Thank You very much for sharing your experience. It is a privilege to learn from other’s experiences.
Your post gives great hope in this bear market - I think it will be atleast the other end of elections before we see a return of bull markets. On stock selection, I would probably change the selection criteria slightly
Instead of looking at what dividends companies pay, I would look at their return on capital employed and their current profit
Lets say company x is trading at a market cap of 1000 crore and makes a profit of 100 crore. And consistently it has grown 10-20pc over previous years
The principle of value stocks is that you buy a part of the company only if you were willing to buy the whole company if you had so much money
So you are getting to buy this company that is trading at 1000 crore and makes 100 crore. If you owned the whole company you can take 100 crore per year in dividends so your earnings is 10% compared to putting it into bonds where you would make 7-8%
However this company is also growing. If you were the sole owner you would delay the dividend and let it grow at 10-20%. So next year if it grows at 10% you are making 11pc on your investment
You want your management to not pay dividend if they cant employ capital that generates 10% return and can reemploy dividends at 5-10-20pc growth
Something like this has potential to become a huge multibagger with margin of safety that comes from knowing that its making more than what bonds would make
Look at vinati for instance that has most of this characteristics
Ofcourse you would sell at some point - the right time is when the profit/market cap ratio is so out of sync like 1pc without a good growth prospect on the horizon
Most cases I’d want the company to retain and reinvest the dividends if they can invest in growth like Dmart is doing. For tax purposes its great instead of taxing dividends in 2 hands, mine and company’s.
Value investing has different meaning for industries that are growing , maturing and declining … In each type of industries you need to use relevant metrics to gain maximum
In Growing industries what you mentioned - ROIC and growth rate are very critical - You might let company also have some debt and also not pay dividends …
Mature Industries - ROIC , PE , PSR , P/B , Dividend yield is critical . Even though some company many find new growth drivers but the probabilities are low .
Declining Industries - Needs to traded like options with maturity period . Often you get big bonanza in these industries - Like what has happened in graphite electrodes in last one year …
Graphite electrodes is a commodity business
The one who produces cheapest usually sells most unless there is a supply crunch
The present rally is because Chinese produced these very cheaply making most European and Indian companies uncompetitive
These uncompetitive industries closed operations or factories and now the Chinese closed factories but before closed Chinese factories, they obliterated the other producers
Value investors usually won’t touch that kind of industry. Traders will
Pure Value Investors have just one principle -
BUY undervalued and SELL overvalued … They are sector , firm agnostic .
Yes true but how does Graphite companies come under that criteria typically when Chinese stop producing. For a value investor they would have to be sold off and have a margin of safety. Even after a huge run due to supply constraints over a period of 10 years Oriental carbon still beats any graphite electrodes company purely based on consistency
My post said buy a company that is consistent and sold off with a history of consistent growth. If you buy these kind of stocks when they are sold there is massive upside compared to looking at percentage of dividend paid
I don’t track oriental carbon and have no views on the same
I entered graphite India @ 77 price purely on basis on value . Chinese electrodes don’t directly compete with GI . The competition was with American , Japanese and European companies . So shut down on graphite electrodes should not have impacted GI primary market . The issue is sudden steel growth in developed market which was supposed to be declining and caught many graphite producers offguard. They had mothballed their capacities which is now being restarted … But this is where I would prefer the discussion to end on Graphite electrodes … as I too feel sad that I sold early at avg price of Rs 350 …
But What I mentioned Graphite electrode is as example of declining industry . Even in such industry you have opportunity to earn profits …
On consistent growth and high ROIC these are critical when you are buying a stock as part of core portfolio. But for opportunistic part of portfolio you need to ruthless on value vs price equation
From what I understand, basically steel can be made with heat from coal or heat from electricity and electrodes. The chinese closed the former factories that made steel with fuel from coal hence the shortage of steel and electrodes as most countries prefer electrodes, it being less pollution free although from what I know they are just shifting pollution from one country into another and electricity as well just needs loads of coal to produce
What is your excel spreadsheet formula for sale - if you have prematurely exited too many companies don’t you need to review the formula. Or just one was a wrong sale. Anyway would like to know your views and formula to better understand how we can all benefit
I don’t mind selling early … so long I am buying at right prices …
Market can be crazy at times and can give crazy valuations , I don’t intend change my software logic just because market has become too optimistic -
My software is based on over 25 years of data of Indian stock market and it worked wonderfully for me for last 8 years since I am using it .