Regarding exit strategies I think I am often poor at selling. I still end up selling winners too early and holding on to losers too long. Its a work in progress for me.
In case of companies which I know are not that great, I often sell out once I see a lot of froth and fanfare in the stock price. e.g recently I sold out of Hikal when it ran up from 140 to 180-185 with no obvious reasons barring the entry of Ashish Kacholia. I was too early to exit Bajaj Finance when I exited around 2450 and had to see the stock go up to 2990 but now it seems to be a good place to get in around 1900-2100 and have started accumulating again.
Similarly I think @bheeshma practises the stop loss of I think 7% below his buy price which could work well for someone well versed in the method.
I am still trying to fine tune my exit strategies. But when I feel overall markets are weakening, I often pull the plug and sell a lot of stuff from my PF where I dont get comfort from price behaviour or from fundamentals.
Slight correction, stop loss is not 7% but 15%. However, there has been a change here - I also average down 2 or 3 times if i feel earnings momentum is intact. If earnings momentum is not there, there is no choice but to exit. As long co is growing earnings at a fast clip , i suffer through the corrections. Sometimes however cos price becomes so high that the implied growth rate is an impossible number to achieve in which case the course of action is clear.
Unlike seasoned investors like yourself who have developed a sixth sense about charts, I have no talent here or the temperament so stop loss works for me coupled with implied growth rates in the stock price. That’s the strategy for now and has kept me from being obliterated in the violent market fall.
For novices like me this is exactly the sort of information which is most useful. The “when to sell” strategies. It is comforting to know that everyone is going through a painful period and we need strategies to decrease that pain since we cannot avoid it altogether. Thank you. Like the 15% stop loss
There cannot be one strategy … One has to see what work for one over period of time .
I have problem of buying when prices trend up , but I can buy falling knives -
In 2013 … Many stocks that I bought in Jan / Mar 2013 were 30% to 50% down by Sept 2013 . But most of them like HPCL , Gabriel , Sono koyo , NIIT , Sundaram Fasteners etc were 5 - 20 baggers .
In 2015 / 2016 I had similar experience with Metals stocks . For example Mr Birla had subscribed to Hindalco at 150 Rs so I thought Rs 120 was good price to enter … But stock fell to Rs 66 . I kept on averaging down . It was successful
Yes there are failures - but often I have seen when market is pessimistic … If you 25 - 30 good companies with avg allocation of 5% -10% , there is good probability that you will do better than most mutual funds …
I use my own tool / software which gives me BUY and SELL prices .
Good thought.can u share which companies u r looking at and the price levels in current market?What’s your view on crude and currency?Only point we need to note is demonetization etc were local issues and the current ones are beyond our control.
My view on currency - It weakens once every 3/ 5 years on account of our higher inflation and interest rate vs US and other developed markets , but long term impact of stock market is not much .
Also if you are earning and spending in Rs - it should not matter to you .
If you are NRI then to get dollar adjusted alpha vis a vis US market you need to keep watch on currency .
My view on Crude : Long term I am bearish … This is based on thesis that in long term
Emission norms ( BS 6 ) will improve fuel mileage drastically and hence reduce fuel demand
China and Europe will move to electric car by 2025 ( fully or majorly ) reducing demand for fuel
Oil demand for petrochemical products … which also should reduce as most GOVT will try to ban plastics esp single use plastics … ( non recyclable ones )
Can you please elaborate on the implied growth rate strategy-will be very useful to understand. Being LT investor, one has to go thru this pain of 20+ correction in the portfolio.
Hitesh bhai - At 7 times book, doesn’t Bajaj Finance look too pricey? I know it is one company which has delivered consistently time and again, but valuation wise I still can’t get myself to even consider it. Just wanted to understand what gives you the conviction to buy at these levels?
The idea is to look at the price of the stock and reverse calculate the growth rate that is required to justify that price.
The second step is to look at the capital invested in the business and compare it with the addressable market size. If the capital invested is small compared to the size, then there is scope for continued growth by investing more capital.
If the current growth rate is greater than implied growth rate then there is a case for considering it as an investment candidate.
There are many resources on the internet that you can Google to get info on how to arrive at implied growth rate. The key is to not to second guess but wait patiently for the co to produce earnings growth and then if the stock price is not pricing in that growth you have a good chance of upside. You would be surprised at how often market doesn’t price in growth as quickly as it should.
This is a general framework and one can tweak it here and there to suit the palate. The downside to this framework is that if you are wrong about the growth assessment it will be painful, hence the stop loss post averaging down a few times.
Just something to add to prespective - go to ratestar.in and look at P/B and P/E chart over last 10 years of the overpriced stocks in the market. It will look like a game of cat and mouse , where there will be steep cuts when growth is factored in every year , but the P/B or P/E starts to tend higher again with price moving. P/E , P/B can contract or expand but growing above 20% for 7-10 years is going to give 5-10 bagger in 7-10 years even when stock is bought at high P/B. Also once you enter a stock at a cheap P/B , you can’t keep selling and buying again every-time P/B becomes insane and sane.
I haven’t seen you commenting on the casino industry and online gaming market in India so far. I just wanted to know your views on the industry in general and Delta Corp in particular.
2 cents into how I think Banks/NBFC should be valued.
Below is what Buffet says:
"P/B is the wrong model to value Financials. This is where P/B of 7 is misleading.
You need to look at the yields banks earning on an implied growth. Banks earn on assets but the ratio of assets to equity, the leverage they have determines what they earn on equity. A good ROE determines management quality. The raw material in banks is money and the NBFC or bank which gets money at lowest cost would end up having bigger spreads. This differentiates Bajaj finance from other NBFC.
Book value is not key to valuing banks. Earnings are key to valuing banks. Now, it translates to book value to some extent because you’re required to hold a certain amount of tangible equity compared to the assets you have."
Bajaj Fin has High return on assets and that ensures high P/BV. Only looking at P/BV is misleading.
Kotak Bank has 5 years ROA at 2.10% and P/BV at 4.19 and ROE at 13.74% (avg 5 years)
HDFC Bank has 5 years ROA at 1.98% and P/BV at 4.96 and ROE at 18.60% (avg 5 years)
Bajaj Finance has 5 years ROA at 3.47% and P/BV at 7.21 and ROE at 20.70% (avg 5 years)
Because Bajaj Finance Generates higher ROA than most of other NBFC and even banks and convert that into better ROE (good mgmt quality) it has higher P/BV. Kotak has lower ROE at 13.74% and lower ROA than Bajaj finance therefore has lower P/BV than Bajaj Finance. HDFC bank with a lower ROA than Kotak but better ROE (again Mgmt Quality) has a higher P/BV assigned by markets. In the longer run, cost of funds, NPA situations, ROE and Higher yields matter. This is where Bajaj finance is the leader. Do not look at P/BV in isolation. Wrong valuation model and so is P/E.
Disc: Not invested in Bajaj Finance and any of other names mentioned above.
Agree with most of the things that you have said. Just wanted to point out that for Banks/NBFCs ROE is also a function of leverage. When 2 banks have similar ROAs the one with higher leverage will have a higher RoE. Among the stocks that you have mentioned Bajaj Finance has the highest RoE with the lowest leverage which is impressive although they cater to different category of customers
IBHF has RoE of over 30% but P/B is much lower compared to bajaj finance and kotak. P/B is like beauty eyes in the eye of the beholder.
Mkt does not look at only ROE to come up with higher P/b it also looks at risks in the book, quality of lending, ALM, nature of business, management past records and decisions before assigning higher p/b. IBHF management is shareholder friendly with such ROE but mkt sees risk in nature of lending and such high growth which could make npa look optically smaller. Higher growth in real estate is much riskier than higher growth in retail or corporate credit. As you mentioned banking is a leveraged business. How much risk adjusted returns I get on a comparable leverage between 2 similar banks makes a better shareholder returns in long term.
price to book and price to earnings in isolation dont mean much. We have to take into context
ROA and ROE of the company.
The quality of portfolio. Kind of asset quality over the years
Opportunity size and competition for the company. Will the company be able to have a really long runway for growth.
Management quality and promoter pedigree.
Demonstrated track record.
For a company which has compounded its topline and bottomline over last 10 years at a scorching pace and all the above boxes ticked, one cannot value it on conventional parameters.
I would suggest you to listen to a recent interview of Mr Bharat Shah talking about long term investing. It should be available on youtube. Interview taken by sourabh mukherjee (ambit fame). There he talks about paying up for franchises like gruh with explanation.
I dont know much about delta corp or about the gaming industry in general. I see govt interference as a big risk in this business and hence keeping away.
@newone I have never invested in unlisted space. You can go through @Anant presentation on the subject which he made in first VP meet at Goa.
