VALUE INVESTING_HOW WE DO IT

The Basic Reason people lose money in Share market is because people think that Just because they can buy/Sell stocks by clicking a button, they should. Will you sell your house in $80,000 which you bought at $100,000 one day before, just because somebody is quoting less prices. No. Well you will, if you don’t know the value of your house. Otherwise you certainly will not, then why do you do it here in stock market.

-Warren Buffet

One of my friends contacted me in Dec 2014 and asked me whether he should buy TATA MOTORs (MP-510) as this stock is touching sky high every day.

Now I was not more than 1 year old in market but I knew that TATA motors was overvalued, so I told him to wait. He waited and came back after 1 month, unsatisfied that I gave him wrong advice as the stock price went even higher 550. He didn’t want to buy on his own. He wanted me to advise him so that he can buy. Anyways I didn’t give him that advice since the stock was way overvalued.

But he kept asking everyday whether he should buy or not. So I told him to buy just 5 stocks, not more, I just wanted him to see what happens when you buy high. (as I had heard).

As you rightly guessed this was the End of peak, stock prices fell like the standard of your EX. Including my friend everyone was happy that “I told them so”. Till sept Prices had gone down by 40%

Everyone in my friend circle was very happy and wanted my advice on whether they should buy TataMotors now. Since I was an ‘expert’ now, I told them to wait more. After some upside the prices further fell to 250. Now I advised them to buy, they did and stock prices went up to 550 again.

We sold our positions at 550 and made more than 100% in less than 5 months, Easiest money ever made. Yours truly became the Jhunjhunwala of the community when it started falling just 1 week after we sold our position.

The stock was very soon trading at 250 and me and my friends were excited to make 100% again. Needless to say we bought TATA motors at 250 again, this time Huge no of shares.

TATA motors looks like this Now.

We are still holding with 60% down in portfolio.

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It is very easy to say “Buy low & sell high”

But How much low is actually low?

If a stock is trading at 100 INR, can i call it buying at lower prices?

What about when if it is trading at 5 Rs?

We all should have common-sense to understand that absolute values mean nothing in this whole world, be it Math, commerce, chemistry anywhere.

Now when I started in stock market I knew this much that stock prices should not be seen alone. i suggested my friend to buy at TATA motors at 250 not on the basis of Prices but on P/E ratio but as you can see that too didn’t work.

So do P/E ratios also mean nothing? If it doesn’t then how to do value investing?

After a lot of failures and research I have come to a conclusion that even PE doesn’t mean anything as an absolute number. PE also should not be seen alone. A stock can be undervalued at PE of 25 and a stock can be ‘not so much undervalued’ at the PE of 6. You heard it right, welcome the reality.

PE alone doesn’t mean anything as there are a lot of factors to find undervalued stocks. If you look at the PE of current market and also stocks based on current earnings you will find them overvalued, but that’s not the reality, their P/E is higher because of having 0 earnings in June Quarter not because their stock price have gone up.

Coming back to basic Ques is how low is actually low and how high is actually high, Ans to this ques alone is going to make us money in the end.

WHAT EXPERTS AROUND THE WORLD DO –

Valuation involves calculating intrinsic value of a business by DCF model, Residual income model, dividend model. You can read all about it on google.

This is how other value concepts looks like.

So value investors buy when the stock price is below Intrinsic value of business by 10% or 20% or 30% and they sell when it is above intrinsic value. Now there is nothing wrong with this concept but how will you decide whether you have to buy 20% below intrinsic value or 30% intrinsic value or you have to keep buying as it goes further below. If you have enough capital that you can keep buying as the prices go from 20% below intrinsic value to 50% below intrinsic value, good for you. But most of the people who face capital limitation or are concerned about capital allocation, they can not keep pouring money in one stock at every 10% Dip.

WHAT WE DO –

This is where our model of Min and Max Intrinsic Value comes in Picture.

Min and max Intrinsic value is extension of intrinsic value. It makes it simple to understand entry and exit points. It also solves the problem of value investors not being able to part of business for long term, it allows you to be a part of multi-bagger that too for a long term. Let me explain how.

We calculate Min intrinsic of business from its fundamental in March every year (we do it every quarter also just have our conviction intact). And we wait for the stock price to come at min intrinsic level (Green line in above picture), if it comes, we buy, if it doesn’t, we don’t. Once we buy, we monitor every quarter if next year Min intrinsic value of business increases, we retain our position and keep retaining until either stock price hits Max intrinsic value (Red line) or Min intrinsic value starts to decrease. Even Min IV decreases you will get out of the stock at 20-30% higher prices than buying prices thanks to your entry point and traders trading in those stocks day and night.

As you can see in above figure Glenmark pharma took more than 5 years to come to its Min intrinsic value (280 in 2019) and we bought it, due to corona stock tanked further but we don’t care, bcz we don’t buy/sell on noise, we buy/sell on earnings, We averaged our position near 190, today Glenmark is trading near 500.

Same thing happened in Ramco system, bought it at its min intrinsic vale of 110, today it is 375.

Averaged my TATA motors positions at 68, today trading at 148.

Bought Fiem at 365 and 285, today trading at 621.

Bought Zeel at 125 on 23 mar. today it is 220.

Bought Vedanta at 89, sold at 106 due to Delisting noise. A big mistake, Today at 136.

There are very few sat backs also we saw during this time.

Bought ONGC at 103, today at 74

Bought Jagran at 67, today at 39

1 year back I never thought a stock like ITC would come to its Min intrinsic value which was 157 in 2019. It always used to trade near 300 and when it started falling I didn’t even think that I would be able to buy it, but to my surprise I did. My GTT order got executed at 157 and that made my conviction harder than diamond. Today it is trading near 190. I am ok with that.

Guys, what I have realised that with simple strategy and strong conviction multi-bagger are not that hard to make. This all is coming from a guy who made loss in market in first 5 out of 7 years so you can trust on it. My return was -7% CAGR in 2018 for 5 year . I started value investing in 2018, today my CAGR is +6% for last 7 years.

Not only I covered my losses but also I was able to turn it around and now I am hoping to gain even more.

I don’t have high tech, cutting edge technology, algo or AI, all I have is plain vanilla common sense VALUE INVESTING.

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Remember this

·      Any stock is basically a part of a business which makes money.

·      There is nothing like Large Cap, Mid cap, Small Cap. There are Profit making businesses and there are loss making businesses.

·      Every segmentation (Caps), every α, β, Ω and all other information is just noise.

·      Indochina, America-Iran, trump-Hillary, Modi-Gandhi Everything is just noise.

·      Filter the noise and keep calculating business’s worth

·      don’t have a price bias, calculate business worth first and then look at stock prices.

·      Keep your conviction intact and stock prices will follow your conviction.

·      If I can make it, you can make it too.

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You can take help from here-

·      Rich Dad- Poor Dad

·      The little book of value investing

·      The little book that beats the market

·      Once upon the wall-street

·      Ashwath Damodaran – lectures on valuation (Free available on youtube)

Be Greedy when everyone else is Fearful, Be Fearful when everyone else is Greedy.

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We are sharing Min and Max Intrinsic value of some businesses.

These values will change with the next Quarterly results of the company, pl do your own research. 

REGARDS,

INVEST WITH US