People who work amid constant noise have twice the risk of heart disease as those with quieter jobs. Men younger than age 50 and smokers are the most vulnerable, U.S. government data shows.
Researchers tracked 6,307 Americans who took part in the U.S. National Health and Nutrition Examination Survey, undergoing medical and blood tests and answering questions about their health, lifestyle and work. Those with the noisiest workplaces were more likely to suffer chest pain, a heart attack, heart disease or high blood pressure, the report said.
The industries with the greatest risk were mining, agriculture, construction and manufacturing, said lead researcher Wen Qi Gan, from the University of British Columbia’s school of environmental health in Vancouver. White-collar workers, such as those on loud trading floors, may also be vulnerable, he said. The investigators defined a loud workplace as any environment where people had to raise their voices to be heard, with one in five participants in the noisy category.
“People believe that heart disease belongs to older people,” Gan said in a telephone interview. “We found that young workers, those under 50, are most vulnerable to occupational noise. For them, there is a three- to four-fold increased prevalence in heart disease.”
The study was published in the journal Occupational and Environmental Medicine, based in London.
Ear Plugs Important
Ear plugs and other personal form of protection are important, but offer only limited help, Gan said. Companies and administrators in charge of loud environments should offer some type of noise control, he said.
Previous investigations into heart risk and noisy workplaces yielded mixed results. A Canadian study found high rates of heart attacks and deaths in sawmill workers, while another that involved men working in the nuclear power industry in England found no ties to heart disease.
The latest study offers a large, nationally representative sample that includes in-depth patient information, the researchers said. The authors controlled for known heart risks such as alcohol use and exercise and physical characteristics in assessing the data. The results show constant exposure to excess noise is an important workplace issue and deserves special attention, they concluded.
The research was funded by the Canadian Institutes of Health Research.
Wednesday, October 6, 2010
Sunday, October 19, 2008
Cochin - Dubai Smart City, IT-Parks, LNG Terminal, Transhipment Container Terminal, Tourism domain a Giant Metro in the making!!
Cochin is undergoing a massive change in its demography over the past few years. The arrival of IT parks and boom in the hospitality sector have resulted in greater influx of migrants from other states. Greater job opportunity also meant the return of the Non Resident Keralites. As a result there is a huge demand for homes in and around Cochin. The greatest development in Cochin is seen in Kakkanad. Many IT parks including the upcoming Smart City are all located in Kakkanad. Another big advantage that Kakkanad has is its proximity to the Seaport-Airport road that connects the Cochin International Airport to the Cochin port via the Cochin Special Economic Zone (SEZ). Also, Kakkanad has seen a rise in number of educational institutions in the past few years, thereby making it the most sought after place for new housing projects.
The development is not just concentrated in the IT sector. The shipping industry will see an immense development once the Rs. 2200 crore Vallarppadam International Container Transshipment Terminal gets completed. Another major boost for the commercial development in Cochin comes in the form of Rs. 2500 crore LNG Petronet project.
All these will lead to more job opportunity and more demand for quality housing. With such huge infrastructure development in near future, it is only wise to invest on real estate. As the demand rises, there will be huge escalation in the real estate prices.
The development is not just concentrated in the IT sector. The shipping industry will see an immense development once the Rs. 2200 crore Vallarppadam International Container Transshipment Terminal gets completed. Another major boost for the commercial development in Cochin comes in the form of Rs. 2500 crore LNG Petronet project.
All these will lead to more job opportunity and more demand for quality housing. With such huge infrastructure development in near future, it is only wise to invest on real estate. As the demand rises, there will be huge escalation in the real estate prices.
Saturday, October 4, 2008
Allen Greenspan Says Markets to Recover as Investors Return
Former Federal Reserve Chairman Alan Greenspan said financial markets and the economy will recover ``sooner rather than later'' from the worst turmoil in seven decades.
``Trust will eventually reemerge as investors dip hesitantly back into the marketplace,'' Greenspan said today in a speech at Georgetown University's law school in Washington. ``From that point, history tells us, financial and economic revival sets in. I suspect it will be sooner rather than later.''
Greenspan urged lawmakers last week to back ``extensive'' measures to tackle the worst financial crisis since the 1930s and head off a recession. The U.S. Senate passed a $700 billion financial-market rescue package yesterday loaded with inducements for the House of Representatives to approve the measure following its rejection of an earlier version Sept. 29.
``We are living through the type of wrenching financial crisis that comes along only once in a century,'' Greenspan said today. ``Financial markets freeze up as an excess of fear displaces a protracted period of what some might call irrational exuberance. Eventually the market freeze will thaw as frightened investors take tentative steps towards reengagement with risk.''
Greenspan, 82, who served 18 years as Fed chief, took office just before the 1987 stock-market crash. He led the central bank during two eight-month-long recessions, the Asian financial crisis, the 2001 terrorist attacks and the bursting of the Internet bubble.
Deepening Crisis
He spoke amid signs the crisis was deepening. Corporate short-term borrowing plummeted 5.6 percent, the most on record, to the lowest amount outstanding in three years, the Fed said today. Separately, the cost of borrowing in dollars for three months in London rose for a fourth day as banks hoarded cash.
Greenspan, while not commenting today on the rescue bill, spoke from a text about the importance of property rights at a conference entitled, ``Our Courts and Corporate Citizenship.'' He didn't take audience questions.
``Broken market ties among banks, pension and hedge funds and all types of non-financial businesses, will become reestablished, and our complex economy, that has the capacity to produce a fifth of the world's goods and services, will reemerge,'' he said.
The House may vote tomorrow afternoon on the rescue bill.
In a statement e-mailed to lawmakers Sept. 25, signed by Greenspan, former Treasury Secretary George Shultz and Stanford University economist Robert Hall, the three economists wrote that ``the only way that financial institutions can continue to function is for the government to provide financial support.''
``Trust will eventually reemerge as investors dip hesitantly back into the marketplace,'' Greenspan said today in a speech at Georgetown University's law school in Washington. ``From that point, history tells us, financial and economic revival sets in. I suspect it will be sooner rather than later.''
Greenspan urged lawmakers last week to back ``extensive'' measures to tackle the worst financial crisis since the 1930s and head off a recession. The U.S. Senate passed a $700 billion financial-market rescue package yesterday loaded with inducements for the House of Representatives to approve the measure following its rejection of an earlier version Sept. 29.
``We are living through the type of wrenching financial crisis that comes along only once in a century,'' Greenspan said today. ``Financial markets freeze up as an excess of fear displaces a protracted period of what some might call irrational exuberance. Eventually the market freeze will thaw as frightened investors take tentative steps towards reengagement with risk.''
Greenspan, 82, who served 18 years as Fed chief, took office just before the 1987 stock-market crash. He led the central bank during two eight-month-long recessions, the Asian financial crisis, the 2001 terrorist attacks and the bursting of the Internet bubble.
Deepening Crisis
He spoke amid signs the crisis was deepening. Corporate short-term borrowing plummeted 5.6 percent, the most on record, to the lowest amount outstanding in three years, the Fed said today. Separately, the cost of borrowing in dollars for three months in London rose for a fourth day as banks hoarded cash.
Greenspan, while not commenting today on the rescue bill, spoke from a text about the importance of property rights at a conference entitled, ``Our Courts and Corporate Citizenship.'' He didn't take audience questions.
``Broken market ties among banks, pension and hedge funds and all types of non-financial businesses, will become reestablished, and our complex economy, that has the capacity to produce a fifth of the world's goods and services, will reemerge,'' he said.
The House may vote tomorrow afternoon on the rescue bill.
In a statement e-mailed to lawmakers Sept. 25, signed by Greenspan, former Treasury Secretary George Shultz and Stanford University economist Robert Hall, the three economists wrote that ``the only way that financial institutions can continue to function is for the government to provide financial support.''
Saturday, September 27, 2008
Indian Economy Summary
* Industrial output rose 7.1% in July 2008 from July 2007 and from a rise of 5.4% in June 2008, data released by the Union government on 12 September 2008 showed. This was above market expectation of a 6.5% growth. Manufacturing production was up 7.5% in July 2008 from July 2007.
* The infrastructure sector output grew 4.3% in July 2008 from July 2007. This is above the 3.4% annual growth in June 2008, government data showed on 10 September 2008. The infrastructure sector accounts for 26.7% of industrial output.
* Inflation based on the wholesale price index surged 12.10% in the 12 months to 30 August 2008, below the previous week’s annual rise of 12.34%, data released by the Union government on 11 September 2008 showed. Inflation for the week ended 5 July 2008 was revised up to 12.19% from 11.91%.
* India’s exports grew 31.2% to $16.35 billion in July 2008 from a year earlier but the trade deficit widened to $10.80 billion from June as higher oil imports weighed, data showed on 1 September 2008. Imports were up 48.1% to $27.14 billion in July 2008, while oil imports rose 69.3% to $9.48 billion in the month. Exports were up 24.6% at $59.19 billion in April to July 2008 from a year earlier, while the trade deficit widened to $41.23 billion in the period from $27.35 billion in the same period in the previous year.
* The UPA Government on 1 September 2008 ruled out an immediate reduction in petrol and diesel prices as state-run firms are still running into daily losses of over Rs 400 crore despite softening in international oil prices. The drop in international oil prices has resulted in Indian Oil, Bharat Petroleum and Hindustan Petroleum reporting a revenue loses of Rs 400 crore per day in the fortnight ending September 2008 from Rs 450 crore a fortnight ago.
* The Union government on 1 September 2008 appointed finance secretary Duvvuri Subbarao as the new governor of the Reserve Bank of India (RBI). He succeeded Dr Y V Reddy, whose term ended on 5 September 2008. Subbarao would be appointed for a three-year period. He may, however, be considered for reappointment for another two years, as the RBI Act provides for appointment of a governor for a period of up to five years.
* India has slipped two notches to 122 in a global list that ranks the ease of doing business in 181 economies. The sixth ‘Doing Business Report 2009’, prepared by the International Finance Corporation and the World Bank, places Nepal and Pakistan above India despite these two countries undertaking no major reform in the last year.
* The infrastructure sector output grew 4.3% in July 2008 from July 2007. This is above the 3.4% annual growth in June 2008, government data showed on 10 September 2008. The infrastructure sector accounts for 26.7% of industrial output.
* Inflation based on the wholesale price index surged 12.10% in the 12 months to 30 August 2008, below the previous week’s annual rise of 12.34%, data released by the Union government on 11 September 2008 showed. Inflation for the week ended 5 July 2008 was revised up to 12.19% from 11.91%.
* India’s exports grew 31.2% to $16.35 billion in July 2008 from a year earlier but the trade deficit widened to $10.80 billion from June as higher oil imports weighed, data showed on 1 September 2008. Imports were up 48.1% to $27.14 billion in July 2008, while oil imports rose 69.3% to $9.48 billion in the month. Exports were up 24.6% at $59.19 billion in April to July 2008 from a year earlier, while the trade deficit widened to $41.23 billion in the period from $27.35 billion in the same period in the previous year.
* The UPA Government on 1 September 2008 ruled out an immediate reduction in petrol and diesel prices as state-run firms are still running into daily losses of over Rs 400 crore despite softening in international oil prices. The drop in international oil prices has resulted in Indian Oil, Bharat Petroleum and Hindustan Petroleum reporting a revenue loses of Rs 400 crore per day in the fortnight ending September 2008 from Rs 450 crore a fortnight ago.
* The Union government on 1 September 2008 appointed finance secretary Duvvuri Subbarao as the new governor of the Reserve Bank of India (RBI). He succeeded Dr Y V Reddy, whose term ended on 5 September 2008. Subbarao would be appointed for a three-year period. He may, however, be considered for reappointment for another two years, as the RBI Act provides for appointment of a governor for a period of up to five years.
* India has slipped two notches to 122 in a global list that ranks the ease of doing business in 181 economies. The sixth ‘Doing Business Report 2009’, prepared by the International Finance Corporation and the World Bank, places Nepal and Pakistan above India despite these two countries undertaking no major reform in the last year.
Friday, September 19, 2008
Bulls Rock'n again!! But Bear will continue.........
Markets are witnessing huge buying interest following surge in global markets led by banking stocks as US government is considering measures to rid financial firms from this debt trap and to end this credit crisis. The Sensex got back above 14000 mark while the Nifty is holding above 4200. Buying is seen in realty, technology, telecom, banking, capital goods, power and oil stock!!
Arun Duggal , former CEO (India) of Bank of America, believes that the concerted efforts being made by global central banks are important to stabilise markets. "There has been a lot of bad news which has come out in the open. We can’t say that it is all over. Perhaps there will be some more bad news, and some further action is required in the next few weeks or months. We are well on our way to looking at the resolution of this problem.”
Tomi Dcruze,CEO
Arun Duggal , former CEO (India) of Bank of America, believes that the concerted efforts being made by global central banks are important to stabilise markets. "There has been a lot of bad news which has come out in the open. We can’t say that it is all over. Perhaps there will be some more bad news, and some further action is required in the next few weeks or months. We are well on our way to looking at the resolution of this problem.”
Tomi Dcruze,CEO
Monday, September 24, 2007
Greatest Investors!
World's Greatest Investors
Benjamin Graham – Numbers Numbers and Only Numbers
Best Quote: “While enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster”
What would Graham have bought in India ? Probably nothing except a few stocks where the market value of holdings exceeds the market cap some thing like a Tata investment.
Benjamin Graham was the only investing legend who ignored the subjective aspects of equity analysis. Graham was never interested in meeting managements and knowing what they were capable of doing or not doing. He never looked at a company's product pipeline nor concentrated on anything else. All he saw and studies were hard core numbers - the Balance Sheet. He wanted to buy cheap, discarded and under valued assets. He was fascinated with numbers and operated on the premise that financial numbers capture every thing that an investor ought to know. He was brutally shaven off in the 1929 crash.Later on he developed a theory that the prospects of a company cannot be determined. He therefore advised investors to look back wards rather then forward. he He encouraged investors to look at the operating history for the past 7 years . It was certain that Graham was not looking at any of the companies in the new sector. In 1934 he published a book titled “Security Analysis” which remains an investment classic till date. In the early 1950's Warren Buffet was amongst his team of research analysts trying to decipher the investing skills of the master.
Predominantly a man who saw numbers and ignored perceptions Graham had a very unique personal life His second wife was his secretary and the third an employee. In fact he spent the last few years of his life with a woman who was earlier involved with one of his sons.
One of Graham's basic investing rules was to compute real earnings of a company. His definition of real earnings was dividend paid adjusted with increase (decrease) in the net asset per share – which usually appears as the change in earned surplus including voluntary reserves.
Graham stressed the diversification mantra. His basic premise was to avoid having concentrated portfolios . Since he ignored the subjective aspects of investment he wanted to buy companies almost for free. While the idea looks good in theory it is actually hard to find such companies in actual practice though. Graham backed his theory by the “Cigar butt” analogy. He stated that cigar buts that are thrown on the ground are always good for a few puffs. Similarly investors should look for discarded companies possessing a good turnaround prospects.
Graham professed that investors should buy companies when the current situation is unfavorable, the near term prospects poor and the low price fully reflects the current pessimism . Investors he added focus on the long term picture and ignore the daily quotations that “Mr. Market” provides. He suggested treating the market as an insane partner who provides daily quotes depending on which side of the bed he got up from. Clearly it should suit the investor to buy shares when “Mr. Market” displays more insanity then otherwise.
Graham advised Investors to keep their equity exposure within 75% of their net assets. For the the more adventurous investors a 100% exposure to equity could be considered in case he meets the following guidelines:
Keep enough cash to take care of 12 months of your family expenses
You wish to invest steadily for at least 20 years into the future
Survived the bigger bear markets – maybe the 2000 tech bubble
Did not panic and sell stocks but actually bought more stocks of solid stable companies as prices continued to slide during the above bear markets
You understand and are able to differentiate between hope and hype.
Key learning:
Buy Stocks trading at two- thirds of their Net current assets and sell them as they approach their net current assets. Graham does not account for the fixed assets and recommends deduction of all liabilities while computing net current assets.
The Earnings yield (inverse of the PE ratio) should be twice of that of a “AAA” rated bond. In other words if the interest rate on a “AAA” bond is 5% the earnings yield should be at least 10% or the PE ratio of the stock should be 1/10% = 10.
The Company’s debt to equity ratio should not be more then 1. For computation debt should include preferred stock
The dividend yield on a stock should not be less then two third of a “AAA” bond yield.
What to look for before Selling?
Sell after the stock moves up 50%. Sell after two years if it does not move up by 50%.
Sell if the company stops declaring dividends.
Sell if the earnings decline or the stock moves up by 50% over the new target-buying price.
Clearly in today's environement of overvalued asset classes it will be very difficult to find a stock on the Benjamin Graham way of Investing. Perhaps the 1929 fall shook him so much that he turned risk averse in the strict sense.
References :
Security Analysis: The Classic 1940 Edition by Benjamin Graham, David Dodd
The Intelligent Investor: The Definitive Book On Value Investing, Revised Edition by Benjamin Graham, Jason Zweig.
Warren Buffet The Schumacher of Investing
Best Quote: Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale will give good results.
Warren Buffett is by far the most successful investor of all times.
He buys businesses that are simple and easy to understand.
Once a business has been bought the time to sell it is “almost never”. Warren Buffet tries to look at stocks as pieces of part ownership of businesses.
Buffet rarely follows the minute-to-minute fluctuation in stock prices and prefers to stay in the small town of Nebraska. Buffet’s holding period often extends into decades and this particular quote makes for a very interesting reading. In a a recent letter to the shreholders of his company,
Buffet wrote:
“We bought some Wells Fargo shares last year. Otherwise, among our six largest holdings, we last changed our position in Coca-Cola in 1994, American Express in 1998, Gillette in 1989, Washington Post in 1973, and Moody’s in 2000. Brokers don’t love us”
Buffet argues that the key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and above all the durability of that advantage.
Key Strategies:
Be focused and buy concentrated portfolios – they perform better. Buying two stocks in every sector will help you create a zoo not a portfolio. A person who diversifies is the one who is unsure of his investments. Buffet once put about half of his wealth in a single stock “American Express” when he believed that the company was into a one off problem.
Buy what you see and understand. Buffet never bought a single technology company in spite of being a very good friend of Bill Gates.
Buy businesses not stocks. Buffet advocates investors to be and think like passive a owner of that business.
Understand the Margin of Safety and the Circle of competence. These are Buffet's favourite words. Do not be a jack-of-all-trades buy stocks of businesses that you understand.
Employ the magic of compounding
Investing is a full time job (24x7x52). If you can go to a dentist for your teeth, cobbler for your shoes, barber for your hair then why can’t you go for an expert for your wealth.
Piquant styles:
Separated bottle corks from the garbage so that he could know which company sold more cold drinks.
It took him about 2 years to figure out that his room was painted in his absence as he just looked at books inside the room.
Although he owns a private jet he preferred to stay away from Wall Street in a small town and declined to invest in a company whose CEO took out a brand mew letter pad to explain the company’s plans
He once invested in a company located on the seashore which had only three sides of its building painted. The side facing the sea was left without paint.
When his wife spent US $ 15,000 on home furnishing his first comments to a friend were” You know how much is that worth if you compound it for 20 years.
Key learning Business Simple understandable – mostly buy what you see category
Consistent operating history.
Favorable long-term prospects
Strong Franchises with pricing power. Buffet wanted to hold on to companies that were surrounded by a moat so that your competitors could not squeeze you on prices and profits.
Amongst Buffet’s favorite businesses were Banks. Media and Consumer related stocks. Buffet liked T.V stations as he thought that the fixed capital requirements were low, companies operated with little inventories and negative working capital and had a very high profit margin on sales.
Management.
Trust worthy managements deserve premium. They should be clear and forthcoming
Avoid companies with managers following lavish and extravagant styles.
Financials:
Look for High Return on Equity (ROE)
Look for high and stable profit margins
Markets:
Use conservative earning estimates and the risk free rate of return as the discount rate
Valuable companies can be bought at attractive prices when investors turn away.
Companies to avoid:
Buffet avoided investing into companies that required a high degree of research. He did not buy technology and pharmaceutical companies.
Buffet was apprehensive about retailing companies his concern – A company could report good numbers year after year and then suddenly go bankrupt. Buffet avoided investments into aircraft carriers as well.
Companies that had a very long inventory cycle like farm (agricultural) businesses should also be avoided.
Buffet advised investors not to put money into Cash guzzling businesses but instead look for businesses that generated free cash flows year after year.
Commodities were an absolute no - no. Buffet stated that agricultural commodities in particular are dependent upon the mercy of weather, which adds another twist to computation of the probability of an event.
References:
Warren Buffet – The making of an American Capitalist – Roger Lowenstien
The Warren Buffet way – Robert.G. Hagstorm.
The Essays of Warren Buffett : Lessons for Corporate America by Warren E. Buffet
Peter Lynch – Buy what you see
Best Quote:If one could tell the future by looking at Balance Sheets then Accountants and Mathematicians would have been the richest people in the world.
What would have Lynch bought in India? ITC, Maruti, Hero honda, Bharti Airtel, Pantaloon Retail, TV-18 and the likes.Most Fund Managers are known for their investing styles rather then the investments that they make. Peter Lynch is one of them. As the fund Manager for the Magellan fund Lynch grew to fame for his "Buy what you see "school of thought". An initial Investment of US $ 10,000 would have grown over to US $ 2.50,000 in the 13 years that Lynch managed the fund. His annual rate of compounded growth averaged 29.2%. The greatness of Lynch lied in his simplicity. He was one of the few people from the Fund Manager fraternity who taught and practiced the KISS (Keep it Simple Stupid) principle.Most often people invest in sectors and industries that they know little of. For instance a Doctor could be investing into a technology company while a software engineer could be looking at pharmaceutical stocks. Lynch often remarked “Your investor’s edge is not something you get from Wall Street experts. It’s something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand” Although he held more then 1400 stocks in his Magellan fund Lynch advised people to hold stocks of as many companies as they felt comfortable with. For instance he advised investors to hold fewer well researched stocks rather then own a complete index replica as such.His advise on the number of stocks investors should hold was also simple. “Owning stocks is like having children – don’t get involved with more than you can handle. The part- time stock picker probably has time to follow 8-12 companies, and to buy and sell shares as conditions warrant. There don’t have to be more than 5 companies in the portfolio at any one time”.
Key Learning:
Small Market capitalized companies - Lynch loved small emerging businesses with strong balance sheets,. His extraordinary returns in La Quinta Inns came at a time when the company was in the initial years of development He argued "Big companies don't have big stock moves you’ll get your biggest moves in smaller companies."
Fast growers - Among Lynch's favorites are companies whose sales and earnings are expanding 20% to 30% a year. He cautions investors from looking at companies that grow more then 30% every year. Companies growing at 50% to 100% are bound to falter and crack. It is therefore imperative to view very high growth ideas with a sense of suspicion.
At the same time, he advised investors to look for slower-growth businesses selling at a truly great price.
Dull names, dull products, dead industry - Lynch loved good managements in simple mundane, colorless businesses. His arguments were that nobody creates excess capacity in dull boring industries and when you can find a winner there it makes sense to jump in.
Lynch loved boring businesses with boring company namesL. Peter Lynch writes about both in One Up on Wall Street. No self-respecting Wall Street broker could recommend absurdly named unknown companies to his key clients. And that left the greatest money managers an opportunity to scoop up a truly solid business at a deep discount.
Spin Offs - Lynch's dream stock at Fidelity Magellan was one that hadn't yet attracted any attention from Wall Street. One-way Lynch recommends finding these companies is to buy spin-offs. For instance, after being spun off, Toys "R" Us went on in relative obscurity to rise more than 55 times in value. Lynch also made a fortune buying into the funeral and cemetery business Service Corp, which had no analyst coverage.
Insider buying and share buybacks: Lynch loves companies where the senior managements bought stocks of their own companies. A combination of insider buying and aggressive share buybacks really piqued his interest. "Buying back shares," Lynch writes, "is the simplest, best way a company can reward its investors."
Lynch ignores conscious asset allocation between various asset classes. He says that market players may have 50% of their portfolio in cash at market bottoms. When the market decides to move up they could miss most of the move.Lynch was the proponent of the PEG theory.
As long as the PE of a company was lower then the growth rate that it expected to generate Lynch would have advocated a buy on the stock.While making investments Lynch advised people not be try and catch bottoms. If you liked a company he argued take a small position and add it up as you see further visibility in earnings growth. Lynch stated that “time is on your side when you own shares of superior companies. You can afford to be patient – even if you missed Wal-Mart in the first five years, it was a great stock to own in the next five years also”.
In this connection he presented a very interesting statistic.
Time and not Timing is the Key
Market timing strategies
S&P Returns for 40 years since 1954
Invested all the time
11.4%
Missed the ten most profitable months
8.3%
Missed the forty most profitable months
2.3%
Lynch cautions investors to do away with weekend thinking, predicting the future course of the economy and debating on the movements in interest rates and other macro economic variable. His advise on this count was “Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the company you are invested in.” And Finally Lynch says that several small gains make a one very large move. Three 30% gains equals a four bagger is his advice to investors.Refrences:
One Up On Wall Street : How To Use What You Already Know To Make Money In The Market by Peter Lynch, John Rothchild
Beating the Street by Peter Lynch, John Rothchild
Learn to Earn : A Beginner's Guide to the Basics of Investing and Business [BARGAIN PRICE] by Peter Lynch, John Rothchild
Philip Fisher – Making Uncommon profits from common stocksBest
Quote: I do not want a lot of good investments I want a few outstanding ones. If a job has been correctly done when the common stock has been purchased, the time to sell it is almost never.
What would have Fisher bought in India ?
Philip Fisher qualifies as one of the few selected investing legends who recommended, bought held and made money in technology stocks. the late 40's and early 50's he bought stocks like Dow Chemicals, Texas instruments and Motorola. While these stocks declined as severely as the others in a bear market they outperformed the others in stable and bull markets.
Fisher started his investment banking business in 1931 – after the great depression. He handled only a few clients and refused to temptation of large scale churning.This helped him cut down on administration and also eliminate transaction costs. Fisher disliked extravaganza for years he wore the same over coat and drove his dilapidated stripped down car Oldsmobile 6. The idea of buying a new car did not seem to make any "financial "sense to him.
Fisher hated to sell good companies. He argued that if a stock becomes over priced investors should sit down with it rather then sell the stock with a view to buy it back at a lower price. He discouraged selling in anticipation of a market fall. Fisher would normally say that stocks sometimes go up because of good news that common investor is are unaware of.
Old companies operating in mature businesses could not be categorized as conservative businesses. Fisher's definition of a conservative investment was a dynamic, well-managed company having a good product portfolio and doing all that it could to grow, prosper and create value year after year.
It is hard to do a subjective analysis of a company from the published literature. The astute investor has to rely on the business grape wine. Fisher termed this scuttlebutt.The best areas to get information were at trade fairs where different companies assembled with their products and helped the intelligent investor make his case. People who buy a company's products carry valuable information, as do suppliers and purchasers.As a part of his analysis Fisher also looked for a smart sales teamin the company. He liked managements that embarked on cost cutting measures and which avoided extravagant spending.
Key learning:Look for these Company specific attributes:
Dominant Industry player
Growth from existing Products
High and expanding operating margins
High Return on Capital employed (ROCE)
Effective Sales and Research team
Scalable business model
Look for these management specific attributes
o Honesty and Integrity
o Conservative accounting policy
o Long range plans
o Financial controls,
o Good personnel policies
o Avoid companies run by managements that seek to issue the mselves cheap stock options.
High profit margin businesses attract competition. Fisher favors a slightly higher margin of profit with dominant market share. This he thought would discourage competitors from entering the business.
It is better to buy stock during the start up period of a new capacity expansion. At that time earnings are subdued with depreciation and interest costs.
Buy on a bad corporate news – strikes, temporary failure of a new product
Do not run after high dividend paying companies. Companies that pay a higher rate of dividend admit their inability to look for newer areas of growth.
Alwayslook for low PE companies that can grow their earnings. An earnings growth would re rate the stock upwards , which would later lead to another increase in stock price.
References :
Common Stocks and Uncommon Profits – Kenneth Fisher Money Masters of our Time – John Train
Common Stocks and Uncommon Profits and Other Writings by Philip A. Fisher, Kenneth L. Fisher
Common Stocks and Uncommon Profits (Wiley Investment Classic) by Philip A. Fisher
Michael Steinhardt – Trader, Investor, Bonds, stocks
Best Quote: “Any one who thinks he can formulate a success in this market is deluding himself because it changes too quickly. As soon as a formula is right for any length of time, its own success carries the weight of its inevitable failure.”
Steinhardt started poor as a son of a jeweler. His parents were divorced when he was a year old. He thought that hedging compounded problems rather then resolve them. Hedging a position by selling a particular stock because you are long on another increased the problem. The original problem was that you were long a certain position and it is best to look at the trade from that angle rather then go in for a hedge through another stock
The above quote summarizes Steinhardt's basic investment philosophy. Steinhardt's greatest strength was to sit over positions for longer periods of time. While all of us have problems staying with positions for days or weeks Steinhardt could carry over his bets for years at a strech.
He was once short the tobacco stocks when the Industry was facing law suits.He opined that if the plaintiffs won the case he would make a great deal of money and if they lost the case it was already discounted in the price. – Evaluate the risk reward ratio was Steinhardt's favourite mantra.
Steinhardt refuses to attribute his success to any one form or another. He suggests that he made money during the early 1970's because he was short the market as a whole. In the early 1980's he made money being long on the bonds. A great believer in leveraged investing Steinhardt once invested US $250 million out of which US $ 200 million was borrowed money. He went long on bonds expecting interest rates to decline (when interest rates go down bond prices rise). After he had taken a position bond prices kept falling but finally interest rates hit their peak and bond prices started to rise again.
Key learning:
When you believe in a concept take a large position
The best stocks to buy are the laggards and the low multiple stocks whereas the best shorts are the ones that are Institutional favorites. Coca- Cola, Mc Donald’s. Merck and AT &T were his list of the best shorts in the market.
One should estimate stock returns with their associated risk. It is wrong to expect higher returns from stocks merely because they are risky.
If the incremental return from equities is very modest investors should focus on bonds.
Smart investors get smarter with each passing mistake. Once a mistake has been committed and the losses incurred the investor will resist the trap to the same mistake again. He observes “ One of the advantages of trading the way I do – being a long term investor, short term trader, individual stock selector, market timer, sector analyst – is that I have made so many decisions and mistakes that it has made me wise beyond my years as an investor”.
Investors should focus on the longer-term prospects of stocks even if they do not wish to hold the stock for that period of time. Investors should buy stocks of companies that buy back their shares from the market.
And finally the maximum potential loss to being short in the market is infinite whereas the maximum potential loss to being long in the market is only 100%.
References :
No Bull: My Life In and Out of Markets by Michael Steinhardt
Michael Steinhardt – Trader, Investor, Bonds, stocks
Best Quote: “Any one who thinks he can formulate a success in this market is deluding himself because it changes too quickly. As soon as a formula is right for any length of time, its own success carries the weight of its inevitable failure.”
Steinhardt started poor as a son of a jeweler. His parents were divorced when he was a year old. He thought that hedging compounded problems rather then resolve them. Hedging a position by selling a particular stock because you are long on another increased the problem. The original problem was that you were long a certain position and it is best to look at the trade from that angle rather then go in for a hedge through another stock
The above quote summarizes Steinhardt's basic investment philosophy. Steinhardt's greatest strength was to sit over positions for longer periods of time. While all of us have problems staying with positions for days or weeks Steinhardt could carry over his bets for years at a strech.
He was once short the tobacco stocks when the Industry was facing law suits.He opined that if the plaintiffs won the case he would make a great deal of money and if they lost the case it was already discounted in the price. – Evaluate the risk reward ratio was Steinhardt's favourite mantra.
Steinhardt refuses to attribute his success to any one form or another. He suggests that he made money during the early 1970's because he was short the market as a whole. In the early 1980's he made money being long on the bonds. A great believer in leveraged investing Steinhardt once invested US $250 million out of which US $ 200 million was borrowed money. He went long on bonds expecting interest rates to decline (when interest rates go down bond prices rise). After he had taken a position bond prices kept falling but finally interest rates hit their peak and bond prices started to rise again.
Key learning:
When you believe in a concept take a large position
The best stocks to buy are the laggards and the low multiple stocks whereas the best shorts are the ones that are Institutional favorites. Coca- Cola, Mc Donald’s. Merck and AT &T were his list of the best shorts in the market.
One should estimate stock returns with their associated risk. It is wrong to expect higher returns from stocks merely because they are risky.
If the incremental return from equities is very modest investors should focus on bonds.
Smart investors get smarter with each passing mistake. Once a mistake has been committed and the losses incurred the investor will resist the trap to the same mistake again. He observes “ One of the advantages of trading the way I do – being a long term investor, short term trader, individual stock selector, market timer, sector analyst – is that I have made so many decisions and mistakes that it has made me wise beyond my years as an investor”.
Investors should focus on the longer-term prospects of stocks even if they do not wish to hold the stock for that period of time. Investors should buy stocks of companies that buy back their shares from the market.
And finally the maximum potential loss to being short in the market is infinite whereas the maximum potential loss to being long in the market is only 100%.
References :
No Bull: My Life In and Out of Markets by Michael Steinhardt
John Bogle: Mastering the Index
Best Quote: “The biggest risk to our financial system is the failure of our retirement system. Right now half the savings assets of the American economy—nearly $10 trillion—are in retirement plans, which are failing badly. The problem is that over an investment lifetime only about 25 percent of the rewards go to the investors and 75 percent go to the intermediaries”
Bogle is a pioneer in the mutual fund industry. He introduced the first S&P 500 Index fund - the Vanguard 500 Index - which debuted in 1976. He professed that investors should not attempt to beat the markets but should follow the markets instead. His index funds were characterized as low cost and low maintenance and allowed millions of investors to participate in the greatest bull market ever
Bogle had a very interesting concept for the managers “the more that fund managers of America take, the less investors will make. If investment returns are 7 percent annually and the system takes 2.5 percent then you are left with only 4.5%”
But it is hard to find an ideal fund manager. Amazing for an industry, which owns 28 percent of corporate America . A few decades back the mutual funds churning (frequent buying and selling of stocks) ratio was just 15%. It has now gone up to about 100%. Bogle laments that high churning rate leads to increased transaction costs, which in turn erodes investor's wealth. half the savings assets of the American economy—nearly $10 trillion—are in retirement plans, which are failing badly. The problem is that over an investment lifetime only about 25 percent of the rewards go to the investors and 75 percent go to the intermediaries. The overhead operating cost for an index fund is 0.2% annually and the annual trading costs around 0.1%. The diversified fund spends 1.5% on operating overhead and 2% as trading costs. Therefore Index funds start with an up front advantage of 3.3% annually.
Peter Lynch was a great believer of the index investing. He advised most investors to go with an index fund . Jack Meyer labels the investment industry as a giant scam. And David Swensen of Yale calls the mutual fund industry a colossal failure for individual investors. In 1976 the Investing guru Benjamin Graham indicated that indexing is the best strategy.Warren Buffet has advocated low cost index funds for years now.
While Bogle's concepts were great for the US markets it remains to be seen how that concept would work for a country like India. The BSE Sensex is skewed in favour of a few stocks.The computation methodology for the BSE Senss also very different when compared to the Dow Jones.
Key learning:
It is very difficult to beat the market.
nvestors should focus on value and not the price
Keep transaction and fund management costs within check.
Invest in low costs Index funds
The investors gets a very small part of the profits – a substantial part of which is taken away by the manager
References :
The Battle for the Soul of Capitalism by John C. Bogle
Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor by John C. Bogle
Bogle on Mutual Funds: New Perspectives for the Intelligent Investor by John Bogle
John Neff Best Quote: “When you make up your mind stick to your conclusion and above all be patient”.
What would have Neff bought in India ? Neff liked low PE stocks cheap stocks. So he would have bought a S.B.I
John Neff started poor and had to see his family struggle in the early days of his child hood.Once into Investments he was more of a Grahamite and successfully ran the Vanguard Fund. His investment philosophy was based on the mantra of “buy value and sell euphoria”. In the 31 years that he ran the fund (from June 30, 1964 to December 31 st 1995) the returns averaged a compounded annual growth rate of 14.8%. Thus an initial investment of US $ 10,000 was worth US $ 5,87,000 when the great man retired.
Neff's investment style was in strict contrast to a Fisher or T. Rowe. He opined that growth stocks are always over valued and suffer from two basic disadvantages
Businesses exhibiting higher growth always suffer from increased mortality
The exact point from where growth would stop is always hard to predict.
Neff stated that investors of a slow growth company paying higher dividend would generate better returns compared to a high growth company. This reminds us of an old adage “ A bird in hand is better then two in the bush”.
Neff believed in taking concentrated bets. He justifies this by stating that since he protects his down side by buying real value stocks the maximum he can lose in any stock is the opportunity cost of not buying some thing else that has gone up in the interim .
Key learning:
A low PE ratio
A high Return on Equity RoE.
Excellent Management.
Stable cash flows.
Great products or services .
A large market that could facilitate scalability.
On the selling part he insisted on making a substantial sale once the stock went up and hold on the existing position. If the stock fell back again you may buy it back. But Investors were advised to sell a part of there holding as and when the stock became dear and look for cheaper pastures else where. He always sold into strength and avoided selling more then 25% of the stock's trading volume. If nothing happens to a stock that he buys he remained invested for years till the stock achieved its potential.
The stocks that Neff recommended would have invariably been out of favor in the market. These stocks would be unacceptable buys into the portfolio of a common investor but that is how Neff got his stocks. He often commented, “Merchandise well bought is well sold”.
Neff had an interesting tool to investing. Like Peter Lynch he used to compute the Price Earning to growth (PEG) ratio of his portfolio.. The growth consisted of capital growth and dividend yield. Thus if he were holding a portfolio having a PE of 10 with a capital growth of 12% and a dividend yield of 3% this ratio would be (Capital growth + dividend)/ PE) i.e (12+3)/10 = 1.5.He would work out the same ratio for the market and then evaluate the incremental growth of his portfolio for each unit of price multiple.
Neff insisted that a stock should always be sold before it has achieved its full potential
Rakesh Jhunjhunwala – What is the Big Man bullish on?
Best Quote: If you find an idea that you are convinced of take a position which if proved correct makes a meaningful difference to your Balance Sheet.
Piquant Observations:
One of the smartest investors in India believes in the benefits of portfolio concentration. His top 5 holdings account for 63.26% of his portfolio and his top 10 holdings account for almost 83.23% of his portfolio.
It is very hard to find a cyclical or commodity stock in his portfolio.
Unlike the general investor none of these stocks are large caps in the true sense of the definition. Of Course he could be holding future positions in large caps but the point that I am trying to make is money is made in small and mid caps only. The notional losses that an investor can suffer are also the highest in these stocks. It is very important for an investor not to convert these notional losses in actual losses by selling the shares in despair.
Most of these stocks are being held for over 3 years. Companies like Titan, Pantaloon Retail fall in that category. Others like Crisil are being held for more then 5 years and some for even as long as 10 years. – Clearly Time and not timing is the key to these markets.
Almost all these companies are looking at a huge external scale of opportunity whether it is a Titan or a Pantaloon a Nagarjuna Construction or Lupin the sheer size of the addressable market is humongous. – Morale of the story “See the Bigger Picture”.
We do cover companies with huge scale of opportunity in The Equity Desk - Report Card section.
Rakesh has a special corner for companies that are engaged in consumer, infrastructure and pharmaceutical space. Otherwise he is betting on rising crude prices by buying stocks like Hindustan oil exploration and Praj Industries The overall portfolio is well diversified except that he is not holding any metal or cyclical stocks.
These shares are held by Rakesh and his wife Rekha Jhunjhunwala and form a part of his disclosed portfolio. He could be holding more shares through companies, trusts, proprietary accounts which are not in the public domain.
To know more about investing legends see the section World's greatest Inves
Samir Arora – Recognize change with Growth
Best Quote: “The maximum amount of money is made early in the cycle, when there is maximum change in let’s say, a company, an industry, the perception of a company, in corporate governance and so on. The whole idea is to recognize change at any level – Micro or Macro”
What Samir Arora would have bought in India? In an interview last year Arora said that the best managed companies in India from the stock returns point of view were NDTV, Bharti and HDFC.
Samir Arora was India 's best-known fund manager. His greatest strength lied in picking up multibaggers long before the markets had spotted them. Pantaloon Retail, Trent, Bharti Telecom, P.N.B, Hero Honda, Infosys, Zee Telefilms, HDFC Bank and Satyam were a few of his outstanding stock picks. He entered into Satyam and HDFC Bank when it was not being covered by any of the research analysts. It is said that during a conversation with the head of a tech company, he suddenly walked out, told his brokers to buy 500,000 shares of the company, and then rejoined the meeting. He had the tenacity to stick with stocks for a long time. He often talks about HDFC Bank as a 20-year story. A mechanical engineer from IIT and an MBA topper from the Indian Institute of Management- Calcutta (1986), 41-year- old Arora dropped his doctorate programme at Wharton midway, collected a Masters in Finance instead, and flung himself into the stock markets. In 1991, he joined Alliance in New York . After a two-year stint as an international analyst, he became chief investment officer of the Indian operations. Basically a top down player Arora loved making that broad macro call and then went forward to look for the best performing company in that sector. Even if he was convinced about the standalone potential of a particular stock he resisted from investing in the sector if the sector as a whole was experiencing a tough macro environment His analysis started with the top down approach and the bottoms up research came in separately later on. While there was always a talk that Arora was too friendly with market operators and company managements we would concentrate on his investing strategies and thinking rather then become judgemental about his dealings..
Key learning:
The main parameter to look at is the P/E. Investors may also look at the Profit/Profit Before Tax to neutralize the effect of taxes.
Investors should also focus on Return on Equity(RoE) but analyzing a company on the basis of DCF is an utter waste of time. Arora contends that DCF cannot be looked at for more then one or two sectors. This is because you really have no idea about what will happen to a company beyond three years.
Buy good businesses. In a bad business, the value that a good management can add is very low. An ordinary management in a good business often keeps its momentum. But fraudulent managements should always be avoided
For a normal steady business you can never rely on the EV/EBITDA.
A tax-saving company is perhaps the worst company in India because it lets taxes determine its strategy
There are several instances where Samir Arora used his veto to get directors changed in private companies just to help them get a higher P/E.
In many cases, money has not been made by buying the best managements but the managements that want to become the best.
High P/E do not come because of high earnings or because that company is in a good industry. It is earned over a period of time
If one learns how to invest in India, he can invest almost any where in the world. Investing in India teaches the analyst how to identify managements that are cheating their share holders. One also understand why two stocks in the same sector don't get the same rating.
Arora started buying HDFC Bank after it got listed in 1995. At that time the stock traded at Rs30. It remained a dog till 1998. Suddenly it flared and went up to Rs250.It stayed there for a while and then started its course to Rs 700. Arora liked such stocks and kept buying them because as long as the company’s earnings kept growing at 30% and the stock remained stagnant it would become cheap and ripe for another rise.
He also bought 5% of Satyam in 1995. The stock did not move much for two years. But once software was in demand Satyam did not stop.
The most difficult thing is selling a stock when its valuations become too high. Arora advises investors to sell on company disappointments rather than on valuations.
Churning high PE stocks for low PE stocks within the same sector is never a good decision. Post the tech bubble while Infosys and Wipro fell 60%, virtually every small stock fell 90-95%. Technology stocks like Infosys and Wipro had the highest P/E in January 2000 and had fallen the least by November 2001.
Julian Robertson
Best Quote:“Management must be wedded to the bottom line as against building sales. It must have both a long term plan and the means to implement it.”
What would have Robertson bought in India? Low cost private label Retailers like Trent, Monopolistic enterprises like Concor and a few cheap Banks.
Julian Robertson the fund manager at the Tiger Fund was introduced to stocks when he was just six years old. He had been particularly attracted to businesses that were monopolistic and oligopolistic. His best stock picks were De –Beers purchased at a PE multiple of three and a half. The South African Diamond major controlled more then 80% of the world's diamond market. While he was long on Wal – Mart he was short the other high cost retailers on the premise that Wal-Mart's low cost strategy would finally push its competitors out of business. Robertson was amongst the very few Investing legends that bought Wal-Mart in the initial stages of its growth. The ones who missed it were Warren Buffet, Peter Lynch, Marc Faber to name a few.
In 1989 post the fall of the Berlin Wall Robertson took huge positions on the German bourses. He was particularly long on the banks and Industrials. Neglected markets always sold cheap and Germany was no exception. The fall of the Berlin wall was the classic catalyst needed to draw attention. Amongst his other country specific bets was Japan , a market he started buying in 1970. He insured his positions in 1990 by buying puts on the Nikkei and shorting Japanese Banks. At one point of time he had more then 10% of his portfolio on Nikkei puts. Subsequently when the Nikkei fell the short positions and puts brought in millions for him.
Robertson used to bet big on leveraged positions . Normally he would have leveraged his portfolio to two to two and a half times its assets and would have also balanced his portfolio between US and non – US Stocks. Most of his gains were made in bottom up stock picking. He wasn't great at gambling on macro variables like currency and bonds etc.
Robertson had a knack of identifying retailing stocks. In the U.K he bought Sainsbury and Tesco, the grocery retailers. These companies owed and sold a large number of their own brands. Back home in the US he made a killing in Time Warner, Comcast and TCI. As with Peter Lynch “Buy what you see” worked perfectly with him.
Key learning:
Bet on great Managements that are committed to profitability with long term growth
Look for monopolies and oligopolies – Companies that present their competitors with a barrier to entry.
Research companies that offer value. Look at cash flows , PE multiples etc.
Sell pick axes rather then dig for gold – In the great California Gold rush people who decided to sell pick axes and shovels made money. Finding Gold was not certain but it was certainly important to buy tools if you wanted to look for Gold. In the late 1990's Robertson placed huge bets on palladium a critical input for cell phones and auto emission devices.
Look for companies generating sustainable growth over longer periods of time.
Keep an eye on legislative developments both in favor and adverse.
Take large bets – in case they work they should make a huge difference to your portfolio.
Robertson is impressed by India 's internal dynamics. The huge pool of doctors, engineers and accountants is perceived to be a solid advantage. The business environment, legal structure and strong stock market trading and risk control measures also attract him.
During the technology bubble Robertson could not develop conviction on any of the tech stocks. His value picks on a couple of airline and banking stocks also went wrong. His investors panicked and withdrew. His bets on the Japanese currency and emerging markets also backfired and Robertson had to close down his fund in 2000 – but as they say this is the nature of the beast.
References :
Julian Robertson: A Tiger in the Land of Bulls and Bears by Daniel A. Strachman
William O’ Neil – The “CANSLIM” Strategy
Best Quote: “If in the past you were not willing to buy stocks with above average PE’s you automatically eliminated most of the best performing securities”
William O' Neil was a radical in his own way of thinking. He stated that a strategy, which focused on buying low priced stock or stocks with low PE was defective and unsound. He argued that it made more sense to buy stocks that were getting into new highs rather then buy stocks nearing their lows. To illustrate his pint he talked of an easy to remember acronym “CANSLIM”.
The “C” stood for current earnings, which Neil expected to grow over 70% over the corresponding quarter of the previous year. There is no need for an investor to buy stocks of companies that were not growing their earnings by at least 20 to 50% year on year. The past five-year average earnings growth of a stock should out perform at least 95% of all listed companies.
The “A” stands for Annual Earnings.The 5 year annual compounded growth arte of outstanding performing stocks was 24%. Buy companies that show consistent EPS growth.
The “N” stands for new. Either the product has to be new or the service or the Industry. A new sector always draws attention. We have seen that happen in India. In the early 90’s when cement and steel were decontrolled stock prices ran upwards, so did the software companies in the late 90’s. Earlier in this decade the development of businesses like mobile telephony, retailing and Insurance sectors created several multibagger for investors.
The “S” stands for outstanding shares. Neil argues that the better performing companies have lower number of outstanding shares. Another way of looking at this concept is to buy shares of companies that have a smaller market cap. O'Neil argues that 95% of the best winners were smaller market capitalized companies.
The “L” stands for the leader and not the laggard. Neil adds that the best performing stocks generally outperform the other stocks in the market. Look for stocks having an RSI of more then 80
The “I” stands for Institutional sponsorship. While it does make sense to buy companies having some Institutional ownership investors should avoid companies that are Institutional favorites. This is because any adverse news could spark off huge selling. Since these stocks are over researched they discount all the good news in the price.
The “M” stands for the market. A fair proportion of stocks will emulate the market and go with it. This makes it important to interpret the general trend of the market.
Neil argues that when the indices move to a new high on poor volumes it indicates a general lack of demand. An increase in volumes unaccompanied by rising prices is also a good indication of a weakening market. If the stocks leading the market start losing out there is a fairly good indication that the market has topped off.
Investors who do not cut losses have a serious risk of losing more then 70% of their portfolio during bear markets. O'Neil suggests that it is easier to buy a multibagger then to sit on one as rising stock price is the best reason to sell a stock for a novice investor.
Stocks that pay high dividends are not the best bets on the bourses. The capital loss on a stock may well over take the dividend income from holding that stock. When stocks move out from a range the volumes should increase by more then 50%. Stocks that are consolidating should do so on little or meager volumes.
Lastly O'Neil has a piece of good advice for Wall Street experts. He says that more then 80% of the research reports are written on wrong companies. He adds further that these research reports seldom provide sell recommendations.
References :
How to make money in Stocks? William O’Neil
Market Wizards – Jack D Schwager
GLOBE TROTING MACRO PLAYERS
George Soros
Best Quote: "Short term volatility is greatest at turning points and diminishes as a trend becomes established… By the time all the participants have adjusted the rules of the game will change again"
What would Soros buy in India? Soros was recently rumoured to have taken positions in real estate stocks like Unitech, Ansal Prop etc.
George Soros was arguably the most powerful money managers of all times. His decisions moved currencies, countries, stocks and commodities. In 1970 he co-founded the Quantum fund with Jim Rogers At that time there were just two of them Soros the trader, Rogers the research analyst and a secretary. During their partnership tenure between 31st December 1969 to 31st December 1980 this fund chalked up a total return of 3365%.Like all the other legends Soros did not spend much time reading the Wall Street Research reports. He considered them to be of little material value and insisted upon getting a first hand information on ideas through reading news papers, journals, periodicals etc. Soros used to pay big on the markets. In 1992 his bet against the pound made him richer by US $ 1.5 billion where as in another such currency swipe he lost about US $ 600 million by betting that the Japanese Yen would fall. In 1999 his views against the technology bubble made him go short and he ended up losing. A few months later he doubled his position and went long thinking to ride the rlly on the upside. Unfortunately he was caught on the wrong side and lost again.Key learning:
Soros believed in starting with smaller amounts of money and then building the portfolio with increasing profits..
Try and do what you are good at was his advice to traders. He discouraged people from trying to be clever and attempting to discover that new technology company with a new product.
Soros insisted that speculators should keep the downside risk of an investment in mind before they punch in the buy button. More over the ability to cut a losing trade should be a speculator’s greatest attribute
Markets are never efficient. Soros dwelled upon reflexivity – the participants have pre defined views and understandings. The outcome of the markets are most likely going to be different then the pre defined set of views that a majority of these participants have. The final outcome would then change the participant’s behavior. John Train summarizes the situation best when he remarks “Perceptions change events which in turn changes perceptions”. Soros also opines that the participants decision relates to the future and the future is contingent on the participants decision in the present”
Soros considers technical Analysis to be an utter waste as he questions the foundation on which this theory has been built.
Stocks prices are determined on the basis of Fundamental analysis. The problem how ever is to understand the internal dynamics of the fundamentals of a company since they keep changing very often.
Soros argues that each Cycle could have the following features:
The proportion of speculative transactions increase as the trend gathers steam.
Trend should be your friend – Longer the trend greater the reason to follow it.
Once in vogue trends normally run their courses.
Soros stated that immediate prices are determined by demand and supply, which in turn is governed by news flow, momentum & legislation. He was a specialist in catching reversal points. He did so twice in the nineties for the European currency markets. He thought that knowing what would happen is not enough as much as knowing when it would happen. The best analogy we can draw is from his Nasdaq trades. He knew that the technology bubble would burst but he still lost a big amount for a pre mature trade
References :
The Alchemy of Finance (Wiley Investment Classics) by George Soros, Paul A. Volcker
Money Masters of our Time – John Train
Soros on Soros: Staying Ahead of the Curve by George Soros
Jim Rogers-Driving into wealth
Best Quote: When you see several major companies losing money and capital expenditure coming to a stop, then look for an Industry recovery!
Known as the “poor boy from Alabama ” Jim Rogers is known more for his post retirement activities then for what he did at work. During his working tenure he never took a vacation for a continuous stretch of 10 years, He believed that history and philosophy taught you more about the markets. This he thought was better then going to business schools.. In 1970 he co-founded the Quantum fund with George Soros. At that time there were just two of them Soros the trader, Rogers the research analyst and a secretary. During their partnership tenure of 31 st December 1969 to 31 st December 1980 this fund chalked up a total return of 3365%
Starting out in his twenties with an initial capital of $600 Rogers retired at age 37 with more money than anyone could possibly spend. His book, Adventure Capitalist - The Ultimate Investor's Road Trip, is the story of his drive through 116 countries over a three-year span from 2000-2003. A few of his conclusions: Thumbs down on investing in Russia and India , regardless of natural resources or technology skills. Thumbs up on China, Uruguay, Mongolia and… Tanzania ?
Key learning:
What to look for before buying into a country?
The macro picture should be improving Rogers looked at the current account, fiscal deficit, exchange rate controls and restrictions etc.
It country's macro economic set up mysr be better off then is gradually understood.
The currency should be convertible and the trades should provide easy liquidity so as toenable a large trader to awitch positions with ease.
He used to rely more on travel and get first hand information rather then rely on Wall Street research reports of different countries. He used to say that the currency black market dealers gave you more information then the Central Bankers report on their repective countries.
What to look for before buying into a Company?
Institutional under ownership. Rogers considers the best short candidates are stocks where Institutions own more then 3 quarter of the shares.
Never try and make money from insider information not because it is unethical but because it is almost impossible to do so on a consistent basis.
Buy stocks of companies that are so under valued that even if nothing positive happens the maximum you can lose is on the opportunity cost of capital – Keeping the capital safe is of paramount importance.
Being more of a top down player Jim was more interested in the macro set up of things rather then worry about quarter on quarter fluctuations.
The micro numbers that he loved working on were:
Capital Expenditure as a percent of depreciation, gross plant and net plant – The ratio is highest when the company is at the top of a cycle and vice versa. Compare this with a cash flow analysis. At times of high capital expenditure plans the free cash flow diminishes and equity valuations take a hit.
Look at ratio of sales to receivables, debt to equity. A very high profit margin with lower inventories and increasing capital expenditure is another indication to go short on a company.
Growth stocks are classic cases of shorting opportunities.
Rogers considers commodity to be the next big thing and he has been proved extraordinarily correct in his forecasts till now. He is bullish on: Crude Oil: Economic development in China and India will create a demand for manufacturing activities - this would in turn increase the demand for newer cars, trucks, and consequently crude. Rogers opines that the per capita consumption of crude in these two countries is just 5% of that of the U.S. Rogers expects crude to sail well above $100 at the end of the decade. Sugar & Coffee : The majority of population in India and China would experience rising incomes with economic growth. This would increase the demand for sugar and tea.
Lead: The growth of cars in the newer economies would create a huge demand for lead as it is used directly in the production of batteries. Other commodities where Jim is bullish on are Tin, Zinc Corn and Soya bean.
References :
Adventure Capitalist: The Ultimate Road Trip by Jim Rogers
Investment Biker: Around the World with Jim Rogers by Jim Rogers
Money Masters of our Time – John Train
Hot Commodities: How Anyone Can Invest Profitably in the World's Best Marketby Jim Rogers
Sir John Templeton
Best Quote: “The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell”
Sir John Templeton started his investment career during the World War – II. Convinced that a war generally creates an increase in demand & business activity Sir John Templeton called his broker and placed a bid to buy 100 shares of each company that was selling at less then $1.Four years later he sold his original investment of US $ 10,000 at US $ 40,000. In his initial years Templeton used to churn his portfolio quite often and switched between cash and stocks with remarkable ease and timing. He was comfortable searching for countries to invest in and was among the early investors to have recognized the potential in the Japanese stock markets. He was among the firsts to have taken a position there in the early sixties. At that time companies were available at low single digit PE's with high dividend yields. The Japanese Index went up 40 times from 1965 to 1989. Being a value investor Templeton scaled down his investments well into and before the peak. He used to read brokers report only to obtain first hand information about the company rather then use their recommendation to buy and sell stocks.
He professed the theory that for those properly prepared in advance, a bear market in stocks is not a calamity but an opportunity. He is bullish on China and predicts that the Dow will hit the 1,000,000 mark by the turn of this century. The only investors he thinks that should not diversify are the ones who are right 100% of the time. Templeton was always excited to generate first hand information from company visits. A few questions he liked interviewing the management was about their long-range plans, the growth about the company and whether there was any chance for this growth rate to accelerate, their views on the competitors etc.
What to look for before buying?
Invest at the time of maximum pessimism with country and stocks specific diversification
Invest into low PE Companies.
Higher EBIDTA or Operating margins
The intrinsic value of the business
Sustainable growth rate
His basic call was based upon looking at the broad macro picture of either a country.
In 2000 he profited from the crash at the Nasdaq. Clients and associates were advised to switch from stocks into Treasury bills. He is bearish on the US dollar and expects substantial gains in the South East Asian currencies. He has founded the Franklin Templeton Mutual fund business that manages over (Rs 18,00,052 crores) US $ 412 billion from 240 open-ended schemes across the globe.
References :
Golden Nuggets from Sir John Templeton by John Templeton
Spiritual Investments: Wall Street Wisdom from the Career of Sir John Templeton by Gary D. Moore
Marc Faber – Discovering Tomorrow’s Gold
Best Quote: “Follow the course opposite to custom and you will almost always be right.”
Marc Faber is the guru of modern day investing if you might call it and his opinion on markets, currencies and economies are meticulously heard, analyzed and implemented all over the globe. In 1987 he warned his clients to cash out before Black Monday on Wall Street. He piquantly forecasted the burst in the Japanese Bubble in 1990.This was before the Nikkei from 40,000 odd lost 75% in value plummeting to 10,000 in about a decade and a half. He correctly predicted the collapse in US gaming stocks in 1993; foresaw the Asia-Pacific financial crisis of 1997/98 and the resulting global volatility. Currently Marc is bullish on Gold, Silver, Metals, Coffee, Orange juice, Sugar. His greatest bet in recent times has been on crude. When crude was in an over supply zone hovering around US $ 12 he ventured out to be a bull. Now well over US $70 per barrel Marc feels crude is still far away from the top.Born in Switzerland and educated in Geneva and Zurich , Dr. Marc Faber received his PhD in Economics from the University of Zurich at age 24. The former managing director at Drexel Burnham Lambert from 1978-1990 has been living in Hong Kong for the past two decades. Essentially a contrarian Investor Faber is known more for his broad macro calls rather then his individual stock picking skills. Faber's Investing logic is based on the premise that everything that goes up must come down and vice versa.
Faber opines that >when ever an economy has high dependence on a single commodity the business cycle will correlate very closely to the movement of that commodity. He pioneered the “ Life Cycle theory of Emerging markets” The theory provides an intellectual framework for emerging markets with symptoms and characteristics for each phase. Investors following this theory can develop entry and exit points from emerging markets.
Faber states that it is much easier to pick bottoms then to judge market tops. Tops are usually formed with spikes and no one knows when the bubble will burst but the bottom is a long extended period of side ways movement. Foreigners do not buy at the bottom or during times of economic depression. They usually buy when things appear bright and robust. A classic case in point is Argentina . He writes “ When I visited Argentina in 1988, I was truly amazed: total market capitalization was only around US$750 million and daily volume on the Buenos Aires stock exchange averaged less than US$ 1 million. A high quality baby-feed steak cost US$5, a luxury apartment US$70,000 and an entire office block in a prime location US$1million! That was when inflation stood at about 600% per annum. But what was the situation a few years later, in 1994, when Argentina 's inflation had been curbed to less than 10%? Everything had become dear and Buenos Aires was once again as it had been in the 70s- one of the world's most expensive cities.
Faber talks of the buying opportunity in Germany during the early part of the last century. He narrates “The first great buying opportunity occurred in February 1920 when the US Dollar index of German shares sold for as a little as 8.47 (1913=100). Within five months, the index doubled in Dollar terms, largely because the Mark appreciated briefly but sharply”. Faber states that while the Index continued to maintain itself till the summer of 1922 it plunged rapidly as currency depreciation exceeded the rise in local currency stock prices by a wide margin. He continues to add “ The enormous relative drop in share prices (down over 97% in Dollar terms) created some odd situations. Daimler, one of Germany's largest and most profitable companies, had share capital of less than 980 million paper marks. Since one of its cars cost three million marks on average at that time, the stock market valued the entire Daimler Company at the equivalent of only 327 cars. Similarly, the market capitalization of the sixteen great Tietz shops equaled the price of just 16,000 suits.
The incredible under valuation of Russian assets in 1993/94 also becomes evident if one looked at the market caps of individual companies in 1994: Surgutneftegaz (the largest oil company in Russia ), which produces about 2% of world oil output, was privatized in 1993 had a market cap of only US$170 million in early 1994! Uralmash and Permsky Motors, each of which employed over 30,000 people, were valued at US$7 million and US$4 Million respectively. Gum Department Stores, a leading retailer in Moscow (Its main store, which it leases, is right next to the Kremlin, but it owns freehold another 15 stores in Moscow ), was valued at a meager US$24 Million.
Although he likes the technology and generic pharmaceutical industries in India he states that the Indian markets are over valued and may go up in the shorter term. His message to Indian investors is that “you will get a chance to pick up Indian Stocks for a lower price in 3 to 4 years then what you would have to today.
References :
Tomorrow's Gold: Asia's Age of Discovery by Marc Faber
Riding the Millennial Storm: Marc Faber's Path to Profit in the Financial Markets by Nury Vittachi,
T. Rowe. Price
Best Quote: “The most profitable and least risky time to own a share is during the early stages of growth. After the company reaches maturity the investor’s opportunity diminishes and his risk increases”
What has his firm T.Rowe Price bought in India? Companies like Mid-Day multimedia, TV –18 & Financial Technologies
A specialist in growth investing. T. Rowe. Price ushered in a new phase of growth investing just as Graham had done for value investing. While analysts and fund managers at leading research houses were busy looking for that turn around spinning company or that Steel company that was restructuring its debt, Rowe looked at companies that were in the secular growth phase. The process started with identifying the sectors in that growth phase and then buying the most promising company in that sector
Key learning:
What to look for before buying?
The most profitable and least risky time to own a stock is during the early stages of growth. Mature companies offer less returns compared to their risk.
Check whether companies have superior research to develop products. Invest in companies operating in niche sectors.
Buy companies that are generally immune to changes in Govt. Legislation.
Avoid investing into companies having substantial or spiraling labor costs.
Look for companies having a high Return on Capital employed (ROCE), High operating margin, and sustained growth in earnings per share (EPS)
The company should exhibit growth both from the both volume as well as the net earnings side. The growth in sales value is not that important as the growth in unit volume.
Companies having the following attributes were expected to prolong their superiority.
Superior Management
Patents and Research capabilities
Strong Finances
What to look for before selling?
Reduced entry barriers giving rise to competition.
Saturating markets. Once the market became saturated it was time to get out.
New innovations or substitute products. The typewriter industry is a classic case in point. The advent of the PC business literally killed this industry.
Adverse change in Management integrity.
Adverse changes in legislative or legal scenario.
Rise in input costs.
Selling Strategy:
Price waited for the stock to go up 30% before he decided to sell then sold another 10% as it went up by 10%. Thus at some point of time he would be out of the stock. Quite a contrast to Fisher who wanted to hold on to a growth stock till eternity.
Rowe disliked dividend discount valuation models employed by Wall Street analysts. He thought that estimating the future on that basis was based more on theory rather then reality. Rowe opined that the changing dynamics of the business environment would not enable the dividend discount model to throw up correct valuations.
Benjamin Graham – Numbers Numbers and Only Numbers
Best Quote: “While enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster”
What would Graham have bought in India ? Probably nothing except a few stocks where the market value of holdings exceeds the market cap some thing like a Tata investment.
Benjamin Graham was the only investing legend who ignored the subjective aspects of equity analysis. Graham was never interested in meeting managements and knowing what they were capable of doing or not doing. He never looked at a company's product pipeline nor concentrated on anything else. All he saw and studies were hard core numbers - the Balance Sheet. He wanted to buy cheap, discarded and under valued assets. He was fascinated with numbers and operated on the premise that financial numbers capture every thing that an investor ought to know. He was brutally shaven off in the 1929 crash.Later on he developed a theory that the prospects of a company cannot be determined. He therefore advised investors to look back wards rather then forward. he He encouraged investors to look at the operating history for the past 7 years . It was certain that Graham was not looking at any of the companies in the new sector. In 1934 he published a book titled “Security Analysis” which remains an investment classic till date. In the early 1950's Warren Buffet was amongst his team of research analysts trying to decipher the investing skills of the master.
Predominantly a man who saw numbers and ignored perceptions Graham had a very unique personal life His second wife was his secretary and the third an employee. In fact he spent the last few years of his life with a woman who was earlier involved with one of his sons.
One of Graham's basic investing rules was to compute real earnings of a company. His definition of real earnings was dividend paid adjusted with increase (decrease) in the net asset per share – which usually appears as the change in earned surplus including voluntary reserves.
Graham stressed the diversification mantra. His basic premise was to avoid having concentrated portfolios . Since he ignored the subjective aspects of investment he wanted to buy companies almost for free. While the idea looks good in theory it is actually hard to find such companies in actual practice though. Graham backed his theory by the “Cigar butt” analogy. He stated that cigar buts that are thrown on the ground are always good for a few puffs. Similarly investors should look for discarded companies possessing a good turnaround prospects.
Graham professed that investors should buy companies when the current situation is unfavorable, the near term prospects poor and the low price fully reflects the current pessimism . Investors he added focus on the long term picture and ignore the daily quotations that “Mr. Market” provides. He suggested treating the market as an insane partner who provides daily quotes depending on which side of the bed he got up from. Clearly it should suit the investor to buy shares when “Mr. Market” displays more insanity then otherwise.
Graham advised Investors to keep their equity exposure within 75% of their net assets. For the the more adventurous investors a 100% exposure to equity could be considered in case he meets the following guidelines:
Keep enough cash to take care of 12 months of your family expenses
You wish to invest steadily for at least 20 years into the future
Survived the bigger bear markets – maybe the 2000 tech bubble
Did not panic and sell stocks but actually bought more stocks of solid stable companies as prices continued to slide during the above bear markets
You understand and are able to differentiate between hope and hype.
Key learning:
Buy Stocks trading at two- thirds of their Net current assets and sell them as they approach their net current assets. Graham does not account for the fixed assets and recommends deduction of all liabilities while computing net current assets.
The Earnings yield (inverse of the PE ratio) should be twice of that of a “AAA” rated bond. In other words if the interest rate on a “AAA” bond is 5% the earnings yield should be at least 10% or the PE ratio of the stock should be 1/10% = 10.
The Company’s debt to equity ratio should not be more then 1. For computation debt should include preferred stock
The dividend yield on a stock should not be less then two third of a “AAA” bond yield.
What to look for before Selling?
Sell after the stock moves up 50%. Sell after two years if it does not move up by 50%.
Sell if the company stops declaring dividends.
Sell if the earnings decline or the stock moves up by 50% over the new target-buying price.
Clearly in today's environement of overvalued asset classes it will be very difficult to find a stock on the Benjamin Graham way of Investing. Perhaps the 1929 fall shook him so much that he turned risk averse in the strict sense.
References :
Security Analysis: The Classic 1940 Edition by Benjamin Graham, David Dodd
The Intelligent Investor: The Definitive Book On Value Investing, Revised Edition by Benjamin Graham, Jason Zweig.
Warren Buffet The Schumacher of Investing
Best Quote: Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale will give good results.
Warren Buffett is by far the most successful investor of all times.
He buys businesses that are simple and easy to understand.
Once a business has been bought the time to sell it is “almost never”. Warren Buffet tries to look at stocks as pieces of part ownership of businesses.
Buffet rarely follows the minute-to-minute fluctuation in stock prices and prefers to stay in the small town of Nebraska. Buffet’s holding period often extends into decades and this particular quote makes for a very interesting reading. In a a recent letter to the shreholders of his company,
Buffet wrote:
“We bought some Wells Fargo shares last year. Otherwise, among our six largest holdings, we last changed our position in Coca-Cola in 1994, American Express in 1998, Gillette in 1989, Washington Post in 1973, and Moody’s in 2000. Brokers don’t love us”
Buffet argues that the key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and above all the durability of that advantage.
Key Strategies:
Be focused and buy concentrated portfolios – they perform better. Buying two stocks in every sector will help you create a zoo not a portfolio. A person who diversifies is the one who is unsure of his investments. Buffet once put about half of his wealth in a single stock “American Express” when he believed that the company was into a one off problem.
Buy what you see and understand. Buffet never bought a single technology company in spite of being a very good friend of Bill Gates.
Buy businesses not stocks. Buffet advocates investors to be and think like passive a owner of that business.
Understand the Margin of Safety and the Circle of competence. These are Buffet's favourite words. Do not be a jack-of-all-trades buy stocks of businesses that you understand.
Employ the magic of compounding
Investing is a full time job (24x7x52). If you can go to a dentist for your teeth, cobbler for your shoes, barber for your hair then why can’t you go for an expert for your wealth.
Piquant styles:
Separated bottle corks from the garbage so that he could know which company sold more cold drinks.
It took him about 2 years to figure out that his room was painted in his absence as he just looked at books inside the room.
Although he owns a private jet he preferred to stay away from Wall Street in a small town and declined to invest in a company whose CEO took out a brand mew letter pad to explain the company’s plans
He once invested in a company located on the seashore which had only three sides of its building painted. The side facing the sea was left without paint.
When his wife spent US $ 15,000 on home furnishing his first comments to a friend were” You know how much is that worth if you compound it for 20 years.
Key learning Business Simple understandable – mostly buy what you see category
Consistent operating history.
Favorable long-term prospects
Strong Franchises with pricing power. Buffet wanted to hold on to companies that were surrounded by a moat so that your competitors could not squeeze you on prices and profits.
Amongst Buffet’s favorite businesses were Banks. Media and Consumer related stocks. Buffet liked T.V stations as he thought that the fixed capital requirements were low, companies operated with little inventories and negative working capital and had a very high profit margin on sales.
Management.
Trust worthy managements deserve premium. They should be clear and forthcoming
Avoid companies with managers following lavish and extravagant styles.
Financials:
Look for High Return on Equity (ROE)
Look for high and stable profit margins
Markets:
Use conservative earning estimates and the risk free rate of return as the discount rate
Valuable companies can be bought at attractive prices when investors turn away.
Companies to avoid:
Buffet avoided investing into companies that required a high degree of research. He did not buy technology and pharmaceutical companies.
Buffet was apprehensive about retailing companies his concern – A company could report good numbers year after year and then suddenly go bankrupt. Buffet avoided investments into aircraft carriers as well.
Companies that had a very long inventory cycle like farm (agricultural) businesses should also be avoided.
Buffet advised investors not to put money into Cash guzzling businesses but instead look for businesses that generated free cash flows year after year.
Commodities were an absolute no - no. Buffet stated that agricultural commodities in particular are dependent upon the mercy of weather, which adds another twist to computation of the probability of an event.
References:
Warren Buffet – The making of an American Capitalist – Roger Lowenstien
The Warren Buffet way – Robert.G. Hagstorm.
The Essays of Warren Buffett : Lessons for Corporate America by Warren E. Buffet
Peter Lynch – Buy what you see
Best Quote:If one could tell the future by looking at Balance Sheets then Accountants and Mathematicians would have been the richest people in the world.
What would have Lynch bought in India? ITC, Maruti, Hero honda, Bharti Airtel, Pantaloon Retail, TV-18 and the likes.Most Fund Managers are known for their investing styles rather then the investments that they make. Peter Lynch is one of them. As the fund Manager for the Magellan fund Lynch grew to fame for his "Buy what you see "school of thought". An initial Investment of US $ 10,000 would have grown over to US $ 2.50,000 in the 13 years that Lynch managed the fund. His annual rate of compounded growth averaged 29.2%. The greatness of Lynch lied in his simplicity. He was one of the few people from the Fund Manager fraternity who taught and practiced the KISS (Keep it Simple Stupid) principle.Most often people invest in sectors and industries that they know little of. For instance a Doctor could be investing into a technology company while a software engineer could be looking at pharmaceutical stocks. Lynch often remarked “Your investor’s edge is not something you get from Wall Street experts. It’s something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand” Although he held more then 1400 stocks in his Magellan fund Lynch advised people to hold stocks of as many companies as they felt comfortable with. For instance he advised investors to hold fewer well researched stocks rather then own a complete index replica as such.His advise on the number of stocks investors should hold was also simple. “Owning stocks is like having children – don’t get involved with more than you can handle. The part- time stock picker probably has time to follow 8-12 companies, and to buy and sell shares as conditions warrant. There don’t have to be more than 5 companies in the portfolio at any one time”.
Key Learning:
Small Market capitalized companies - Lynch loved small emerging businesses with strong balance sheets,. His extraordinary returns in La Quinta Inns came at a time when the company was in the initial years of development He argued "Big companies don't have big stock moves you’ll get your biggest moves in smaller companies."
Fast growers - Among Lynch's favorites are companies whose sales and earnings are expanding 20% to 30% a year. He cautions investors from looking at companies that grow more then 30% every year. Companies growing at 50% to 100% are bound to falter and crack. It is therefore imperative to view very high growth ideas with a sense of suspicion.
At the same time, he advised investors to look for slower-growth businesses selling at a truly great price.
Dull names, dull products, dead industry - Lynch loved good managements in simple mundane, colorless businesses. His arguments were that nobody creates excess capacity in dull boring industries and when you can find a winner there it makes sense to jump in.
Lynch loved boring businesses with boring company namesL. Peter Lynch writes about both in One Up on Wall Street. No self-respecting Wall Street broker could recommend absurdly named unknown companies to his key clients. And that left the greatest money managers an opportunity to scoop up a truly solid business at a deep discount.
Spin Offs - Lynch's dream stock at Fidelity Magellan was one that hadn't yet attracted any attention from Wall Street. One-way Lynch recommends finding these companies is to buy spin-offs. For instance, after being spun off, Toys "R" Us went on in relative obscurity to rise more than 55 times in value. Lynch also made a fortune buying into the funeral and cemetery business Service Corp, which had no analyst coverage.
Insider buying and share buybacks: Lynch loves companies where the senior managements bought stocks of their own companies. A combination of insider buying and aggressive share buybacks really piqued his interest. "Buying back shares," Lynch writes, "is the simplest, best way a company can reward its investors."
Lynch ignores conscious asset allocation between various asset classes. He says that market players may have 50% of their portfolio in cash at market bottoms. When the market decides to move up they could miss most of the move.Lynch was the proponent of the PEG theory.
As long as the PE of a company was lower then the growth rate that it expected to generate Lynch would have advocated a buy on the stock.While making investments Lynch advised people not be try and catch bottoms. If you liked a company he argued take a small position and add it up as you see further visibility in earnings growth. Lynch stated that “time is on your side when you own shares of superior companies. You can afford to be patient – even if you missed Wal-Mart in the first five years, it was a great stock to own in the next five years also”.
In this connection he presented a very interesting statistic.
Time and not Timing is the Key
Market timing strategies
S&P Returns for 40 years since 1954
Invested all the time
11.4%
Missed the ten most profitable months
8.3%
Missed the forty most profitable months
2.3%
Lynch cautions investors to do away with weekend thinking, predicting the future course of the economy and debating on the movements in interest rates and other macro economic variable. His advise on this count was “Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the company you are invested in.” And Finally Lynch says that several small gains make a one very large move. Three 30% gains equals a four bagger is his advice to investors.Refrences:
One Up On Wall Street : How To Use What You Already Know To Make Money In The Market by Peter Lynch, John Rothchild
Beating the Street by Peter Lynch, John Rothchild
Learn to Earn : A Beginner's Guide to the Basics of Investing and Business [BARGAIN PRICE] by Peter Lynch, John Rothchild
Philip Fisher – Making Uncommon profits from common stocksBest
Quote: I do not want a lot of good investments I want a few outstanding ones. If a job has been correctly done when the common stock has been purchased, the time to sell it is almost never.
What would have Fisher bought in India ?
Philip Fisher qualifies as one of the few selected investing legends who recommended, bought held and made money in technology stocks. the late 40's and early 50's he bought stocks like Dow Chemicals, Texas instruments and Motorola. While these stocks declined as severely as the others in a bear market they outperformed the others in stable and bull markets.
Fisher started his investment banking business in 1931 – after the great depression. He handled only a few clients and refused to temptation of large scale churning.This helped him cut down on administration and also eliminate transaction costs. Fisher disliked extravaganza for years he wore the same over coat and drove his dilapidated stripped down car Oldsmobile 6. The idea of buying a new car did not seem to make any "financial "sense to him.
Fisher hated to sell good companies. He argued that if a stock becomes over priced investors should sit down with it rather then sell the stock with a view to buy it back at a lower price. He discouraged selling in anticipation of a market fall. Fisher would normally say that stocks sometimes go up because of good news that common investor is are unaware of.
Old companies operating in mature businesses could not be categorized as conservative businesses. Fisher's definition of a conservative investment was a dynamic, well-managed company having a good product portfolio and doing all that it could to grow, prosper and create value year after year.
It is hard to do a subjective analysis of a company from the published literature. The astute investor has to rely on the business grape wine. Fisher termed this scuttlebutt.The best areas to get information were at trade fairs where different companies assembled with their products and helped the intelligent investor make his case. People who buy a company's products carry valuable information, as do suppliers and purchasers.As a part of his analysis Fisher also looked for a smart sales teamin the company. He liked managements that embarked on cost cutting measures and which avoided extravagant spending.
Key learning:Look for these Company specific attributes:
Dominant Industry player
Growth from existing Products
High and expanding operating margins
High Return on Capital employed (ROCE)
Effective Sales and Research team
Scalable business model
Look for these management specific attributes
o Honesty and Integrity
o Conservative accounting policy
o Long range plans
o Financial controls,
o Good personnel policies
o Avoid companies run by managements that seek to issue the mselves cheap stock options.
High profit margin businesses attract competition. Fisher favors a slightly higher margin of profit with dominant market share. This he thought would discourage competitors from entering the business.
It is better to buy stock during the start up period of a new capacity expansion. At that time earnings are subdued with depreciation and interest costs.
Buy on a bad corporate news – strikes, temporary failure of a new product
Do not run after high dividend paying companies. Companies that pay a higher rate of dividend admit their inability to look for newer areas of growth.
Alwayslook for low PE companies that can grow their earnings. An earnings growth would re rate the stock upwards , which would later lead to another increase in stock price.
References :
Common Stocks and Uncommon Profits – Kenneth Fisher Money Masters of our Time – John Train
Common Stocks and Uncommon Profits and Other Writings by Philip A. Fisher, Kenneth L. Fisher
Common Stocks and Uncommon Profits (Wiley Investment Classic) by Philip A. Fisher
Michael Steinhardt – Trader, Investor, Bonds, stocks
Best Quote: “Any one who thinks he can formulate a success in this market is deluding himself because it changes too quickly. As soon as a formula is right for any length of time, its own success carries the weight of its inevitable failure.”
Steinhardt started poor as a son of a jeweler. His parents were divorced when he was a year old. He thought that hedging compounded problems rather then resolve them. Hedging a position by selling a particular stock because you are long on another increased the problem. The original problem was that you were long a certain position and it is best to look at the trade from that angle rather then go in for a hedge through another stock
The above quote summarizes Steinhardt's basic investment philosophy. Steinhardt's greatest strength was to sit over positions for longer periods of time. While all of us have problems staying with positions for days or weeks Steinhardt could carry over his bets for years at a strech.
He was once short the tobacco stocks when the Industry was facing law suits.He opined that if the plaintiffs won the case he would make a great deal of money and if they lost the case it was already discounted in the price. – Evaluate the risk reward ratio was Steinhardt's favourite mantra.
Steinhardt refuses to attribute his success to any one form or another. He suggests that he made money during the early 1970's because he was short the market as a whole. In the early 1980's he made money being long on the bonds. A great believer in leveraged investing Steinhardt once invested US $250 million out of which US $ 200 million was borrowed money. He went long on bonds expecting interest rates to decline (when interest rates go down bond prices rise). After he had taken a position bond prices kept falling but finally interest rates hit their peak and bond prices started to rise again.
Key learning:
When you believe in a concept take a large position
The best stocks to buy are the laggards and the low multiple stocks whereas the best shorts are the ones that are Institutional favorites. Coca- Cola, Mc Donald’s. Merck and AT &T were his list of the best shorts in the market.
One should estimate stock returns with their associated risk. It is wrong to expect higher returns from stocks merely because they are risky.
If the incremental return from equities is very modest investors should focus on bonds.
Smart investors get smarter with each passing mistake. Once a mistake has been committed and the losses incurred the investor will resist the trap to the same mistake again. He observes “ One of the advantages of trading the way I do – being a long term investor, short term trader, individual stock selector, market timer, sector analyst – is that I have made so many decisions and mistakes that it has made me wise beyond my years as an investor”.
Investors should focus on the longer-term prospects of stocks even if they do not wish to hold the stock for that period of time. Investors should buy stocks of companies that buy back their shares from the market.
And finally the maximum potential loss to being short in the market is infinite whereas the maximum potential loss to being long in the market is only 100%.
References :
No Bull: My Life In and Out of Markets by Michael Steinhardt
Michael Steinhardt – Trader, Investor, Bonds, stocks
Best Quote: “Any one who thinks he can formulate a success in this market is deluding himself because it changes too quickly. As soon as a formula is right for any length of time, its own success carries the weight of its inevitable failure.”
Steinhardt started poor as a son of a jeweler. His parents were divorced when he was a year old. He thought that hedging compounded problems rather then resolve them. Hedging a position by selling a particular stock because you are long on another increased the problem. The original problem was that you were long a certain position and it is best to look at the trade from that angle rather then go in for a hedge through another stock
The above quote summarizes Steinhardt's basic investment philosophy. Steinhardt's greatest strength was to sit over positions for longer periods of time. While all of us have problems staying with positions for days or weeks Steinhardt could carry over his bets for years at a strech.
He was once short the tobacco stocks when the Industry was facing law suits.He opined that if the plaintiffs won the case he would make a great deal of money and if they lost the case it was already discounted in the price. – Evaluate the risk reward ratio was Steinhardt's favourite mantra.
Steinhardt refuses to attribute his success to any one form or another. He suggests that he made money during the early 1970's because he was short the market as a whole. In the early 1980's he made money being long on the bonds. A great believer in leveraged investing Steinhardt once invested US $250 million out of which US $ 200 million was borrowed money. He went long on bonds expecting interest rates to decline (when interest rates go down bond prices rise). After he had taken a position bond prices kept falling but finally interest rates hit their peak and bond prices started to rise again.
Key learning:
When you believe in a concept take a large position
The best stocks to buy are the laggards and the low multiple stocks whereas the best shorts are the ones that are Institutional favorites. Coca- Cola, Mc Donald’s. Merck and AT &T were his list of the best shorts in the market.
One should estimate stock returns with their associated risk. It is wrong to expect higher returns from stocks merely because they are risky.
If the incremental return from equities is very modest investors should focus on bonds.
Smart investors get smarter with each passing mistake. Once a mistake has been committed and the losses incurred the investor will resist the trap to the same mistake again. He observes “ One of the advantages of trading the way I do – being a long term investor, short term trader, individual stock selector, market timer, sector analyst – is that I have made so many decisions and mistakes that it has made me wise beyond my years as an investor”.
Investors should focus on the longer-term prospects of stocks even if they do not wish to hold the stock for that period of time. Investors should buy stocks of companies that buy back their shares from the market.
And finally the maximum potential loss to being short in the market is infinite whereas the maximum potential loss to being long in the market is only 100%.
References :
No Bull: My Life In and Out of Markets by Michael Steinhardt
John Bogle: Mastering the Index
Best Quote: “The biggest risk to our financial system is the failure of our retirement system. Right now half the savings assets of the American economy—nearly $10 trillion—are in retirement plans, which are failing badly. The problem is that over an investment lifetime only about 25 percent of the rewards go to the investors and 75 percent go to the intermediaries”
Bogle is a pioneer in the mutual fund industry. He introduced the first S&P 500 Index fund - the Vanguard 500 Index - which debuted in 1976. He professed that investors should not attempt to beat the markets but should follow the markets instead. His index funds were characterized as low cost and low maintenance and allowed millions of investors to participate in the greatest bull market ever
Bogle had a very interesting concept for the managers “the more that fund managers of America take, the less investors will make. If investment returns are 7 percent annually and the system takes 2.5 percent then you are left with only 4.5%”
But it is hard to find an ideal fund manager. Amazing for an industry, which owns 28 percent of corporate America . A few decades back the mutual funds churning (frequent buying and selling of stocks) ratio was just 15%. It has now gone up to about 100%. Bogle laments that high churning rate leads to increased transaction costs, which in turn erodes investor's wealth. half the savings assets of the American economy—nearly $10 trillion—are in retirement plans, which are failing badly. The problem is that over an investment lifetime only about 25 percent of the rewards go to the investors and 75 percent go to the intermediaries. The overhead operating cost for an index fund is 0.2% annually and the annual trading costs around 0.1%. The diversified fund spends 1.5% on operating overhead and 2% as trading costs. Therefore Index funds start with an up front advantage of 3.3% annually.
Peter Lynch was a great believer of the index investing. He advised most investors to go with an index fund . Jack Meyer labels the investment industry as a giant scam. And David Swensen of Yale calls the mutual fund industry a colossal failure for individual investors. In 1976 the Investing guru Benjamin Graham indicated that indexing is the best strategy.Warren Buffet has advocated low cost index funds for years now.
While Bogle's concepts were great for the US markets it remains to be seen how that concept would work for a country like India. The BSE Sensex is skewed in favour of a few stocks.The computation methodology for the BSE Senss also very different when compared to the Dow Jones.
Key learning:
It is very difficult to beat the market.
nvestors should focus on value and not the price
Keep transaction and fund management costs within check.
Invest in low costs Index funds
The investors gets a very small part of the profits – a substantial part of which is taken away by the manager
References :
The Battle for the Soul of Capitalism by John C. Bogle
Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor by John C. Bogle
Bogle on Mutual Funds: New Perspectives for the Intelligent Investor by John Bogle
John Neff Best Quote: “When you make up your mind stick to your conclusion and above all be patient”.
What would have Neff bought in India ? Neff liked low PE stocks cheap stocks. So he would have bought a S.B.I
John Neff started poor and had to see his family struggle in the early days of his child hood.Once into Investments he was more of a Grahamite and successfully ran the Vanguard Fund. His investment philosophy was based on the mantra of “buy value and sell euphoria”. In the 31 years that he ran the fund (from June 30, 1964 to December 31 st 1995) the returns averaged a compounded annual growth rate of 14.8%. Thus an initial investment of US $ 10,000 was worth US $ 5,87,000 when the great man retired.
Neff's investment style was in strict contrast to a Fisher or T. Rowe. He opined that growth stocks are always over valued and suffer from two basic disadvantages
Businesses exhibiting higher growth always suffer from increased mortality
The exact point from where growth would stop is always hard to predict.
Neff stated that investors of a slow growth company paying higher dividend would generate better returns compared to a high growth company. This reminds us of an old adage “ A bird in hand is better then two in the bush”.
Neff believed in taking concentrated bets. He justifies this by stating that since he protects his down side by buying real value stocks the maximum he can lose in any stock is the opportunity cost of not buying some thing else that has gone up in the interim .
Key learning:
A low PE ratio
A high Return on Equity RoE.
Excellent Management.
Stable cash flows.
Great products or services .
A large market that could facilitate scalability.
On the selling part he insisted on making a substantial sale once the stock went up and hold on the existing position. If the stock fell back again you may buy it back. But Investors were advised to sell a part of there holding as and when the stock became dear and look for cheaper pastures else where. He always sold into strength and avoided selling more then 25% of the stock's trading volume. If nothing happens to a stock that he buys he remained invested for years till the stock achieved its potential.
The stocks that Neff recommended would have invariably been out of favor in the market. These stocks would be unacceptable buys into the portfolio of a common investor but that is how Neff got his stocks. He often commented, “Merchandise well bought is well sold”.
Neff had an interesting tool to investing. Like Peter Lynch he used to compute the Price Earning to growth (PEG) ratio of his portfolio.. The growth consisted of capital growth and dividend yield. Thus if he were holding a portfolio having a PE of 10 with a capital growth of 12% and a dividend yield of 3% this ratio would be (Capital growth + dividend)/ PE) i.e (12+3)/10 = 1.5.He would work out the same ratio for the market and then evaluate the incremental growth of his portfolio for each unit of price multiple.
Neff insisted that a stock should always be sold before it has achieved its full potential
Rakesh Jhunjhunwala – What is the Big Man bullish on?
Best Quote: If you find an idea that you are convinced of take a position which if proved correct makes a meaningful difference to your Balance Sheet.
Piquant Observations:
One of the smartest investors in India believes in the benefits of portfolio concentration. His top 5 holdings account for 63.26% of his portfolio and his top 10 holdings account for almost 83.23% of his portfolio.
It is very hard to find a cyclical or commodity stock in his portfolio.
Unlike the general investor none of these stocks are large caps in the true sense of the definition. Of Course he could be holding future positions in large caps but the point that I am trying to make is money is made in small and mid caps only. The notional losses that an investor can suffer are also the highest in these stocks. It is very important for an investor not to convert these notional losses in actual losses by selling the shares in despair.
Most of these stocks are being held for over 3 years. Companies like Titan, Pantaloon Retail fall in that category. Others like Crisil are being held for more then 5 years and some for even as long as 10 years. – Clearly Time and not timing is the key to these markets.
Almost all these companies are looking at a huge external scale of opportunity whether it is a Titan or a Pantaloon a Nagarjuna Construction or Lupin the sheer size of the addressable market is humongous. – Morale of the story “See the Bigger Picture”.
We do cover companies with huge scale of opportunity in The Equity Desk - Report Card section.
Rakesh has a special corner for companies that are engaged in consumer, infrastructure and pharmaceutical space. Otherwise he is betting on rising crude prices by buying stocks like Hindustan oil exploration and Praj Industries The overall portfolio is well diversified except that he is not holding any metal or cyclical stocks.
These shares are held by Rakesh and his wife Rekha Jhunjhunwala and form a part of his disclosed portfolio. He could be holding more shares through companies, trusts, proprietary accounts which are not in the public domain.
To know more about investing legends see the section World's greatest Inves
Samir Arora – Recognize change with Growth
Best Quote: “The maximum amount of money is made early in the cycle, when there is maximum change in let’s say, a company, an industry, the perception of a company, in corporate governance and so on. The whole idea is to recognize change at any level – Micro or Macro”
What Samir Arora would have bought in India? In an interview last year Arora said that the best managed companies in India from the stock returns point of view were NDTV, Bharti and HDFC.
Samir Arora was India 's best-known fund manager. His greatest strength lied in picking up multibaggers long before the markets had spotted them. Pantaloon Retail, Trent, Bharti Telecom, P.N.B, Hero Honda, Infosys, Zee Telefilms, HDFC Bank and Satyam were a few of his outstanding stock picks. He entered into Satyam and HDFC Bank when it was not being covered by any of the research analysts. It is said that during a conversation with the head of a tech company, he suddenly walked out, told his brokers to buy 500,000 shares of the company, and then rejoined the meeting. He had the tenacity to stick with stocks for a long time. He often talks about HDFC Bank as a 20-year story. A mechanical engineer from IIT and an MBA topper from the Indian Institute of Management- Calcutta (1986), 41-year- old Arora dropped his doctorate programme at Wharton midway, collected a Masters in Finance instead, and flung himself into the stock markets. In 1991, he joined Alliance in New York . After a two-year stint as an international analyst, he became chief investment officer of the Indian operations. Basically a top down player Arora loved making that broad macro call and then went forward to look for the best performing company in that sector. Even if he was convinced about the standalone potential of a particular stock he resisted from investing in the sector if the sector as a whole was experiencing a tough macro environment His analysis started with the top down approach and the bottoms up research came in separately later on. While there was always a talk that Arora was too friendly with market operators and company managements we would concentrate on his investing strategies and thinking rather then become judgemental about his dealings..
Key learning:
The main parameter to look at is the P/E. Investors may also look at the Profit/Profit Before Tax to neutralize the effect of taxes.
Investors should also focus on Return on Equity(RoE) but analyzing a company on the basis of DCF is an utter waste of time. Arora contends that DCF cannot be looked at for more then one or two sectors. This is because you really have no idea about what will happen to a company beyond three years.
Buy good businesses. In a bad business, the value that a good management can add is very low. An ordinary management in a good business often keeps its momentum. But fraudulent managements should always be avoided
For a normal steady business you can never rely on the EV/EBITDA.
A tax-saving company is perhaps the worst company in India because it lets taxes determine its strategy
There are several instances where Samir Arora used his veto to get directors changed in private companies just to help them get a higher P/E.
In many cases, money has not been made by buying the best managements but the managements that want to become the best.
High P/E do not come because of high earnings or because that company is in a good industry. It is earned over a period of time
If one learns how to invest in India, he can invest almost any where in the world. Investing in India teaches the analyst how to identify managements that are cheating their share holders. One also understand why two stocks in the same sector don't get the same rating.
Arora started buying HDFC Bank after it got listed in 1995. At that time the stock traded at Rs30. It remained a dog till 1998. Suddenly it flared and went up to Rs250.It stayed there for a while and then started its course to Rs 700. Arora liked such stocks and kept buying them because as long as the company’s earnings kept growing at 30% and the stock remained stagnant it would become cheap and ripe for another rise.
He also bought 5% of Satyam in 1995. The stock did not move much for two years. But once software was in demand Satyam did not stop.
The most difficult thing is selling a stock when its valuations become too high. Arora advises investors to sell on company disappointments rather than on valuations.
Churning high PE stocks for low PE stocks within the same sector is never a good decision. Post the tech bubble while Infosys and Wipro fell 60%, virtually every small stock fell 90-95%. Technology stocks like Infosys and Wipro had the highest P/E in January 2000 and had fallen the least by November 2001.
Julian Robertson
Best Quote:“Management must be wedded to the bottom line as against building sales. It must have both a long term plan and the means to implement it.”
What would have Robertson bought in India? Low cost private label Retailers like Trent, Monopolistic enterprises like Concor and a few cheap Banks.
Julian Robertson the fund manager at the Tiger Fund was introduced to stocks when he was just six years old. He had been particularly attracted to businesses that were monopolistic and oligopolistic. His best stock picks were De –Beers purchased at a PE multiple of three and a half. The South African Diamond major controlled more then 80% of the world's diamond market. While he was long on Wal – Mart he was short the other high cost retailers on the premise that Wal-Mart's low cost strategy would finally push its competitors out of business. Robertson was amongst the very few Investing legends that bought Wal-Mart in the initial stages of its growth. The ones who missed it were Warren Buffet, Peter Lynch, Marc Faber to name a few.
In 1989 post the fall of the Berlin Wall Robertson took huge positions on the German bourses. He was particularly long on the banks and Industrials. Neglected markets always sold cheap and Germany was no exception. The fall of the Berlin wall was the classic catalyst needed to draw attention. Amongst his other country specific bets was Japan , a market he started buying in 1970. He insured his positions in 1990 by buying puts on the Nikkei and shorting Japanese Banks. At one point of time he had more then 10% of his portfolio on Nikkei puts. Subsequently when the Nikkei fell the short positions and puts brought in millions for him.
Robertson used to bet big on leveraged positions . Normally he would have leveraged his portfolio to two to two and a half times its assets and would have also balanced his portfolio between US and non – US Stocks. Most of his gains were made in bottom up stock picking. He wasn't great at gambling on macro variables like currency and bonds etc.
Robertson had a knack of identifying retailing stocks. In the U.K he bought Sainsbury and Tesco, the grocery retailers. These companies owed and sold a large number of their own brands. Back home in the US he made a killing in Time Warner, Comcast and TCI. As with Peter Lynch “Buy what you see” worked perfectly with him.
Key learning:
Bet on great Managements that are committed to profitability with long term growth
Look for monopolies and oligopolies – Companies that present their competitors with a barrier to entry.
Research companies that offer value. Look at cash flows , PE multiples etc.
Sell pick axes rather then dig for gold – In the great California Gold rush people who decided to sell pick axes and shovels made money. Finding Gold was not certain but it was certainly important to buy tools if you wanted to look for Gold. In the late 1990's Robertson placed huge bets on palladium a critical input for cell phones and auto emission devices.
Look for companies generating sustainable growth over longer periods of time.
Keep an eye on legislative developments both in favor and adverse.
Take large bets – in case they work they should make a huge difference to your portfolio.
Robertson is impressed by India 's internal dynamics. The huge pool of doctors, engineers and accountants is perceived to be a solid advantage. The business environment, legal structure and strong stock market trading and risk control measures also attract him.
During the technology bubble Robertson could not develop conviction on any of the tech stocks. His value picks on a couple of airline and banking stocks also went wrong. His investors panicked and withdrew. His bets on the Japanese currency and emerging markets also backfired and Robertson had to close down his fund in 2000 – but as they say this is the nature of the beast.
References :
Julian Robertson: A Tiger in the Land of Bulls and Bears by Daniel A. Strachman
William O’ Neil – The “CANSLIM” Strategy
Best Quote: “If in the past you were not willing to buy stocks with above average PE’s you automatically eliminated most of the best performing securities”
William O' Neil was a radical in his own way of thinking. He stated that a strategy, which focused on buying low priced stock or stocks with low PE was defective and unsound. He argued that it made more sense to buy stocks that were getting into new highs rather then buy stocks nearing their lows. To illustrate his pint he talked of an easy to remember acronym “CANSLIM”.
The “C” stood for current earnings, which Neil expected to grow over 70% over the corresponding quarter of the previous year. There is no need for an investor to buy stocks of companies that were not growing their earnings by at least 20 to 50% year on year. The past five-year average earnings growth of a stock should out perform at least 95% of all listed companies.
The “A” stands for Annual Earnings.The 5 year annual compounded growth arte of outstanding performing stocks was 24%. Buy companies that show consistent EPS growth.
The “N” stands for new. Either the product has to be new or the service or the Industry. A new sector always draws attention. We have seen that happen in India. In the early 90’s when cement and steel were decontrolled stock prices ran upwards, so did the software companies in the late 90’s. Earlier in this decade the development of businesses like mobile telephony, retailing and Insurance sectors created several multibagger for investors.
The “S” stands for outstanding shares. Neil argues that the better performing companies have lower number of outstanding shares. Another way of looking at this concept is to buy shares of companies that have a smaller market cap. O'Neil argues that 95% of the best winners were smaller market capitalized companies.
The “L” stands for the leader and not the laggard. Neil adds that the best performing stocks generally outperform the other stocks in the market. Look for stocks having an RSI of more then 80
The “I” stands for Institutional sponsorship. While it does make sense to buy companies having some Institutional ownership investors should avoid companies that are Institutional favorites. This is because any adverse news could spark off huge selling. Since these stocks are over researched they discount all the good news in the price.
The “M” stands for the market. A fair proportion of stocks will emulate the market and go with it. This makes it important to interpret the general trend of the market.
Neil argues that when the indices move to a new high on poor volumes it indicates a general lack of demand. An increase in volumes unaccompanied by rising prices is also a good indication of a weakening market. If the stocks leading the market start losing out there is a fairly good indication that the market has topped off.
Investors who do not cut losses have a serious risk of losing more then 70% of their portfolio during bear markets. O'Neil suggests that it is easier to buy a multibagger then to sit on one as rising stock price is the best reason to sell a stock for a novice investor.
Stocks that pay high dividends are not the best bets on the bourses. The capital loss on a stock may well over take the dividend income from holding that stock. When stocks move out from a range the volumes should increase by more then 50%. Stocks that are consolidating should do so on little or meager volumes.
Lastly O'Neil has a piece of good advice for Wall Street experts. He says that more then 80% of the research reports are written on wrong companies. He adds further that these research reports seldom provide sell recommendations.
References :
How to make money in Stocks? William O’Neil
Market Wizards – Jack D Schwager
GLOBE TROTING MACRO PLAYERS
George Soros
Best Quote: "Short term volatility is greatest at turning points and diminishes as a trend becomes established… By the time all the participants have adjusted the rules of the game will change again"
What would Soros buy in India? Soros was recently rumoured to have taken positions in real estate stocks like Unitech, Ansal Prop etc.
George Soros was arguably the most powerful money managers of all times. His decisions moved currencies, countries, stocks and commodities. In 1970 he co-founded the Quantum fund with Jim Rogers At that time there were just two of them Soros the trader, Rogers the research analyst and a secretary. During their partnership tenure between 31st December 1969 to 31st December 1980 this fund chalked up a total return of 3365%.Like all the other legends Soros did not spend much time reading the Wall Street Research reports. He considered them to be of little material value and insisted upon getting a first hand information on ideas through reading news papers, journals, periodicals etc. Soros used to pay big on the markets. In 1992 his bet against the pound made him richer by US $ 1.5 billion where as in another such currency swipe he lost about US $ 600 million by betting that the Japanese Yen would fall. In 1999 his views against the technology bubble made him go short and he ended up losing. A few months later he doubled his position and went long thinking to ride the rlly on the upside. Unfortunately he was caught on the wrong side and lost again.Key learning:
Soros believed in starting with smaller amounts of money and then building the portfolio with increasing profits..
Try and do what you are good at was his advice to traders. He discouraged people from trying to be clever and attempting to discover that new technology company with a new product.
Soros insisted that speculators should keep the downside risk of an investment in mind before they punch in the buy button. More over the ability to cut a losing trade should be a speculator’s greatest attribute
Markets are never efficient. Soros dwelled upon reflexivity – the participants have pre defined views and understandings. The outcome of the markets are most likely going to be different then the pre defined set of views that a majority of these participants have. The final outcome would then change the participant’s behavior. John Train summarizes the situation best when he remarks “Perceptions change events which in turn changes perceptions”. Soros also opines that the participants decision relates to the future and the future is contingent on the participants decision in the present”
Soros considers technical Analysis to be an utter waste as he questions the foundation on which this theory has been built.
Stocks prices are determined on the basis of Fundamental analysis. The problem how ever is to understand the internal dynamics of the fundamentals of a company since they keep changing very often.
Soros argues that each Cycle could have the following features:
The proportion of speculative transactions increase as the trend gathers steam.
Trend should be your friend – Longer the trend greater the reason to follow it.
Once in vogue trends normally run their courses.
Soros stated that immediate prices are determined by demand and supply, which in turn is governed by news flow, momentum & legislation. He was a specialist in catching reversal points. He did so twice in the nineties for the European currency markets. He thought that knowing what would happen is not enough as much as knowing when it would happen. The best analogy we can draw is from his Nasdaq trades. He knew that the technology bubble would burst but he still lost a big amount for a pre mature trade
References :
The Alchemy of Finance (Wiley Investment Classics) by George Soros, Paul A. Volcker
Money Masters of our Time – John Train
Soros on Soros: Staying Ahead of the Curve by George Soros
Jim Rogers-Driving into wealth
Best Quote: When you see several major companies losing money and capital expenditure coming to a stop, then look for an Industry recovery!
Known as the “poor boy from Alabama ” Jim Rogers is known more for his post retirement activities then for what he did at work. During his working tenure he never took a vacation for a continuous stretch of 10 years, He believed that history and philosophy taught you more about the markets. This he thought was better then going to business schools.. In 1970 he co-founded the Quantum fund with George Soros. At that time there were just two of them Soros the trader, Rogers the research analyst and a secretary. During their partnership tenure of 31 st December 1969 to 31 st December 1980 this fund chalked up a total return of 3365%
Starting out in his twenties with an initial capital of $600 Rogers retired at age 37 with more money than anyone could possibly spend. His book, Adventure Capitalist - The Ultimate Investor's Road Trip, is the story of his drive through 116 countries over a three-year span from 2000-2003. A few of his conclusions: Thumbs down on investing in Russia and India , regardless of natural resources or technology skills. Thumbs up on China, Uruguay, Mongolia and… Tanzania ?
Key learning:
What to look for before buying into a country?
The macro picture should be improving Rogers looked at the current account, fiscal deficit, exchange rate controls and restrictions etc.
It country's macro economic set up mysr be better off then is gradually understood.
The currency should be convertible and the trades should provide easy liquidity so as toenable a large trader to awitch positions with ease.
He used to rely more on travel and get first hand information rather then rely on Wall Street research reports of different countries. He used to say that the currency black market dealers gave you more information then the Central Bankers report on their repective countries.
What to look for before buying into a Company?
Institutional under ownership. Rogers considers the best short candidates are stocks where Institutions own more then 3 quarter of the shares.
Never try and make money from insider information not because it is unethical but because it is almost impossible to do so on a consistent basis.
Buy stocks of companies that are so under valued that even if nothing positive happens the maximum you can lose is on the opportunity cost of capital – Keeping the capital safe is of paramount importance.
Being more of a top down player Jim was more interested in the macro set up of things rather then worry about quarter on quarter fluctuations.
The micro numbers that he loved working on were:
Capital Expenditure as a percent of depreciation, gross plant and net plant – The ratio is highest when the company is at the top of a cycle and vice versa. Compare this with a cash flow analysis. At times of high capital expenditure plans the free cash flow diminishes and equity valuations take a hit.
Look at ratio of sales to receivables, debt to equity. A very high profit margin with lower inventories and increasing capital expenditure is another indication to go short on a company.
Growth stocks are classic cases of shorting opportunities.
Rogers considers commodity to be the next big thing and he has been proved extraordinarily correct in his forecasts till now. He is bullish on: Crude Oil: Economic development in China and India will create a demand for manufacturing activities - this would in turn increase the demand for newer cars, trucks, and consequently crude. Rogers opines that the per capita consumption of crude in these two countries is just 5% of that of the U.S. Rogers expects crude to sail well above $100 at the end of the decade. Sugar & Coffee : The majority of population in India and China would experience rising incomes with economic growth. This would increase the demand for sugar and tea.
Lead: The growth of cars in the newer economies would create a huge demand for lead as it is used directly in the production of batteries. Other commodities where Jim is bullish on are Tin, Zinc Corn and Soya bean.
References :
Adventure Capitalist: The Ultimate Road Trip by Jim Rogers
Investment Biker: Around the World with Jim Rogers by Jim Rogers
Money Masters of our Time – John Train
Hot Commodities: How Anyone Can Invest Profitably in the World's Best Marketby Jim Rogers
Sir John Templeton
Best Quote: “The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell”
Sir John Templeton started his investment career during the World War – II. Convinced that a war generally creates an increase in demand & business activity Sir John Templeton called his broker and placed a bid to buy 100 shares of each company that was selling at less then $1.Four years later he sold his original investment of US $ 10,000 at US $ 40,000. In his initial years Templeton used to churn his portfolio quite often and switched between cash and stocks with remarkable ease and timing. He was comfortable searching for countries to invest in and was among the early investors to have recognized the potential in the Japanese stock markets. He was among the firsts to have taken a position there in the early sixties. At that time companies were available at low single digit PE's with high dividend yields. The Japanese Index went up 40 times from 1965 to 1989. Being a value investor Templeton scaled down his investments well into and before the peak. He used to read brokers report only to obtain first hand information about the company rather then use their recommendation to buy and sell stocks.
He professed the theory that for those properly prepared in advance, a bear market in stocks is not a calamity but an opportunity. He is bullish on China and predicts that the Dow will hit the 1,000,000 mark by the turn of this century. The only investors he thinks that should not diversify are the ones who are right 100% of the time. Templeton was always excited to generate first hand information from company visits. A few questions he liked interviewing the management was about their long-range plans, the growth about the company and whether there was any chance for this growth rate to accelerate, their views on the competitors etc.
What to look for before buying?
Invest at the time of maximum pessimism with country and stocks specific diversification
Invest into low PE Companies.
Higher EBIDTA or Operating margins
The intrinsic value of the business
Sustainable growth rate
His basic call was based upon looking at the broad macro picture of either a country.
In 2000 he profited from the crash at the Nasdaq. Clients and associates were advised to switch from stocks into Treasury bills. He is bearish on the US dollar and expects substantial gains in the South East Asian currencies. He has founded the Franklin Templeton Mutual fund business that manages over (Rs 18,00,052 crores) US $ 412 billion from 240 open-ended schemes across the globe.
References :
Golden Nuggets from Sir John Templeton by John Templeton
Spiritual Investments: Wall Street Wisdom from the Career of Sir John Templeton by Gary D. Moore
Marc Faber – Discovering Tomorrow’s Gold
Best Quote: “Follow the course opposite to custom and you will almost always be right.”
Marc Faber is the guru of modern day investing if you might call it and his opinion on markets, currencies and economies are meticulously heard, analyzed and implemented all over the globe. In 1987 he warned his clients to cash out before Black Monday on Wall Street. He piquantly forecasted the burst in the Japanese Bubble in 1990.This was before the Nikkei from 40,000 odd lost 75% in value plummeting to 10,000 in about a decade and a half. He correctly predicted the collapse in US gaming stocks in 1993; foresaw the Asia-Pacific financial crisis of 1997/98 and the resulting global volatility. Currently Marc is bullish on Gold, Silver, Metals, Coffee, Orange juice, Sugar. His greatest bet in recent times has been on crude. When crude was in an over supply zone hovering around US $ 12 he ventured out to be a bull. Now well over US $70 per barrel Marc feels crude is still far away from the top.Born in Switzerland and educated in Geneva and Zurich , Dr. Marc Faber received his PhD in Economics from the University of Zurich at age 24. The former managing director at Drexel Burnham Lambert from 1978-1990 has been living in Hong Kong for the past two decades. Essentially a contrarian Investor Faber is known more for his broad macro calls rather then his individual stock picking skills. Faber's Investing logic is based on the premise that everything that goes up must come down and vice versa.
Faber opines that >when ever an economy has high dependence on a single commodity the business cycle will correlate very closely to the movement of that commodity. He pioneered the “ Life Cycle theory of Emerging markets” The theory provides an intellectual framework for emerging markets with symptoms and characteristics for each phase. Investors following this theory can develop entry and exit points from emerging markets.
Faber states that it is much easier to pick bottoms then to judge market tops. Tops are usually formed with spikes and no one knows when the bubble will burst but the bottom is a long extended period of side ways movement. Foreigners do not buy at the bottom or during times of economic depression. They usually buy when things appear bright and robust. A classic case in point is Argentina . He writes “ When I visited Argentina in 1988, I was truly amazed: total market capitalization was only around US$750 million and daily volume on the Buenos Aires stock exchange averaged less than US$ 1 million. A high quality baby-feed steak cost US$5, a luxury apartment US$70,000 and an entire office block in a prime location US$1million! That was when inflation stood at about 600% per annum. But what was the situation a few years later, in 1994, when Argentina 's inflation had been curbed to less than 10%? Everything had become dear and Buenos Aires was once again as it had been in the 70s- one of the world's most expensive cities.
Faber talks of the buying opportunity in Germany during the early part of the last century. He narrates “The first great buying opportunity occurred in February 1920 when the US Dollar index of German shares sold for as a little as 8.47 (1913=100). Within five months, the index doubled in Dollar terms, largely because the Mark appreciated briefly but sharply”. Faber states that while the Index continued to maintain itself till the summer of 1922 it plunged rapidly as currency depreciation exceeded the rise in local currency stock prices by a wide margin. He continues to add “ The enormous relative drop in share prices (down over 97% in Dollar terms) created some odd situations. Daimler, one of Germany's largest and most profitable companies, had share capital of less than 980 million paper marks. Since one of its cars cost three million marks on average at that time, the stock market valued the entire Daimler Company at the equivalent of only 327 cars. Similarly, the market capitalization of the sixteen great Tietz shops equaled the price of just 16,000 suits.
The incredible under valuation of Russian assets in 1993/94 also becomes evident if one looked at the market caps of individual companies in 1994: Surgutneftegaz (the largest oil company in Russia ), which produces about 2% of world oil output, was privatized in 1993 had a market cap of only US$170 million in early 1994! Uralmash and Permsky Motors, each of which employed over 30,000 people, were valued at US$7 million and US$4 Million respectively. Gum Department Stores, a leading retailer in Moscow (Its main store, which it leases, is right next to the Kremlin, but it owns freehold another 15 stores in Moscow ), was valued at a meager US$24 Million.
Although he likes the technology and generic pharmaceutical industries in India he states that the Indian markets are over valued and may go up in the shorter term. His message to Indian investors is that “you will get a chance to pick up Indian Stocks for a lower price in 3 to 4 years then what you would have to today.
References :
Tomorrow's Gold: Asia's Age of Discovery by Marc Faber
Riding the Millennial Storm: Marc Faber's Path to Profit in the Financial Markets by Nury Vittachi,
T. Rowe. Price
Best Quote: “The most profitable and least risky time to own a share is during the early stages of growth. After the company reaches maturity the investor’s opportunity diminishes and his risk increases”
What has his firm T.Rowe Price bought in India? Companies like Mid-Day multimedia, TV –18 & Financial Technologies
A specialist in growth investing. T. Rowe. Price ushered in a new phase of growth investing just as Graham had done for value investing. While analysts and fund managers at leading research houses were busy looking for that turn around spinning company or that Steel company that was restructuring its debt, Rowe looked at companies that were in the secular growth phase. The process started with identifying the sectors in that growth phase and then buying the most promising company in that sector
Key learning:
What to look for before buying?
The most profitable and least risky time to own a stock is during the early stages of growth. Mature companies offer less returns compared to their risk.
Check whether companies have superior research to develop products. Invest in companies operating in niche sectors.
Buy companies that are generally immune to changes in Govt. Legislation.
Avoid investing into companies having substantial or spiraling labor costs.
Look for companies having a high Return on Capital employed (ROCE), High operating margin, and sustained growth in earnings per share (EPS)
The company should exhibit growth both from the both volume as well as the net earnings side. The growth in sales value is not that important as the growth in unit volume.
Companies having the following attributes were expected to prolong their superiority.
Superior Management
Patents and Research capabilities
Strong Finances
What to look for before selling?
Reduced entry barriers giving rise to competition.
Saturating markets. Once the market became saturated it was time to get out.
New innovations or substitute products. The typewriter industry is a classic case in point. The advent of the PC business literally killed this industry.
Adverse change in Management integrity.
Adverse changes in legislative or legal scenario.
Rise in input costs.
Selling Strategy:
Price waited for the stock to go up 30% before he decided to sell then sold another 10% as it went up by 10%. Thus at some point of time he would be out of the stock. Quite a contrast to Fisher who wanted to hold on to a growth stock till eternity.
Rowe disliked dividend discount valuation models employed by Wall Street analysts. He thought that estimating the future on that basis was based more on theory rather then reality. Rowe opined that the changing dynamics of the business environment would not enable the dividend discount model to throw up correct valuations.
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