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Life story of Sanjay Bakshi
http://arvindt.blogspot.in/2005/09/prof-called-sanjay-bakshi.html
Apart from Benjamin Graham’s The Intelligent Investor, there is no better book to get started for beginners than Peter Lynch’s One Up On Wall Street.
The easy-going and simplistic stock picking style discussed in this book brought Lynch great success in his profession as a fund manager at the US mutual fund company, Fidelity.
The best part about this book is that it’s low on number crunching but high on anecdotal stories. Moreover, readers are given a clear picture on how to get off to a good start in the stock market.
One Up On Wall Street offers insight into the mind of one of the greatest money managers of all times.
Lynch helps you discover that he is a normal guy (like you and me) who thinks rationally, believes in doing his own independent research on companies, asks plenty of questions, and gets caught off guard by the market at times, just like anyone else.
Anyone thinking about buying individual stocks must read this book before they ever make their first stock purchase.
While there are numerous lessons that Lynch dispels through this book, here are my personal “Top 10″ that really stand out. I have in fact benefited from incorporating each of these lessons in my personal investment philosophy.
I hope these also add to your investment arsenal. So let’s start right here.
Peter Lynch’s 10 investing gems
A lot of people buy stocks with the mentality – “This stock is really going up!”
This reasoning of buying stocks has never worked in the long run. You might buy a stock that is going up in price, and you might make some money in the short run. But in the long run, this basis of buying stocks is going to suck you into a never ending whirlpool of losses.
A stock is just a share in a business. So it’s important to understand what is the kind of “business” that you are getting into. And then you must have specific reasons to buy and hold the stock (again, reasons that have less to do with how the stock price is doing and more to do with how the business is doing).
You might say, “I love Maggi! In fact, everyone loves Maggi. So Nestle must be a very good stock!”
Let me ask you, “Great! But what if Maggi is just 1% of Nestle’s total sales, and the products that contribute the remaining 99% aren’t that great? Does Nestle still sound like a great investment just on the basis of one great product that contributes just 1% of its sales?”
Now what do you say?
See, companies selling products or services that everyone love or is talking about is worthy of “considering” as a potential investment.
But, as an investor, the greater task for you is to know how much of that great product or service means to the company. If it does not contribute meaningfully to the company’s sales and profits, it can’t be the core reason for buying that stock.
“Growth for the sake of growth is the ideology of the cancer cell,” goes a famous saying. In the same way, companies that are growing at rates of 50-100% annually must be looked at with suspicion.
One reason for this is that such growth cannot continue for long (for reasons like higher competition that might want to take a pie of this growth opportunity). The second reason is that if such a company still wants to push for higher growth for a few more years, it might have to infuse more capital in the business.
This could either mean stretching the balance sheet (by taking on debt) or diluting equity (by issuing new shares). Both these are bad omens for existing shareholders.
What is more, one year of slowdown in growth can come as a shock to the stock market, and might lead to a sharp fall in the stock price.
Experience suggests that most diversifications (acquisitions of companies in the same area or a different one altogether) are done to satisfy the egos of promoters, and not for real business reasons. And most of the diversifications end up as diworseifications.
So watch out for companies that are blazing guns in this space.
Not many small investors appreciate this, but it is one of the best ways they can pick great stocks.
If I’m a banker, I know what makes up a bank’s balance sheet and I also know which banks are worth banking upon as investments.
Considering this, I would be a fool eyeing biotechnology or IT stocks, especially when I don’t understand the ABCs of these industries, but just go by what my broker or friend advises me.
Of course I might enhance my circle of competence and learn about these industries, but my first hunting ground must be ‘banking’.
Even if I love my fund manager for his stellar track record in managing my money, toeing all his stock ideas without doing my own research would be fraught with extreme risks.
The stock he is recommending on CNBC might form just 0.001% of his total portfolio. I might be so enamored by his story on the stock, that I may buy it in bulk and it forms around 10% of my small portfolio.
Now when this stock crashes, the fund manager would appear smart for taking a very small risk with it. I might lose my shirt.
So the idea is to always do an independent research on a stock before you even think of buying it.
Such a company is rarely covered by stock analysts and bought by fund managers. So there is a great chance that the stock could be available at a great bargain.
This is the most important lesson that you would remember (or forget) when it comes to identifying the right businesses for investment.
Companies that borrow money to grow their businesses might appear good (because they are ‘growing’).
But more often than not, such companies get so much intoxicated by the growth that they end up making a mess of their balance sheets, and in the process, destroying whatever shareholder wealth they created during “growth” years.
Look at realty and construction companies, and you won’t have to look anywhere else for such examples.
I have been shouting this from the rooftop of Safal Niveshak all this time, but not many seem to hear. So now, let me tell you how much Peter Lynch believes in the power of “independent investment research” in the success of an investor.
Lynch suggests that you must invest at least as much time and effort in choosing a new stock as you would in choosing a new refrigerator.
Now this is where the emotional part about investing comes into play.
I have spent ten days researching a stock, and thankfully on the eleventh day, I find that it’s a great business and even available at a good discount to the intrinsic value. So it seems like a perfect “buy”.
Now, what in the world should stop me from buying this stock?
Well, here are some questions that must stop me from buying that stock (call it XYZ) instantly:
Am I biased towards XYZ just because I’ve spent ten days researching it?
Am I getting over-confident with my analysis?
Am I impressed by just the company’s recent performance?
Do I like the stock just because it has fallen in price?
Do I like it just because my friend advised it to me in the first place?
If the answer to any of these questions makes me uncomfortable, it’s an indication that I must sleep on the stock idea instead of buying the stock then.
There have been numerous instances where I have waited weeks or even months before committing money to a stock idea I liked.
As Peter Lynch says, “The key organ for investing is the stomach, not the brain.”
The 15-20 days after I complete my analysis on a stock help me know whether my stomach is ready to digest the stock even when the mind answers in the affirmative.
What do you say?
Source : Saral Gyan
“The investor of today does not profit from yesterday’s growth.” Warren Buffett
Most of us have relatives who like to fashion themselves as ‘stock-gurus’, with their stories revolving around how they ‘could have been’ millionaires now, if only they had held their nerves. The stock that comes up frequently in these conversations is Infosys. If you had invested Rs. 9,500 to buy 100 shares of Infosys in the IPO (that went undersubscribed in 1993), 12,800 shares (adjusted for bonus issues) worth sum of Rs. 3,15,26,400 would be in your kitty. But, is Infosys still the key to riches? As often repeated, past performance is no guarantee of future results. So, how does one find out the next ‘Infy’?
A Fast Grower is a small yet aggressive & nimble firm, which grows roughly at 20-25% a year. This is an investment category which can give investors a return of 10 to as much as 200 times the investment made by them. No doubt, it remains a favourite of Peter Lynch!
In 1950s, the Utility & Power Sector were the fast growers with twice the growth rates to that of the US GDP. As people got more power-hungry gadgets for themselves, the power bills ran through the roof & the power sector surged with booming demand. Post the Oil Shock in 70’s, cost of power generation became high with power tariffs going up; people learnt to conserve electricity. Demand, thus, fell and power sector witnessed a slowdown. Prior to it, similar decline was observed in the Steel Sector & Railroads. First, it was the Automobile Sector, and then the Steel, followed by Chemicals & Power Utility& now the IT Sector is showing signs of slowing down. Every time, people thought, rally in the fast growers of the age would never end, but it did end, with people losing money as well as their jobs. Those who thought differently like Walter Chrysler (founder of Chrysler Corporation), who took a pay cut and left the railroads to build new cars in the turn of the last century, became the next millionaires.
Three phases involved in their life cycles, are:
The trick is to track, which phase the organization is in, at the moment. If the firm is in late start-up phase with possibility of moving to rapid expansion phase, buy the stock when it is still cheap. Once firm’s earnings start falling with its products witnessing poor demand, it’s time to bid goodbye to the stock.
The key parameters involved in Peter Lynch’s ‘two minute drill’ are:
Stay away from companies which are being actively tracked, followed & invested in by large institutional investors. News about buy back of shares or internal stakeholders increasing their stakes should be construed as positive.
Checks specific to Fast Growers:
One must judiciously walk the tightrope between the unquestioning belief that made the stock to be held for so long and the fear of the end from nose-diving prices due to a one-off bad year. The key is to always keep revisiting the story & ask some pertinent questions like ‘What would really keep them growing?’, ‘What is their next offering? or ‘Are their products & services still in vogue?’ It is here, that one must track the point of time when the phase 2 of the firm’s expansion comes to an end. This is usually the dead-end for organizations as success is difficult to be replicated. Unless, innovation happens, downfall is imminent & thus, an exit is necessary. P/E of these stocks is drummed up to unrealistically high levels by the madness of crowd towards the end. One must keep one’s eyes & ears open to signs, which mark the end of the road for these fast growers. A great case in point is Polaroid which had its P/E bid up to 50, only to be rendered obsolete later by new technologies.
A sure shot sign of a decline is a company which is everywhere! Such a company would simply find no place to expand any further. Sooner, rather than later, such a company would see its ‘Manhattans’ of earnings reduced to ‘plateaus’ of little or no growth, simply because no space is left to expand further.
Fast Growers, which pay, are ephemeral & one misses them more often than not. It is a High Risk & High Gain Category of Stocks. One must remember along the classic risk & return principle, that when one loses, one loses big! So, if you are in the quest for magnificent returns, a Fast Grower can be your bet provided you know when to bid Goodbye!