Nature of the Beast

Stocks…

…crash.

It’s the nature of the beast.

Stocks also multiply.

For stocks to multiply, one needs to do something.

What is that something?

One needs to buy stocks when they crash.

Let me give you an example. 

Let’s assume markets are on a high, and there’s euphoria.

Excel Propionics is cruising at a 1000.

The prevailing euphoria seeps into your brain, and you buy Propionics at a 1000.

For Propionics to multiply 10 times in your lifetime, it will now need to reach 10,000.

Likely? Wait.

Cut to now.

Stocks are crashing. 

The same stock, Excel Propionics, now crawls at 450.

You have studied it. 

It’s debt-free.

Positive cash-flow.

Ratios are good.

Numbers are double-digit.

Leverage is low.

Management is shareholder-friendly. 

You start buying at 450. 

By the time the crash is through, you have bought many times, and your buying average is 333.

For Propionics to multiply 10 times in your lifetime, it will now need to rise to 3330.

Which event is more likely to happen?

Just answer intuitively.

Of course, the second scenario is more likely to play out than the first one. In the second scenario, Propionics will need to peak 3 times lower.

Simple?

No!

Try buying in a crash.

You are shaken up. 

There’s so much pessimism going around.

Rumours, stories, whatsapps, opinions. The whole world has become an authority on where this market is going to go, and you are dying from inside.

What’s killing you?

The hiding that your existing portfolio is taking, that’s what’s killing you.

Are you liquid?

No?

Very bad. 

Why aren’t you liquid?

Create this circumstance for yourself.

Be liquid.

Optimally, be liquid for life. 

Then, you will look forward to a crash, because that’s when you will use your liquidity copiously, to buy quality stocks, or to improve the buying averages of the already existing quality stocks in your folio. 

How do you get liquid for life?

You employ the small entry quantum strategy.

Yes, that’s about right. 

We’ve been speaking about this strategy in this space for the last two years.

Read up!

🙂

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Negating Promoter Greed

You like a stock. 

You’ve checked it out. 

Fundamentals are under control. 

You find the management reasonable.

They’re shareholder-friendly. 

They have high salaries though, specifically those connected to the promoter-group. 

Now, you need to answer some questions.

Are you ok with high salaries for the top staff?

What is your definition of high?

Are salaries performance-driven?

Do the company’s number justify what promoter-connected management is taking home?

Ok. 

You’ve answered these questions. 

You still want the stock, despite the fact that an answer to two could be an outlier. 

That’s fine. 

One won’t find perfection anywhere. 

If one finds it, the stock will probably already be overpriced. 

So, you’re ok with mild imperfection, as long as your basic needs are met. 

You decide to purchase the stock. 

Here’s how you can negate promoter greed. 

The fancy cars, the family dish outs, the pushed-in lunch bills, the first class travel, you get the drift. 

Who doesn’t do it, given the opportunity?

Your promoter is human, and will surround him- or herself with comforts, at the company’s expense. 

That is the norm. Get used to it. 

Here’s how you are not letting this affect you. 

You buy in a staggered fashion. 

You buy with margin of safety. 

Because you’re sure of fundamentals, you average down. 

Each time your holding average touches a new low, you’ve secured yourself against promoter greed just a tad more. 

Because of sound fundamentals, ultimately, the stock will start to rise. 

That’s the time your low holding average will show a stellar profit for you. 

Perhaps your holding average is better than that of the promoter.

If that is the case, rise in price has given you more profit than it has to the promoter. 

Therefore, while the promoter got to live in the lap of luxury at the cost of the company, you were busy raking in a better result owing to the price rise.

Successive margin of safety buying amounting to averaging down after convincing oneself of intact fundamentals has been the key for you. 

Use this key, but do so wisely, and safely. 

Remember, that averaging down only works well in the case of diligent, research-based long-term investing. Averaging down is a strict no-no for short-term traders, however. 

Wishing you happy and fruitful investing!

🙂

How to Enter into a Growth Stock

You can play this one in different ways.

The successful way for you will depend upon your risk profile.

What we will be discussing here is a kind of a value way for growth stock entry.

Fine. What sets growth stocks apart from value stocks?

Valuation.

Growth stocks have high multiples.

What does that leave us margin of safety people?

Will we completely have to stay away from growth stocks?

No.

There’s a way.

Loosen your margin of safety criteria slightly. Bring it up to, for example, PE < 15, amongst other things. (We’ll compensate for this loosening, you’ll see).

Now wait.

Let the stock correct.

PE goes under 15.

Don’t enter yet.

Now we compensate.

We let more margin of safety develop in the price.

We want price going down to a technically viable level for entry.

This can be a Fibonacci level, a support, a base, a pivot, or what have you.

Three things have happened.

You have identified a stock through your due diligence.

You have waited for it to reach desired valuation after raising your valuation criteria a tad to compensate for the growth aspect.

You have compensated for your compensation by waiting further for a technical level to be hit before entering.

Now, you enter.

Your entry price becomes your base. (Subsequent entries will always refer to the base-price average).

You have entered with your minimum entry quantum.

You will take many entries, each with your minimum entry quantum.

You will keep taking entry till all the above criteria keep being met.

When even one criterion is not met, you will stop entering and will sit tight.

You will keep watching the stock and its management.

If entry criteria are not met for a long time, but stock is still not over-valued as such, you can enter once for every shareholder-friendly act of good governance, upon an interim dip in price.

You will only stop entering when over-valuation rules and becomes obvious.

You will think of exiting when you are no longer convinced about the stock.

Exit will be done upon a market high only.

Hopefully, you won’t need to exit for a long, long time, so that your investment turns into a multi-multi-bagger!

🙂

A Small Entry Quantum per Day Keeps the Doctor Away

Your ears are probably swelling from all this talk about a small entry quantum (SEQ) per day.

However, you are also noticing the practical element of the SEQ, especially during the current correction.

Whatever’s happening in the world is happening. We need to long-term invest on the basis of what’s being offered to us. When we see margin of safety, we act.

However, we could go on seeing margin of safety for years upon end. Therefore, our entry quantum per day is small, so small that we can last out purchasing for quite a while, and still have ample liquidity left over for all other necessary aspects of life.

There’s another benefit of the SEQ though.

Let’s say that one of your holding turns rogue.

It can happen. So many scams are emerging. There’s a new scam every day.

So let’s just assume, for assumption’s sake, that the management of one of the stocks you are holding is involved in a fraud, and this fraud has come to light.

Where does that leave you?

You stop accumulation of this stock immediately.

Don’t expunge it yet. You’ll lose out. What if the scam is a hoax? Find out. It might blow over. Management might change. Your conviction in the stock might be rekindled. Wait for a market high. If you’re still not convinced about the stock anymore, expunge it on a market high.

What did the small entry quantum do for you here?

You had accumulated the stock over some kind of period, SEQ by SEQ, right?

When the fraud exploded, your holding wasn’t that sizeable. SEQ, remember.

A fraud management won’t wait multiple years to let their fraudulent natures act. Sooner or later, a fraud will get caught. Sooner the better. When this one is caught, your holding is not enormous. It’s size depends upon the number of years of holding and conviction.

The greater the conviction, the longer the holding and the lesser are the chances of the management consisting of fraudsters.

Your small entry quantum has ensured that over many, many years, stocks that end up getting accumulated majorly are the ones where conviction strengthens year upon year upon seeing multiple practices of good governance and shareholder-friendliness.

Scammers stop getting accumulated long ago. They are expunged on market highs.

After a decade or two, your portfolio is brimming with honest multibaggers.

Defining a Long-Term Hold

Homework, people, is the most essential element of long-term investing.

No wonder they stressed so much upon homework in school. 

They knew what they were talking about. 

And, it has counted. I always took my homework very seriously. 

Things are no different in the markets. 

Do your homework well, and diligently, and the pay-off might surprise you. 

In the markets, you are not paid off with marks, but with appreciation in the value of your holding. 

So, what kind of homework goes into defining a long-term hold?

Today, we have stock-screeners, so use a stock-screener to spit out some potential long-term holds after defining the screener’s parameters as per your wishes. Choose a stock from the results of the screening that you might want to delve into. Then, delve into it. 

In scam-ridden India, the first things that one needs to look for are honesty and integrity.

Look very, very hard.

Do repeated fraud / scam / bribe searches. The web is your oyster. 

Look into salaries of top personnel. Low is good. If salaries are on the higher side, is it justified? Specifically, scrutinize the salary of the top promotor and the CEO. If not justifiable, just drop the stock. 

Look for acts of good governance. 

Openness.

Sharing.

Shareholder-friendliness.

Truth.

Responsibility.

Once honesty and integrity are established, go over the fundamentals. 

Overall, fundamentals will either meet your parameters, or they won’t. Also, it is you who is going to define the fundamentals you wish to gauge, and what you wish to see. 

Are you seeing what you wish to see?

No?

Discard.

Yes?

Proceed.

Is the stock going to be around even after ten years?

Gauge. Product, business-model, circumstances…

You think no?

Discard.

You think yes?

Proceed.

Is the business scalable?

No?

Rethink.

Yes?

Proceed.

Is there debt in the equation?

Are you comfortable with the level of debt?

No?

Discard.

Yes?

Proceed.

Get the overall picture. 

Are you comfortable with the overall feeling you are getting?

No?

Discard. 

Yes?

Proceed.

Look for an entry point. Open the chart and try and enter upon a base or some other technical level. If none is available, wait for a level to come, and then make your entry. 

Thus, you have successfully defined and entered your long-term hold.