Tuesday, November 22, 2005


  1. Shai Dardashti on Grahamian Value, a really good blog on value investing and one of the most comprehensive such resources I've seen on the Net. Highly recommended for people who follow Buffet, Graham and other fundamental analysts of their ilk.
  2. Value Stock Plus, which belies its name by spending a fair amount of time on global trends and movements of economies around the world, kind of like a CNN for the blogosphere! Check out the interesting comments on the Indian economy in this post and this one
I'd also take this opportunity to thank everyone who commented in response to my last post. Do keep coming back!

Monday, November 14, 2005

Looking Back

My interest in stocks - actually in investing in general - began early last year, when I read 'Rich Dad, Poor Dad' and was inspired enough to sit up and take some interest in my finances, open demat and trading accounts, set up mutual fund SIPs and begin to take an active interest in the stock market.

Beginner's Luck

I was lucky in chancing upon some really good books on fundamental analysis and value investing which I could use to work out an initial stock-picking strategy. Far too many people I think get into day-trading and market timing, approaches that are not suitable for everyone, especially for salaried types like me who don't have the time, guts or funds to get into such short term plays.

I was even luckier to get into the market just before the major crash at the time of the 2004 elections. I saw many of my holdings go into the red but I didn't have enough in the game to panic. Instead, I took the opportunity to add to my holdings, based on some conservative target prices I had worked out by applying various ideas I had got from my readings. The research took time and a great deal of number crunching, but it was worth it.

Lessons Learned

It's now been about 18 months since my first stock purchase and the markets have swung all over the place, from around 5,500 to 4,500 to 8,800 to 7,500 and now back to around 8,500. During this period, a patient and savvy investor would have had several opportunities to buy good companies at decent prices and make money.

I was neither as patient, nor as savvy or alert as I should have been through this period but I think I've made a decent start and would like to share a few of the things I've learnt and validated so far:

  1. Have a target purchase price based on some sound reasoning: This is the biggest lesson I have had so far and I am yet to learn it fully! Based on a study of your target company, you must have an idea of how much you're willing to pay. Don't get swayed by the market. I have applied this sporadically and been rewarded handsomely each time. Conversely I have screwed up several times by not working out the price properly before jumping in
  2. Have a target sale price and / or some sensible offloading criteria: Again this is based on a study of why the company is attractive and when it will not longer be worth holding. I have not suffered significant losses selling late but I have sometimes given up sizeable gains by selling too early
  3. Have confidence in your analysis: Flying in the face of popular opinion is surprisingly difficult to do but remember that if you've done a good job of the research your opinion is at least as valid as everyone else's! The corollary to this is that you must check and cross-check any calculations you are doing, especially if you are using Excel as it is very easy to screw up one formula and end up bankrupt!
  4. Be patient: That stock you have your heart set on will sooner or later come down to a reasonable valuation. Wait for your target purchase price to be reached before making a move. It could take a long time but it's better to have cash and do nothing than to jump the gun and have nothing!
  5. Evaluate the management: Your company is only as good as its management and share prices will in the long run reflect this factor. I try to judge management by comparing their forecasts and stated plans and strategies from old annual reports with actual achievements as evidenced in subsequent years. This might not be good enough, though.
  6. Hold on to a good thing: Why churn your investments if they are doing well? I like steady companies like ITC and Cipla that hold out the promise of slowly, but surely gaining ground year after year.
  7. Don't be too cautious: Putting in a tiny amount is going to yield nothing worthwhile so, if you are betting on a stock, make sure the potential gains are worth the effort
  8. Don't sweat the small stuff: Don't get hung up on making another rupee. Too often we have a stock making profits at, say, Rs. 119 and we hold out for it to reach 120, only to see it fall to 110 before we have to sell in panic.

My Portfolio as a Basis for These Lessons

Lesson 1: A conservative target price yields good results

  • Purchased Hero Honda in May 04 - currently at 76% profit
  • Purchased SBI in July 04 - currently at 105% profit
  • Purchased ITC in May 04 - currently at 122% profit
  • Purchased Infosys in April - currently at 86% profit
  • Purchased Cipla in May 04 - currently at 60% profit
  • Purchased Wockhardt in May 04 - currently at 58% profit
  • Purchased iFlex in April 04 @ 510 - sold recently at about 90% profit

All these were bought at or near target prices I determined through Excel-based analysis

The price for not following this lesson? I bought Thomas Cook a few months back at 550, after which it dropped to 500 and has never come up to 550 again. I'm sure I will make money in the medium term, but it could have been better...

Lesson 2: Have a target sale price

My best example is iFlex, which I sold at 977 immediately before it dropped to below 900. I believe it was a good move as the PE is too high and future prospects uncertain.

I've screwed up on Patni, which at a 20% profit in a matter of a few months. If I had thought it through, I might still have been holding it at a profit of almost 100%! Even worse was my purchase of Nestle at 575 and subsequent loss-making sale at about 560 (when I got worried by its steady decline). The stock is currently over 900!

Lesson 3: Have confidence in your analysis

I passed up City Union Bank when it was at 32 just because some bankers told me it was no good even though my analysis was screaming out for me to buy it. It is currently at 95, a three-fold increase in less than a year. Worse still, I finally bought it at 85 but realised my mistake and sold it at a small loss.

On the other hand, I've had two spectacular successes - a 60% gain in 6 months on the obscure Indian Hume Pipe Company (I've sold it) and a whopping one-year 500% increase in Torrent Cables, another unknown company (I still hold it).

Lesson 4: Be patient

After scaling the rarified heights of 500 and 600 last year, Biocon finally came down to about 400, when I was finally able to buy it after tracking it for months. The stock is currently over 500.

Lesson 5: Evaluate the management

My Biocon purchase was based almost entirely on the management quality and ability to deliver on its promises. I also bought Bharti Tele a few months back, again mostly on the strength of its management (and a recent dip in price that brought it into the BUY zone), and it is already up 70%!

Lesson 6: Hold on to a good thing

I'm still holding almost all the stocks I bought in last year's crash. They've rewarded me handsomely and look set to keep on delivering the goods for years to come

Lesson 7: Don't be too cautious

I invested way too little in many of my small-cap stocks and repented when they turned out to be spectacular successes - notable example again is Torrent Cables where I could kick myself for not putting in more

Lesson 8: Don't sweat the small stuff

I've not been guilty of this, thankfully, but know several people who've had horror stories of this sort.

I hope this was useful. Do write in with your thoughts.

Happy investing!

Tuesday, November 08, 2005

'Winning On Wall Street'

I recently stumbled across this book by Martin Zweig, a mutual fund manager who was quite well-known and respected in the '80s and '90s. It is simply amazing, especially for people like me who focus on fundamentals and have little or no idea on technical investing.

The most interesting aspect of 'Winning on Wall Street' is that, based on research into the long history of the Dow, Zweig outlines a set of parameters as well as a complete forecasting model that he used to forecast the onset of bull and bear markets on a consistent basis!

Imagine that - wouldn't you like to be able to tell when an upsurge is an aberration and when it is actually the start of something big and so get into the market early? Or when a small dip might be leading to a major market decline?

The only issue is that the model is based on the Dow and hence the triggers might not work for the Sensex / Nifty, though the parameters (like interest rates etc.) are universal. It needs someone to work out the values at which the Indian markets make their moves, which might not be possible as the Sensex data goes back only 20 years.

Would be worth a try, though. Even better would be marrying such an India-specific 'Zweig' forecasting model with a working stock-picking model based on fundamental analysis in order to get truly spectacular results.

The key takeaways for me are the list of parameters to consider when evaluating market moves and the relationships between them as proposed in the model.

The book is a little academic in nature, but simply written and definitely very high up in the list of investing books to read.

Note: For a list of other good books, please check out my previous post on the subject