Investing Basics - Feel free to ask the most basic questions

Yes the NAV will increase. But any such debt fund which suffers substantial losses is usually shut down to new investors so that the rise in NAV benefits only the old investors who suffered because of fall in NAV

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Hello all,
I want to know relation between equity base & stock price…how a small or very large equity base can affect a share price? Should an investor should look into it before investing? It would be better if any one can explain with real examples…

Also if any one can explain how a bank should be looked at with large equity base as normally bank is valued at price to book…

Hello,

is there any way to differentiate between SPV and shell companies ?
i am referring to dhfl in particular where company has clarified “shell” company mentioned by cobrapost is actually SPV.
i am aware that many companies operate through the SPV route to protect the parent company, however still unable to understand what make a company a SPV or a SHELL ?

@dineshssairam
Sir, can you please explain in brief

I am reading a book on financial statement analysis & it says that a public company can prepare 2 separate kinds of P & L calculations. One for publication to the investors where it uses all accounting rules to maximise profit & a 2nd one for the tax authorities where it uses all the rules to minimise profits to as to reduce tax liability. Is this allowed in India also - preparing a separate calculation for the tax authorities?

Let’s say a stock is selling at Rs. 100. I think it’s highly undervalued at Rs. 100 & so I buy 100 shares at 100 each. Now the price falls - so logically it’s even more undervalued so I should buy more if I can afford it - if circumstances haven’t changed.

But has anyone arrived at a thumb rule as to how much fall you should buy more & how much more?

I mean let’s say for the next 20 weeks, each week it falls a little - so at the end of the 20 weeks, it’s at Rs. 60 - then there is like roughly 100 days between Rs. 100 & Rs. 60 - I can’t possibly buy more each day with some fall.

So how to people who do buy more handle this? Is there a thumb rule?

As of now I buy the same number when the stock falls 50% - i.e. I originally bought 100 shares at 100 Rs each. I buy more if it falls to Rs. 50. So I buy 100 more shares at Rs 50 each.

I don’t think this question can be answered with a formula or a number. Daily volatility is inevitable no matter how great the stock is, but a continuous fall more often than not warrants an inspection. Why is market reacting the way it is reacting? Why are the sellers selling, do they know something we don’t know? Are there any buyers for every fall or more people are waiting for a clear picture (you can check this via the % of Deliverable Quantity to Traded Quantity). Say for example today Yes Bank has fallen 1.75%, the CMP is 115, the lowest price in 5 years but the the % of Deliverable Quantity to Traded Quantity today is 15%, so nobody is interested in buying as they might be thinking of it as a falling knife, and traders are having their time.

When I did not have good understanding of the company, did not develop a conviction and simply jumped into a stock for whatever reason, I tend to increase allocation with each fall as I don’t know if I should come out or stay put, so I invest more. It may fetch me good gains if the market reaction reverses or pulls me down if the market is right. I could give 2 examples, Bajaj Finance which fell last year and gave me an opportunity to enter and which is up by 50% and Yes Bank which is down by 60%.

The reasons for fall may be genuine but as sellers or buyers belong to different mindsets they react differently, the all chose to go the same path but the reasons for walking that path are different, so I as an individual should have clarity of the situation if I have to choose the same path as of others or a different. If I am buying when everyone is selling that may bring me big gains or wipe our the invested amount in no time.

It all boils down to our knowledge, conviction along with our experience. People with great understanding will allocate more and come out triumphant, so it is always good to pause, take a step back and start from the beginning and question ourselves and go forward and allocate more or come out altogether. If you had conviction and invested and believe in the turn around, then it is an opportunity to get more for less price. I personally don’t have the experience to predict if the price will go up or not, so I don’t make any fresh purchases and stop, in other words I am willing to take that loss.

If the management is ethical, able, and the headwinds pertain to the entire industry or the sector, the price will be up, albeit slowly. But if I am invested in companies with questionable management, then it may take a lot of time to get my principal back if that happens at all. The connection between price and management is one of the lessons I have know.

This is from my negligible understanding and limited experience.

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I think you have missed the point of my question - I am specifically talking about the case where I have inspected and still have great conviction. Let’s say I am a Warren Buffett who has analysed the situation thoroughly & I am confident (say about American Express). In such a case, when should I buy more & how much?

You are asking the wrong question, Buffett said you should not ask the barber if you need a haircut. So, If you are so convinced, it is entirely up to you as to how much to invest and how much to get in return. You may keep on accumulating as per your available capital, while everyone is waiting on sidelines.

I don’t think there exists any number as to when to stop, when you have conviction. If I come across a business that I understand and convinced and arrive at a price and invest a good amount, and it falls for months and if my conviction is still strong, I would be greedy and bet big. The purchases should be directly proportional to the fall, the more it falls, the more I should purchase. I think I have read when house prices were plummeting, Buffett invested good. If you have 20 lacs, you may invest 5, if you have 50, you may invest 15, who can tell? These kind of bets will make or break, so one should be real careful.

@dineshssairam has written about this point in his PF thread, you may check.

Does your question pertain to any specific company or was it general?

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I didn’t get who is the barber here. I am asking fellow hair growers if they have a thumb rule.

My question wasn’t about when to stop or how much to invest.

You have again missed the point of my question.

It’s very general. I haven’t even identified a company which is undervalued.

I read the first few posts from his portfolio thread (I assume that’s what PF thread means) - he has written about how he gets his conviction - is that what you mean - if yes, I am not interested in that (for the purpose of this question). My question is about something which happens after the conviction. Or has he discussed something related to my question later on in the thread?

You should excuse my ignorance and follow through of that ignorance. You asked the question, so you are Buffett.

Do you buy if the price falls by 10 or 15%? Or do you buy only if it falls by 50%?

Unlike there exists Kelly Criterion for investing, I don’t know if there exists any formula for the falls.

I personally don’t buy unless it falls by 1% after I have created a position. And even then I will not buy as I have to check a few things related to that point in time.

And yes it is the same thread I am talking about, he had a discussion as to why someone should not invest more if the price falls, because there is more value than it was before when the price was high. I couldn’t find the post.

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I get what you mean

You are asking when will the knife stop falling so you can pick it up

I would say there is usually a cause that makes it fall. The initial reaction that makes it fall. You have to very carefully evaluate that initial reason. Is the initial reason likely to get more worse. Like in case of dhfl, I think it got more worse. Same with Manpasand but not with nestle or with Biocon when their they had to pull out their application and submit a new one and the market thought the application is pulled out for good.

Even if the initial reason is not likely to get worse I would say wait about a month. If you see price rise with volume and you like the company after about a month, it might be a good time to buy some more.

There is no hard and fast rule because its a game you are playing with rest of the market. When there is a rule then the entire market knows the rule and they exploit it until the rule no longer holds true.

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Pardon my limited knowledge , I still consider myself as a learning investor and have had a fair share of miscalculations in the past .
I personally do not try to buy more unless the stock is available for at least 10% less than the avg price of my current position . This of course is done only when my belief about the company holds strong and valid . As someone already mentioned , there is no hard and fast rule for this and varies from person to person . So for me , 10% fall and if I have available capital with no other better options to invest and unless more investment in the stock skews my entire portfolio to this specific stock/sector,I will go ahead and invest . This is my approach .

@ChaitanyaC probably meant this thread:

Some broad pointers I considered while building the model:

  1. What percentage of your PF can you risk allocating to a single stock? (Ties back to how much you know about that specific company)
  2. What percentage of your PF can you risk allocating to a single sector? (Ties back to how much you know about that specific industry)
  3. What percentage fall in your PF can you tolerate? (Ties back to your understanding of equities as an asset class - probably there is an additional layer if you are someone who manages other people’s money)
  4. What are your expected returns from each stock in your PF? (Ties back to your understanding of Opportunity Cost)

I have tried to give some weight to each of these questions in my model. But as @basumallick has rightly pointed out in the thread, the model is not really “accurate”. It wasn’t really meant to be. I only hope that the tool is a right step in the direction towards a logical way to allocate capital.

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Not really. I am fine with buying multiple times.

A good video by our @basumallick on a 5 point checklist.

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Can somebody explain why market is reacting so negatively to bringing the Bank under RTI and beginning the clean up of the bank. Isn’t that a good thing for long term investors.

Thanks

I wish there was a ‘thumb rule’ for this @VijayShetty, but what I can say from my experience is almost every time I ran up big losses was when I bought on the way down. I don’t think there’s any defined % one can look at - it will be stock specific given what’s going on what the company and the industry that’s brought the stock down to that level. Some thoughts from poor decisions I have made in the past - and I will illustrate with the example of Tata Motors. There are many other ‘lousy’ decisions I have made :), but I will just limit myself to this one.

  1. I usually start with a small tracking position. In the past I would buy a bit more if the stock went down 10% from my tracking position. Tata Motors - I got in it at 400+. If there’s a small position, better to invest more on the way up than the way down, particularly if you get in when the stock price is already elevated given historical performance.

  2. Now I invested more in Tata Motors when it fell 40%+ (say in 275 odd levels). By this time, it was no longer a tracking position and had become a decent position already. Seemed like a good decision at that time, but I did not study JLR enough and had no idea JLR would be in such big trouble. As a retail investor, I think we usually get to know of fundamental issues a bit later than others, unless we do really detailed research. Not sure how many of us do that - honestly, I don’t. By the time I became fully aware of China auto issues and JLR specific issues - well, 275 odd didn’t seem like a good idea anymore. So the point is buying at 40-50% down doesn’t necessarily mean it’s a good decision unless you really understand what’s going on.

  3. Tata Motors fell all the way to 150-160 and then moved up again to 240 odd. I added more in the 170s/180s, sold and booked a small amount of loss when it hit 230s, but then added a bit again when it went down to 200. (See my behaviour here? I bought on the way down again, because I used the original 400+ as my reference and not the ‘new’ local maximum of 240-250 that I should have looked at). I thought China troubles would dissipate in a few months, but then realized the India auto market is in quite a bit of trouble too. Tata Motors’ India numbers’ have become pretty poor again, flattering to deceive as usual.

  4. Now the stock is at 160 something. Is this the lowest it will fall? Or will trade wars affect if further? What about it’s presence in the Indian market? Is this a great time to invest more or is there more pain to come? I have my own thesis, but there’s no saying that’s right.

In general, my learning is not go by these percentages on the way down. 75% down may seem like a steal just looking at it from your original purchase price, but well, if it’s 75% down and you think it’s attractive, maybe you are missing something that others know better. In a ‘good case’ scenario, the market’s overreacted and given enough time the stock will recover. In the ‘worst case’ scenario, there’s something much more fundamentally wrong (e.g. DHFL, Yes Bank, Jet Airways) and you don’t know what the floor will be.

I learnt about ‘margin of safety’ in this forum, and so right now my thinking is get in with a ‘margin of safety’ and it’s ok to average up. But if you are ‘averaging down’, really really study the business and the drivers. And validate it with smart folks. We are prone to bias and tend to get caught up in our own la-la land. Don’t go by any ‘thumb rule’ percentages on the way down.

Disclaimer: I am just an amateur investor with average performance.

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Let me try to give my positive experience on catching falling knife experience

First I like to say I am buy and hold and review kind of investor and never done trading

My simple theme is “Bad news in Good business”

Just to give example
1 Divis Lab when there was import alart
2 HDFC AMC when there was reduction in TER

I never touched promoter integrity problem and most off the time it’s there

I you read thread of Divis Lab from day of import alart (don’t read summary) you will realise most off Top investor were negative but I felt promoter is focus and main income is from export , normally he don’t do concall .
He surprise every one by prompt action

Same way if you read HDFC AMC thread everyone was negative about business prospects if TER is reduced
Management comments was we will pass on to distributer while others AMC were confused about passing on , Market gave a good chance

So always waiting for Bad news in Good business and this mentally help when there is global melt down like(in 2008 /9) bought some TCS Infy but retrospectively my knowledge on equity was not that good but atleast I was able to act
Thanks
Ashit