does not have that liberty. If you do not have the time or the zeal to search for good stocks, then mf is best alternative. Start reading as much as you can about stock market investing. Read 1. The Intelligent Investor by Benjamin Graham (known as father of vlaue Investing) 2. Stocks for the Long Run by Jeremy Seigel 3. One up on the Wall Street by Peter Lynch 4. Beating the Street by Peter Lynch 5. The Intelligent Asset Allocator - William J Bernstein 6. A Random Walk Down Wall Street, by Burton G. Malkiel 7. Security Analysis by Benjamin Graham 8. Common Stocks and Uncommon Profits, by Philip Fisher 9. Common Sense on Mutual Funds by John Bogle

I promise if you read most of the above mentioned books.(1st one being must) , you would know enough about doing research on stock, what one should be looking for.

Hi You can start by reading a book by Peter Lynch "One Up on Wall Street" Or if you cannot get it, you can read lots of recommendations on this site or on valuenotes etc. What you need to do is follow up these recommendations with some research of your own before buying any stocks. Fundamental details are available on bseindia.com, religareonline.com, icicidirect.com and other such websites where you can see annual results, quarterly results, dividends declared, announcement by company and shareholding pattern etc. Once you have these info, you can pick some stocks which fit your investment criteria and watch them and in market like now, you can get it at a reasonable price if you are patient and dont jump in. This website also provides guidelines for selecting a good stock so go through some old posts which should help you out. whichever stock you buy you should be fully convinced about the stock so that if market turns negative , you should be able to hold on to your stocks. any you can do buying in small lots. if a stock runs away very fast , dont chase it because there will be plenty of other stocks. Best of luck Stockmarket is a weird place. For every person who buys a stock there is a person who sells it and both think they are very smart.

We have learnt some tough lessons said the CEO of Indias largest private sector MF who had promised his unit holders growth with vision. Another voice notorious for his tandaav with the bears a Le Grand From Age if you might call him has turned his tail 180 degrees. He was a bear a big one and is now a bull a quick hurried harmless bull, who gives no guarantee of his species because he might become a bull one day, a bear the other and a dog or a Pig depending on which way the wind is blowing. The Star anchor of <ST1:COUNTRY-REGIoN w:st="on">India</ST1:COUNTRY-REGIoN>s much talked about business channel who was sporting different T Shirts as the sensex moved past each 1000 point brigade is now changing course. Having become an self styled analyst he seems to be cautioning with random and useless double talk with his co-host and changes his colour before you thought that you were color blind. For major part of the October 2008- March 2009 he was cautioning his investors Make no mistake markets can go down to six and a half or maybe seven were his favorite lines and had we been there he would have proclaimed five and a half and six all in an effort to let an investor remain irrational in irrational times. No wonder he leapt at a <ST1:COUNTRYREGIoN w:st="on">Singapore</ST1:COUNTRY-REGIoN> based Hedge fund manager who had the guts to call him a panic driven desperate gatekeeper of a theater which had caught fire. I wonder who is having the last laugh now. Coming back to our fearless bear he had the courage to call Buffett lucky well if luck makes money and intellect loses it Id rather be lucky then intelligent. Mr. Bear writes a report every few days. He is good at English and probably a student of Gynecology. In one of his reports he was doing a pregnancy test on the bull! He said that after checking the urine he is of the opinion that this is not a bull market and that a bull trap. Those reports do make for interesting reading especially if you are fond of brushing up your English. Then there is another who sees to rhythm with the range. His ranges are as deep as the Grand Canyon. The last time he was talking about 8000 anmd 16,000 and he seems to have upped his higher band at 19,500. Well if that is what the Stanleys and the Goldmans pay for then Id rather be an employee then an investor. I think that there is no way to check the quality on the Idiot Box for whatever reason it is called one. Now no one can tell me that you should switch off the TV because that means that if there is murder going on in front of my house I should just move away from the window and pull the curtains. Markets are not about making a day trader out of every participant. It is also about long term education and if that looks too charitable to these business channels then well, good luck to them

because sooner or later they will have to go free to air for their free advice. But as the critics would say there is are no free lunches in the world. There is some serious flaw in the way the business channels operate. Either they are too stupid to understand their drawback or either too much hand in glove with the participants to create a psychology that they seem to have desired. It takes no magic wand to understand why certain people including the self proclaimed momentum trader and several others are put up as mascots time and again. I think the primary precondition to have your face on TV is your English speaking skills rather than your thinking ones. No wonder the best of the speakers get mud and dust on their face but that's ok as long as there is a market we will have opinions but to blow the trumpet every time there is an opinion and to expect the crowd to be the bunch of rats and the mascot to be the Pied Piper of Hamlin is something that the crowd will be able to decipher sooner rather than later. But as Gustave Le Bon wrote his book THE CROWD A study of the popular mind the most eminent men seldom surpass the standard of the most ordinary individuals. From the intellectual point of view an abyss might exist between a great mathematician and his boot maker but from the point of view of character the difference is most often slight or non-existent. Strangely making money in the markets is 65% character and 35% intellect.

Samir Arora runs the Singapore based Helios Capital and is known for his candid talk. One of his recent interviews to CNBC-TV18 had raised a small flutter amongst the members of TheEquityDesk. In this connection we tried to put forth our questions relating to his recent strategy on the markets and also his investment philosophy. In this article Samir talks of how his strategies are guided by the mandates and compulsions of the fund, how the retail investor can outsmart the institutional guy and more importantly how relevant it is to follow each of the FII/MF trades.
Expectations from a Hedge Fund: I run a long/short hedge fund which means that we are always long some stocks and short some stocks (sometimes specifically having pair long and shorts but most of the times owning stocks and separately shorting some other stocks). In the minds (and expectations) of our investor we are supposed to deliver better risk adjusted returns than a long only fund. This basically means that we under perform a rapidly rising market (for our net exposure to the market is no where near 100% unlike a long only fund) and end up out performing a falling market. In general, the investor does not mind giving up a part of the upside on the expectation that we will not give him the same downside (or draw down) as the market. In 2008 when the markets were falling steeply I resisted reducing my longs or increasing the shorts in the first few months. All I was saying in this recent interview was that if the market fell sharply (say 10% in a month) I will not resist it this time and go along in selling/reducing net exposure/increasing shorts for my investors are happier if I can protect them on the downside even if I end up giving up a part of the upside (if the market goes up soon after falling sharply and I am whipsawed). In our view risk is basically risk of a large drawdown (sharp 10% type fall in our NAV over any period). In the hedge fund business, short term performance is quite important and I have reconciled to that. Of course, the investor is not being totally unfair for he is willing for us to give up part of the upside to protect the downside. We try and reduce this drawdown by actively buying puts, shorting index and shorting stocks and reducing net exposure if markets are weak (this may be counter intuitive for we sometimes sell when the markets are weak instead of adding to the positions. After

experience of 2008 it is not obvious to me that is a wrong strategy although we try not to panic at every twist and turn). In general, we keep our long positions for the long run and try and reduce net exposure in volatile times by adding to shorts through futures markets (rather than disturbing the long positions).

Individual vs. professional investors: How many times have we heard the argument that individual investors are no match to professional, institutional investors in equity market? According to conventional logic, institutional investors have the best resources to meet the long-term investment goals of investors. All the strengths and resources of an institutional investor appear real, but it is not clear how these resources help them in developing a longterm view. Access to Bloomberg and Reuters, an army of analysts attending corporate results conference calls and access to other live data sources helps institutional investors gain short term edge. On the other hand, retail investors operate with no differential competitive advantage over institutional investors in access to short-term news. Not constrained by any benchmark considerations and not having to show their weekly performance to clients, retail investors are ideally suited to hold a longterm view. However, the problem is that these investors pride on their short-term views. The problem with the stockmarkets is that retail investors, who have the luxury of being long-term choose to be short-term and institutional investors, who have the resources to be short term, use them to try and achieve long-term success. No wonder none of these groups are successful, and the debate never ends.
Sector preferences: In general we do not buy consumer staples, pharma and commodity stocks and like infrastructure, financials and urban oriented under penetrated sectors. We do not buy ultra small cap but are sometimes willing to buy illiquid stocks. We also do not like Indian companies expanding aggressively in foreign markets for we bet on <st1:country-region>India</st1:country-region> and not on Indians. The real factor we like is scalability (that means that revenue opportunity should be very big- it is for this reason that I stopped liking ENIL and TV 18 initially). I have bought only one FMCG company and the weightage of that is also less than 2% in my portfolio so I have not changed my big picture view that overall I do not like this sector for various reasons (high P/E, moderate growth, reliance on rural India which grows much less than urban India,services and manufacturing in general, costlier to target rural customers due to lower concentration of consumers etc) I like commercial airconditioning business for I believe that this is the best way to play creation of urban infrastructure- malls/IT parks/airports/hotels/high rise office blocks etc all need a much higher proportion of commercial airconditioning content. We own the leader in a significant way (also because of its international business and other segments). In the case of the 2 wheeler company we bought the stock earlier in the year (around December/January- may be the interview was in March) and sold it recently. Af ter it was clear that <st1:country-region>India</st1:country-region> was having a very weak monsoon period we decided to reduce our weightage in stocks that were strongly supported by rural growth and consumption. Although we all expect that current drought across rural <st1:country-region>India</st1:country-region> will not have a big impact on the market (due to global liquidity), it cannot be the case that no company will be affected. In general, we do react to news/views if

we believe that it will have a material impact on stock prices in the short term (even if we believe that in the long term the stock in question is OK). I liked real estate sector earlier this year as the stocks were discounting serious liquidity issues- which starting disappearing as companies raised capital. I do not like mid cap real estate companies and I do not consider normal companies which have some valuable piece of land as real estate companies. Also, in many such cases where a normal company has some real estate and it sells or develops that land, there is no guarantee that they will not invest the proceeds in their mediocre current businesses (some how all companies which were sitting on valuable land parcels were otherwise really mediocre). Basically what we like are companies that can compound their earnings for a long time with infrequent dilutions. Infrastructure sector offers the possibility of years of growth which will basically be exploited by the same group of companies (in each sector). I do not like areas where the top down growth is not so obvious and not so high (telecom sector for example currently). Within the infrastructure sector I like power sector. We like the second largest housing finance company and own it. General: 1. I do not think that what FIIs/MFS are doing every day makes any impact to the stock prices and there is no reason to bother with that. The only time it matters is if large blocks change hands which were a clear overhang on the market( for example when Fidelity had a change of manager recently or the TCI fund decided to exit Indian PSU banks earlier this year). In general, there are now so many individual fund managers at each mutual fund company and they all cannot be good, by definition, so following the MF transactions have even less value than when you knew exactly who has bought. 2. We do not invest in a company without meeting the management but I am not sure that each time these meetings add value (for managements are nearly always bullish about their business and prospects). Many times the management is very articulate in explaining their future but global issues overwhelm the fundamentals. 3. I read 3-4 investment books a month and my all time favorite isFooled by Randomness. Other books I have liked are Reminiscences of a Stock Operator, The Future for Investors , Against the Gods, The Black Swan.When Genius Failed Devil takes the Hindmost etc. These books are for enjoying not only for necessarily learning. 4. I am not sure whether family businesses are worse or better than professionally run businesses My view on corporate governance is that in general all companies have poor governance in absolute. The biggest fraud in <st1:countryregion>India</st1:country-region> currently is the issue of warrants to promoters with 25% down payment. However, once you accept that all companies have pathetic governance it no longer irritates you and you can treat corp governance as a scale rather than treat it as YES/NO factor. Therefore, some companies have better governance than others but in absolute I can find flaws and conceptual or philosophical frauds in nearly all companies. 5. I do not think that an individual investor needs to buy only a handful of companies to make real money. If you hold 20-25 companies the impact of fraud is significantly reduced.. If one stock goes up a lot and becomes a disproportionate part of the portfolio it does not mean that you have to sell it solely for diversification reasons. I do not consider your risk of losing paper profits in the same way as losing original capital and therefore your portfolio may end up becoming concentrated and that is OK. Concentration should evolve with some stocks doing really well and not by your buying them in a concentrated fashion.

6. In my fund I do not invest in fixed income or indeed anything other than listed stocks At a personal level, I think that individuals who are not full time investors (and therefore have an independent source of income via job/business etc) can afford to have a high allocation to equities. In fact professional investors (who try to make a living through investments) should have a certain portion allocated to fixed income to provide stability in bad phases.
Hi Basant Sir, I wanted your thoughts and experience on the point of buying premier or leading companies. What i find is this: 1. When a market leader faces headwinds the price goes down significantly. 2. But when a small company faces headwinds the market kills it and leaves it for dead. Shouldn't 2 also give us significant opportunities? e.g. if you have a debt free automotive parts company which has been around for 40 years and have customers like Maruti, Ashok Leyland etc....but is now quoting at about 1.5 times your average earnings of last 5 years and way way below book value...isn't this a good bargain as well esp if the company has a reasonable average ROE. Off course you need to do qualitative analysis as well... I cooked up the case but i always wanted your thoughts on this. So the question is when are we buying these second liners. I had a terrific run with a second liner transformer company which I would have never bought in my lifetime but the valuations were so compelling that one could just buy it without worrying too much about other things. But in those instances we look for a 30%+ RoCE; PE less than 5 and a yld of near about 5% with zero debt. If you find any such opportunities then surely they are potential match winners. I am looking forward for an animated stock market reaction to the lower than normal Monsoon!!! Such an event will enable us to get into the high quality consumer names. Its time to sell some Industrial cyclical (which have had a terrific run post March 2009) and use any opportunity of a bad monsoon to buy a couple of the super high quality consumer brands! I am not particularly focussed on any specific company as on date but a bad Monsoon will create a Hungama for anyone wityh a 6-12 month view in all the monsoon affected areas like Autos, Two wheelers, Consumers etc etc! Hi Sir, missed this post before I hold around 4 companies at the moment and though I have not met anyone who has backed me in my strategy my thought is that the quantity of companies do not matter as much as the quality of the companies? But as I have explained before if one expects the earnings of the companies in the portfolio to grow by 30% every year then even if one of your investments drop out all you lose is the one year of hard work. But 8-10 is a better number if you are willing to leave out a bit of risk with the reward! Whatever be the number of companies always try and bet on the leader when you have a concentrated portfolio. The risks of a complete whitewash is reduced when you hold Infosys, Wipro, Tata Steel, ACC compared to holding Satyam, DSQ, Lloyod Steel and kalyanpur Cement! The examples are just for the purpose of illustration. Hello basantji, I dont know where to post this message. I need your advice for investment. i have almost 3 lacs rupees to invest.Can you please help me

decide how to break this amount for Mutual funds,direct equities, debt related MFs or someother things. I am 25 now. i can stay invested for more than 5 years. The first thing to do is close your eyes and visualize a 50% drop in this money and then asking yourself am I prepared to put in more. If the answer is yes, then yu can choose stocks because you are young and I presume have very few immediate obligations. If you can buy get into some large consumer companies like Nestle, Dabur or Marico until such time you develop some understanding about the market but remember equities work the best in the long term. MFs are no better than direct equities and we have all seen how they tend to fall and behave when the chips are down.

In the long term services which is growing at 10% will outperform manufacturing which is growing at 6% and which would further outperform agriculture which is growing at 3%-4% though intermittently there would be companies within these segments outperforming each other. We have had detailed sectoral discussions here in Sector talk and you may read up on the individual sectors but I found this post quite interesting.

How to find the right stock price

R. Sree Ram Edition: September 2009

Just about a year ago, the rumour mills were working overtime, leading to speculation about the survival of ICICI Bank. This was soon after the global economic crisis hit the Indian shores and ICICI Bank owned up to subprime losses. After it announced the extent of the losses, the banks share price went into a tailspin as panicky investors started offloading their holdings. Within two months, the share price crashed from Rs 650-700 to Rs 310. The fall may have seemed scary, but not to analysts and brokerages, who upgraded their rating of the bank from underperformer to buy in October 2008. What prompted the upgrade in the midst of a downturn? The answer lies in the value of the stock. As the stock corrected to Rs 310, analysts found that the price was lower than the market value of the banks investments, or the book value per stock. If we factor in the worst case scenario and erode the entire non-government foreign investments from our target price, our rock bottom valuations are at Rs 445, say Prabhudas Lilladhers banking analysts, Abhijit Majumder and Bharat Gorasiya. On an average, analysts valued the bank at Rs 440 per share (book value). Given the fact that bank shares usually trade at two times their book value, ICICI Bank soon became the most favoured stock. The stream of upgrade calls were not wrong. Since then, the stock price has more than doubled to Rs 755 and is currently around 1.5 times its estimated 2009-10 book value.

This case offers an important lesson for equity investors - get the price right. No matter which stock you invest in, the cardinal rule is not to overpay. Unlike fixed income options, such as bank deposits, where the returns are guaranteed, the performance of equity investments is determined by the purchase price as well. Once the stock is bought, there is very little that retail investors can do apart from buying more or selling them. So, if they invest at the right price range (or low valuations), the probability of earning greater returns is higher.

Valuation tools How do you know you are paying the right price for a stock? The answer is to check the target investment using a couple of financial parameters. Depending on the nature of the business and the sectors growth prospects, an appropriate tool must be used to value the company, says Hitesh Agrawal, head of research, Angel Broking. This tool is the ratio or financial metric that determines the value of a stock. Unfortunately, there is no single tool for all industries and stocks. One ratio cannot be applied blindly to value stocks across sectors, says Manish Shah, associate director, Motilal Oswal Financial Services. This is due to the inherently different nature of businesses. Broadly, there are two valuation metrics: PBV (price to book value) and PE (price to earnings). The former calculates the value of assets and the latter determines the price investors are paying for the companys earnings per share. A high growth, low capital-intensive company must be valued on PE, whereas the PBV or the replacement value is the appropriate tool to value capital-intensive businesses.

Another ratio that takes care of the debt leveraging aspect across companies is the EV/EBITDA (enterprise value/ earnings before interest, tax, depreciation and amortisation), or the enterprise multiple. But, as Agrawal says, it is always advisable to consider two or three valuation tools before taking an investment decision. The tools that apply to different sectors and industries vary. Cement manufacturers are best valued using EV/EBITDA, real estate firms using NAV, while engineering companies can be valued using forward PE (see graphic). The PBV is used for capitalintensive businesses like banks and power companies. Public sector bank stocks are attractive when they are trading below their book values. For a private bank, depending on its size, the ideal PBV ratio is around 2. In case of FMCG companies, the PE multiple is a better yardstick because these companies invest upfront in building brands and facilities and derive the earnings in subsequent periods.

Yardsticks to Value Stocks in Different Sectors Industry Auto Best measure of value Price to Earnings (PE) multiple

Banking Cement

PE and Price to Book Value (PBV) or Adjusted PBV multiple PE, Enterprise Value to Earnings before interest, tax, depreciation & amortisation (EV/EBITDA), EV/tonne

Comparing with peers After deriving the book value, a peer Forward PE, which reflects the order book group comparison is needed. Engineering position of the company Always conduct a peer analysis. PE, Return on Equity (RoE) and Return on FMCG Consider the sectors potential and Capital Employed (RoCE) ratios see how the company compares with Net asset value (NAV), which is book value Real Estate its peers, says Sonam Udasi, viceat market prices. Also look at debt levels president, Brics Securities. PE and DCF, because there is a future
Telecom* stream of cash flows for upfront heavy

However, peer group valuation has investment its own limitations. The target Oil & Gas Residual reserves of energy assets companys valuations might be lower Technology Trailing PE and its growth than the benchmark or industry * Includes utilities average due to constraints regarding market share or economies of scale, and it might continue trading at a discount. Infosys, which is considered to have superior margins and a high-yielding business portfolio, has always traded at a premium to Wipro, Tata Consultancy Services and the information technology industry as a whole.

One also has to look at the reasons for the valuation discount versus the benchmarks. Most likely, there is a good reason for the discount. For instance, if a company can address adverse issues going forward, the discount will narrow and the stock valuation will improve. If it fails to do so, then the stock will continue to trade at a discount to its peers, says Udasi. To refine the research process further, comparing the efficiency and return ratios of the stock with the industry or benchmark would help investors take informed decisions. In case of banks, the loan growth, net interest margins and the rise in bad loans can help find the right stock. Likewise, FMCG stocks can be sorted on the basis of return ratios like the return on equity (RoE), return on capital employed (RoCE) and the companys operating margins. How does an investor find out if a particular valuation method is a good parameter? According to Macquarie Research, the valuation parameter is considered good if the sector consistently shows increasingly strong returns from progressively lower levels of the valuation metric, and increasingly weak or negative returns from progressively higher levels of the valuation metric. Sustainable growth The sustainability of the earnings momentum is crucial because all the financial parameters or metrics are based on this presumption. The valuation of the financial

parameters needs to be done on expected or estimated earnings potential and growth. This is the most difficult and critical part for any analysis, says D.D. Sharma, senior vice-president, research, Anand Rathi Financial Services. Apart from comparisons with benchmarks, the management quality, transparency, earnings growth and earnings volatility are key factors for driving the valuations of a stock. Any change in these factors will re-rate or de-rate a stock. So, a standalone comparison of a stock with its peers or benchmark indices will not help much. Look for a change in the earnings potential, growth or management for a re-rating trigger, says Sharma. Hence, a company that is currently not earning profits cannot be valued at zero or close to zero. A typical example is dishtv. The direct-to-home cable service provider is still in the investment process and is not making a profit now. The loss-making company is currently trading at Rs 42. This is because it is developing a business, which will earn significant profits in the next few years, says Sharma. The bottom line Clearly, valuations are not static, but dynamic. Depending on broader factors, such as market sentiment and sectoral preference, these change with time. A stock that trades at a discount to benchmark valuations, but shows superior earnings growth rates and scores better on operational efficiencies, can be a good investment pick. Investors should use the valuation methods mentioned above to zero in on the stocks that have value, while avoiding the ones that trap them by appearing to offer value.

What Impacts Stock Valuations in Sectors Industry Auto Banking Cement Engineering FMCG Real Estate Utilities/Power Telecom Oil & Gas Best measure of value Volume growth, realisations, operating profit margins, new product launches Loan growth, non-performing assets, net interest margins, CASA ratio Dispatches, operating costs, regional demandsupply equation Order book inflows, execution skills, margins RoE, RoCE, margins, volume growth, new products, marketshare Debt levels, liquid assets, inventory levels, promoters ability to raise funds Project costs, plant load factors, raw material costs, debtequity ratios Revenue per user, growth in usage, new subscribers, non-wireless revenues, EBITDA Reserves, efficiency ratios, free cash

flow generation Technology Order inflow, ability to contain costs, service verticals, profitability, client attrition

Recently there has been a lot of hullabaloo of how one particular fund has delivered around 40 times returns in 14 years. The best thing about statistics is that they show us what the statistician wants to display so if a fund has done best in the last five years it will advertise that period. The idea is to cut the time charts according to convenience and display it as an advertising tool. The biggest question is whether these pieces of data are as Taleb would call rare random chance events or do they bear any resemblance of a recurring nature? While I like history the worst place to put history is in the asset management industry. At the cost of sounding critical I have stopped looking at how the past data works because investors cannot make future returns by looking at the past. More-over the past data means almost nothing when you have had several fund manager changes and in some cases even the whole research team has been revamped. My first question would be to find out if there is any data of how many of the original investors are still with the fund? If there are a few people invested then the fund should use their faces to advertise. That will create more mileage for the fund in terms of impressing new investors then anything else. Here we should exclude the investors who are betting with less then 2% of their net worth. There are over several hundred Mutual Fund schemes (and each of the fund houses having around twenty to fifty of them) then obviously a few would do the double of the underlying index but the trick is to find that out in foresight then in hindsight and the only way to know if that was in anyone's foresight is to count the number of original investors in the fund. Though I have no privy to such data I am sure that the actual numbers would not impress me or for that matter anyone who is convinced and aware of the danger of getting sucked into chance events thinking them to be actual predictable outcomes in foresight. I'd also like to know the Fund manager's bet on this particular fund as a percentage of his net worth soon as he took over and how long has he continued with that bet. Of course there should be no one believing more in the Fund then the Fund Manager himself. Now if the Fund Manager's bets aren't too big then he also did not think of the performance in foresight thus making it a chance event. I would strongly urge SEBI to make mandatory disclosure of the Fund Managers investment in the fund so that Investors know if they believe in the fund more then the Manager. Even if absolute bets are not mandated SEBI should include classifications as a relative percentage of the Fund Managers net worth. There is a need for some urgent legislation in this context so Fund Managers just can't come up to the Idiot Box and say "OK Guys we got it wrong". They should also be made to pay for their mistakes. Once this is done some funds will advertise their Manager's bets in the underlying fund. Clearly Funds with little bets of their managers will have little confidence amongst the investing public and vice-versa.

Reading a Charles Sobraj book does not mean that you become a Charles Sobraj! But yes, I would like to know more about trading and at some point allocate maybe 1% of my capital to trade like a trader with the maxim (Book your losses and let the profits run). There is no end to learning in this world and though 99% of traders do lose money that 1% class makes enormous wealth and we should try and see what that 1% did which these 99% did not. I do not know if trading is a zero sum game but it does appear to be! Even Lord Keynes was an active trader and so is Rajat Bose and Sudarshan Sukhani but surely there are features that distinguished each of these. For example one TA who was running his own shop till recently before joining the Big Bull blew up a lot of money which my friend had given him by trading in Nifty but yet he seems so smart on the Idiot Box. Trading is more about psychology then about skill you can learn the skills but psychology cannot be learnt it can only be developed!

Is it true that only 99% of the trader lose money?? Basantjee you must be in touch of lots and lots of market people. Haven't you found few successful traders? From the ones I know personally I do not know anyone who has made as much to write home about but RK Damani: is one hell of a trader but many of the copy cats who wanted to copy him were caught with their pants down! He always pyramids into his position. Even market talk has it that he lost a huge chunk (of what he made shorting in the bear market) in the market rally post March 09 many say that his loss post-election day was a few hundred crores. This is all market talk and I have no basis to prove anything on this. Hit: I am aware of all that and have read Martin Pring a couple of times and keep looking at it time and often the real trick is to put that into a structure to create a monetary payoff . Actually I am really curious to know why so many of all fail to make money trading.

Basant Ji.....On this particular point...my understanding is that Keynes was a speculator/trader to start off with....but then moved to conservative/long term/concentrated investing which is when he became truly successful. Rumour has it that the guy used to just work for an hour or so from his bed in the morning and could make impressive returns despite the great depression. He was one of the inspirations for WB Yes, he managed the Chest Fund and beat the indices really hard. The London Markets did zero% from 1920-34 whereas Keynes did a 13% CAGR. Do you know any book or link that explains Keynes Investing Rationale and where we can get more information on his investing philosophy. If you buy 100000 shares of Z at Rs 40 and the price moves to Rs 42 then you buy more and keep adding to your position in a profit. Alternatively if you short the stock at 40 and it goes to 37 you sell more of it. The idea is to add position to a winning trade. This is what Jesse Livermore said:

"Stocks are never too high for you to begin buying or too low to begin selling. But after the initial transaction, don't make a second unless the first shows you a profit"

The Thirteen Commandments - Gospels from Jesse Livermore

1. Never act on tips. 2. Never buy a stock because it has had a big decline from its previous high. 3. If a stock doesn't act right don't touch it; because, being unable to tell precisely what is wrong, you cannot tell which way it is going. No diagnosis, no prognosis. No prognosis, no profit. 4. Don't blame the market for your losses. Never add to a losing position. A losing position means you were wrong. 5. Stocks are never too high for you to begin buying or too low to begin selling. But after the initial transaction, don't make a second unless the first shows you a profit. 6. Always sell what shows you a loss and keep what shows you a profit. 7. Don't argue with the tape. Do not seek to lure the profit back. Quit while the quitting is good-and cheap. 8. There is only one side to the stock market; and it is not the bull side or the bear side but the right side. 9. The speculator's chief enemies are always boredom from within. 10. A man must believe in himself and his judgment if he expects to make a living at this game. 11. Bulls and bears make money, but pigs get slaughtered 12. Markets are never wrong. Opinions are!

John Maynard Keynes, whose brilliance as a practicing investor matched his brilliance in thought, wrote a letter to a business associate, F. C. Scott, on August 15, 1934 that says it all: "As time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one's risk by spreading too much between enterprises about which one knows little and has no reason for special confidence. . .. One's knowledge and experience are definitely limited and there are seldom more than two or three enterprises at any given time in which I personally feel myself entitled to put full confidence." I did not invite you to board the train. All I said is if you think that trying to get up at 15kmph is ok then get into it. We all have different ways to compute value and value like beauty lies in the eyes of the beholder. My value matrix would be different from somebody else's because if everyone had the same value matrix there would be no trading in the market because everyone would like to sell at one price and everyone would like to buy at another. So if by whatever matrix you compute for valuing a stock if this or any other stocks looks ok then do not be tied to past price behaviour. That is what I said. One person's (My) Investing decisions should not make any difference to the other because thoughts, compulsions, risk reward profile will be different and swing from person to person. I learnt this the hard way

A simple business like say a Hawkins, Page(i wish i had analysed them before march) or for that matter Asian paints or titan that one understood to a certain degree and had fallen on

sales/growth concerns which would eventually pick up were good buy candidates and i regret not buying them in good quantities. The businesses are still good but the prices aren't cheap but for anyone like me who has made an equity allocation absolute prices mean nothing everything has to be valued in a relative context. SO when page was trading at 12 times Fy09 in March we had the sensex at 9 times Fy09. To me the only cost of investing is the opportunity cost so now the sensex is at 20 times Fy09 and Page is at 23 times Fy09 but suddenly 23 seems more expensive then 11 it would in absolute terms. Page has become relative cheaper than the Sensex. Something to think about and debate. P.S: This is no invitation to buy/sell Page.

Hi, multibagger is a classic confluence of a company's ability to compound earnings and the investors patience to see that process carry itself. The catalyst that expedites the process is the Pe expansion. Sometimes small market cap companies are able to grow faster in terms of earnings because they operate from a small base and hence that preference. Otherwise there are no rules that all smaller capitalized companies should necessarily outperform all large cap companies.

True. I understand that, for e.g., if I own one shop then it intuitively seems easier to own two shops in a years time through internal accruals or debt and possibly double revenue and increase profits. Might be difficult to double the number of shops if I already own 1000 shops (because of complexity). Also growth in most industries has been seen to follow an S curve. That is why I asked because I have a feeling you also feel that after a point every business will reach a saturation point. You mentioned you didn't feel comfortable with Bharti at 4 billion dollar market cap. I expect you were comparing it to some other telecom company (maybe China Mobile or Verizon). That is why I asked which companies you were using as market cap comparable for Titan, Page and Hawkins. I understand you use historical ROE and EPS growth to extrapolate into the future. But don't you also use Market Cap to determine the scale of the opportunity?

One of the many hallmarks of Lynch approach was "rotation"- selling the company and replacing it with another company with similar story, but better prospects and probably more exciting in fundamental value. In the markets my expectations or for that matter anybody's expectation does not matter. From March 2009 having few stocks and rotating them has helped me do about 40% better then the Nifty. That is if the Nifty is up 2.1 times I am up 2.5 times.If we consider from September 2007 I am just about the same as the Nifty but am down from January 2008 (between September and January 2008 my portfolio really took off).These figures are without the effect of leverage. Now all of us should not have predetermined plans of when to switch because such plans never work out. Switching should be done with cyclical stocks only and only on company specific reasons. I exited Pantaloon last year because I thought that Biyani was doing too much in terms of expansion and fund raising, My exit from Pantaloon had more to do with the company then with trying to time the market.

The cyclical bought in March were purchased as positional trades only. That is I wanted to play for the economic upswing and once I realized that valuations are discounting Fy11 I saw no reason to hold them. Now if you start switching a lot of your positions then transaction costs and the Govt. of India become unwanted partners and that is never too comforting for long term wealth creation unless you are stealing from the Govt and really squeezing your broker

I love talking about my tech boom days. I had this sectoral approach then also but mixed it up with PE and EPS. It goes something like this. In 1997 I bought Satyam and sold off because I was making 25% in one week . Satyam used to move like crazy then. The best part (coz I learnt from it) was in the year 1999. I reentered software buying DSQ, Silverline, Pentamedia and Sri Adhikari (yes no Global and no HFCL missed it). In about 8 months I had a list of 5 and ten baggers with me. My over all portfolio was up seven times I had also invested in some non performing consumer and Pharma companies and I started to get worried. I thought that software stocks would fall and was working on the idea of converting everything to Infy and Satyam but I stopped. The red chips that I was owing traded at a PE of 100 times and the blue chips I wanted to own were at a PE of 100 times. Now I did not want to sell a low PE stock to buy the higher PE ones. As prices fell these stocks fell further so relatively their attractiveness improved . I bought more at each decline by borrowing from a Bank. But the prices kept falling and the margins had to be met by pledging more shares - since there was no surplus cash. At one point in time I had pledged all my shares and would buy new ones only if they were bank approved. Finally inevitable happened. the bank sold off my shares and credited the a/c with the balance. I learnt the most important lesson of my life 1) Always invest in the sector leader either No. 1 or No. 2 2) DO not buy any thing that you do not understand .Better to buy things that you can see. 3) If you have made a 400% on a stock you need to lose only 80% to break even. 4) Do not look at the PE alone. An investor shall not live by PE alone I have tried putting My investing strategies on a different section at this forum. Most of it has been created through reading and experiencing (losing) and hardly anything by listening.
If you could tell the future from a Balance Sheet then accountants and mathematicians would be the richest people in the world. I could be buying & selling stocks recommended here.Read the DISCLAIMER.

Basantji, Most of the stocks one buys here at TED are bought with at least a 3-5 year horizon. Once we have built up positions in 3-5 stocks and invested all the capital all we have to do is wait. Now this waiting period of 3-5 years can make one really restless. How do you cope with this? My question specifically is if one is a full time investor what does one do in the meantime after buying what you like and having to wait for elongated periods of time?

Do Nothing! Enjoy roaming around, spend time with family and eat good food.

And take out six hours in a day to read the other 6000 odd stocks in BSE (annual reports) and I am sure you will find some bargains. Then wait for the right price to enter. Thats all investing is all about? You have to find gold in a pile of dust. Nobody will tell you that there is gold hidden there. You will have to find it yourself.

Mr.Basant: Would you care to express how the investment philosophy has matured over the last few months/years. E.g. previously one could sense a thematic view and then riding on the best company in that theme. E.g. retail and then selecting pantaloon for long term gains. My sense is that it has become more "business model" focused with higher appreciation for ROE/ROCE. This may mean more bottom up focus - where individual character of the company and its returns have gained a higher weightage. We are all a slave of our opportunities so if we have a thematic option the potential to make 10x or 40x exists not so much with the bottoms up companies where making a 5x is an uphill task. I have realized that the thematic options have dried up and if we have to play the game we wil have to do it in the way that the present opportunity presents itself so I can be buying a cyclical at a PE of 3 times Fy11 ad then hope to sell it at a profit something which I did not doearlier because the opportunity cost of money (investment)was too high. But yes, the evolution is there and maybe I might turn back it all depends on the options that we get.

1) I suppose there will always exist some thematic plays, but is may be difficult to identify them at the time, though they become apparent with hindsight. Ans : Absolutely true but I have always played that with respect to following the West and I see almost very few options in that sequence and the ones which are there are in the private domain.

2) After reading older posts on this forum and comparing them to more recent ones, I get the feeling that the tone has become more risk averse. Understandably so, because if someone have accumulated really good returns in the last bull run, they may be inclined more to capital preservation. Ans : Even I am trying to find whether there is change in strategy because of the returns or because of the opportunities (that I like to state more often). Maybe its a mix of both with a general bias towards the latter but I am no sure judge on that. 3) I wonder if we could focus a bit more on thematic investing. Some of the ideas contributed by members may light a spark and make us all wiser Ans: But ultimately the thematic plays were all 40% plus annual revenue growers and what we need is a PE expansion to create a big multibagger now if you start investing in a stock at a PE of 15 times then the scope for super normal returns diminishes.

I think the next few months could lead to a strong rally in mid and small caps where there has been demonstrated growth but there is a lot of scepticism regarding various factors e.g promoter pedigree/sector specific issues/debt factor to name a few. There are many such companies with one or the other issues currently quoting in the 3-8 PE range of valuation where I feel the PE could go up and go to surprising levels.

Stockmarket is a weird place. For every person who buys a stock there is a person who sells it and both think they are very smart.

Basantji, Once you have made up your mind about buying stock (to replace one of the stocks in your portfolio), how do you go about buying this stock. Do you have a valuation band say +-10 % ? What if the price goes up as you start buying? Also, do you believe in averaging the "buy price". I am planning to completely churning my portfolio. I understand that you have an eye for "multibaggers" but since there is a cost involved in churning, how do I keep the costs to a minimum. I have recently joined the forum and I am learning a lot. Thank you for sharing your knowledge.

If I like a stock then it has to be relatively cheaper For e.g. If I have to replace X with Y then it is not necessary for Y to go down if both and Y are up 10% each that makes zero difference to my analysis and I normally look for the relative switch off point. If I start buying and the stock moves up a bit I do not mind since I have already had a fill at a lower price. If you are looking at a four bagger a 10% movement in price should make negligible difference provided the thesis about a certain stock being a four bagger is correct in the first place. I do not churn because I think too much churning skims the milk you will get sucked in transaction, brokerages and short term capital gains taxes unless you are playing in absolute small numbers churning is not something that I do. The reason could be that I rarely like to sell my winners (unless they are cyclical) so the moment a stock shows profit I am mentally tuned to keeping it assuming of course that the fundamentals have not deteriorated. But there is no bar to churning if you see a better idea for your money!

Analysing the comments, everyone has its own point. So as critic, I guess it is right. Do you know the saying, No man is an island? Surely, all of you know it. It may seem that for this situation, investment in the stock market isn't the greatest idea. But the king if investment, Warren Buffet, recommends invest seriously treat it as your main source of income. He also doesn't touch mutual funds, so diversification isn't necessarily the key. Put an investment into companies that you believe in, and that are proven over the long run, and don't go panicking every time things in New York take a sour turn, as that is the natural behaviour of markets to begin with.

My idea of buying cyclical is to play it like a pinch hitter in cricket. When Irfan Pathan is sent in at No. 3 he is expected to hit out and get out. In other words there is no need to become a long term investor in cyclical stocks what we need to do is make our money and get ahead with life and not to regret if the stock price moves up or down post we have made the money. About fertilizers I am never keen to bet on any sector that is under strict Govt. regulation! I am always on the lookout for a better alternative for my capital. Looking for multibaggers is like looking for a needle in a haystack. According to me there are multibaggers to be had in panicky markets as we all have seen stocks multiply 2-10 times within 6 months to 12 months. But that does not happen every year. Coming to normal markets or range bound markets, finding multibaggers is a challenging job. To me the foll. criteria are important:

Price at which you enter the stock and valuations at time of buying. There has to be good growth prospects with cheap valuations. Majority of people may not agree with you for quite a long time but that should not discourage you. Management pedigree -- We don't want someone of the Raju pedigree running a company. Average to good management is okay. Debt levels: Stocks with very high debt are going to face an uphill task, raising their earnings. Return ratios (although these may change with very good or very bad years). There is a whole thread dedicated to this topic. My usual strategy is to look for well managed companies facing some difficult times for a few quarters and the problems should be such that they are of a temporary nature and are surmountable. Other strategy is to look for turnarounds because every 1-2 year, some or the other sector faces some headwinds and gives a good entry point with a lot of negative news built in the stock price. These are the broad outlines for picking up good stocks at bargain prices. Enough stocks are discussed in this forum and you can form your own views. (Dont depend on others' views, they may or may not be correct) When buying a stock, don't look at it as a multibagger. One need to look for a good company and if it turns out to be a multibagger well and good, otherwise rotating your stocks with 30-50% gains also is equivalent of getting multibaggers. You need to keep a check on fundamentals every few months and look at valuations. What I do is what Prof Bakshi suggested: I dont look at my entry price, I just look at the list of stocks and their current prices and if I feel they are worth buying even at current prices, I keep them, otherwise I start selling them in parts and keep some part for longer term if I feel that the story is going to improve. Quite a long answer, but there are no shortcuts for identifying good stocks. I believe that it is difficult for the average investor to evaluate the promoters pedigree and hence what I feel is that as far as possible, one can try to verify about the promoter track record and company's growth, dividend/tax payment etc. Asian Paints cannot grow at more than 20% though that is good for the majority of people and US is a great business a super brand but unlike what Buffet says I believe the management's reputation takes precedence over the business model.` Projections in the report for top two tiers of households (Global & Strivers in McKinsey terms) are quite interesting (Exhibit-3 of report). Number of households in top two tiers is projected to increase from 3.6 million in 2005 to 42.6 million in 2025. Consumption expenditure of these top two tiers is expected to increase from Rs. 2.2 trillion to 30.6 trillion. With this type of growth, companies catering to premium segment, basically high end luxury goods, will register very good volume growth which will provide better economies of scale resulting in increasing operating margins and increasing ROE / ROCE for quite long period of time. In this case, business with well established brands catering to high end segment will reap benefits of this operating leverage. This could be high end consumer durables business which could prove to be good investment even though the current return ratio of business might be low. Is this logic correct? I guess this is the primary reason you are bullish on Titan's diamond jewellery business. I am not a believer in those real estate stories. I'd rather invest in the direct consumer plays if I want to benefit from that middle class explosion.

Price to sales is important for intercompany comparison within the same sector for example you can compare ACC with Gujarat Ambuja with that but not Ambuja with Hero Honda. It is also important in times when the company is in a loss and a PE ratio is not exactly forthcoming. Why would you look at Pyramid in the first place the management quality is questionable and the business model isn't too robust either.

I have taken few lines need your explanation on these.. The Price Earnings should be less than the growth. In other words the Price Earnings to Growth PEG should be less than 1.Always buy low PE stocks because a low PE means that growth has not been factored into the stock making it fit candidate for a PE re rating
1) How to calculate PEG ? 2) Is RoE and return on net worth , same ? 3) If management buyback its shares.. That means they are more confident abt their growth or they just wanna cheat?

Eg: If X company will do EPS of 62 this year, so it's trading at p/e of 33 now.. and if expected growth for FY11 is 42% then PEG = P/E divide by growth = 33/42 = 0.78 < 1.. So PEG is less than 1.. This ratio is helpful to evaluate company based on future growth.. In our market we will find many listed companies with PEG < 1, hence it shouldn't be taken as main criteria for valuation. 2) Yes, they are same.

3) It depends on management. Generally when management buying means company is undervalued as per their view and overall good sign [most of the times]..

A very good indicator of future growth is to check on a) The Sales growth of the last 3 years b) The RoE less the dividend payout ratio. Please visit the RoE and RoCE thread for this and c) What the management says? Basantji, If a company has RoE > 30 and RoCE > 40, and last 5 year avg sales growth rate is 20% at what PE would it warrant a buy? Seems like a good company but if you can get it at 20 times trailing it should be reasonable. The bargain would start either a) You get it at less than 15 times or b) The earnings in any specific year grows at 30% or above. BTW can you share this company's name?

i am not very experienced here .. but what i understand from PE is PE= Price /EPS .. means how much (in multiples) you are ready to pay for buying a share which earns x/share (EPS) Say .. u wanna see movie in Balcony which normally cost Rs 100 but u are unable to get ticket on time so u will buy it at premium (in black) of Rs 30 so you are paying rs 30 extra for same ticket which you could have bought at 100 .. so you paid Rs 130 .... so EPS = rs 100 (the actual value / earning ) Price = 130 (you paid 30 rs higher) and PE = 130/100 = 1.6 so 1.6 times you paid for a share which earns rs 100 .. i hope i didnt messed it up

The past growth rate is important but to check it further we look at the RoE 5 years is a bit too long to project growth but if the company is in a sector that is not cyclical then we can get some estimate of future growth.

Once I exit a company I never try to buy it back! That is because that exit is made after a lot of thought. Generally I like buying 75% of the desired quantity in one go and the balance 25% on strength. There have been very few instances where I have averaged down. We get lucky in investing sometimes. Initially I was betting on HDFC bank and Titan and as the recovery happened I exited HDFC bank and bought the beaten down transformer, boiler and AC companies, with some exposure to the consumers as these cyclical became expensive I slowly eased myself out of them to have a consumer portfolio. SO the early gains of the cyclicals helped me bet hard on the consumer companies. Basantji, Thanks for your detailed response. If at some point in this correction, cyclicals and financials again become inexpensive; do you see yourself repeating the same process again? I understand that you always maintain concentrated portfolio. So, when you sell, you completely exit from that scrip. Is this the case for your above mentioned switching as well especially when you exited from HDFC bank? Don't think they will become as cheap or even relatively cheaper as what they were last year. Most of these companies were at 5PE with more than 5% yield and a RoCE history of 30% it was very difficult to go wrong with that kind of a valuation set up. Concentrated portfolios help you find the maximum returns for your buck!

If you do not mind, Can you please explain what was your underlying reasoning.. Normally if something works the conventional logic would be hold on to the success e.g. HDFC Bank would keep growing your capital over the long term or if your transformer company doubles - what prompted you to move from one to another set of company. In the past your success was betting on a big trend & enjoying the multiplier effect over the years. Has this changed or was this strategy to capture the returns from this onetime event. And lastly, coming to the present time - are you betting that the consumer companies would be the best bet for the future? Isnt the capex cycle on a revival - would it not be a good bet to find good companies available cheap in the transformer, boiler, A/c Companies. HDFc Bank is a great company but will find it tough to outperform the markets significantly. My premise was two fold at that time a) If several the companies in india went bankrupt then the banks who have lent to them will be put in a tight corner so we could not be safe buying the banks when we expect several Indian companies to go belly up as the theory was during that times b) if HDFC bank had lent to only the A class companies it would have lent to several employees of companies that would not have qualified for loan so de facto the risk was about the companies where the employee was working even if the company was not in the approved loan list. Hence I bet on the DEBT FREE/ CASH on BOOKS stocks which could never go bankrupt. Also at that time I heard Roubini argue on TV that the recovery will happen in late 2010 and not in 2009 so that meant that he was talking of a bottom not that I believe in macro economists but these are small pieces of information that add up over time.

Plus any event in The West would have had a run on our Bank stocks and that made me move out because even a HDFC bank was not safe in the relative sense of the word. Also the valuation of the cyclicals were at debt capacity bargain levels at that time so Buffett, Graham, John Burr Williams, Peter Lynch everybody would have bought it. Over the past one year HDFC bank has barely kept up with the Nifty whereas the other companies have gone up 3 to 7 times. 2. Strategy was to capture one time returns from the gross mispricing of equity values. 3. Infra will do well but is more prone to falling if there is any global event. Plus these stocks are not cheap. Also I am more comfortable owing oong term secular stories where I am sure that there will be some growth every year rather than betting on cycles. It is all a case of state of the mind. Thanks, I put a lot of stress to opportunity cost. So if I have a retailer right now and I find another alternative that will provide me with larger long term returns I might shift. In this market there are no friends and foes only opportunities. The trick to all this is to own a few stocks and then compare them in relative terms. At that time there was no talk of HDFC bank going under buy Axis and ICICI were under the hammer and if any one of them would have faced an issue the valuation of the entire sector takes a knock! About Europe if UK goes under then we have another major issue but the PIGS have been factored in the price. Greece has a GDP of US $ 60bn and that is as much as Reliance's market cap. Unless I get the cyclicals very cheap I am not willing to easily bet on them maybe becasue the consumer story is more secular and comfortable. Most of the consumer names are cash on books and debt free with outstanding RoEs. Basantji, I am grappling with a question, Given an option b/w 1) A company growing at 20%(Sustainable),ROE of 20% and selling at PEG of 0.5 2) A company growing at 30%(Sustainable),ROE of 30% and selling at a PEG of 1.2 Which one would be a better buy? Mathematics suggests option 1,what does your experience suggest?

Assuming that companies grow at that rate for 5 years at the end of which the stocks trade at PeG of 1. Then assuming initial eps of Rs 10each the first co. will have a Eps of Rs 25 and the second one a Eps of Rs 37 at a PE of 20 and 30 they will trade at Rs 500 and rs 1110. Initial price is Rs 10x10= Rs 100 and Rs 10x36 = Rs 360. Net gain 5 times and 3.1 times. The question is not about the option but which business you think is more predictable. But assuming equal probability one should go with option 1 as the yield would also be higher there.

Good businesses have above average RoEs and the only way to protect that RoE is through a brand or pricing power. If the product is a commodity then RoE wil be equal to cost of capital in the long run because it will attract new entrants into the business.

So high EPS growth should be facilitated by high RoE(pricing power, brands etc) otherwise the high EPS growth will evaporate over a period of time.

What are your views on Ken Fisher's Super Stocks and picking stocks on the basis of market cap/sales ratios? I have read the book and his basic premise is that super stocks (which he has described as consistent growers with a lot of details thrown in) should be bought at market cap to sales ratio around 0.8 and sold above 2-4 levels. Here he considers margins to be around 6-7%. so for stocks with higher margins, the ratio needs to be raised. For small caps he says that anything around 0.3 ratio is a good buy for profitable growing small cap stocks. At best this market cap to sales ratio could be one of the parameters deciding the attractiveness of a stock. There are other things to consider as well.

Here is my quick analysis of the TTK Prstige's Annual Report for Fy10! Business: 1) From the Directors report there seems to have been a slew of new product launches but the key aspect to check out would be the kind of difference these products make to the topline. Sometimes there are minor improvements in existing products that make their way into their Annual Report but do not impact the topline as much as it appears at first glance. 2) The company indicates that the share of organized brands is slightly more then 50% but that has been the case for a few years now. I wonder why the share of Hawkins and TTK as part of the industry exposure is constant if they are collectively growing at more then the industry. Or is it that the industry size is totally unknown and is an offshoot of mere conjecture. I am more in favor of the latter then the former. Whenever there is a big unorganized element present the total market size become that much more difficult to construct. 3) The company writes that the threat to the domestic market continues from the unorganized markets and the regional brands because of their low unviable pricing strategy. But unviable pricing strategies are short term events in the long run companies that follow them will go bankrupt so that is not something to worry about but I would have liked the company to comment on what they feel would be the impact of GST. They should have provided their version of competitiveness of the organized players in the post single GST environment. 4) Sales Mix Fy09 Fy10 Pressure Cooker 54% 47% Cookware 15% 17% Gas Stoves 09% 12% Kitchen appliances 17% 20% Others 05% 04% a) Clearly the big volume driver isnt Pressure Cooker which grew by only 12% in Value terms. In case of volumes it grew at 15.58% implying that discounts were higher and pricing was lower and negatively impacted. b) For Cookware the volumes grew at 27% and value by 37% c) For Gas Stoves the volumes grew at 13% and value at 46% d) For Kitchen appliances the volumes grew at 88% and value at 53%

These data suggest that the company does enjoy pricing power except in case of Cookware and Gas Stoves and that too one has to see whether the products were the same as sold as last year or improved innovated appliances being sold at higher rates have increased per unit selling price. Financial Analysis 1) There has been an all-round margin expansion led by lower raw materials (2%), and higher volumes have resulted in lower operating costs (3.6%). 2) The company writes that free cash flow has been generated because of better inventory and debtor management which is INCORRECT. The debtors and inventory have grown at 23% and 22% respectively whereas sales and Cost of Goods sold have increased by 24% and 16% respectively. 3) I will state below the reason for the free cash flow which for some reason the company has omitted to indicate and explain. 4) The discussion of Prestige Kitchen Boutique and Smart Kitchens network should have been indicated by value because in the absence of that one cannot make out whether the numbers are significant or not. On the face of it increasing Kitchen Boutique to 9 from 2 stores is immaterial in the overall context of things. Capex: Last year the company had underutilized capacity in Cookers (55%) and Cookware (30%). Yet while production increased 18% and 26% additional capacity was set up for Cookers (20%) and Cookware 11%. Why would you set up new capacity when the existing is not used or if there is a change in product mix and the collective caption is cookers then they should mention it. Maybe this explains why their RoCE at 61% is lower to their peer group company (Hawkins). The increase in capital employed at 35% is lower then the increase in sales at 26%. Not a good sign unless they are investing for the future but when you have unutilized capacities why invest for the future? I guess they invested in Uuttaranchal for tax breaks but if the RoCE for investors were better in their exiting capacity without tax breaks I would have opted for the latter. Cash Flow: The big increase in operating cash flow has come in the back of increase in Sundry creditors. It appears that the company has outsourced more of its work to third party manufacturers and hence the big increase in Creditors. But if you strip out the Sundry Creditors (Rs 29.56 crores) the increase in Operating cash flow at 18.83 crores to Rs 61.65 crores from Rs 42.83 crores in Fy09 evaporates and the company has done worse off in terms of operating cash flow. Getting cash from Sundry creditors by outsourcing is a one time event you can do it for a couple of years and then that will have to stop so I have not been too enthused by their cash flow statement. The total fixed assets is around Rs 40 crores and surprisingly the value of Buildings (Rs 14.23 crores) is as much as the Value of Plant and Machinery (Rs 14.22 crores). Value of Buildings increased by around 40% for the current year whereas Plant increased at 18%. Not sure why? The Cash, Investments and loans in hand are Rs 43 crores enough to create another TTK (Total Capital Employed is Rs 116 crores as on date) with debt from Bank. Why then is it that the company chooses to hold cash and not distribute it amongst the shareholders? The Company has paid off its loans and become almost debt free. (good sign) Properties and Investment: Why a company that generates free cash flow and is sitting pretty on its business competitiveness wants to go in for rental income? They should get the money out and distribute it amongst the shareholders rather then go in for JVs and agreements. Investments

in Property is always a grey area and instead of trying to seek security for their main business by focusing on rental income they should raise the cash and a) Either expand operations in the non cooker segment or b) Just return the money back to the shareholders. Conclusion: The Companys cash management is not as robust as it seems maybe the promoters are not focused on cash and Return ratios as they are on growth and somehow I get a feel that this company should be more transparent and focused in its operations then it actually is. I still feel that slightly lower growth with focus on productivity and cash flows is a better way to play the sector and Hawkins (their Annual Report is still awaited) appears a better relative bet. If there is any discrepancy in the above analysis please put it up. A) What according to you should be an average tenure for someone investing in stocks? Although, from your perspective, I gather 'Forever' is the right tenure, but this may not gel well with one starting out on equity investing. Would appreciate if you could let me know the minimum number of years' one should hold the stock without panicking on downturns. Ans As long as the company keeps delivering investors should hold on. In between stocks can become expensive when prices run ahead or cheap when fundamentals improve more than the prices but unless it becomes relatively expensive compared to another opportunity that you have uncovered one should hold on. B) When you are planning to invest in a fundamentally sound stock, how important is it to assess entry levels? Ans Buffett says "Have the purchase price be so attractive that even a mediocre sale gives good return". But we do not get attractive prices 365 days a year and sometimes we have to buy expensive but in that case we have to be really sure that the earnings over the next 6-9 months will make the stock cheap. Basantji, When u decide to invest in a particular stock, do you buy it in a single lot or buy in tranches? Same question about exits. Entry is 70% in the first lot and then the other 30% when prices move up and then come down !!! If prices fall after my purchase I am not too excited to add (though this has never happened except once). Exit is all in one swift go except when I am buying some new stock and want to take something off everything. Generally if you have bought a stock with increasing earnings and strong Return Ratios it should not fall by more than 10%- 15%. If it does just because of market conditions and no company specific reason one should buy but somehow I am more comfortable buying a stock at say Rs 100 and then the price going to Rs 120 and retracing back to Rs 107 then buying at Rs 100 and averaging at Rs 85! Not sure if that is an ideal investor's way of handling downtrends but as I said I have not been really tested in this method because except for Voltas I cannot recall any other stock that fell by more than 10%-15% after my purchase. Reminiscences of a Stock Operator (Wiley Investment Classics) by Edwin Lefvre, Roger Lowenstein I am halfway through reading this great book again! I last read it in 2002 and then thought that there was no need to repeat it but even though I remember the learning I am convinced that not reading this book for eight years was a mistake.

Whether you are a trader/investor or whatever you should read this book at least once in every twelve months. It will help you increase your wins in the market. Just ordered the book from bookadda.com - Rs 160/- only! Don't your eyes burn? I suffer from that problem after elongated hours of computer work. not really basant ji. actually at the start of my career that happened. but one of my family members (with god's grace i belong to a family of brilliant doctors few life changes to keep my vision intact : ) who's a doc suggested a

1. after every 5-10 mins look away from screen at a distant object... 2. do make a conscious effort to blink the eyes after every few seconds when looking at the screen. by the way at start you have to make a conscious effort, thereafter, it becomes a habit. 3. during toilet breaks, it would not harm to wash ur eyes... 4. quality of sleep matters then volume of sleep, so relax and sleep well. (by the way i remember he specifically saying that this point is a cure for a numerous other ailments ) and as tigershark pointed out you could try some eye drops too. .but its been so many years and honestly speaking i have followed just the above four things and i still have the same power (0.5) as i had in the final year of my college , so i can safely say these behavioural changes would help u or anyone using computer for long period of time. if its on books.google.com, then the legal onus is on google and not on viewer of the books. a few books have full access and few limited, and the limited ones have only a few pages blocked and that too randomly. so in case you find page 16 missing today, you would find it there tomorrow or after doing a logout and login. so you can read the whole book. Smartcat: Do those books help Basant & others? Especially since whatever books you read, you will probably not change your investing style? I have stopped reading books by investment gurus, brokerage reports, news items related to my stocks and investment magazines like Dalal Street/Outlook Money. Nowadays, I only read annual reports and check on financial results every quarter.

SmartCat, reading books does help and it helps a lot. There's is so much to learn from good books (not only related to investing/trading). You get to know lots of new insights, perspectives etc. Besides 'investing style' evolves, doesn't it? It doesn't make sense to have rigid views or extreme ideologies. With the changing realities, one needs to be willing to accept and adapt with an open mind.
I have one question Smartcat. I'm assuming/guessing that you at any given point of time, having around 20 companies or more in your portfolio. How do you keep track of dividends (ECS?), annual reports and other stuff like capital gains, bonus, splits etc. Do you do this full time? Dividends -> I check all my savings accounts at least once a day via Intuit Money Manager. Annual Reports -> I read the hard copy when it arrives in the mail. Capital Gains -> MS Excel (buy date, sell date, profits/losses etc are neatly tabulated) Bonus/Splits -> I have my portfolio on moneycontrol.com and I keep it open in a browser window all the time. Whenever I notice that a particular stock has fallen, say 50%, it means that the stock either split or has given a bonus. And oh, I have 80 plus (not 20) stocks in my portfolio. Too many cooks spoil the broth. Likewise, I thought too many books spoil the brain!

There is a risk of one picking bad/irrelevant strategies from each book (rather than picking up good advice from each book). Because, at the end, it is our brain's ability to analyze the advice that matters. Regarding learning about other things in life (rather that just investment strategies) from books, I will have to agree to that. Peter Lynch's books are quite an eye-opener on many fronts. Yes, Intuit has a tie-up with moneycontrol. If you want something free, you can try out Artha Money (from Times of India group). Basant: Reading a book and staying ignorant is better than not reading a book and staying ignorant. The cost of education while learning through our own experience will not be limited to a few hundred/thousand rupees. Also there are several people like me who read to kill time, because if you are not looking at the TV/Stock quote screen and not reading the pink papers (I have stopped getting any financial news paper) you need to do something. Intuit intentionally does not allow transactions in the accounts - for security reasons. It is only for viewing the account statements of all the bank accounts with a single login. TheEquityDesk and Basant Maheshwari are now at Facebook as "BasantMaheshwari Theequitydesk". This should have happened before but as Peter Lynch says "You can't drive a car by looking at the rear-view mirror". This is the link: http://www.facebook.com/profile.php?v=info&edit_info=all&code=1322895438 Basantji, What all does the market PE for any stock signify in terms of earnings expectation? Does a PE of 15 mean market is expecting the company to grow at 15% for the next one year? How do you determine what the consensus is? Brokerage reports and research analysts provide a great view on the consensus and my thought is if a stock is growing at 100% CAGR and the consensus also expects it to grow at 100% investors will not be as rich as when a stock expected to grow at 20% grows at 35%! As analysts we need to find our edge and hence I like companies that do not do concalls, do not talk to analysts quite often and just does not forecast with vision statements etc. That will remain the focal question when we meet them later this month but personally I do not think there is any need to preempt the management they have been around for half a century and will do what is good for the Shareholders. Also they know more then most of us! All I want is high RoE and caution in capital allocation because there have been far too many companies who have blown themselves up in trying to chase growth. Two that instantly come to mind are Pantaloon and Tv18 Strangely Basantji, these two companies have been multibaggers for you :) Making money is completely divorced from the discussion about the mistakes these companies did. Almost my entire capital has been built upon these companies but as on date I can put these two managements in the list of most irresponsible allocators of capital! I have no emotions from companies that I own/have owned (because I have seen many investors

talk too cozily about the companies from which they have made decent money). That is because as Peter Lynch says a stock does not know that you own it so why should we not think likewise Can someone tell me what are the options for a company which have huge accumulated losses to wipe out its losses? The company is very much operational and is now back in black by the way... and is also showing consistent net profit growths for last quite a few quarters.... so what are the options in front of this company to get back to positive net worth ?? The easiest and surest way is to keep making money the quickest way is to sell assets and the immoral way is to change the auditor!!! Best way to search any company on TED is to go to google, type xyz(company name)+theequitydesk and you get the thread instantly. I often tried TED search but google is much faster. Basant ji, I have a query for you. In a scenario of raging bull market, rivalling that of 1992 when sensex was valued at 50 times earnings, most of the stocks would be grossly overvalued whereas there would still be some reasonably priced. What would be your course of action? You have few options: 1. Cash out 100% and sit on cash. 2. Stay invested 100% in stocks but ones comprise of reasonable valuations (which may not offer much growth) to protect capital as much as possible. 3. Stay invested 100% in stocks with high growth rates relying on growth to take care of valuation problem. 4. Combination of all three above.

I am interested to know your thoughts as I believe this scenario will come true in next 6-8 years. Please advise.
I think we will get there sometime between 2013-15 and the only option at that time would be (1). The best way to do it is to sell out and not to check back in fast - take a long holiday or do whatever but never get back in quickly enough. But the Sensex begins to look overvalued from the point it reaches 25-30 times PE. So how do we make the precise exit call? By following a stop-loss or preserve gains strategy???? No right answers but the way we go about it is to sell out when valuation looks over-overstretched rather than do a stop loss strategy. BTW we will cross the bridge when it comes! I don't think we need to sell out now. We are not in a bubble phase. PE is higher than in past but we are also on a higher growth curve. Very true. If we want to ride a bull market (P/E expansion on top of superb earning growth) of life time, we need to be careful about not selling too early. Sometimes it is better not to spend time understanding things that do not have a direct bearing on our portfolio. RIL at Rs 300,000 crore market cap is HUGE. Also Mukesh Ambani's statement at the AGM of adding another RIL in the next 10 years indicates a CAGR of 7.2% only though I am constrained to believe that Mr. Ambani's statement was more out of exuberance then reason. Of course his statement did not have any exuberance as much as it appeared at first sight.

Basantji, I was thinking about Investing strategies, Warren Buffet and you :) I have some doubts. It will be great to hear from you on these. Please pardon me if I am wrong in any facts. 1. Many of us feel that we must invest majorly in financial and consumer goods sectors. Warren Buffet has his major investments in these sectors. Also, these are non cyclical. My confusion is that Warren Buffet has been investing majorly in developed economies where there is negligible rapid infrastructure development, energy capacity expansions, technology boom as compared to developing nations. Also, when he invested majorly in a developing nation (China), it was in Petrochina (Energy/Oil Gas). 2. It will be interesting to know, in which sectors he invested when his nation was developing. 3. So, as long term investors in a developing nation, should we only stick to Consumer durables and Financial stocks? Others, although cyclical and commodity oriented, will also keep making higher cycles and growing in every cycle they make. 4. Also, sooner or later, we will come to the developed nation's state, when Infra, Metals, Mining will not give much growth because Infrastructure is ready! But even then, Energy and Technology Innovation will remain. So, should we not include Energy and Technology Innovation at par with Consumer Durables for long term? These are just thoughts from a Newbie to learn and never to question anybodys thoughts. If you read his letters from 1959monwards you get a feel that he invested in almost everything that had a potential to make money. It was only later when he came under the influence of Munger that he decided to focus on strong businesses. I don't think we should get obsessed with sector investing just that sometimes some sectors are leaders in a bull market and we want to be with the leaders rather than identify the potential leaders from the current heap of laggards. Ultimately you want to be with companies who can show high RoCE with low payouts available at reasonable valuations and if a energy company can satisfy that benchmark so bet it.

If you are a buy and hold investor you will make only as much as the company makes adjusted for valuation (PE) changes. Also it is tough for any company to grow at 35% CAGR consistently and more so if you are holding too many stocks. Now to make more than that you would need to move out of companies where valuations (PEs) are on the high end and into companies where the PE is in the low end and ready to expand - but all this is a lot more to easy to write then to do. Personally I even feel that the buy and hold for ever will make you only 25% CAGR in India and if you aspire to do more than that then one needs to keep on switching. Does not mean you sell and buy each month or quarter but at least in a year or two!

If you could tell the future from a Balance Sheet then accountants and mathematicians would be the richest people in the world. I could be buying & selling stocks recommended here. Read the DISCLAIMER.

I do not know which article you read. However, most of such articles are written keeping US situation in mind. For country like US which is struggling to achieve even 5% nominal GDP growth, it is true that getting good returns by buy and Hold strategy is very difficult. For India which is growing at 15% to 18% in nominal terms, it is relatively much easier to get returns in the range of 20% by following Buy and Hold strategy. Of course, 20% returns do not at all satisfy Basantji. However, everyone is not the same and I guess most of us would gladly accept 20% returns.

One more flaw i generally see is that they make their calculations keeping the index in mind. While the dow might have given zero to negative returns over the last 10 years there were stocks like Google and Apple that have multiplied money manifold. So if one if invested in a company that grows at 20% you will earn around 20% CAGR whether the index performs or not. And generally if your stocks are doing well while the index is stagnant, its good because when the index rises your stock will be significantly rerated, generally. Prashant Jain HDFC MF Q: You think a 20% kind of earnings growth over the next two years CAGR is a reasonable expectation? A: One should always segregate the cyclicals and the acyclicals. If you remove the cyclicals I think it is doable, though in some sectors we see margins at levels which are significantly higher than the historic levels and only time will tell whether those margins revert back to normal levels or not. Q: Give me an example which sector could you be talking about? A: Let say some companies in the consumer sector or some companies in the two wheeler space are sitting on margins which are way above the historical averages. No doubt they are comparative position is very strong, underlying demand trends are very strong but you still cannot be sure that these margins will hold for let say 1 2 years, but I would say 15% to 20% earnings growth minus the cyclicals appears to be fairly sustainable in my opinion. So even the smarties don't know who talk to gazillion managements so why should we worry lets just keep punting. No, my question wasn't really directed at Hawkins type RM fluctuation. Some companies in the polyfilm space like Uflex, Polyplex have tripled market cap in the last 6 months because the finished product price has doubled due to demand supply mismatch and is expected to stay there for the next 6-8 months at least. So these companies are expected to report 3 times last year's EPS as is evident by their quarterlies. Now the market has already factored this in the last 6 months. So my question is what happens to the market cap of these companies over the next two years when things return back to normal. The situation is similar to an IT employee who is working on an Indian salary and then all of a sudden is sent onsite for a year Again same logic....... Management of polyplex Q: So what will revenues look like for the full year and since you will have a better advantage of using this expanded capacity in FY12, give us an idea of how FY11 and FY12 revenues will look? A: As far as FY11 is concerned, we would be exceeding Rs 2,500 crore which is almost doubling from last years turnover of about Rs 1,200-1,300 crore for two reasons - one, because the prices have gone up significantly and two, our expansion that has taken place not only in Polyester film but also we have added new capacity as far as forward integration is concerned and also in our concentrate diversification into BOPP Film. All these things put together we expect FY11 turnover to exceed Rs 2,500 crore. As far as FY12 is concerned we dont have a very significant visibility but we are doing a de-bottlenecking in India which will increase the Indian capacity by about 5-10%. Plus we are adding capacity in Turkey which will become operational only in the fourth quarter of FY12, so that impact will be limited.

So from interviews management themselves aren't sure. Keep punting, Uflex management is gung ho. If you say what will happen if things return to normal EPS will contract so shall the PE..........less the effect of extra capacity added by company. Now we need a kinder soul research house report on this poly film company who does bull case and bear case EPS calculation............... since it is beyond me. It should be as simple as this this product item bull case x capacity and bear case x capacity
Edited by chimak10 - 17/Oct/2010 at 3:31pm

Generally such cycalicality is adjusted by market on a quarterly basis. For example, these polyfilm companies in the past have traded between 3-10 PE, so already they are trading near the higher band of their PE in expectation of good 2-3 quarters ahead, current PE of these companies is around 10-12 times on trailing twelve months earnings basis. So when their earnings will start declining on a qoq basis, their stock price will start adjusting to their historical PE band. A good example to understand this phenomena is cement companies. While on average basis you'll find them always trading in a band of 6-12 times but at good times they trade at much higher p/e (on a TTM basis) in anticipation of good 3-4 quarters ahead, but finally as they start reporting stable to declining qoq numbers after their cyclical peak quarters their stock price start adjusting to those earnings still remaining in that band of 6-12 p/e. So the catch in these polyfilm companies is to keep tracking their final product price and as they start falling, calculate their forward eps and give them their average historical p/e to arrive at target price. Hi Basantji and other gurus, I have this strange problem. I have been investing with a long term view. As everyone recommends, I buy in small quantities with a plan to keep adding in the future on every dip. After taking the initial position in a scrip, i find it difficult to judge when to load it again. I will not ask this question to you guys as this depends on the individual. But i want to know what would be ideal amount to start a scrip and adding in the future. I use anywhere between rs 5k to 10k in a single buy. I feel this wont make me wealthy or poor. In some of scripts i regret investing just 5k. Just wanted to know the general thumb of rule. I know everyone is not comfortable answering in numbers. You could give it in terms % of available cash to invest. Thanks in advance. The easiest and best answer is to invest to the best of your ability. Whether that is 5k or 50k is totally irrelevant because you can't change your cash flows but just optimise the way that is deployed so things without remedy should be without regard. As a small investor I used to have the same feeling of not being able to build a decent position on some of my picks. However I have started buying more every time it breaks the new high and comes down a little bit. With my salary savings, any new position I take will inevitably be a small position unless I sell from existing under performers. But not adding to a winning position is a mental block and it is best to overcome it first. I was able to do it with reasonable success. Titan, Page, Hawkins, Zydus all of these were bought at their 52 week/lifetime highs and I added more as the share price kept rising. For instance, my first purchase of Zydus was in April, since then I have added more of it almost every month, albeit in small quantities. My average price has gone up from 397 to 505. Should it go back to 560 next month I might add a few more. Right now, I am faced with a similar situation with Photoquip. I took a small position in this microcap at 35 levels and decided to wait and see how the market treats this before putting in any more money on it. My hunch is to add to my position once it makes a new high or looks like it is very close to breaking out its previous high.

Since timing is impossible, I prefer investing allocated % in one go. Suppose if I decide to give a weightage of 10% for a company, I invest entire 10% in one shot. I take a 2 year view at a time & short term fluctuations in prices do not matter. Computational tools should not be used in isolation. Also stocks discount the future and not the past. But RoE/PE is a powerful tool but while doing that adjust the RoE for the dividend payout. What does RoE/PE data say? Please throw some light. One more query: what would have to say about a company that has dividend payout ratio of more 80% consistently? Will it put really put constraints on their future growth? In the long term no company can grow at more than the RoE minus payout ratio so PE/RoE is a modification of Peter Lynch's PEG ratio. A 80% payout means growth is limited. Check out HUL! What does a lower mcap/sales but a higher PE indicate when comparing two companies? It should mean lower profit margins. sales A = 100, B = 100 profit A = 5, B = 25 PE A = 30, B = 30 MCAP A = 150, B = 750 MCAP/SALES A = 1.5 , B = 7.5 ROE & growth rate should matter and not margins as per Titan's example (I am not giving my opinion here). I would go with how Karn has illustrated the matter. While I follow PEG the important thing to realize is that Peter Lynch looks at growth rate in isolation to RoE which to my knowledge is not the appropriate thing to do. One should reduce the payout from RoE and then try and estimate the growth rate. Though I remain invested always I somehow feel that the market is entering a very tough phase. The leading stocks of this bull market are giving way first LIC Housing then the PSU Banks and now the stock to watch would be Tata Motors. If that loses ground then it would pay to have zero trading longs unless the sensex hits a new high. Of course as an investor we welcome these falls depending on what stocks we want to buy. My focus will be on consumer stocks only. Nestle is a great business to own but if the market cracks down a lot I would like to bet on some cyclical/commodity stock. I have nothing as such in mind but if you are not interested in too much switching then Nestle is there as a top drawer investment. In the same context look at Page which is also a great business to own. If your investments are keeping you awake at night sell down to the sleeping point - Jesse Livermore. To be a successful business owner and investor, you have to be emotionally neutral to winning and losing. Winning and losing are just part of the game.

According to portfolio theory, the relation is of the number of stocks in portfolio with the risk of the portfolio and as you increase number of stocks, the risk reduces. The rate of reduction also keeps

on decreasing as the number of stocks increase. So you have the graph of risk falling at a lesser and lesser rate and then becoming flat like the right side of the bell curve. Theoretically unsystematic (security specific) risk is diversified and systematic (market) risk remains. Typically, it is because of the instincts of making fast money forgetting that there is never anything called free lunch and no substitute for hard work. Be it working in fields or investing in stock markets! Earnings yield is a good ratio to conceptualize what you are getting into. It should however be used only in conjunction with expected growth rate just like PE should be. For e.g. a Co with an EPS of 10 and a CMP of 100, giving a current earnings yield of 10% will see earnings yield reach 50% (on the original purchase price of 100) in just about 4 years. So here again you have to estimate the future growth (along with capital intensity etc etc of the business). Just as with PE (where one looks for lower multiples) the quest for high earnings yield can saddle you with low growth/commodity stocks if you do not adjust for future expected growth. On future estimates of earnings, you can find them if you have access to bloomberg or reuters terminal. However, i dont trust these estimates much as some of them would be out of date or 1/2 exceptionally different estimates will reduce the quality of the average!. You have to get those done by yourself (or trust one individual who does it) though for the most commonly tracked companies it may represent a decent avg of the market expectations. For mid-caps and small-caps in particular, the reliance on consensus can be extremely dangerous to your fiscal health. ben graham's intrinsic value works or not and how is discounted cash flow method is used ....which companies in India have pricing power ? Buffett recently said that if a company can raise price of its products without affecting sales it can be a good investment I feel several companies in food/dairy and wellness products business can fall into this category like say dabur, zydus, nestle. Similarly in hair oils, navratna from emami has its own loyal customers, same goes with Horlicks. These brands have very loyal customers who do not easily switch. At least price will not make them switch so easily. ICICI bank also has many extra charges and max brokerages, but still ppl prefer it for being user friendly and amazing service until they sell u the product :) Havells fans and lights, Sony (had it been listed!), Pulsar, Gail (if government doesn't do anything otherwise) etc etc. (seems there are many such companies) Am i going wrong somewhere?

Basantji, Is greedy the correct word in Pantaloon case? I am not aware of its history but just wanted to know what demarcates greed of promoters and their non-greedy efforts in diversification. All diversifications need not be greedy and how to spot it before knowing whether it will work or not? Frequent QIP, high press coverage, Low RoE, increasing debt, lack of ability to internally fund new ventures are some pointers but each case differs from the other. Wah Basant Sir........ Thank you for the details.... 3 years back everyone (including top CEOs) was reading Kishore Biyani's book.... It's just amazing how something is extremely dangerous just when it's most popular... However, the stock seemed like a great deal at 1000 odd crore just after the Subhiksha scam.....however i never mustered the courage to put in money

Even I read his book . But between writing a book and increasing RoE I know where to bet on the management of a company. Even I sold way down from the top but even otherwise made a big doze of money. Doesn't Buffett say "Have the purchase price be so attractive that even a mediocre sale gives you good (BIG) returns." I think these companies are bull market fads and one has to play them and then exit at the right time (right time does not mean at the top but it means when you are still in the money by a great deal). Even TV18 was a classic case in the same league. So True...I really wonder how you managed to identify so many business cycles so well.. There were all these boom time companies like Pantaloon, TV 18 and now you repeated the feat with Hawkins, Page which are completely unrelated and in a new cycle....Great Job ... I'm realizing max money is made when one identifies business cycles early .. but that's a very hard thing to do. Most mere mortal like me are forced to buy what seems undervalued stocks and hold them and hoping for the best. BTW...did you manage to catch the Mannappuram wave as well? Dear all respected investors, Sir's I visit this forum regularly but only as a spectator , as I started investing in market since 2 yrs and still struggle to understand lot many terminologies . I see so many people out here who has found a gem of a stock with so much research and earned after great patience , congrats to all . Sir my question to you all is , upon finding a stock with good fundamentals , how do we start investing in it and how much do we need to allocate? because this depends on individuals income level . From a layman perspective say we can set aside 3000 monthly ( am sorry , it would be difficult to allocate more from my side :( ) . There is another challenge while finding a stock because we cant always find such a stock being available at cheap prise say Rs 25 or such so that we can get 120 shares in m y case . But if the stock price is more than hundred , we get very less shares :( . Kindly educate us on how to come up with a strategy with this small amount of money with a hope that this will someday get us Lakhs of Rs . Am sorry am expecting Lakhs with this mere thousands :( Please through some light on this how to keep investing with this small amount . Basant sir , please upload this to the relevant forum as I was unable to create a new topic hence posted this query here Hi, it is a reasonable and relevant argument. But try working Rs 3000 invested on a monthly basis for 30 years at 20% CAGR annually and tell me how much it comes to. You wil be surprised by the answer. In this market what matters is not how much money you put into a stock but what stocks you choose to put money in? Peter Lynch, Warren Buffett, Fisher, Templeton, Jim Rogers all started with very very small amounts and made it really big. Finally the price at which a stock sells tells you nothing about where it is going to go tomorrow. A Rs 1000 stock could outperform a Rs 10 stock ten years in a row. Focus on the market cap and not the market price of a stock. First of all, I appreciate your monthly approach with small amounts. The most important thing is not to lose money in markets. Infact, if you are earning anything less than FD (current rates 10%) its equal to losing money.

So, if you are not convinced with the stock to put say one third of ur money at one go, its better to go for monthly SIP in select blue chips which you follow and you are bullish compared to other blue chips, because otherwise u can go for a NIFTY top 100 fund SIP also. Buy at declines is also a good idea. After you have identified a good stock, wait for declines and till then accumulate 3000 per month. As far as I have seen, decent declines come in every stock. Patience is always rewarded by market. Feeling of jump in, i may lose opportunity is bad. Also, invest in only those stocks which you will be happy if it falls below your buy price and stays low for months, because it gives u time to accumulate 3000 per month and buy that stock for months together. Stay away from others however lucrative and fast money they may give to others. Just steer clear of making too much money too fast and you'll do much better that your expectations. Before you invest in any stock ask yourself if you are trying to get rich too fast - if the answer is yes, don't buy that stock. Agreed inflation adjusted, the value will be much less. I had thought few days back. If we adjust all our savings for inflation, they seem peanuts. Inflation plays such a bad role. Then I read somewhere, to counter inflation, u need to increase ur earnings and skills. The person who wrote this article, interestingly, nowhere mentioned savings to counter inflation. Because now I have realised one fact, that no savings can match great returns with inflation adjustment. The returns will be ok but not amazing. To make amazing inflation adjusted returns, u need to work on the earnings and skills side. Any thoughts? After all, reaching a conviction like Basantji is an amazing skillset and so is investing in multibaggers again and again. Normal investments is just like India grows and we grow and inflation adjusted, we are just at same place This is what Buffett says on inflation.

We dont really concern ourselves with the macro issues. We cant rely on t he macro to bail us out of a wrong decision on a [specific] business. Look at Sees Candies. We bought it in 1972 and look what happened right afterwards. In 1973, the Arab oil embargo happened. Then inflation, followed by political turmoil. If we would have had a road map of 1972 to 1982, wed have seen more inflation, a 20% prime rate, worldwide dissension. But knowing all those macro issues wouldnt have helped us make a better decision to buy Sees Candies. Its just more important to recognize a great business when you see it than it is to predict macro issues.- Warren Buffett

Sounds simple, but is an amazing skillset..to recognize, to invest good amount, to ride highs and lows, to hold and to exit appropriately..amazing skillset to make all judgements correct and get a multibagger in a concentrated portfolio! Since Buffet and Basantji have developed this skillset, they need not fear Inflation and macro issues

What are the plus points of IDFC over say a PFC or REC (power infra focus) and HDFC/LIC housing? They intend to double their financing in next 3 years and also several projects funded by them are becoming commercial soon, is what I have heard. Any more insights? Dear Mr. TED, IDFC is to Infra lending what HDFC was to housing finance. IDFC has the first mover advantage for any infra financing in India and a very powerful moat. There is yet to emerge a 2nd to IDFC. REC and PFC are not in the same league as IDFC. Never in its operating history, has its NPA in access of 0.2 % of its advances, while still maintaing profitability while retaining quality. It chooses to conserve capital. As a matter of fact, IDFC has a completely de-risked model from interest rates, GDP growth etc., It has had 25% of its total income from non-fund revenues over past 4 years or so. Company's

AUM (IDFC Mutual fund, PE and project financing) while derive higher fees in the future. Also, Mr. Limaye was talking about increasing ROE in the future. IDFC can be compared to Wells Fargo - a buffett stock. Also pls note, that IDFC has stake in several listed entities like NSE etc, which will unlock sign value add for shareholders. The only risk that a financer like IDFC runs is its ability to assess project proposals and arrange funds at competitive rates and that is also offset by the points mentioned above. GOI has 20% stake , no risk is very minimal. One fundamental difference between the Investing approaches between Graham and Buffett is this- Graham would go out and shop for any security which is on sale (market price less than intrinsic value with adequate margin of safety) while buffett would prepare before- hand what he needs to buy and buy only when its on sale. That is one trait he learned from Phil Fisher and from Charlie Munger. on portfolio Concentration. I feel if we investors adopt this strategy, it would be terrific for our portfolio. We would have to think in terms of decades as an investor not in terms of 2-5 or even 10 years. One has to be disciplined and rational in buying, that is why buffett is such a great investor. Some of TED XI are terrific businesses - Page Industries and HDFC, but only if prices were right currently. Excellent analysis. You hit the bulls eye. I believe that for all those investors who feel like they missed out on HDFC, IDFC is the best proxy. It is probably not as exciting for those who look at stocks every day. Though. it's more of a buy it and forget it kind of stock. In India buying companies growing at 25% - 30% helped by some dividend yield, pE expansion and selective switching one can do a 40% CAGR for several years. But people who seek to do that return by buying super high growth companies through a classic buy and hold strategy will have a problem at hand. The PE contraction at critical times will wipe out most of the returns. The probnlem of falling stock pricves ios two fold first it wipes off some returns and then it compels the investor to make another bad investing decision in order to recover that loss so multiple bad decisions will ensure that portfolios break the path of super normal returns and rreverse back to the mean. For instance if someone loses 30% in a jiffy he would never buy Nestle after exiting but target to get some small company whre he can recover the loss, that shall mark the begining of the problem.

One of the typical attributes of a young, impatient and a restless investor is to desperately look at new investing ideas when the existing ones look as promising as the rest. So the moment you meet someone the first question that comes to you is Aur Naya Kya liya (What did you buy new?). Isnt that strange? Why do people want new things in life always? So many families could have lived happily had people not looked for the new? Likewise so many investors could have stayed and become wealthy had they not tried identifying the new. Spare a thought for the guy who having bought Wipro in 1980 looked to exchange his stock for something new in 1981. A Rs 10,000 investment in the company would have grown to over Rs 350 crores had he just stayed with the old. So does it mean that investors should do nothing and just sit back after an idea has been identified? Certainly not, all ideas need introspection and a constant monitoring vis-avis the new ones that come in every day. The only cost of investing is opportunity cost. So if Company A is doing well and

someone whispers to you about the prospects of Company B then try comparing Company B with Company A before committing your money. If A is still better then B then buy A until you hi the 15% open offer limit! Peter lynch says that the best stock to buy could be the one you already own. Suppose you were running a restaurant, or a casino or a hotel, would you have looked at putting more money buying a new business each time your existing business threw back cash or would you have tried to consolidate your position in the business that provided maximum return for capital? Money has no emotion, given a free run it would flow to the spot that provides it maximum return but the emotions of the person in whose pocket the money resides allows it to do foolish things in the garb of looking at something new. Many people look to buying something new to avoid the pitfalls of putting all eggs in one basket but one should remember that as long as the basket is strong and capable of holding the weight there is no harm in putting several eggs in one basket and if the basket is weak then even one egg can break the same. The idea is look for strong baskets not necessarily new ones. There could be months where a smart astute and serious investor would not get new investing ideas in that case it would be prudent to analyse the existing stocks in the portfolio rather then hold cash and wait for new ideas. If a stock that he holds does not qualify as a buy then he has no business holding it in the first place.
Edelweiss has a tool called 'Stock Screener' on its website. You can go to edelweiss.in and create a free id/password. Then you can log in and go to 'Data Tools'. I find it quite handy. Agree. Edelweiss has the best screen with so many useful filters. However I am not sure if the data is accurate/up to date The challenge before humanity is to strike a balance between discipline which is needed for survival and chaos which is needed for growth. For Discipline: Put yourself into an intellectual framework based on principles of value investing (basically all investing is value investing) and stay away from getting for framework corroded!! For Chaos- Wait every day for someone to do something foolish.. Stay with Elephant Gun loaded and dump when someone does something foolish!! Looking back we find may wealth creators which are today either great names or ok ok names. But 10-15 years back, they were hard to know. I read about someone in TED who followed a strategy of owning small quantities in many companies and forgetting them. Even 5 of them become great in 10-15 years, his purpose is solved. He gave a very smart reasoning that if he puts large quantity and it doubles, he would be tempted to sell, but in case of small quantities, he can buy and forget. Interesting isn't it? This reminds me of someone quoting Buffet saying that someone who had bought just 1 share of coca cola at IPO and held on would be a millionaire

My comment is that your relative best move was about holding good companies for a long time. Any strategy which allows one to do the latter is good..... A somewhat nice move (not as good as the one above) is buying on strength. Personally, I'm realizing that the problem with buying and selling is that getting in on a fast moving train is almost impossible...You require to be a real brave heart to buy a 30 PE stock even if you know it's profit will double Chances are that once you sell a good stock you're likely to move to an inferior issue esp in times like now when markets aren't exactly cheap For e.g. i've always been unable to buy more Prestige after my initial allocation even though its always sure it has more potential.... It's much easier to buy a new stock as you do not experience price anchoring. Hi Basant Sir, Have you ever bought a high PE stock? Any experiences you can share with us? Page at Rs 350 was a 15 PE stock on trailing earnings which was high considering other stocks at that time, But as I sold my cyclicals like Voltamp, BlueStar, Thermax etc I kept buying Page right till 600 so that was high PE. I will buy a 30 PE stock as long as I am convinced of the growth. Also Zydus was a 25 PE trailing stock when I added aggressively. Titan was high PE always but relatively I have found it easier to hold a high PE stock then to buy one. Most of my money has been made by buying low PE stocks and then waiting for the market to take notice and make it a high PE stock. Once it becomes high PE then I normally wait because I already have a position which because of my concentrated portfolio is dominant but there are a few companies that I would have bought even if the PE were high had I not have had a big position. Remember money is lost because a company that we own stops growing at historic rates so in that case a 20 PE can become a 10 PE and a 30 PE can become a 15 PE. The trick is to identify the speed (growth) breakers which we sometimes succeed(TV18) and sometimes don't (Pantaloon). Few questions basantji 1.) How did you decipher that it was time to move out of bluestar, voltamp.? Ans No scientific answer, I looked to make 3-4 times in quick time and buy something that had moved 75% with that money. With cyclicals I always look to move out after making quick money because the longer you hold them more the chances of reversion to the mean. 2.) If the prices fall would you again buy these co.s(which you have named cyclicals)...and what would be required parameters? Ans Haven't given it a close thought yet. 3.) at the very beginning of one of the thread,i read that cyclicals should not be a part of long term portfolio..if you consider voltamp, bluestar etc to be cyclical, then why are they still in TEDXI ... Ans Remember TED XI is not a sectoral fund nor it is Basant's XI it is a standard benchmark of some companies from almost all sectors. If we have beaten all MFs and Indices with a TED XI think what a TED Super5 would have done. So while I may hold a few of the TED XI names, my personal portfolio need to be completely the same as TED XI because I am ok with putting all my money in one sector at times not so much for a portfolio that is visible to the common man. 4.) in a recent post, i remember u mentioning that you might be picking up cyclicals in the next opportunity....guess we are still waiting for the sectorial cue.. Ans Will share it at the appropriate time

Unless there is panic in the markets and or there is a one-off company specific event there are going to be no free lunches. These are extremely good companies, that are discovered and they will almost never trade cheap relative to other companies because every time they fall someone smart will come in and buy. Titan went all the way till 3100 and it was a great opportunity to pick it up at 31 times trailing but then other inferior stocks were trading at 10-15 times and to some of us 31 times will seem expensive then. The same PE debate has been going on for Page,Titan since they were trading at half the price. So there is no right answer. One has to learn to pay for quality because in the end quality will pay you. And good quality will always trade expensive to other stocks - so this trap. As long as these companies are not exorbitantly expensive it makes sense to keep buying these companies because they have years of growth ahead of them. I think the reason why it's easier for us to buy Mutual Funds during a bull market is that we don't know about the exact stocks the money is going to. I remember when i started off in 2007 armed with reading a few books on WB and Lynch i could never buy stocks with conviction since all stocks were at a high PE and yet i would easily shell out my SIPs to MFs. I am an average guy and hence stay away from complex businesses where net profit is basically a function of many variables. A case in point being infrastructure or natural resources. I like businesses that are simple and have an underlying competitive advantage. As a glimpse, post the fall, I am sorry that I may not be directly able to comment on particular stocks. But I firmly believe that the following scenario is here to stay in India: 1. Moderately high inflation. 2. Higher rates 3. Consumerism fuelled by nominal prosperity For those with slightly long term mindset/goals these are good guidelines So what you want is: 1. Moderately high inflation. Companies which can raise prices to tag along with inflation but do not have to spend a lot (low capex requirement) 2. Higher rates does not require external financing for the most part 3. Consumerism fuelled by nominal prosperity Their revenues should tag along with this growth. I guess if we just focus on such companies we have a good chance of acing the Sensex Hank, You are a professional fund manager. My perception is that you guys do not sit quiet but do quite active churning to generate something called "alpha". So how come you are able to sit inactive for long time. May be you are different than the lot or my perception is wrong. Please do write something about pulls & pressures of professional fund management and how do you adapt to the same. Just curious to know. (I guess you are the first person on forum who has declared himself as being professional fund manager). I think I will answer both questions in this post. Firstly, I don't manage a mutual fund so I am not abounded by their restrictions of asset allocations and daily NAV grind. I manage a part of a Private Fund that invests in India. My colleagues does the same for other places. This is the reason I can wait and act. Secondly, every manager, who is not investing in an India, should earn his bread only if he gets the "alpha".

Regarding a good opportunity, I don't say that the markets will turn around and strt going up in the next 2 months. But couple of my scrips that I want to invest in have already dropped in my valuation comfort zone. I hope the same should have happened for other investors, provided they have an idea of their valuation band.

I am sorry that I cannot disclose my positions. But I will still write my 2 cents of opinion here. You are right in your interpretations and definitely companies like ITC, GSK Cons enjoy significant brand equity. The same are also comfortable on the debt front and are an important play on the Indian consumer. But the theme does not stop just here. Think of other business models that can broadly imbibe these three tenets. A case in point can be a company like SRF or a lending business. The idea is to find the true competitive advantage of a business. It can lie on low cost of production, consumer preference or large economies of scale. Brand alone is not a moat. A brand is powerful if it can't be recreated. For eg; Castrol is a powerful brand. We all keep seeing it and it is definitely the top of the mind recall business brand. But do you always insist on castrol. We did a nice survey to gauge its consumer preference and most people didn't even care about the lub. So if someone makes a case of buying castrol because it is a strong brand - I won't invest. So look around for true economic moats.

This Sms which I received yesterday applies so much to the stock market. "If we could sell our experiences for what they cost us we'd all be millionaires." An easy way out is to buy the experiences of others at less than a thousand bucks. An inverted yield curve has preceded recession many times across world. Last week, this event happened in India (From an article) Basantji and others, can you give an understanding as to what debts' yields should we look into for generating this curve like bonds or treasury etc. In short, with Indian context can someone elaborate on yield curve, inverted yield curve and its significance here

An inverted yield curve has preceded recession many times across world. Last week, this event happened in India (From an article) Basantji and others, can you give an understanding as to what debts' yields should we look into for generating this curve like bonds or treasury etc. In short, with Indian context can someone elaborate on yield curve, inverted yield curve and its significance here MR TED, I would give it a try. It means that yield on long term bods are less than short term instruments. Yes, this is a bad sign but you know recession means only slowdown in India. This could happen due to various reasons : 1. Market participants think that there is real danger ahead. And they see current interest rates as one of the reasons of prolonged weakness. 2.The second and most probably applicable for Indian scenario is the current high interest rates

are not sustainable and will have to come down, a way of saying mean reversion would happen. 3. Many a times market participants anticipate it wrongly or you can say they are pricing risk inappropriately. US bond markets are highly developed and efficient even then it could not price the crisis in CDO market properly. You would know that Indian bond market is not so developed and any signal picking from that market need to be seen in context. There is lot of gloom & doom talk going around in the market and that also affects market behaviour and it becomes selffulfilling prophecy. I do not think we will head to recession i.e. 2 qtrs of negative growth. But if it comes down to 6% it would look like recession too. hi basantji and others. Two very well-known investing quotes are. 1. buy at the right price no matter how good the business is/future prospects are. 2. good ones don't come cheap. Obviously these are contradictory... so this puts an investor in a dilemma. just to give a an examples in the recent past, take titan,nestle,jubilant food,page,zydus etc for instance. if one went by rule 1, he/she would have missed out. i would like to know what strategy should one adopt? i know it needs some balancing act. but its easier said than done. i would love to hear your views thanks in advance. The key question to ask is what makes the stock expensive? Is it growth (as it is in most cases)? If it is then one has to go by what Steinhardt says is variant perception. If the market is assuming a 30% growth (in analyst reports not as per PEG etc) then a 35% EPS increase will please investors. I say not by pEG because HUL never grew at 30% in the last decade but still commands that PE growth is not the only factor that determines PE ratio! So coming back if Titan can keep increasing earnings at a rate faster than or equal to what the analysts predict then the stock will not be derated but if it does not then there is a value destruction. To know about how Titan or any other company will keep growing one has to do a lot of scuttlebutt as we did in hawkins and that is what creates an edge in the market. Good ones never come cheap is a perfect statement provide the stock is good. If it lapses in its growth then it does not remain good but that is known in hindsight but investing has to be done with foresight. Basantjee, Your explanation is perfect. Your conviction is all fact and analysis based. The problem comes when many of us try to work with borrowed conviction. It never helps, rather creates doubts and confusion. It's better not invest in opportunities where one doesn't have conviction even though there is chance of missing the bus. I would appreciate it if someone could give their opinion on which is the best online site to create watchlists. I've used Google Finance, Moneycontrol and Icici Direct. Is there anything out there that is better than these? Try rediff money or Economic times watch list A great company at a good price is better than a good company at a great price Investing Equation E = mc2 Earning Power of Business = Moat of the business * Character of Management * Competence of Management So on the RHS if any of the items is zero the LHS will be ZERO! A company with zero moat or any of the others will not make money for investors.

Difference between hindsight and foresight. These things cannot happen consistently someday one will lose a great idea by trying to add a few percentage points to the CAGR Dear and honourable basantji,namaste I want to ask u that-i understand ur view and strategy on investing .question is whether you, after selecting company; search its intrinsic value ? Or invest in it without waiting for right price? What is ur strategy about price of the stock? pls explain.. For above average growth companies consistently earning high RoCEs with minimum capex I look at the current price and then evaluate what the company would look like one year hence provided my expectations are met. If it looks ok then I go ahead and buy it. In other words I am willing to wait for one year in order to see the stock become cheap. For buying cheap cyclicals we have to go by the current situation since it is not wise to forecast with such companies. I smell gloomy days ahead. (Considering the things in the US). If you look back 8 months, Sensex tested 17k levels and then surprised everyone with a rally till 19k levels. (i think this happened 2 or 3 times). Somehow I feel it wont happen this time. I am thinking of selling off all direct stock and mutual fund holdings. (As of now. its not in loss. but i am sure it will). What strategies you guys are adopting? Please share your thoughts. I know panic selling during crash is herd mentality. But to me the debt issue all over the world is scary. Even in India, look at the number of people borrowing 90% for home loan. It all depends upon at what margin of safety one has entered in the stocks. In all busts most popular and successful themes loose shine first and offer very little margin of safety. At the same time storm clears dust on neglected real gems and offers value creation for survivors Basant Ji, Is your investing strategy on page 1 of this thread still applicable or you made some changes to it. We keep evolving in this market - always. Just that I now look for companies that have free cash flow to be distributed to shareholders so that in a few years the increasing yield will ensure the stability of stock prices irrespective of what happens in the interim. What do you exactly mean by free cash flow? How do we calculate that from balance sheet.

we will have to add one more term

free cash flow=free cash flow from operation-capex-working capital changes.net working capital is the difference between a company's short term liabilities and assets. Short term assets(accounts receivable-customers unpaid bills,inventory) and short term liabilities(accounts payable-bills that you have not paid),if the net working capital increases from one year to another you minus from the cash flows otherwise add,some companise like hero honda had a negative working capital ,that is they could command advance money from dealers and pay late to vendors. Free cash flows is what matters in valuation and generally premium to companies generating them. Accounting profit and along with it P/E is only an added tool. That was why i had the initial hesitation in going with a stock like PI industries. Maybe in simple terms cash flow is the difference between the rupees recieved and rupees paid out.Accounting profits as shown as PAT has some nnegatives- profit is shown as earned,companies can book revenues aggressively,they may not have received the money from the customers yet/the company must have not paid their bills yet. cash outflow includes your expenses but does not include the capital expenditure which eats away substantial cash. However you deduct depreciation from the profits which in real terms is not a cash outflow. So while looking at companies free cash flows is very important and they would be in a position to give you dividends,companies in the initial years /growth phase may not have free cash flows but if they cannot get it after a few years, they would be in a debt trap.

Basant ji, Do you put an upper limit for market cap in the stocks that you own? I mean do you sell once the stock crosses certain market cap such as 50000 Cr. Some investors feel never look at market cap, look at business only. I used to do that earlier but after I became negative on Airtel (post a five bagger from Rs 22 to Rs 110) I saw it rise another ten times from that point so while generally small caps create wealth one should not create water tight classifications on this. I think you mentioned that you want to find out the combined sales/profits of all players in a sector and see how much upside is left. Yes, that is correct but one has to view that in the context of the size of the sector and also the combined market cap. But of late I have realised that the size of the sector in most reports are incorrect because it is not worth estimating the size and secondly because India is also a cash economy in rural areas so many transactions on the consumer/ manufacturing side (unorganized sector evades taxes) never gets captured. Enclosed please find the personal notes I had made at this year's TED. They are merely the points I found useful and not an official transcript. I took these down in a hurry and also I arrived one hour late. Hence, it is in no way a complete description and does not capture even 1% of the learning at an event like this. So in case of omissions, corrections and additions please feel free to add as this will enhance the value of the thread. The format of the session was as follows - Questions were received,the best questions were shortlisted and asked to Basantji. His answers were heard by all and then in a free flowing manner comments from the crowd were also obtained. I do not recollect most of the questions hence I have put only the points and other issues where I have notes/ clear recollection. Here they are - limited recollections from a good learning experience

Q-Which sectors create the greatest wealth in the long run in the stock market? -Historical studies of stock markets in the US have shown that the following sectors created the maximum wealth in the long run -Pharma (due to strong research and patent protection) -Consumer Non Durables e.g. FMCG (due to brand and franchise power) -Financials Q-Is it a good idea to invest in cash rich companies especially Piramal Healthcare? -Investing in Piramal Health Care is like investing in a PMS (Portfolio Management Service) with Ajay Piramal as the fund manager. Therefore if one is comfortable with that idea and Mr Piramal has a good record, taking that into consideration one should form a view about the stock. Q-Is it a good idea to buy a stock on a new high -Buying into a stock at its first lifetime high and holding for at least a year may be an interesting strategy, as it usually may indicate some kind of paradigm shift if it is the first lifetime high ( Some further discussion on Jesse Livermore and his strategies).

Some discussion on gold loan companies. Also, discussion on how in some states an arbitrage opportunity is present by taking priority sector loans and putting into high yield NBFC deposits. Q-Can we predict the growth of companies like Page, Hawkins and other consumption led firms -Predicting how consumer companies like Page and Hawkins will do in the very long run is difficult. A good way to understand consumer trends however is to compare India to 1970s and early 1980s America as certain trends are common. Also, in India consumptio n being driven by schemes such as NREGA etc. Q-Whether schemes such as NREGA etc. and macro conditions such as Europe and US Slowdown can impact Indian consumption stocks like Page, Hawkins etc. -Once a scheme like NREGA is announced and is successful, it will be difficult to withdraw it politically, hence it will likely continue. -Consumption stocks are unlikely to be impacted by macro-economic conditions in any of the above countries. Q-When to sell a stock - When you find something even better and even cheaper to buy Q-How to avoid commodity price inflation and its impact for a stock -To avoid impact of commodity price on inflation buy a product with a lot of pricing power. For e.g. Marico hikes the price of Parachute when commodity prices are high. When the prices reduce, it gives away 20% free on the bottle. By comparison Page hiked prices due to high cotton prices last year. However now it does not have to give 20% extra underwear when raw material prices fall again. So Marico does not have pricing power, but Page does. Q-Discussion on the concept of variant perception
-Markets always pay for variant perception (read Michael Steinhardt). For e.g. though Titan may have great earnings, it is expected, hence there is no upside surprise. However, if a firm delivers an earnings upside surprise the market will reward the stock.

Q-Why did Page Industries get a low valuation at its IPO? -The reason for Page Industries getting a low valuation at IPO was that it was treated as a textile company rather than on its other strengths Q-TTK or Hawkins which is better -TTK and Hawkins are both good companies. However the management of TTK is more communicative compared to Hawkins. Hence the earnings of Hawkins are likely to cause surprise, mostly on the upside. This creates the opportunity of a variant perception on Hawkins, hence it might be better. Some discussion on management of Hawkins and interesting incidents at the AGM.

Concept of variant perception and Michael Steinhardt discussed. Example of Titan having excellent economics but no variant perception hence likely to cause not much of upside surprise and likely to be a steady CAGR performer. Q-Why was TV 18 such a good business in 2007 -The operating costs were fixed in terms of anchor, sets, telecasting costs etc. Hence if the viewership doubled, the costs remained fixed (only one Udayan Mukherjee needed independent of viewer size so fixed cost) and this ensured that additional revenue so obtained went to the firms bottom line. Q-What are the characteristics to look for in a potential multi bagger? The typical characteristics of a multi bagger -Sector leader -Reasonable P/E ratio -Sector should not be commoditized -Return on capital is high -Pricing power -Growth -Small cap -Stock that fell in the last year and needs to be examined - Lakshmi Energy - a viewer answered because they have a rice husk plant and rice production problems both. Q-Can the success of VIP Industries be replicated by buying another luggage company like Tainwala chemicals? -Several participants noted that Tainwala has a stake in Samsonite India, however this is through an overseas subsidiary probably Singapore. Also, several years ago Tainwala had taken the most profitable subsidiaries and delisted them or spun them off. Consequently the listed entity is not an efficient route to do the same and also the management may not be very pro minority shareholders.

The study was done in respect to CAGR over a 50 year period. Read Jermey Segal's "Future for Investors". I think Exxon was there on the list

Basantji, I am not sure if the question is appropriate here but I would still go ahead. Personally, I have always wondered whether leaving a full time job (even if one has a sufficient surplus) for full time investing is a good idea. I want to understand what does a person as a full time investor do? Does he keep on analysing companies and reading books? RJ has said that if he was not trading, he would have been free 90% of the time. And you have also said that you need only a few hours to analyse a company. I want to know what would be the set of activities of a full time investor like you.

Yes, there is nothing much to do for a full time investor especially if you own just a handful of stocks and sooner you might get bored and impatient, personally I enjoy my free time in doing nothing, but sometimes it seems a bit tough especially when the results season is not around. But this is all a state of mind. When you are working you want to be free and when you become free you want to be working we want to have a bit of everything that we do not have! That are trading at decent P/Es inspite of not-so-great dividend pay-outs. That's possibly because investors can "see" the products made by these companies in supermarket shelves, and that gives them enough confidence to buy the company behind the maker of those products. People can also see the aeroplanes, ships, cement, cars bikes etc the reason why consumer stocks trade at high valuations is because most of them have high entry barriers which make them earn higher return on capital for extended periods of time, also most of these companies work with small incremental doses of capital making them free cash flow generating businesses and hence they become prospective yield stocks. Importantly most of them have able and honest management except the liquor companies! Dear Sir, But does not these points also apply to banking stocks. One cannot get a banking license easily. Hence there are entry barriers. But then why are even good banking stocks trading at very low PE ratios when comparable to FMCG Stocks. A rupee earned is a rupee earned whatever the business. Yes, interesting argument, banking as a sector has huge entry barriers but as individual banks they have little differentiating factors for e.g. even if HDFC Bank is a very good bank would you still take a home loan from it if Corporation Bank gives you a lower quote, the only thing that distinguishes the better Banks from the others is a) Managing risk and b) Operating costs otherwise they are pure commodity plays with money as the raw material. I agree, Basantji. You can also add c) servicing capability/ people. This includes - branch network (if I have no access to HDFC Bank, I will have to go to another bank even if the cost of funds borrowed is higher or the interest on deposits kept with the bank is lower - internet penetration is not so high as to make a branchless bank a big success) - People power (as a customer, I would prefer HDFC Bank over some other private sector banks the experience is much different) - perception (e.g., I would NEVER want to deal with some of the foreign banks even if they offer me funds at the lowest cost - some of them are very notorious - their way of managing risk is just not palatable) Extending this discussion a little further, If we compare banks with FMCG brands, the switching cost in brands is very high for companies and brand loyalty also very high among consumers. Is this the case in Banks also? Because sooner or later, almost all major banks will have same reach, almost similar services, tech savvy, good management etc...then what would be the differentiating factor? or will only chosen few survive till then? I believe that the only differentiating factor between banks is the management and that too has a finite life why would a Lehman collapse otherwise? They had such a long history. That is because it is the 'Management' that manages risk, even if you have the most cost effective operations and you do not manage risk then all that cost effectiveness will be neutralised. So even with HDFC Bank we do not know what will happen after 20 years unless the present group of leaders are groomed into what Mr Parekh and Mr Puri have been doing all these years.

1. Agree! Then for long term investments, do you think PSU banks are better placed to survive risks compared to Private? 2. Also, your above point makes me think that banks, although consumer play indirectly, can give huge surprises either way and one has to be a very cautious approach. FMCG consumer companies on the other hand seem to stand out as clear winners and incomparable. 1. No PSU suffer from poor governance and can be only a short term play. I just gave an example for HDFC Bank because we all think that this is the best bank but the finite life of the management cannot be extrapolated to make this Bank the best infinitely. 2. Without doubt. Your style is to invest most of your funds and hold as little cash. How do you compare this with Charlie Munger who says that: "It takes character to sit there with all the cash and do nothing. I didn't get to where I am by going after mediocre opportunities" Of course, I am not saying that your investments are mediocre. Charlie Munger is a legend but we all have our own ways of investing. Finally what matters is to identify 3-5 great investing opportunities and that is not too hard to find - in any market. However the problem arises when we try and divide our bets in 15-20 different companies so it is in that context that I would like to apply Charlie Munger's statement to. Dear TED, When we have a capital employed as negative, how do we calculate ROCE ROCE= EBIT/Capital Employed CapEmployed = Net fixed Asset-WC How do we calculate ROCE when CapEmployed is negative i.e Net Fixed Asset< EC Please help Capital employed must be Net Fixed Assets + WC...I think you're taking it wrong... Supratikji, Capital employed can never be negative, just as Capital raised can never be negative. Think about this logically - both are two sides of the same coin. Capital employed is Assets and Capital raised is Liabilities (including equity). If you look at a Balance sheet, Assets and Liabilities balance, that is, equal each other. If you see a negative Asset, it means it is a liability and vice-versa. That is why usually, a negative Asset is transferred to the Liability section and a negative Liability is transferred to the Asset section. I don't want this to confuse you - maybe an example will help - when the bank balance is positive, it is an asset, and when it is negative, it is a liability payable to the bank. If you still don't understand, please feel free to ask. Charlie Munger is a big believer in holding cash unless one sees great opportunities AND he is also a believer in maximizing returns by not diversifying. He has said this many times but actions speak louder than words - If one were to read the annual reports of The Daily Journal Corp (of which he is the Chairman / Director) you will see that DJCO continued to squirrel away cash for a number of years until 2009 when ALL of it was invested in Wells Fargo. One thing to keep in mind while looking at what WB & CM are doing is, they are operating in a matured economy which is struggling for the growth. Hence, it is difficult for them to get growth story at reasonable valuation. Therefore, this tendency to retain cash till they find good opportunity. In case of India, we are probably at start of very long term consumption boom and

growth stories are available in plenty. Therefore, there is no reason to keep large amounts of cash unless valuations reach extreme highs. Sure but WB and CM have been investing since 1956. GDP growth in the U.S. since then has been in the band of 5% - 10% multiple times. There have also been 9 official recessions as defined by NBER in that period (which comes to about 1 in every 6 years not counting the time period of the recession itself) and several minor setbacks. Undoubtedly, Indian GDP is going to grow much faster than the U.S. but to expect that it will grow exponentially without setbacks (that will provide great opportunities to the astute and liquid investor) is unrealistic. Suppose I have Rs. 100/- investible with Rs. 80/- invested and Rs. 20/- in cash. Suppose portfolio loses 20% that means value is now Rs. 64/- and Rs. 20/- still in cash. Suppose now I invest fully then my portfolio value will be Rs. 84/-. Now say market goes up 25%. In this case, portfolio value will be Rs. 105/If I am fully invested from beginning, my portfolio value will remain unchanged at Rs. 100/- after drop of 20% and subsequent rise of 25%. Therefore, the difference will be very minor of 5%. Basically, holding cash makes big difference only if cash holding is very significant, say in range of 50% or so OR portfolio value drops very significantly. Here too, I am assuming that one is able to invest all of money at bottom which is not realistic. So, basically, one is hoping to achieve minor gain of 5% or so by holding cash but in the process risk is to lose out on gains due to possible appreciation of good stocks which could be bought for that cash. I have tried this "keeping cash" thing in the past but not gained much in the process. Therefore, methods applied by WB & CM might not be relevant for retail investors in India type economy. The trick is to invest that Rs.20 only when you see a possibility of 3-5x return in a short time. Otherwise you remain in cash. If you have the probability of 3-5x return in a short time then why invest only 20. Sell the other 80 and invest full 100. By the way, I never saw such an opportunity so far The idea is for those who want to remain in cash to take advantage of severe corrections by having the discipline to not invest that cash unless there is a compelling opportunity. Only then does staying in cash makes sense. For the rest of us we should remain 100% invested as Monk pointed it out. Staying in cash and waiting for the right opportunity is not for everybody. For example, somebody who has just started investments in stocks (<5 years) or a person whose equity portfolio percentage is a small part of his overall networth. The idea behind holding cash is to be able to load up on opportunities that meet your minimum threshold of expected return. If you see plenty of opportunities that already meet your expected return then no point in staying in cash. However, stocks like every other asset tend to get mispriced once in a while due to certain market specific, asset specific or general economic malaise and provide the opportunity for the person with cash to invest. To make one point clear - I am not talking about timing the market. I'm simply saying that it may be suitable (at least to some) to let the cash accumulate and make purchases of securities only when there is significant margin of safety. Btw this method of keeping some dry powder for future opportunities is also applicable to other asset classes, the way one runs a business as well as to life in general, in my humble opinion. Oh and a 5% difference in compounding over a long period of time can have a disproportionate effect on a persons wealth.

It all comes down to individual styles of investing. I am quite comfortable being fully invested even in face of severe correction. I could sleep well in October 2008. Hence, I think I will be OK if we revisit that period. Still, if pain of being down 40% is too much then it will be felt even if one is only 80% invested and 20% in cash. Real winners would be the ones who keep, say, 40% to 50% cash and able to invest after-market being down, say, 40%. Also, a moderate gain on a concentrated investment is what makes one rich. Absolutely, that is what matters Subu! Generating a 30% CAGR on a 40% portfolio allocation is a lot better than doing a 60% CAGR on a 5pc portfolio allocation something that we so actively debate on TED and which is completely missing from the discussion that investors get into normally. In this endeavour one will lose several good money making (multibagger) ideas but that is OK because in any case he could not have put a lot of money into it. Great point Basant Sir I think there is no other alternative for a full time professional in a non-finance industry like software. A few bets, long term holding is about the only way to do well Somehow I also think having a job which keeps one busy and helps avoid tracking the market on a minute by minute basis is a source of competitive advantage With respect to the Indian markets I think staying in cash in the shorter term will work out for only those people who are exceptionally gud trend/technical traders or who understand the manipulators/operators moves well enuf, and for longer term investors, staying in cash necessarily means to identify the big swings. Those who can't do this should either protect their capital by staying away or learn how to fundamentally pick value and growth stocks when they are cheap both value wise and price wise and ride them letting the losers stay at the bottom and the winners run...but as i Read it here somewhere. In the long run we are all dead. When you say this just think of the guy who bets big when the market PE is below 10. (typically when markets correct 50-60% from the top) Such a guy will win in all markets in all situations and will definitely beat the market hands down with a 15%+ CAGR. I guess the overall idea is to turn market fluctuation into one's advantage. On this issue of index P/E, I think if one remains 100% in equity during index P/E of less than 1415 and sell it all when P/E crosses 23-24 range (equity 0%), and keep making fixed deposits during rest of the time, it will yield quite handsome returns compared to index. For continuous investment, Equity exposure may also be changed either linearly or exponentially in proportions during index transition from 14 to 25 and vice versa Somehow I also think having a job which keeps one busy and helps avoid tracking the market on a minute by minute basis is a source of competitive advantage Great argument because in the early days of an investing career the urge to do something quite frequently is too hard to resist and will come only after one has made a lot of money which will come only after one knows how to get rid of the urge to get impatient. One way to get around this problem is to look at the terminal value (if your assumptions are correct) and then re-focus. The chicken and egg theory at work. Having tax on short term gains is another deterrent. More than that the hassle to calculate, report and pay it. Better be long term and hassle free :-) Great point.......I've also found this to be a big deal...Right now when i have the misfortune of selling winner in the short run i try to sell more than enough compensating losers to avoid this additional pain. (I struggle to pay my regular taxes in time)

Dear TED, Could somebody plz help me calculate the ROCE for Hawkins? From the AR I found that Net Fixed Asset 185462842 Working Cap 485508847 Inv 1025000 PBT 475500932 PAT 317651938 Otherincome 55427405 roce = Operating Income or EBIT/Cap Employed How do we calculate the EBIT and CapEmpl? (I know that ROCE is 53%)..but how do we calculate that. Is there some other parameter I need to consider Capital employed = Equity + Debt Capital employed 2010 =51.18 Cr Capital employed 2011 =66.35 Cr Average Capital employed=58.765 Cr PBIT 2011 =49.64 Cr ROCE=PBIT / Avg Cap Emp = 84.47% Private Banks, mortgage players, few NBFCs, selective pharma are long term growth stories, Big software companies selective cap goods like LT, and some MNCs are moderate growth but unless you have strong entry barriers you cannot have a very long term robust outlook on growth. Consumers are expensive and always were but still growing. Once you are in the money and the company shows no signs of disappointment it is better to hold one. Valuations can become expensive but with earnings growth they try and become cheap again. Read each and every line of one up on Wall Street thoroughly until you understand the meaning. Underline IMP points and make notes and write down your observations. Then once you finish reading the book, analyse your investment method and try to correct the flaws. This is not a one day process. It'll take time. Once you finish reading the book, you'll start looking around for investment opportunities in things which are part of your daily use. Read Essays of Warren Buffet lessons for Investors and Managers. A capital allocation thought - which is better way of the two? Lets take two companies Apollo Hospital (standalone, excluding pharmacies) and Bharti Airtel (Mobile services only) during 2003-07. I know different businesses but since question is about capital allocation, I think we can look at these. Both are capex led high growth stories, with good ROE and good cash flows. Apollo Hospital - they took reasonable debt, had high dividend payouts, regularly raised capital at premium. Bharti - they took reasonable debt, never paid dividend, and didnt raise capital post IPO. (Tower deal came later) Same requirements (need to reinvest to grow), same circumstances (will earn high returns on investments), different approaches.

Which is better in terms of wealth creation? Will it impact P/E that each will get? The ultimate catalyst of stock valuation is growth with consistency, something that Bharti had and Apollo lacked, also high RoE with high dividend payout is good as low RoE because growth is RoE adjusted for payout. I think I mentioned this somewhere but will repeat it again. I did not participate the entire infra boom since 2003-07 since I was playing the Retail/Media/Banking themes. Voltas as a company had given a vision of around Rs 10,000 crores revenues for Fy11 I guess in 2008 and hence when I liquidated my position from media and retail I thought why not voltas? The stock fell from Rs 260 to rs 160 - down 40% - earnings were growing at 25%; order book was fine and I jumped in in my usual style at around 170 odd! Stock moved up to Rs 180 in two days and then started its decline slowly and gradually I became poorer. It went to around Rs 130 and then came back to Rs 150, at that time I thought that I should exit because the price behaviour was not looking conducive but then I thought i am an invetsor and not a trader so held on. SLowly the stock came down and when it hit around Rs 80 I panicked and sold off - not sure what magic was there in the rs 80 figure, maybe that i had seen it at Rs 180 and now the "1" was missing. I liquidated and decided to buy back at rs 50 because from the screen you could make out the carnage that was being done to infra shares... slowly the stock reached Rs 60... 55... and I removed Voltas from the screen because I did not want to buy it at Rs 50 now, I thought it will come down to rs 35 and it did....at that time I thought it was headed to Rs 10!!! The stock stayed at Rs 30 for some time and then went up in a straight line to Rs 200 and I watched. The problem with Voltas was it was cyclical business and I was completely wrong in my judgement, also cyclical stocks move on macro factors earnings follow. In this case earnings were rising (that makes it more difficult to sell) but the entire macro picture was getting tougher middle east/ domestic commercial real estate etc. I remember when I asked same question long time back, Basantji recommended me to read "Common Stocks and Uncommon Profits by Phil fisher" next after One Up on Wall Street. You should also consider reading Ken Fisher's Super Stocks which is not on Basant's list. And read it several times. Fellow tedies , Can I ask what an acceptable level of debt a company should carrry ? i am averse to debt and believe that it just adds extra pressure onto margins . However there are only few companies out there with less than 20% Debt to Equity.. How would you bring Debt level while assessing a company strength/weakness and what is an acceptable level? If the RoCE is more than 25% and the business is non-cyclical with entry barriers and a decent management then incremental debt will add to shareholder value. Basantji, is additional debt for M&A an issue even in such cases. The reason I ask is that many companies in the recent past which incurred debt to make an acquisition ( particularly overseas acquisition) are finding their account books go haywire.... That is because those guys bought assets in when the cycle was up and now face the consequences. That is why cyclical companies should be very careful with excessive leverage. Growth= ROE (1-Div Payout Ratio)

Practically speaking how much can a company grow its ROE? If we assume company goes on increasing its dividend payout will the growth falter? Defunct Govt.negative IIP, falling rupee, sinking markets, bruised investors, bleeding traders, still looking for the ultimate bad news that signals HOPE The best companies to invest in this inflationary environment are the ones which have pricing power and ability to generate revenue growth. Motilal Oswal's16th WC study is a good read but focuses on high dividend payout ratio whereas a high RoE & low div payout is a better mix. Negative Working Capital situation appears when a company has higher current liabilities than current assets. It doesn't signify any liquidity problem with the company (though it can happen if the sales are dismal or they have no cash or investments). Negative working capital denotes that the suppliers have ample faith in the company's business prospects and they're ready to supply without taking any advance. Thats evident from higher current liabilities. And, lower current assets denote that the company is able to sell its products in lieu for advance payment of cash. Nestle, Jubilant Foodworks have this model if you can assess their balance-sheets. Commodity companies sell products or services that are indistinguishable from the products and services of other companies. Here the customer generally buys on price. Today i got a first hand experience of what does a commodity company mean. I had gone for purchasing wall tiles for my dining room. The shop owner showed me nearly 90-100 varieties in the range of Rs 30-90. And at no point of time did he specify name of the company. His stress was on price. After choosing a few of them i purposefully asked him about the company. To that his answer was that there are thousands of companies in Tile mfg business. All are of same quality. So company hardly matters. I don't think there is any moat and pricing power in this business. Here is what buffet has to say about commodity companies: Businesses in industries with both substantial over-capacity and a "commodity" product (undifferentiated in any customer-important way by factors such as performance, appearance, service support etc) are prime candidates for profit troubles. These companies are bound to be bad investments Had a question if anyone can help with the way around I moved from Hyderabad to Kolkata and haven't got the addresses changed to the new one. Hence, postal ballot of a company will not reach me. Is there a way I can participate in a postal ballot not having received the ballot form? Apply with the registrar for the issuance of duplicate postal ballot. If your application reaches in stipulated time you shall be issued the same. Rising fiscal deficit (4.8% ++) coupled with government's populist measures- in the view of 2014 general elections like MNREGA(further continuation),food security bill(in the pipe line), MSP hikes and many more-shall bloat fiscal deficit. what is antidote for it? we are unable to do disinvestment of even 40,000 crore while fiscal deficit in rupee is not less than Rs.3.36 lakh crore. government shall have to borrow money further which shall keep higher credit rates reducing GDP growth . To prop the GDP growth rate govt. shall have to again come up with stimulus package. For political reasons oil subsidy burden shall increase which is nothing but money printing. Government lacks the grit to decontrol the diesel or to levy a charge on even noncommercial diesel vehicles-especially SUV's,which politicians ride in.

To cut the long story short, though we are much better than Zimbabwe but slowly heading towards the same destination. There are some shares in my mother in law name. My father in law and mother in law is no more. We have received dividend cheque for the same. But we couldn't find the physical shares. we've folio number. What will be the procedure to receive the information and to transfer the same in our account. Write to the Company secretary and say that you have lost/misplaced the certificates. he should respond back with the formalities. Hi Basantji, I am little confused at the life cycle of investing. We invest in a company, it creates sales growth -> net profits increase -> produces huge returns on investment, creates free cash flows. Now this free cash flows should get converted into buy backs and or dividends. Is there any other way that a shareholder can get benefited? If we look at Titan, how does a nominal shareholder gain from the cash flow - the div yield is barely 1%, I believe there is no share buyback that has happened. Where is the gain corner to the end investor? You can sell it in market ... right !! Your ownership value (shares) increases with the value of company. The idea is that ultimately the money should come back to shareholders and as long as a company is able to compound it at 20%+ Rates of return it does not matter whether the money is in my Bank or with the company but someday these opportunities will evaporate and the money have to be paid back to shareholders. So you mean ultimately (when the opportunities evaporate) the company should de-list itself (buy back all shares from all shareholders) or distribute everything through dividends..right? It might just boldly liquidate itself and return all money to shareholders. Ideally, that is what I think should happen - give the money back to the shareholders if the company is not able show growth. In reality, this would not happen or encouraged due to its larger impact on the economy and general public. I think, these kinds of companies would continue to struggle till they find other growth opportunities or be acquired/merged, or they become bankrupt ultimately. Very few of them would be great turnaround stories. I think Kotak is one of the examples - struggling NBFC before 1998 to a great bank now. I think you should take out your money at opportunistic times from companies which do not pay decent dividends. Such companies are only worth trading. Maybe long or short, whatever your definition of long short maybe. If a business does well, the stock eventually follows:Warren Buffett I don't worry too much about the market but worry a lot about my companies try and get networked through distributors, vendors, visiting outlets, AGMs etc and it was because of this that I was able to get out of Zydus before it fell 40%. I think for focused investing one needs to be networked because a wrong move could remove years of hard work. Still there are no guarantees in this game!

Apple (Market Cap US $ 550Billion) is around 45% of India's marketcap & holds cash equivalent to 35% of India's Forex reserves. Innovation really thrives in the US

Never mix investments with insurance. Life Cover (Term Insurance) is a basic protection against the untimely death of the individual. The whole purpose of this corpus is to replicate the earnings of the individual to support the dependents left behind. In Beating the Street, Peter Lynch strongly advocates the benefits of a stock portfolio vis-a-vis a fixed income or mixed asset portfolio. However, one must also account for a contingency fund ( 4-6 months running expenses) before moving to equities. So in order of importance: 1) 2) 3) 4) Term Insurance. Health Insurance Contingency Fund (Savings account/Debt fund) Equities

Please include a good accidental and disability policy also in the list of must have. I have seen incident where a person met with fatal accident which made him lose his job/income and spend large part of savings in treatment. There is no use of Term insurance here as person is alive but unable to generate income required to sustain family needs. A pure accidental and disability which is relatively cheaper policy is best suitable for such unfortunate incidents. This should be purchased separately instead of taking riders along with other policies which are usually much expensive compared to standalone policy. Basantji, I don't know if we are underestimating the extent of the problem. Suppose half or 75% of the Greek debt go bad. The losses on equity side of the balance sheet would be 350-500bn Euro. Now we need to understand how banks work they take leverage of 10-30x. So those banks need to deleverage 3.5-15tn Euro immediately to comply to capital requirements. Now imagine if somebody withdraws so much money in quick succession from the world market what would happen. Sooner than later we would realise that Lehmann crisis was not a crisis at all. Officially French banks are leveraged 26x but if you include off balance sheet items this becomes 70x, more than Lehmann had when it collapsed. We need to keep in mind that European banks are biggest financiers in Asia after American ones withdrew post 2008. LTRO 1&2 was done to delay this deleveraging process.

I don't understand the global macro events and would not worry about it at all. Let's say Greece collapses and there is a huge financial crisis. How long this will last. 3 month, 6month or an year. The current world is very interconnected and hence crisis in one part will impact everybody but recovery will also be sharp like 2008 Lehaman crisis.
1929 US recession is not going to come back ever again, that is for sure. As an investor, one should keep buying quality companies without worrying about doomsday scenario whenever one has money. An individual investor is not a MF manager who is responsible for showing daily/weekly/monthly performance. Unless you sell you have only notional gain/loss. Quality companies will always bounce back as soon as the problems start settling down. Raj, you are absolutely right these macros don't have huge impact on companies in long term since most of the good companies manage their micro markets well. We just need to follow micros well and stick to them. One has to keep in mind that these macros do affect all of us in some way or other. It is macro backdrop which helped folks find gold as great asset in recent years, US treasury has given best

returns ever. You could have shorted Rs in November to get 20% etc. Obviously for a passive long term value investor it hardly matters. A 40% CAGR for 3 yrs & a negative 40% in the fourth brings down the overall return to 13%. This is the power of a down-year. Yes, the power of a negative year remains one of the true rules of investing. Even if we do not get s stock call right we should look for not losing a lot of money in the error that we commit. That is what Pabrai says "Heads I win, tails I do not lose much". The quest for returns should as far as possible never overlook risk.