SEVENTH TARGET MET IN ORCHID CHEMICALS

TODAY WE RECOMMENDED TO BUY ORCHID CHEM AT CMP OF 159.50 WITH A STOPLOSS OF 156 FOR A TARGET OF 164.80, 166.40, 168.80, 170.40, 172.80, 174.40, 176.80, 178.40 AND 180.80. OUR SEVENTH TARGET OF 176.80 ACHIEVED TODAY ITSELF. BINGO AGAIN! 


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TEN RULES OF LONG TERM TERM INVESTING

Rule No. 1: Margin Of Safety – Buy Shares “Cheap” – Keep Capital Intact:

Q. How To Determine That The Price You Are Paying Is “Cheap”?

There are two practical ways to determine whether you are paying a reasonable price or an exorbitant one for a stock.

The first is to try and visualize the next five years earnings of the stock. If the total earnings of the stock in the next five years is lesser than the total purchase price of the stock, it is “cheap” and you can go ahead and buy it confidently.

The second is to compare the purchase price of the stock with the market capitalization of the company.  &  give a practical example of what they mean. In 2003,  bought shares of Bharti Tele at Rs 25 per share. At that time, Bharti Telecom’s shares were quoting at a price equal to its book value. Its profits were about Rs. 1,000 crore and its market capitalization was Rs. 5,000 crores.  says that he conjectured how the profits were going to move and thought Bharti Telecom would make about Rs 26,000-27,000 crores profit in next five years. At this rate, the price that  was paying for Bharti Telecom was obviously “cheap”.‘s hypothesis was vindicated and Bharti Telecom actually made about Rs 30,000 crores giving  his multibagger.

Rule No. 2: Keep the “Long Term” In Mind:

It is implicit in  & ‘s technique that they are only looking at the long-term prospects of the stock. Both  &  make it clear that the question whether you have bought the share “cheap” or not has to be decided today with regard to the future 5 year earnings or market cap of the stock.  made this quite clear when he announced his purchase of Central Bank of India that while the stock may under-perform its peers in the short-term, he was confident that it would become a multibagger in 10 years time.

In this, one is reminded of the priceless advice given by Warren Buffett that “Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. If you aren’t willing to own a stock for 10 years, don’t even think about owning it for ten minutes.”

Rule No. 3: Reappraise periodically the validity of the investment hypothesis:

That investors should not get unduly perturbed by short-term downward price movements in the stock. Quotational losses are notional losses and the investor should not lose any sleep over it, emphasize the investment gurus, so long as the underlying business prospects of the stock remains unimpaired.

But, that doesn’t mean that the investor should not reappraise matters and see whether the quotation loss is going to be a permanent feature say  &  gives the example of the investment he made in Float Glass. bought the shares at Rs. 40 and then it plummeted to Rs. 4.  was forced to book his loss because certain events had happened in the company which changed the investment prospects of the company.  calls booking the loss “such a gruesome business” but emphasizes that it has to be done periodically to spring-clean ones’ portfolio.

Rule No. 4: Focus On The Business – Buy A “Predictable” Business:

That the investor must be very careful of the business that he buys. If the investor is right about the business, then the other things don’t matter so much. Even if the price paid for the stock is high, a good business will ultimately bail out the investor emphasize & 

Q: What is a “Good” & “Predictable” Business?

That a “good business” is one which is able to consistently generate more cash than it’s ever likely to need, but more importantly, it’s so scalable and the external opportunity is so large that it can actually consume that cash and continue to grow the volume of cash that it is generating.

With regard to “predictability”, the four investment gurus point A practical example is provided by Central Bank and Bharti Telecom where it is possible to have a sense of where the company will be in the foreseeable future.

On the point of “predictibility”, the three investment gurus ,  and give the example of Sun Pharma. Sun Pharma is a profitable generic company and it is run by Dilip Shanghvi, a competent manager. Given the nature of business that Sun Pharma is engaged in and the the level of competence in its management, there is the element of “predictability” that whatever the economic problems that the World may face, there will continue to be demand for the products such as chronic therapies, cardio vascular, anti epileptic drugs that Sun Pharma is engaged in.Sun Pharma is in a stage today where the products that it launched more than five years ago are generating two-thirds of its sales and these products are actually growing faster than the industry and faster than the Company’s entire core business.

For some businesses, don’t set your expectations too high:

A very important point about how investors must be wary of certain businesses and not set their sights too high. The textile business is one that the investment gurus warn about as being one where money is structurally sucked in from the investor for the reason that the cotton inventory that an average company has to maintain is over six months and the asset turns are probably struggling to beat one-month. The result is that the fixed capital deployment is equivalent of sales; margins are always highly competitive and yet you have to consistently put in money into capex to remain at the same level of production.

The Airline business is also another sector with high capital investment, intense competition and cyclical trend that one must be wary about.

Competition

On the question as to how to factor in competition when selecting a stock for investment,  &  point out that what the investor has to be careful about is that the business has a “moat” around it (such as a powerful brand e.g. Apple), and operating economics which are in its favor (such as a demand for its products). The company must have the technology to power its business. The trioka gives the example of Nokia which despite a great brand name and business prospects, lost out to Apple only because the latter had better technology at its disposal.

On the concept of “Good Businesses” one cannot do better than to echo what Warren Buffett said:

“We look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag.

A truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns. Therefore a formidable barrier such as a company’s being the low cost producer (GEICO, Costco) or possessing a powerful world-wide brand (Coca-Cola, Gillette, American Express) is essential for sustained success. Business history is filled with “Roman Candles,” companies whose moats proved illusory and were soon crossed.

Our criterion of “enduring” causes us to rule out companies in industries prone to rapid and continuous change. Though capitalism’s “creative destruction” is highly beneficial for society, it precludes investment certainty. A moat that must be continuously rebuilt will eventually be no moat at all.

Additionally, this criterion eliminates the business whose success depends on having a great manager. Of course, a terrific CEO is a huge asset for any enterprise, and at Berkshire we have an abundance of these managers. Their abilities have created billions of dollars of value that would never have materialized if typical CEOs had been running their businesses.

But if a business requires a superstar to produce great results, the business itself cannot be deemed great. A medical partnership led by your area’s premier brain surgeon may enjoy outsized and growing earnings, but that tells little about its future. The partnership’s moat will go when the surgeon goes. You can count, though, on the moat of the Mayo Clinic to endure, even though you can’t name its CEO.

Long-term competitive advantage in a stable industry is what we seek in a business. If that comes with rapid organic growth, great. But even without organic growth, such a business is rewarding. We will simply take the lush earnings of the business and use them to buy similar businesses elsewhere. There’s no rule that you have to invest money where you’ve earned it. Indeed, it’s often a mistake to do so: Truly great businesses, earning huge returns on tangible assets, can’t for any extended period reinvest a large portion of their earnings internally at high rates of return.”

Rule No. 5: Invest According To Your Temperament and Act Within Your Circle Of Competence:

That investing is a test of psychology and character and of intellect and that an investor has to invest depending on his particular temperament and should not forcefully copy a style of investment only because someone he admires adopts that style.

The investment legends give the example of Warren Buffett for whom the investment mantra was a “concentrated portfolio” and “Buy and Hold Forever”. Warren Buffett was immensely successful in that strategy. However, Peter Lynch, also a successful investor openly declared that “he never saw a stock he didn’t like” and had as many as 1,400 stocks in the Magellan Fund which he managed. Similarly, as against Warren Buffett‘s “Our Holding Period Is Forever”, George Soros philosophy was “Everything is a buy or a sell depending on the price.”

So, what  &  point out is that the investor must invest in the way that he understands best depending on his temperament. The investment gurus also point out that there are certain businesses or industries where one may either instinctively have a better understanding or where one may have absolutely no idea. An example is that of Warren Buffett who did not invest in Google because he did not understand the nature of the business and where Google would be in ten or twenty years. Warren Buffett lost out on a fabulous multi-bagger but that is no reason to regret. As a principle, one should not venture into businesses that one has no understanding about emphasize & .

Rule No. 6: Don’t Get Carried Away By Public Euphoria – Never Buy A Stock Only Because It Is Popular & Everybody Is Buying It:

This is probably the single most important piece of advise given by  & .  &  caution that markets sometimes take a fancy for a certain type of stock or a certain sector and investors get carried away.  gives the example of dotcom stocks in the 1990s when the public euphoria was so great that there were many companies trading at Rs 70,000-90,000 crore kind of market cap.  points out that even Infosys, whose profit then was Rs. 500 crores was trading at a market capitalization of Rs 130,000 crores. It is only after the bubble burst that investors realized that they were paying for Infosys about 5-6 times more than what was its correct valuation.

That while Infosys continued to be a great company even after 10 years of the euphoria, a number of other stocks like Global Tele and Himachal Futuristicwent to absurd valuations and today they are literally penny stocks.

A more contemporary example of how getting carried away with public euphoria can ruin an investor. They point out that in the recent real estate boom a number of real estate companies such as DLF and Unitech spun plans on how they would be selling 15-25-30 million square feet and making a lot of profits. Their story was very plausible and easy to believe selling. They claimed that they were like FMCG companies and that the Country had the ability to absord such high priced real estate.

Unfortunately, when the bubble burst, the investors were left holding the shares of real estate companies at completely extravagant valuations.  &  forcefully bring home the point that when the crowd gets charged, it becomes completely irrational.

Rule No. 7: Never Hesitate To Buy A Stock Only Because It Is Unpopular & No one Is Buying It:

This Rule is the converse of the earlier Rule. In the earlier Rule,  & cautioned investors against buying a share only because it was popular and everyone was buying it. In this Rule,  &  caution investors against hesitating to buy a stock which meets all the criteria only on the ground that nobody else is buying it.

The priceless advice given by , India’s greatest investor, who candidly says “Never in my life have I not made an investment because the stock is not popular. In fact I like to make the investment when the stock is not popular.”

There are several examples that ,  and  give in support of their proposition. The first is public sector banking stocks that at one time were totally ignored by the public at large. These stocks, though of fundamentally strong companies, were ignored by the investor community in the misconception that these PSU companies were inefficient and no match for their private sector counterparts.

He took advantage of this misconception in the public’s mind and bought huge quantities of PSU stocks like Shipping Corporation of India, Bharat Electronics, CMC, BEML etc. Likewise,  bought huge quantities of PSU Bank State Bank of India. Both  and  bought the PSU stocks at a fraction of their fundamental value. When the inesting public realized that the PSU companies were quite efficient as well and started paying a premium for the shares,  and  got their multibaggers.

Other examples of stocks that are undervalued by the market because nobody likes these shares even though there is nothing fundamentally wrong with them. VIP Industries is one example that  is never tired of giving. The stock of VIP Industries was quoting at Rs. 65 15 months ago when  bought it (see  & VIP Industries: Best Stock Pick!). Today, VIP Industries is quoting at Rs. 650 and that means  has got himself a ten-bagger!

Another example that  &  like to give is that of United Brewerieswhich was languishing at a market cap of USD 40 million or Rs. 160 crores even though it had 50% share in the Indian liquor market and a great brand name. Similarly, McDowell was available at a market cap of Rs 200 crore. United Breweries held 40% of McDowell at that time. So it was clear as rain that United Breweries was grossly undervalued but somehow the company was not fancied by the investor public.

The example of Bharti Telecom which was langusihing at Rs. 25.  recalls that all his well-wishers were so convinced that he had made a mistake in buying Bharti Telecom that they virtually forced him to sell a large part of his shares. However, such was ‘s conviction in Bharti Airtel that even after he succumbed to the advice of his well-wishers and sold out, he bought back a large quantity. The rest is history because  made a huge fortune from the multi-bagger that Bharti Airtel became shortly thereafter.

Rule No. 8: Never Accept Anything At Face Value – Do Your Homework:

In formulating this Rule,  &  have been inspired by Warren Buffett‘s timeless maxim “Only when the tide goes out, you discover who is been swimming naked.”

The example of Satyam to highlight this Rule. At the peak of the scam, Satyam was seen to have several big marquee clients like GE and State Farm. Satyam‘s founder Ramalinga Raju was even awarded the “Businessman of the Year” prize by Ernst & Young. However, it soon turned out that everything was a fraud. The clients disappeared, the employees were non-existent and the business was just a bubble.

There are several other examples like Enron and World Com that should caution the investor that what he sees and what he gets may be two different things say  & .

Rule No. 9: Buy What Is. Not What Will Be:

Be cautious against getting carried away with forecasts and projections of future profitability. This happened at the time of the Dot-com boom and again at the time of the Realty Boom when euphoric investors started making irrational and unrealistic assumptions about where profits were headed and where share prices would go.

Investors must have their feet firmly planted on the ground and err on the side of caution emphasize & . This makes sense, when read with the other Rule regarding preservation of capital.

Rule No. 10: Better To Have A Small Holding In An Excellent Company Than A Large Holding In A Mediocre Company:

For those investors who are constantly scouring for penny stocks in the hope that they will turn into multi-baggers overnight by some mysterious process.  &  advice that the investor is better off in investing in quality companies rather than in mediocre companies. This way, not only is the capital safe but the investor is assured of a reasonable return.

If one thinks about it, there is a lot of merit in the advice that  & are handing out. If a company’s earnings are growing at say 25% p.a. (not an unreasonable assumption) and the share price grows at the same pace, in five year’s time, the investors investment would have tripled. In 10 years time, the investment would have grown 9.31 times. At the end of 20 years, the investment has grown 86.73 times. In other words, if Rs. 10,000 is invested in year one and allowed to compound at 25%, at the end of 10 years, the investor has Rs. 93,100 and at the end of 20 years, the investor has Rs. 867,300. You have your own “multi-bagger”! Of course, the income by way of dividends is extra!

ALL THREE TARGETS MET IN TTK PRESTIGE

TODAY WE RECOMMENDED TO BUY TTK PRESTIGE AT CMP OF 2582 WITH A STOPLOSS OF 2550 FOR  A TARGET OF 2638, 2653 AND 2668. OUR THIRD TARGET OF 2653 ACHIEVED TODAY ITSELF. BINGO AGAIN!
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