My Recipe of Sensible Stock Investing

It’s a long one. Okay that was not to scare you; on the contrary, I’m going to keep it short & simple. I’ll cover it in a series. And don’t worry I’m not inspired by Ekta Kapoor’s K series. So it’s going to be a sweet and a short one. Before the chef shares the actual recipe, a few words about the chef and her journey to becoming a value investor -

Episode 1 – The Discovery of the Chѐf

I’ll share a little secret today. I did my Masters in Economics and secured the highest or maybe the second highest marks in the Financial Economics Paper. Guess what? In spite that I didn’t know ABC of stock market investing! Surprised? Yeah I know it’s surprising but it’s true. By the way I’m not the only one! This is what happens to most of the people!

The problem is that there’s too much information, too much advice, and no clue about where to start. And moreover, it’s damn boring, because you don’t understand anything! No one tries to make it interesting enough! Trust plays a crucial role. Whom should we trust? We get advice from every possible person – be it your friends, your broker, financial analysts with an entire universe of possible views or your relatives. Where to go, what to do are some of the questions which loom large in the minds of novice investors like I was then. I’m still in a learning phase and I guess it’s a continuous process – it never ends.

Have you also been through this stage? I have and my journey did not start till I read about the concept of Value Investing. Now I’m not going to sit and bore you guys by delving too deep into the concept. But yes, it deserves a small brief.

The concept invented by Benjamin Graham, followed by the world guru of investments, Warren Buffett rests on two simple rules. At MoneyWorks4Me these are called the Two Golden Rules:

Golden Rule No. 1: Invest in a company that’s worth owning forever!

Golden Rule No. 2: Buy shares at 50% discount or lower and sell at MRP provided it gives minimum 20% compounded annual rate of return.

We will discuss how to apply the two rules in detail a little later.

The next step involved finding processed (or adjusted) historical data of companies I wanted to evaluate. Data is a much broader term and to narrow it down, I focus on Net Sales, EPS, Book Value, PE, ROIC, ROE and Debt/Profit ratio for the past 10 years. Whoa, quite a big list, isn’t it? You must be wondering as if I’m sitting in a nice restaurant (a la carte) and ordering from an extensive menu card!

Two questions must be popping in your head right now. One where do I get it from, i.e. which restaurant I’m talking about? And two, what is this data adjusted for?

The answer to the first question is that I’m lucky to be a part of MoneyWorks4Me.com – a website from where I get all the data. The answer to the second question lies in the fact that companies are very smart when it comes to playing around with financial data. Thus we have to adjust the data for splits, bonus issues, extraordinary items, etc. Believe me it’s a task to compile these numbers, then adjust them and then sit and interpret. It all seems so complicated! I hate it when things get complicated. I like it simple.

It’s an art and you become a master when you write something which even a layman can understand. Well am still learning and hope I will be able to master it one day. Best of luck Charu ji. Ok I’m already deviating from the core. What was I talking about? Ah! Yes, I was talking about adjusted historical data. (You know chef’s can be like this at times. So please excuse me for deviating!) After collating the raw material for my recipe, I geared myself for the real task; the task of evaluating companies.

And we’ll meet after a break…

Commercial Break:

Bade: Abe tu kal kya kar raha hain…

Chhote: Kal main busy hoon

Bade: Kyun kahin jaa raha hain kya?

Chhote: Haan kal subah P.M. ke saath meeting hain..

Bade: P.M. ke sath?

Chhote: Haan

Bade: Subah subah?

Chhote: Haan kyun?

Bade: Subah mil hi nahi sakye who.

Chhote: Kyun?

Bade: Abe woh P.M. hain shaam ko miley ge… A.M. hota to subah milta na..

Chhote: Bakwas Bankar..

Disclaimer: The above image and joke have been adapted from 9XM.

Welcome back. I hope that the break was refreshingJ. I at least tried to make it one. Okay so we have the ingredients ready. All we need to do is to start cooking. Don’t worry; I’ll take you through the steps of making the perfect blend of ingredients with the art of cooking it on a low flame. And then we’ll enjoy the scrumptious recipe (our investments) with a glass of old wine (our handsome returns)! What do you say? Mouth watering?

But hey, we’re out of time! Hehe, this is how serials are nowadays, they end before they even begin to show something. But don’t worry we’ll meet again soon, same time, same place. Don’t miss me too much…I’ll come back soon! Till then, sayo nara, shabha khair, shubh ratri, bye-bye.