The Intelligent Investor – 9 – Investing in Investment Funds

Posted on October 13, 2019 by Jimit Zaveri under Bibliophile: The Intelligent Investor

For selecting whether to make an investment to the investment fund or not, we need to think for the answers of few questions such as getting better than average return (performance fund?), if not, then avoid fund which can give us a worse than average return and lastly, can we make choices between different types of funds or not.

General people who open a trading account, most probably engage in the speculations but such behavior is not common for the mutual fund investors. People also tend to select a fund that is growing fast.

Many times, due to the support of luck, few of the fund managers or investors stay in the right direction at the right time and they earn good returns but when such tide goes out, we can see the real skill of the particular manager or investor. It is also highest into the possibility that winning fund does not always remain winner due to –

If a fund has a good touch of the fund manager then every other fund house demands the same manager and they hunt to the manager at a higher pay scale also.

When a particular fund provides a good return then it will attract the investors. Due to the higher flow of the investors, managers have to put additional money into the stocks which he already owns. Such strategies lower down the returns. Sometimes, we can play a few risky strategies with small funds but the same is not suitable for the huge size fund.

As the fund grows bigger, the fund manager gets higher fees on it. So that reluctant to lose the higher fees and they started playing the game which everyone else is playing. If we see that top holding of the different funds then it will be more or less similar to each other. So, for protecting their higher fees, they do not focus on their ability to generate a superior return. They believe in getting wrong conventionally rather than unconventionally.

MFs

If we see then the majority of the funds having a similar stock as a top holding.

On the other view for good return from the fund when –

A fund manager is the biggest investor of the fund then his motive and motive of other investors will be the same and they work for generating a decent return.

Expenses of the fund are lower than definitely, the fund provides better performance.

Few fund managers do not focus on what others are buying but they focus on what looks good to them. They do not follow the herd and such strategies provide them decent return. Also, they do not get involved to do advertisements.

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When a fund manager feels that they will not able to generate a good return if the fund becomes huge then they close the door for the new investors which restricts the fund to get huge by the additional flow of new investors.

We should also focus on the few points which can help while the exit from the investment of the fund such as an unexpected change in the strategy, increase in the expenses, sudden huge volatility to the returns, etc.

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Few funds mentioned such a warning to the fund. I found PPFAS long term equity fund which has mentioned warning and to whom this fund is suitable and to whom it’s not.

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Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.

Read for more detail: The Intelligent Investor by Benjamin Graham, Jason Zweig

The Intelligent Investor – 8 – The Investor and Market Fluctuations

Posted on October 5, 2019 by Jimit Zaveri under Bibliophile: The Intelligent Investor

When we have invested in the bonds then that will get little fluctuation to the market price. But when we have invested in the common stocks then it will have a wider fluctuation to the market price. So that we need to be ready financially and psychologically for upcoming fluctuation into our common stock investment. It is easy to advise for not doing a speculate but hard to follow it. Fluctuation and behavior of the market attract us to make a speculative decision. So, if we want to make a speculative decision then keep aside some amount of money as considering that we are going to lose it through speculation.

We need to take a benefit from the swing of the market pendulum rather than getting trapped into it. And we can take a benefit by way of timing to the market or through pricing.

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We cannot predict the direction of the market consistently and if we start predicting a direction then we end up as a speculator, not as an investor. People want to buy during the bear market where everyone else is selling and sell during the bull market where everyone else is buying. But people are tending to do the reverse, the majority of the people buy at high / during a bull market and sell at low / during a bear market.

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Similar has happened during the year 2017, people have seen a bull market from the year 2014 to 2017 and they started believing that this will never be going to end and stock prices keep on going higher and higher.

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1^st, 2^nd and 3^rd point has been explained to the previous articles of the same series.

One of the optical and data networking products company

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IPO of the company came at Rs.257 so that MCap was ~Rs.2367cr which was at the EV/EBITDA of 14.09x in FY17 and stock price rose to ~Rs.437 in FY18 which was at EV/EBITDA of ~26.33x. The company has incurred losses in a few years and came to profit since FY2016.

One of the publication company

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The IPO of the company came at P/E of 33x and EV/EBITDA of 16.59x.

Day-to-day or month-on-month fluctuation to the market does not make investors richer or poorer. But what will happen for a longer period that will impact the wealth of investors. We need to keep distance ourselves from the crowd rather than go with the crowd. Also, we need to focus on emotional stability over an investment journey which helps us a lot. The normal investor gets trapped with greed as the market starts advances, but at the same time, intelligent investors booked a position of overpriced issues and parked those funds to bond, he will re-balance his portfolio.

Owning a common stock means we are a part-owner of the business, but due to the advancement of the stock market operation, investor’s mind gets diverted and they are getting more engaged towards the stock prices. They forget that stock price fluctuation should not be focused but they have to focus on the value of the businesses, quality of the businesses and progress of the businesses. Stock prices bring distance between business and us. If a person is making an investment for a longer period, but getting fluctuated as stock prices get fluctuate then he does not know for the emotionally stable and matured investors. Matured and intelligent investors do not focus on the price quotation every second but they focus on the underlying business. As businesses show successes it becomes popular among the people and it will command more premium, its mood swings with the market, etc.

We need to focus on earning the power of the business with the asset value of the business. But we should avoid paying higher to the assets as well as to the earning, otherwise, we need to be stay affected through the market fluctuation.

One of the telecom company

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(Source – Thoughts on Thoughts blog)

The company looks very cheap based on the financial metrics and assets base, but if someone who does not have paid attention to the business of the company and earning the power of the business then—

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One of the gelatin company

The company has some uncertainty and raw material problems but having a stable business. The company was traded at ~Rs.66 cr of MCap with having investment + cash on the balance sheet was worth of ~Rs.70+ cr so that entire business was available at free due to uncertainty. The company has delivered a decent return with also deliver Rs.10/per share as a dividend.

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Few critics of value-based investing tell that such an approach does not work with the listed companies due to the ample amount of liquidity available. Such liquidity and stock market platform provide a daily opportunity to the participants to make changes to their holdings.

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Many a time, Mr. Market ready to pay overpriced for the business and sometimes, He is ignoring too few of the businesses. We need to stay away to getting trapped from the Mr. Market mood swings. Mr. Market also behaves like a human being because prices of it and the behavior of it direct through human involvement as a market participant. We need to control our emotions based on our experience and belief over a while. We should stop overpaying attention to the market.

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If we are doing a business then daily price fluctuations will not be going to disturb us and we do not make a change to our holdings. Price fluctuations only provide an opportunity to buy a business at a favorable price and sell when Mr. Market shows a higher price of the business.

The main distinction between speculators and investors is their attitude towards the market. A speculator is willing to make profits by way of market fluctuations whereas investors are willing to hold security at a suitable price and market fluctuations do not important for them. Market prices are just for our conviction so that taking benefits of it or to ignore it depends on us.

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Stocks or a bond, the Market price will remain to fluctuate over a longer-term period. Good company with good management gets recognition into the good market price and bad management will get bad market price recognition.

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Mr. Graham has explained the liquidity concepts which is suitable for the current scenario. The fund manager purchases few stocks for the portfolio, then the market starts moving upwards which attracts the investors to put more money. Now, due to the additional fund inflow, the fund manager has to buy a similar stock to the additional fund which brings stock prices to the dangerous level. Now, as the market falls, investors ask for the withdrawal of the fund and fund manager has sold out stocks to make the payment which leads to further fall to the stock prices. So here, they buy at high and sell at a low price. Our brain makes a pattern that similar has happened during the last time so it might be going to happens now also. And many times, our brain creates a pattern when there is not the availability of any pattern.

What we should need to do for the better than average return –

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Our behavior is most important to get an above-average return. By controlling ourselves, we can stop ourselves from becoming our enemy. When we have made any prediction and that proven right then we become addicted to own predictions.

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Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.

Read for more detail: The Intelligent Investor by Benjamin Graham, Jason Zweig

The Intelligent Investor 7 Portfolio Policy for the Enterprising Investor: The Positive Side

Posted on September 29, 2019 by Jimit Zaveri under Bibliophile: The Intelligent Investor

Enterprising investors are willing to put more attention and efforts for generating a higher return.

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Generally, an intelligent investor buys and keep holding common stock when it has a cheapness and they sell a common stock when it becomes overpriced. After selling off the stock they transfer to the bond and wait till another opportunity of common stock available with the cheapness.

General Market Policy—Formula Timing

This is an approach of investing timing of the market. The market keeps on fluctuating and taking a benefit of those fluctuations to our favor adds additional value. It is very difficult to forecast the future market level for a consistent period. When we look back towards any situation then it looks easier to predict but when we are passing through the situation then it is very difficult to predict.

Growth-Stock Approach

Growth stocks are the companies which have shown a growth better than an average. The problem with such kind of companies is they have given good growth into the past and we have to assume that they will keep on doing the same into the future. But such kind of stocks selection needs huge careful attention from the investors. As the bigger companies start to grow at a slower pace compared to the smaller companies. But it is also a fact that if the company is a leader with the availability of competitive advantage in the market then it has a huge probability of growth. We need to careful with what we are paying for buying a growth. If we pay a sky-high price for the prevailing growth then also, we have to suffer through the company grows.

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If we have proven wrong with our assumption of future growth and also, we have paid a higher amount for the business, then it will be a dangerously affect to our wealth. Growth stocks can create our fortune or can spoil our fortune. If our assumption for the future growth proven right and also, we have bought the stock at a proper valuation then fortune into the growth stock can be created. Many times, the company has a temporary problem, then it will be available at a relatively cheaper valuation. When larger companies have adversity, they have a resource and brainpower to come out from the adversity and market responds quickly to such improvement to the larger company.

One of the two-wheeler company of India

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The company which has a negative cash conversion cycle, availability of float, market leader since many decades, traded at 10%+ of earning yield with higher return ratio, market participants having a fear of electric vehicle disruption.

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One of the MNC FMCG company of India

Company’s one of the flagship product got banned which contributes decent revenue to the company. Also, no other competitor gets success in the same product at the same level. Company has a higher return ratio, good brand over the globe, successful track record.

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Mr. Graham mentioned regarding a cyclical business –

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We need to bought such businesses during the bad time at higher multiplier and need to sell it at a good time at a lower multiplier. During the bad time, the profitability of the company gets depressed which resulted in the higher multiple to the company and reversely, when time is good, profitability gets improvement which resulted in the lower multiple.

One of the sugar company

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When we want to get an above-average return into the investment, then our investment needs to be proper, sound enough to avoid risk and we need to adopt a policy which is different from most of the investors or speculators are using.

Bargain issues are those which are selling below its true worth. Now, for calculation of bargain – first, we need to forecast future earnings and giving it an appropriate multiple for arriving at a future market price. If the current market price seems lower than future market price then we can consider it as a bargain common stock. And second, where we need to focus more on the net realization of the asset value and net working capital (Working capital – all obligations) with the growth into the future earnings. Also, the current result is disappointing (future result can be improved) and unpopularity among the stock price creates a bargain opportunity. During a bear run, people do not focus on the companies which are not a leader, because they have a fear and belief that leader can provide safety. So that companies other than leaders will be available at a cheaper bargain price. We should focus that whether these companies can generate a fair return on invested capital or not and whether that generated return will be above the cost of capital or not. Such companies require a bull market, changes in policies, changes to the management, acquisition of smaller bargain companies by a larger one, etc. for reaching the fair valuation.

A special situation is also one of the ways to create a return on our investment. Special situations are different from the usual part of investing. Here, we need a different kind of process and different level of mentality compared to the usual one. This strategy includes demerger, merger, arbitrage, delisting, buyback, right issues, etc.

When we select to be an aggressive investor rather than a defensive investor then we require a thorough knowledge of businesses, how to value it etc. There is not a middle way between aggressive and defensive investment. And those who are involved in the middle way, they get a disappointment to the result due to the lack of requiring time and knowledge.

Disclosure – Companies mentioned in the article is just for an example & educational purpose. It is not a buy/sell/ hold recommendation.

Read for more detail: The Intelligent Investor by Benjamin Graham, Jason Zweig

The Intelligent Investor – 6 – Portfolio Policy for the Enterprising Investor: Negative Approach

Posted on September 1, 2019 by Jimit Zaveri under Bibliophile: The Intelligent Investor

We have seen the defensive investors in the last article of the same series. Now, Mr. Graham has explained what not to do for the defensive as well as aggressive investors.

Mr. Graham has explained what not to do for aggressive investors such as –

Aggressive investors also have to start with deciding an allocation between common stocks and bonds. Also, they have to be ready with more analytical work compared to defensive investors. When second-grade bonds are available at the substantial discount to the principal value and also, having a prospect then it will be more attractive compared to high-grade bonds. Aggressive investors have to compare a discount available to the high-grade bonds and the second-grade bonds. We need not forget the rule of the safety of principal while investing in the bonds. We need to check the adequate cover to the interest charge on pre-tax earnings. If such cover is not available then we should avoid bonds though they having a higher yield.

Mr. Graham has mentioned regarding foreign bonds that we do not properly know the future of foreign bonds. If any troublesome times come then we do not have a legal means of enforcing claims. So, we should avoid such opportunities though we get interested rate benefits.

Day trading – Mr. Graham has mentioned that day trading is a weapon invented for committing financial suicide. Buying and selling a stock for a few hours also bringing down your profit. The more we trade; we keep less with us which also affects our long-term profitability. Luck can provide us a benefit for a few times, but for getting consistent benefits from trading, we require great attention. Someone who can’t hold on to stocks for more than a few months at a time is doomed to end up not as a victor but as a victim.

New issues – we need to be very careful before purchasing a new issue because the majority of the times new issues comes during favorable market conditions for the seller of the new issues which means not purely favorable to the buyers of the new issues. Majority of the time, prices of new issues get collapsed. We have seen very few winners which have given a good return by investing in the IPOs such as Infosys, Wipro, Eicher Motors, etc. but there is a huge list of losers also.

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