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!

16 comments:

Ajay said...

Hi
I been following your blog for sometime now. Though you dont write that often but whenever you do, I love to read it. I am from the same background as you...started 20 odd months back, based only on fundamentals and have a full time day job

Rahul said...

Hi Amit
Looks like you made quite a few gains in your investing. I guess for someone to be value investor you just need 2 things : You need to be patient and you need to have decipline. Would love to know more about you Excel Based Analysis. I am still new to investing and all my knowledge is limited to what Peter Lynch mentioned in his Book. Till date I only invested in Mutual FUnds (recently with SIPs)and made average 50 % in 18 months.
Would love to read couple of books and then jump into equities.

darthcoder said...

There's saliva all over my tables,hands,mouth..and thats because of you...

Am salivating seeing ur excellent holdings and decisions regarding the equities...

Am a small time player..currently only hold 200 Guj Ambuja @ 72 (Will hold for 1 more year atleast).

Any other good stock picks??
And please do inform us of what u r going to buy so that we can also book handsome profits like u do (and please don inform when u sell too :) )

By the way, Zicom is around 120 now...Whaddayasay??Shall I go for it or wait for the markets to come down (which they will as they are around 8500 now).

Awaiting ur reply (sandeepkj41@yahoo.com).

Thank you and Carry on enriching us!!!

Regards,
DC.

arrarrgee said...

Dude...awesome posts.. i stumbled upon this blog a couple of days back..I would be interested in the excel based analysis ...plz send a template across to arrarrgee@yahoo.com if you can (only if you think its gonna help me learn few things...) me a small timer..applying for ipos..and investing lil bits of amounts in using the gyan i gained reading Mr Lynch..neways thanks again for these posts..hopefully i can comeout with something similar soon.... count me in as a regular guest..

pramod said...

Dear Amit

I have been reading your post for the past few months. I find the post quite interesting and useful for a new person in this world of investing .

Could you kindly mail me the tools you might have been using on some idea on how to go about it and what to look for in analysis .

My mail id : pramod_kmr73@yahoo.co.in

I am currently located at Mumbai/India.

This will be of great help to me as i would not be required to find the starting thread.

Regards

PRAMOD.
Regards

Unknown!!! said...

Hmm now thats what is called success..was all these days complacent with those petty profits i used to make.. after reading ur post i feel i know nothing.... i should learn more about how to analyse stocks better... am curious to know about that excel analysis... My study in deciding a stock includes the following things"..
I check out the balance sheets,returns.. any acquistions or mergers... and follow BT,moneycontrol and ndtvprofit... past six months the stock performance and thats it... mailto:just08in@yahoo.com
Thanks in advance...

Anonymous said...

Good blog..

Recently started investing a month back..

Could you please suggest few books and your excel based analysis.

I am an NRI and is there anyway I can stocks and mutual funds online....

Thanks,

Vydhehi

Amit said...

Hello everyone. Sorry for not writing sooner but I was travelling. I'd like to thank you all for your kind words and encouragement which will definitely help me overcome my laziness and post more often!

Excel sheet:
I'll send across the excel sheet to all of you. Just drop me a mail on journeytowealth@gmail.com and I'll reply with the excel sheet and perhaps some instructions on how to use it. Those who've already given your mail IDs need not bother.

Books:
Please check my posts on this but basically - 1. Buffetology by Mary Buffet (mainly for large companies) 2. One Up on Wall Street by Peter Lynch (better for small and mid cap stocks) 3. Do subscribe to the free online Motley Fool newsletters for some very good weekly articles

Darthcoder:
Suggest you buy Zicom at 120 and perhaps pick up more in case it drops further. Do check up on the stock though, at least the latest news before you buy.

Vydhehi:
Please check with your local NRI RM as there are specific laws for NRI investments, though these are not too restricting. ICICI Direct is a good option for online trades, IPO subscription etc.

Anonymous said...

Hi...This is Pramod Kiron. Like Amit, I too have bought shares carefully and held them for long. I had bought Satyam at 77 (at Rs.10 FV) which is now worth above Rs.3000. Several other picks have given HUGE gains including multiple bonuses. I have been careful, looking at Fundementals and growth prospects.

Based on my experience, I am developing an application which would track stock prices and alert you to buy. My methodology is based on looking at good stocks, see how their price has changed over a period of a year. Check whether their prices are low compared to their 52 week high and if PE is low buy at low price. The Share would defenitely go up when market improves.

The most important factor is to spot such shares and then get alerted when price becomes low to buy. Wait for share to hit high and sell when alerted. I would be implementing this at
www.e-stockpro.com. The application would track current prices and do all backend calculations.


I am still working on the application and hope to bring a real rocker for all you guys to MAKE MONEY! ...mail me at
mail@e-stockpro.com. I would be happy to get tips for making the application
(www.e-stockpro.com)
robust!

Nishit Rawat said...

Hey Amit,

Good show. I am totally impressed. Also, please send me the Excel sheet too.

Cheers,
Nishit

Shankar said...

hey amit, very good suming up of your experiences. continue with your blog dude. its been a long time since u had any post on it.

- Shankar
small2big.blogspot.com

Sumit said...

Wow, definitely one of your best posts, especialy because it was concise.

Prash said...

Guys,

I wanna know if the website e-http://www.stockpro.com is closed.
I am not able to logging since past few months.
Appreciate your help on this

Thnx,
Pritesh

Raj said...

I am impressed with the quality of the content in this blog. Thanks Amit. I follow mostly Ramesh Damani's advice and have benefitted . I recommend strongly to read some of his chat scripts on moneycontrol . He is also a proponent of Value investing.

Ashish said...

I wanted to read some basic books to understand the fundamental paramters. Can you suggest. I will also appreciate if you can share some of sample excel templates.

iMetanoia said...

Dear Amit,

I have enjoyed reading your blog. We have a similar outlook on reaching out to the individual investors with the right tools so that the focus is on fundamental analysis for the long term. I wanted to invite you to become a part of our iMaestro Network.


Regards,

Raj Majumder