Hi all…i visited the forum for taking insights from all others who are faced with the same question…
Coming to my small view about this…
Disclaimer… I have been into equity markets since 2011 through mutual funds and graduated into equity since 2013, i got to milk the most out of this bull market but still i long to see a good bear market where the skeletons comes out of the closet, so my experiences can be biased since i belong to a single market cycle triggered mainly by crashing crude and good liquidity coming back into the system…
I am not a good stock picker, infact i dont pick stocks at all… i am a parasite over dd sharma and pick stocks from his basket of picks …
I have been obsessed with many models of valuation , DCF being the best of which, then several parameters we use like price to earnings, ev/ebitda, price to book, peg etc etc…
But what i found was, we overly complicate things and try to do something which is too illogical by any good standards… Predicting the future via any analysis is bound to get wrong but still we should try, says the great mr.damodaran… i followed him a lot, similarly i followed another recent writer joel greenblatt, and many others, but in the hindsight, although i enjoyed learning but in practice i could hardly apply… predicting probability on probability is something i cannot comprehend ! Its waste of time i feel , for an average investor like myself, with internet being the only source of info , concalls, inv.ppt. , bse corp notification history etc…
Rather i wanted to practice something simple, something that everyone else can do while still maintaining a cagr of 30percent in my portfolio… i have no intentions to be get a 100 bagger but betting on something beyond my comprehension, even if numbers say so, specially the price and the ratios,is not something i do at all… i am happy with a 3x compounder every 3 years in a bull market like this, or a 6x compounder in every 9years in a standard market…
I will go out of my way to reach out to investors who are also professionals and employee in other circles , to whom investing is just a compounding machine and the capital for that comes from the salary slip… to all of you, focusing more time on the main profession is much more yielding than becoming a big investor per say… hence i avoid big jargons and focus on something simple which will not make me exclusive but provide me with sustained compounding…
So, coming to the main point now, i have a few commands which i follow , i will share the same…
1.Dont try to find undervaluation, try to find value…
2.Dont bet against the market, try to follow…
3.Wait for a breakout rather than , entering before one…
4.try to find value dents like bullet cash flows in the form of acquisitions, capex coming online, big government grants, land banks, cyclical changes like import duty, recently like antidumping duty,hurricanes and other natural calamities disruption business and having effect on indian markets
5.Time turnaround stories well…
Having said that, never miss a restructuring program…Very recently i have had tremendous success with jindal saw, where i came across the restructuring plan in 2015 end analyst meet, studied the company for 3 months, and made a good chart entry at 35, at the end coumpounded 5x, and still the effects of the story is going to come… I am also trying to unlock opportunities in tata power and HCC…And trying to time sintex plastics…
What i have learnt from dd sharma for the past 5 years is never miss an opportunity!
Let the opportunity be at reasonable valuations… by valuations i mean in numbers and ratios…
Bottomline is, forget all these number crunching and believe in stories… The maker of this thread mentions of porinju, i am not a avid follower, infact i avoid the tv, rather prefer the business newpapers and tuesday evening youtube for sharma ji’s pick…Porinju says something like this, he likes stories…i dont fully comprehend what he wants to communicate but what i have found is stories can be of turnaround (recent ones) like jindal saw , can be of a international major entering into india after turning around other companies post acquisitions like kridhan infra, or a natural calamity disrupting the polyurethane chemical industry in US like GNFC …
Try to check whether these stories are worth paying valuations, if yes, pay them… If undervaluation is there, you are in luck…
I can never differentiate growth investing and value forms…
Take the DCF model, if FCF growth is not there will the intrinsic value ever move up , thus creating value… So there is no point in being obsessed with being a value finder in numbers…
And, i think its pointless to use a screener…And the theory of similar asset valuation i feel is of no sense, if the management is different , even with the same model of business, the balance sheet can never be the same…so there is no point in comparing valuations i feel…The max to max comparison i like to do is the term of EBIT/( Net working capital + tangible asset) , the magic formula by Mr.Greenblatt…
So keep it simple,…
Forget all this number screening…
The rough algorithm i follow while sitting with a stock is…
1.Read the bseindia site , the corporate ppt tab and read each and every document starting from last 5 years and analyse the q and annual result (excluding the Board report & auditors report) as they start coming up with other notices and keep the weekly technical chart open in a side screen with a good momentum indicator and move along…
2.next comes the Auditors report of the last 5 years…Even distracting but, i strictly read yoy auditors notes ( note 2 of 2017, then 2016 so on… then restart with note 3 complete the whole series and next note, provided the notes represents the same entity of the financials and go back historically in chronology)
3.Next comes the Boards report of each year in chronological order
4.Now comes the best part and the most boring part, look into 3 types of peers according to market cap, and Major peers in international market- the US, the chinese (when ever available), europian…
Just the board reports in annual reports…
5.Internet search on products, programmes etc
6.Decide on the story by instinct
7.IF satisfied, check and compare the (ebit/net working cap+tangible asset) across peers and assess…
8.IF satisfied, look for entry point in daily chart, if not, and if i find better peer restart the cycle…
This is way easier with some reference stock picks i know, like i get mine from dd sharma…But you have to look for a start point, and it has to be a story, may be sector wise or something else you may be interested in… Like presently the Ev theme or the renewable energy focus , inshort a disruption story…And stories can be contacted in daily life also, Just for an example, my girlfriend was going to US and was attending the visa office, i was pleasantly surprised with the number of applicant and i was looking for a visa outsource processing company which is listed…And i found BLS international! To my utter surprise a couple of months later dd sharma came up with bls in his tuesday pick! Similarly was amazed with the demand in granite and quartz while researching ideas of flooring and kitchen for my new house, and i found pokarna!
So, end of the long post, sorry if the content was boring but i felt people should move away from valuation crazyness…I am not a CFA or a MBA finance and i find it very very difficult to suddenly jump into a concept which involves analysing the future using numbers…professionals in that can practice and become good if not perfect at it, but i am very sorry, i have my major time taken up by my profession and family and i cannot waste anymore time trying to analyse and predict the future numbers…Rather i can more easily access and form opinions from words and outlooks…
I prefer not keeping targets in such an uncertain world of the market, rather get the least i can…
Somewhere behind my mind, i know, if i can get 2 to 3 more of 2008 atleast in my investing life, i will make another 100 bagger… if not by a single stock, but i can get 2 10baggers or 6 3 baggers or 8 2 baggers will be just fine…!! is finding 8 good stories difficult in a life time?! Believe me , i am an amateur but keeping things simple has worked for me and i have already 100bagged my portfolio by being parasite in this bull market , I am not recommending my algo or anything, but instead of diving in the ocean of numbers, dive in the ocean of stories…
Also never miss a cyclical stock or ignore them! Sugar, pharma, Cement, steel or metals as a whole , if you are serious about investing , do spend a couple of hour in a month to keep tract of the development in the cyclical sectors…There timing is very important and you will miss, i missed metal and steel cycle recently but sugar and chemicals paid me great rewards! Keeping my eyes strained on pharma and cement…Again remember, you may not get cheap valuations in cyclicals while timing, still time it, a 2x bagging is not a joke and very common even at rich valuations…
At cmp consider jain irrigation or heg, both are trading at 25 to 30 pe ratio, or mcx at pe of 40!! Will i take it? If i follow my algo, i will be buying them anytime, even if i will have to pay such valuations! With mcx, definitely i will not bet against the market or not wait for a breakout as i mentioned in my commands as its on a downtrend, but i will pay these prices to buy them… the story is good… The story will create value with growth, and these are all 20quarter story or more… With fcf growth, the intrinsic value will grow, do i need to look at intrinsic value numbers… No… I am confident of the growth story… Done…i will buy them if available at more discount… Do we buy more cloths in end of season sales?
I know this is very basic… But do we follow? Raeely, we start crunching numbers wither to convince ourself or end up confused with decision paralysis…none of jain heg or mcx i hold nor i recommend, was just examples of great story and rich valuations…
Similarly on the exit , i read a lot of good investors say the valuations have stretched so i sold and i will buy again if available at discount…
Absolutely personal, but i feel valuations should not be exit point, i respect the market, if the market is richly valuing something means its precious, i will instead take a good look at the balance sheet and cash flow… Are they conserving cash without plans of capex? Are they giving too much dividends which will increase cost of equity? Is the working capital compressing? Is there any capex planned? Are they not taking long term debt anymore? What the board report say? Or whats the concall saying? Is the other income contributing to cash flow in rapid growtha yoy? Have they reached capacity? Is the order backlog on a downtrend without parallel increase in working capital?if the tangible assets not increasing parallel to working capital? Whats the health of subsidiaries? Are they ebit poaitive? If the corporate garuantee in provisions or contingent liability? Receivables cycle increasing?
If yes to any and more of these questions, then i will conclude valuation is unsustainable and i will exit… If not… Then keep holding rather i will add more if discounts are given…
So you see, just valuations are not the answer, a lot of reasons should counter the valuations to make an exit…and you dont need numbers… Its for the same reason i feel jindal saw has tremendous steam still irrespective of whatever valuations its trading at irrespective of a 5x price from entry, irrespective of an impending bear market irrespective of far undervaluations by number in other stocks…
Regards…
