Value investing


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Value Investor

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Value investing

  1. 1. ® Rahul Pagaria,2013 Value Investing Rahul Pagaria
  2. 2. ® Rahul Pagaria,2013 Value investing • Long-term growth • Long term investing.xls • Increases net worth over time • Based on techniques for estimating the “value” of a share of stick • Many techniques • Not all techniques work at any given time • No technique works all the time • The “heart” of value investing is research & discipline
  3. 3. ® Rahul Pagaria,2013 Background • Graham & Dodd (1934) • Shares appear to be under priced based on some form of fundamental analysis • Security Analysis • High Dividend Yield • Dividend yield greater than discount rate • Low Price to earnings • 1/pe > discount rate • Low Price to Book • PB < 1
  4. 4. ® Rahul Pagaria,2013 Value investing as time progressed • 1949 B. Graham wrote the Intelligent Investor • Margin of safety • Build a 15 Ton Bridge for a 10 Ton Truck • “Mr. Market” • Just because “Mr. Market” is irrational doesn’t mean you should be too • 1954 Templeton Fund (15%APR) • 2000 + Warren Buffet becomes the second richest man in the world by practicing value investing
  5. 5. ® Rahul Pagaria,2013 Mr Market Graham’s parable goes something like this. Think of yourself as owning a share in a business in partners with others. One of your partners, say Mr Market, is somewhat of a neurotic who on any given day will offer to buy your share or sell you his at a specific price. His moods can fluctuate anywhere between incredible optimism and overwhelming depression. One day he will nominate a higher price to buy or sell, the next day he might increase it, lower it, or even appear uninterested in whether he buys or sells. The point that Graham makes is that Mr Market’s judgment is formed more by mood swings that by rational thought and that this gives the wise investor buying and selling opportunities. If Mr Market’s price is unreasonably high, then wise investors have the opportunity to sell. On the other hand, if it is unreasonably low, then they have the opportunity to buy. .
  6. 6. ® Rahul Pagaria,2013 Oracle of Omaha • Warren Buffet • the essence of value investing is buying stocks at less than their intrinsic value. • Discounted value of future earning/distribution/growth • "finding an outstanding company at a sensible price" • the nice thing about investing is that every day the pitcher throws you a ball and you don't have to swing. So you can wait for your pitch and then hit it out of the park. And that's the good news that is always true
  7. 7. ® Rahul Pagaria,2013 Famous Warren Buffet quotes • Wide diversification is only required when investors do not understand what they are doing. • If a business does well, the stock eventually follows • Our favorite holding period is forever. • Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years • The first rule is not to lose. The second rule is not to forget the first rule. • If past history was all there was to the game, the richest people would be librarians
  8. 8. ® Rahul Pagaria,2013 Things you should know • Stock markets are Predator prey relationship • To buy a stock someone must sell it • Why would any one sell a stock that is worth more than that what they are getting?? • For you to be right, someone else has to be wrong • The currency of stock markets is not money but information • Knowing something that no one else know is profitable • That is why insider trading is illegal (ask Martha Stewart) • Traders who harness information are Wolves, all else are sheep • Get smart or get broke!
  9. 9. ® Rahul Pagaria,2013 How it works (at least for me) 3 Steps Search Strategy 1. Find a pool of sticks to research Valuation strategy 1. IN or OUT 2. I pick I have elimination rules 1. Intangible assets! 2. “cooking the books” 3. Find a true value for the stock A disciplined approach to buying and selling • If things are not working right change 1 or 2! Stick to the discipline!
  10. 10. ® Rahul Pagaria,2013 Search Strategy • Guidelines a pool of potential stocks • Pick obscure stocks but not “penny stocks” or OTC • Stocks that have “low visibility”, high visibility means no surprises • Not too many analyst covering the stock • < five for small cap • < ten for mid cap • Not too much institutional ownership • I like 20-60% • Use fundamentals to pare down list • Go with what you know, limit your self to industry you have experience with
  11. 11. ® Rahul Pagaria,2013 Search Using MSN Stock Screener • Two Modes • Deluxe • Power searches • Power Searches Fundamental screens • Dogs of the dow • Great Expectations • GARP • Righteous rockets • Deluxe • Low P/E < Industry • Price/book <= 1.5 • % institutional ownership > 10 , < 60
  12. 12. ® Rahul Pagaria,2013 Valuation Strategy • There are too many to explain • • Best use forecasts of future growth (earning/dividend/equity) to develop current discount prices • tockvalue.htm • Choice is pick a model someone has develop OR develop you own • Either way do the analysis your self • “True” value • Hard look at the company
  13. 13. ® Rahul Pagaria,2013 Discipline • Buy when stocks are 30% below true valuation based on your model • Sell based on periodic reevaluation of stock • when stocks reaches 95% of the valuation your model predicts • When stocks fall 10% below the price you bought them it redo your model • Did you do something wrong? or is this a chance to buy more (greater vale) • Don’t “stock watch” • That’s for swing, momentum and day traders (graham’s Mr. Markets)
  14. 14. ® Rahul Pagaria,2013 Best Rule to follow In a bear market buy, in a bull market sell The secret is knowing what to buy and what to sell