I started my blog with the intention of sharing my journey of investments in Indian Equities. I do plead guilty to the fact that lately I have not been contributing much towards the readers of this blog. This year has been unusually busy for me on the work front and I have not been able to devote enough time to put in my thoughts and actions.
Magic Formula investing is something I stumbled upon accidentally and I liked the idea of it and started following. Though the book in itself (The little book that beats the market) is more of a repetition of the same idea in different ways and forms in the various chapters of the book, the logic itself does make a lot of sense. All books on value investing (I mean investing and not trading or speculating), are focused on buying companies cheap.
What does Cheap mean?
It would mean below the intrinsic value. As Buffet said “Price is what you pay and value is what you get”. If a company sells below its intrinsic value it could possibly be a worthy investment. To be able to follow this investment methodology, one needs to be able to value a company correctly. There are numerous ways one can value a company, but to be good at arriving at a value, subjective and qualitative analysis is as important as the math. I am pretty good at the math part. There is a lot of information available free on the internet and honestly, for retail investors like you and me that are all there is to information. We do not have access to management of companies and will never be the first to know of the so called insider news. So I work with the information I have access to.
Qualitative analysis is something that is not at all my area of competence and I have not a clue of what might me or could me. And as a result doing a Discounted Cash Flow analysis or calculating Grahams number is only 50% of the value investing approach, I do not follow this path for my investments. Yes, when there is doomsday prediction for the market, I blindly follow www.valueinvestorindia.blogspot.com since Rohit is one of the very few who arrives at a fairly accurate intrinsic value of a company.
Another aspect of value investing is arriving at the fair price. A company is considered cheap when the price quoted is less that the fair price. One would arrive at the fair price for a company based on projected earnings growth. Again, you can do a DCF to arrive at a fair price and possibly justify the high P/E of some companies being at a fair price. I have not been able to arrive at anything conclusive as yet.
The first way of finding undervalued companies throws up interesting opportunities when the markets crash, like what happened in 2008 and early 2009. But the fact of the matter is, when markets crash to those levels, almost every stock can give you great returns if you buy during those times and hold till normalcy returns.
The second way of arriving at a fair price gives you more opportunities to find companies. Even in this market, if you put down your head to it, you might find interesting options to invest. There are many fellow bloggers who are good at it and are able to come out with these kind of opportunities.
If you are like me, who cannot afford to devote time or are limited in competence at arriving at the intrinsic value or fair price, Magic Formula would be the next best option.
Before I ventured out into equities I asked myself the following set of questions and answered as mentioned:
1. Do you know how stock markets work?
Well, the answer was no. I started reading and am still reading. I now know what stock market is and who the players are, but I will never ever be able to arrive at a conclusive answer on how it works.
2. What returns do you expect?
This was and still is a million dollar question. Read about Harshad Mehta, Ketan Parekh, Rakesh Jhunjhunwala, Ashwani Gujral et all, and you want to be a billionaire in a couple of years. When I first started, that is what I wanted to be and I bet you, most novices start with this in mind. Stock market is a get rich quick place !! and that my friends is the biggest mistake of all. It will frustrate you, make you take illogical decisions and you will feel like a puddle of water without any direction. I have experienced it and warn you against that. You cannot make all mistakes yourself, so learn from others mistakes.
Since I have a day job and I was investing my own hard earned money, become another Buffet dream was started with a very small capital that I could afford to lose… but I did learn my lesson.
Now I have set my returns to at least 20% gains annually on my capital and I am happy with that. I have been able to achieve that. Last one year was an aberration where the returns sky rocketed, but I don’t expect that to happen any time in near future. If it does.. good for all of us.
To be continued……
