I recently received a comment from madhav

The question I have on outsourcing kind of IT companies like NIIT, Infosys, TCS etc is, “where is the moat?”.

Every company seems to be into everything that happened yesterday, today or will happen in the future. All companies are generally present in all geographies, across all industry sectors etc. To top up the challenge, the “asset” of such IT companies are their people, but the employees keep hopping between the competitors and there is hardly anything preventing them from doing so. So where is the moat or where is the long term advantage? This also leads to the question - how do you value such a company?

This is an interesting question and there are several ways to answer it. I will try to answer it, by first doing a porter’s five factor model analysis on IT companies (for more on this model you will have read this book).  I will then use the conclusions from this analysis to answer madhav’s question and see if we can value these companies.

The porter’s five factor model has the following five factors, on which the moat of a company can be analyzed (by the way, I do this analysis for every investment I do)

• Entry barrier : Level of entry barriers in the industry to a new entrant
• Level of rivalry : Level of competition within the existing companies
• Supplier power : bargaining power of suppliers
• Buyer power : bargaining power of buyers
• Substitute product : presence of substitute products

I have a spreadsheet uploaded in Google groups, wherein I had done a similar analysis some time back for multiple industries. It is dry reading, but I think a useful document (for me). I am reproducing some parts below for this post, for the IT industry with appropriate updates.

Entry barriers: This factor can be analyzed in detail based on multiple sub-factors. I have listed the analysis in the table below. The summary of the analysis is in the first row

The above analysis clearly shows 2-3 main sources of competitive advantage. Scale is critical in this business as the larger companies tend of have cost advantages due to economies of scale and can also provide the requisite resources for large engagements. In addition, these companies can afford to spend higher amounts on marketing and sales. The second source of advantage is customer relationships (long term contracts). This advantage is not set in stone, but it a very critical asset. For ex: After the scandal, the key value in satyam, was existing client relationships and Mahindra paid for that. Ofcourse this asset does not have as much life as fixed assets and can be lost much more easily.

Level of rivalry

The above analysis shows that the level of rivalry has been high, but not destructive till date. Most companies in the sector earn high return on capital and are fairly profitable. This has been mainly due to high growth in the industry and low fixed costs (they can cut our salary and bonus when the demand drops J). Due to multiple companies in the industry, the long term returns in the industry are bound to trend lower (read that as profit margins).

Supplier power

If you work in the IT industry, you are the supplier. Supplier power - zip, nothing..doesn’t exist. Yes, companies say employees are their asset etc etc. We all know the reality. Employees are the raw material for the industry like steel and copper (sorry if I hurt your feeling by comparing you to a commodity J ). Most companies pay for this commodity based on what the market prices it.

Buyer power

Buyer power is clearly a bigger issue for smaller companies. The large IT companies have consciously tried to diversify their revenue to reduce dependence on any specific client. This is a key variable for a company. If the buyer concentration is high, the vendor can get squeezed and will not be able to make high returns.

Substitute product

Substitution of one vendor with another is a key competitive threat for each company. Clients typically have multiple vendors to ensure that they can maintain competition and keep the prices low. Till date, the competition has not been destructive and most companies have made decent returns in the past.

Conclusion

The broad conclusion one can draw from the above analysis is that IT companies do enjoy a certain degree of competitive advantage. The source of this advantage is no longer the global delivery model (everyone does it) or the employees (all the companies source from the same pool). The key sources of competitive advantage can be summarized as follows

• - Switching cost due to customer relationships
• - Economies of scale
• - Small barriers due to specialized skills in specific verticals such as insurance, transportation etc
• - Management. This is a key source of competitive advantage in this industry and explains the wide variation of performance between various companies operating in the same sector with the same inputs and under similar conditions.

Inverting the question

Let’s assume for argument sake that the industry does not have a competitive advantage and is similar to the steel or cement industry (which by the way has some competitive advantage). In such as case, the industry would be characterized by intense competition and low returns on capital (low ROE). This has not been the case for the last 15 odd years and most companies especially the larger ones have maintained fairly high returns on capital. This variable alone shows that the industry has some level of competitive advantage - especially the larger ones.

Valuation

The above analysis is clearly a backward looking exercise. Valuation on the contrary requires a forward looking estimate. Can we arrive at any conclusion from the above analysis?

It is difficult to arrive at how each company will evolve over the next 5-10 yrs (the typical duration required for a valuation). However we can arrive at some general conclusions

• 1. As in other industries, the return on capital for the industry should come down over the course of next 5-10 yrs
• 2. The industry could split in two levels - the large SI (system integrators) such as Infosys, Accenture, Wipro, IBM etc and the niche players. Both these type of players should enjoy a decent level of profitability.
• 3. The industry is likely to diversify and expand into new geographies, but the future growth is unlikely to be as high for the big players.

The above conclusions are my educated guess and are as valid as anyone else’s. However based on these conclusions I would propose the following

• - The large SI like Infosys, WIPRO etc should continue to do well. However, these companies would see only moderate growth in profit. As a result I would be hesitant in giving a PE of more than 25 to these companies.
• - The attractive returns in this sector are to be made with the small niche players. These companies, if they can be indentified early enough, are likely to have high growth and profit. However this is a specialized form of investing, requiring deep skills in the specific sub-segments.

I recently received an email  from a reader asking my suggestions on retirement planning for his parents. The timing of his question is good as I have been working on this topic for the last few weeks for my family.

I will try to detail out my thoughts on the above topic . This is however my own idiosyncratic way of doing it. It may make sense for some of you to approach a licensed financial advisor (if they exist in India!) for advice.

Before I discuss about the above topic, let us look at the above issue by inverting the problem. We need to identify what we should absolutely not do when planning for retirement - especially for our parents

• Chasing returns: Repeat after me - I will not put my parent’s or family’s funds at risk in pursuit of returns. Please read this a few times and memorize the statement. I cannot stress this enough. It would be completely stupid and irresponsible to chase an investment idea for extra returns with your parent’s money when they are depending on this capital to support themselves for the rest of their lives
• Due diligence - Do not put your family’s money in any instrument without complete due diligence. This includes the obnoxious ULIP schemes sold by most banks and guaranteed return policy sold by friendly insurance agents to unsuspecting seniors. The agents in question are not targeting your parents out of malice. Most of them have good intentions, it’s just that they do not fully understand the product they are selling. So please avoid all such agents unless you are sure you are buying something worth it.
• Be realistic - Do not assume returns in excess of 10-12% for a conservative, low risk portfolio. Even if you have made 30% returns in the past and consider yourself a finance whiz kid, please hold your horses and spare your folks of your brilliance. If this performance turns out to be a fluke or you hit a bad patch, they will suffer and you will carry the guilt (which is a horrible feeling)
• Face the facts - If your parents have unfortunately not been able to save enough for their retirement, do not target higher returns to cover for it. It could mean tough decisions for you and your parents in terms of lower standard of living (though assured) or help from you to maintain their current living standards.
• Paper work and admin - Do not develop an intricate investment portfolio where your parents have to spend half their time filing documents, visiting banks and other such administrative tasks. I have done this in the past and made it difficult for my family.
• Teach - Do not keep them in the dark about where their money is being invested. Teach or atleast educate your parents about the investment options you are selecting for them. Do not make it mumbo jumbo for them - When the market hits the top and retracts 5%, I will sell 6% and move to cash! Keep it simple and understandable. It will also ensure that you will pick some sensible options for them.

I do not plan to layout a template which can be followed step by step to plan for retirement. It would be difficult to do that as individual circumstances vary and so would the solution. My attempt is to layout my thought process on various factors for retirement planning which can be used to think through and execute a plan.

Risk and return
The starting of risk and return should be risk and not returns. One should not start with a return target of x% and then work out the investment plan. On the contrary, it is important to look at your risk tolerance and how much time you would have to cover losses, if any.
Risk tolerance in turn is a difficult and subjective topic. What is risky for me, may be low risk for you. As a result, risk should be analysed from a personal perspective. I personally do not follow the typical risk measures of beta and other such academic concepts.
I look at  risk as doing something without the knowledge and experience to do it, especially where I do not have a clear view on how much I can lose in the worst case scenario. Lets explore that point further - Lets say I wish to invest for my family in such a way that they are able to get a return of 10-12% over 3-5 year period. It is easy to get around 8% through FDs and other such fixed income instruments. In order to get the extra 2-3% per annum, I need to look at equity to improve the returns.

My own personal experience and the last 10-25 yr data shows that the BSE index has returned between 12-15% per annum over the long term. However at the same time, this average return has been marked by 30% drops and 40% increases too. So in this case I can look at index funds as a possible option as I have a rough idea of the risk and return profile.

Now suppose someone suggests that I should invest in gold or real estate as these are good hedges against inflation. I would hesitate for multiple reasons  

• I have never invested personally in these asset classes for investment purpose.
• There is lack of enough long term information and transparency in case of real estate (or atleast I do not have access to it)
• Gold has not provided good long term returns over the last 20 yrs. Now the next 10 yrs could be different and there seem to be a lot pundits saying so, but I don’t have the data to validate it and hence would stay away from it.

 In a nutshell, risk for me is a lack of understanding the investment option in terms of the long term return and the maximum possible loss under various scenarios.

Expected returns
The next aspect of investment planning is returns. Returns are closely tied with the level of knowledge and sophistication one can bring to the process of investing. Lets look at some scenarios

The know nothing investor - you have no idea of equities and have never invested in the stock market. Your idea of a bull market is the bull or cow you may have seen in a local indian market :). A person who has no idea of even the basics of investing should look at investing in bank FDs and look at 7-8% returns. Such an individual when planning for retirement for self or for parents should not go beyond these FDs. There is however a risk for such an investor too. The risk is inflation. As the investor is barely earning 1-2 % above inflation (or even less), there is serious risk that the investor would not be able to support himself with the excess 1-2% returns over inflation. If the investor draws any more than 3% of the capital per annum for expenses, he or she will run out of money in due course of time

The beginner - you have some idea of equities. You have invested a little bit in mutual funds. You typically watch CNBC and think the anchors are dispensing good advise. Your idea of the stock market is that this place is like a casino where you can make it big or lose money big time. A person at this stage is at the highest risk of losing his or her capital. Half knowledge is always dangerous. A person at this stage needs to decide whether he is ready to invest the time to learn more about investing. If this person is not ready to invest the time and energy to do so, then the best option for such a person is to invest a small portion of his capital every month in a good index fund (via a systematic investment plan) and the rest in bank FDs. If the person is able to keep a 40-60 asset allocation (40% in equities), he or she can expect 10-11% returns over the long term.

The key issue for such an investor is that he or she needs to start saving and investing early in life and reduce the equity allocation to a max of 20% after retirement. I would not recommend an equity exposure (via index funds) of more than 20% of capital for anyone in this group who has crossed retirement.

The sophisticated investor - This kind of investor has been investing for the last 6-7 years. He or she has seen 1-2 bear market and has not been scared by it. He understands the risk involved in investing and has a fair amount of risk management skills. If you parents fall in this bucket, I doubt they would need your help.

If you are planning your own retirement and have 15-20 years to go, then you are in a good position. A 60-70% allocation in equities can be maintained. A 30-40% investment in stocks with the rest in good mutuals or index funds can be built via a systematic investment plan (investing a fixed amount of money each month).

This kind of investor needs to keep the long term in mind and should avoid a short term approach of performance chasing. The risk of losing capital for an extra 2-3% is fairly high and should be avoided. An investor in this group can expect around 13-15% return in the long run and if he or she starts an investment program early, should be able to retire very comfortably

The expert or the guru - This kind of investor has been investing for more than a decade. He or she has beaten the pants out of the market (in excess of 20%). If your parents are in this group, congratulations !!. They will take care of your retirement

If you fall in this group, I am not sure why you are reading this post. A person in this group has no reason to think or worry about his or her retirement. Any one who can compound money in excess of 20% can retire a very rich man ( for ex: such a person can convert 100000 to 40 lacs in 20 years). A person in this category can manage money for others and become seriously rich before his or her retirement.

Various instruments
In the above discussion I have discussed about fixed income instruments and equities. You would have noticed a lack of discussion about other assets such as real estate, gold, commodities, options etc. Let me share some thoughts on the various asset classes below

fixed income: One can expect returns in the range of 6-8% and low risk. Typical options are bank FDs, Post office deposits and debt mutual funds. All these options are low to very moderate risk and good for the first two group of investors (the know nothing and the beginner)

Equities: One can expect returns in the range of 12-14 %. Typical options are index funds and mutual funds. This option has moderate to high risk and should be handled with care. A beginner should look at only index funds or some good mutual funds. A sophisticated investor can look at stocks as long as he or she knows what they are doing. A lot of investors and financial planners would like to assume that equities can returns in excess of 20%. However the indian markets over the last 15-20 yrs (a typical retirement planning horizon) have returned around 13-14% and I would not like to assume anything more than that when planning for retirement.

Real estate: This asset class has become a hot favorite in the last few years. However the long term history of real estate across the world and across time horizons is that the returns from this asset class are 1-2% lower than equity. If you are beginner or a know nothing investor, I would really not look at putting money in real estate (other than for primary residence). This is an illiquid asset class with lack of transparency in india. If you are a sophisticated investor, then it may be possible to get a fair return, but then one has to be ready to spend the required time managing it too. I have written about real estate here in the past

Gold, commodities, and options: I have clubbed all these options on purpose. If you are a know nothing or beginner, I would stay away from these assets as far as possible. In these categories I will buy gold when I am buying jewelry for my wife and commodities when I need sugar or wheat for my kitchen J. The only group which should invest in these assets should be the experts. I would even say that sophisticated investors should not look at these assets for long term investing. If you need an ego boost, invest a little bit for fun, but If you are not an expert, you can get you’re a** kicked big time in the market.

Asset allocation and rebalancing
I have written about how asset allocation drives you portfolio returns. All of us think we can tolerate risk and can afford to have a high equity component. My suggestion is to keep it lower than the level you think you can maintain without losing sleep.

Let’s say you are looking at 11-13% returns and are planning to keep around 50-55% of your portfolio in equity. I would suggest that one should start with a 30-35% allocation and go through a bear market and see how one is able to survive it. If you are able to avoid the gloom and doom and still able to invest during the bear, then go ahead and start raising the allocation. It is easy to maintain a high equity allocation during a bull market. We are all geniuses during bull runs. The test of patience and risk tolerance is during a bear market.

Finally if one is not actively managing his or her investment, then it makes sense to start reducing the equity holdings during a bull run to bring it to the target allocation. For example, if you target is 40% and the equity components goes up during the bull market to 60% of your portfolio, then it makes sense to start liquidating some equities to bring it to around 40%. In contrast, if your allocation drops to 30% during the bear market, then one should start buying equity to bring it up to the target level.

The above suggestion is easy to understand and very difficult to execute. I have personally gone through this last year. It felt like quick sand. I was constantly adding money from March 2008 to my equity portfolio and the market kept dropping at the same time. So at the end of the year, the absolute value of the equity portfolio stood at the same level as the start of the year, inspite of pouring money into it. It is not easy to constantly lose money in face of a bear market.

One can further split the allocation between different instruments in each of the categories. One can split the debt component into Bank FDs, Debt funds, Post office deposits etc. In a similar manner the equity component can be split between mutual funds and shares. The actual numbers need not be precise and you do not have to get very scientific on it. As long as you are close to your target levels, it should work out fine.

Administrative effort
This is an ignored, but important component of portfolio planning. It does not make sense to invest in an option where there is a lot of documentation and other risks and costs involved. In the past, shares could be bought and sold only in the physical format and there was always a risk of bogus shares and the headache of paperwork.

In a similar manner mutual fund investing also involved a decent amount of paperwork. Luckily most investment options (except Post office schemes and Bank FDs like that of SBI) are now convenient and easy to manage. However one should keep in mind the paperwork involved in the specific investment option. My own preference is to look for option which requires minimal paperwork, allows online mode of investing - preferably automated, and does not require me to track payments and receipts on an ongoing basis. I also prefer investment options which would allow me to pull an electronic statement at the end of the year for tax purposes.

Most of the investment options and firm providing them are focused on making it smoother and easier for the investor. However we still have some options such as the post office and public sector banks who believe in torturing you, even when they take your money.

The entire topic of retirement planning which is a subset of personal finance is a vast topic. One could write a book on it and could easily update it on an annual basis. I have tried to scratch the surface here and just provide some initial thoughts or factors to look at when developing your portfolio for your or your parent’s retirement.

If you have to take one point from my post, it should be this - Invest with full knowledge and understanding of the investment option and always focus on the risk or downside.

There is one key point missing in my blog - My portfolio details and performance. The omission is by design and there are several reasons behind it.

I have written in the past on my reluctance on sharing my portfolio in detail, especially the performance. I have disclosed my portfolio in the past (see here) and it has more or less remain unchanged since then.

There are several reasons for not sharing my performance. The key reason for not sharing the performance, is that a public display would put pressure on me and would in turn impact my investing decisions. Investing is tough enough and I don’t want to make it any more tough for me.

The second reason for not displaying the performance is that I want the readers to follow my posts based on the strength of the ideas I present and not the performance of my portfolio. The soundness of idea - sensible and rational value investing - does not change based on whether I perform well or badly as an investor. There are some investors who are far superior to me in performance and practise a similar approach. The performance of these investors is a reflection of their superior skills.

In addition to the above reason, I can choose to put any numbers as there is no independent audit of these numbers. I do not want to create a situation where the readers are always wondering whether the numbers on the blog are real or imagonary.

As you can see in the sidebar, I also publish my posts on moneyvidya.com. This association is non financial and i was contacted by the moneyvidya team in past to be a member of their core blogger team. I have posted my stock ideas on the website in the past few months and thought of sharing a  snapshot of the portfolio performance.

A few caveats before you read too much into it.

• The above stocks do not represent my portfolio. They represent a few of my ideas which I decided to post on the website.
• The above is an equal wieghted portfolio of the picks which is not the case in my personal portfolio.
• The portfolio performance may not be a true reflection of my personal portflio in future as I do not have idea of how to take a stock off this model portfolio when I decide to sell it (maybe the moneyvidya team will clarify that for me)

So why publish this portfolio
A few key points stand out.

This dummy ( pun intended ? :) ) portfolio has been in the top 10% for the last 10 months ( I don’t know how that is calculated though by the moneyvidya team). This in a way shows the validity of picking good stocks and holding on to them.

This dummy portfolio has beaten the index by around 20% during this period. This period is too short to reach a conclusion, but is interesting as typical value investors generally under perform bull market and out perform bear markets.

Finally, not matter what I try to claim, there is a certain amount of bragging involved too. The reason why the last few months have been more satisfying, is that I have been able to follow my convictions, ignore the doomsday predicitions and commit my personal capital to my ideas. That is more satisfying than the gains themselves.

I recently received a comment from rajiv which is reproduced below

Rohit,
As a stock moves towards its intrinsic value, there is a temptation to exit a little before the final value is hit, especially if you have waited a long time for Mr. Market to come around.
I feel that as a value investor the sell decision is much tougher than the buy decision, because the buy decision usually comes with a big enough margin of safety. However, during the sale decision the market value may be stuck at Intrinsic Value minus 10%, making the investor quite jittery to sell.
I have been asked this question in a several different ways, but all essentially boil down to the point - when should one sell a stock ?
I agree with the point made by rajiv and several other readers - selling is more diffcult than buying. In addition, there is no clear cut formulae for selling. The process of selling is made even more diffcult by the various emotional and psychological factors involved in selling.

Emotional factors
Most the discussions and articles on investing rarely discuss emotions explicitly. I find that strange as anyone who has ever invested in the market can vouch for the emotional roller coaster. The rational aspect of selling is easy for a long term investor - sell when price crosses intrinsic value (or 10% below or above - take your pick of the number)

I have written on the above question earlier - see here. The is the rational way of deciding on when to sell.

Now this suggestion may have sounded irritating to some of you and rightly so. The reason this  advice, though rational, does not sound great is due to the emotions involved in selling.

There are two situations in which one is selling - one has made great gains in the stock and wants to capture some of the gains. Selling at this point is driven by the fear of losing the gain, which is counterbalanced by the desire to hold on to a stock which has treated you well and also by the doubt that there may be more upside to it.

The other situation in which one sells a stock is when one has lost money on the stock and wants to get rid of the piece of !!@##. In this situation the decision is driven by disgust.

These emotions are quite powerful and not easy to manage
All these emotions are nothing new, right ? Even if you have felt these emotions earlier, it does not mean that you are managing them well.
I maintain a spreadsheet of all my holding with the qty, intrinsic value estimate, current price and discount to the current price. At any point of time, when I am looking at my holding, I am looking at the instrinsic value and the discount to it. I ‘anchor’ myself to the instrinsic value. As a result if the stock is selling below the intrinsic value, I will continue to hold.

As the intrinsic value of the stock gets updated every quarter, I am not tied to a fixed value. If the business performs well, the intrinsic value goes up and so does the sell target. If the company performs badly, then the reverse happens.

So is this buy and hold ?
Buy and hold is most abused and misunderstood term (more on that in another post). My approach is not buy and hold, tops and bottom or any other term or title. The logic is simple - buy when something sells for less than intrinsic value, hold till it is below intrinsic value and sell when it is above it. Now if the intrinsic value grows faster than the price,  I will continue to hold.

Where’s the catch ?
The catch is in getting the fundamentals and intrinsic value estimate wrong. If you get that wrong and refuse to change your opinion, then you are toast.

But you lose money when the market drops !!
Yes, that does happen. If the market drops, my portfolio will drop with the market. I have yet to figure out how to keep jumping in and out of stocks and still keep my sanity. There is so much chatter and noise in the market, that it is easy to go nuts. My way of keep my sanity intact, has been to adopt the above approach.

Is this the best way ? no I will not claim that. However as I have a day job, I would rather lose a percentage points, than lose my job and maybe my sanity. Finally, I have yet to find another approach which relies on sensible and consistent logic and not on the opinion of others.

Today we will discuss a Model of learning developed by me for new comers in stock markets . Its very logical and obvious way of learning .There are 5 things a new comer has to do , I will call it CLOPS model of starting in Markets .

• Calm Down
• Learn
• Observe
• Practise
• Start Small

This model of learning is totally obvious and logical and applies to all the areas of life. Stock Markets are no different . Lets see each of them separately and what they mean in Stock markets .

Calm Down

The first thing a newcomer has to do is calm down and not rush . Just be where you are . Most of the people come in stock markets and its totally a new place for them and every things looks like a great “get-quick-rich” opportunity to them and they want to make most of that once-in-a-lifetime opportunity . They don’t know its every-day thing in stock markets. Markets are like a wonderland for them. Markets are no going anywhere and its more true for the opportunities they provide . When you calm down first and don’t get excited, you are doing an important thing , which is not jumping in without thinking and making yourself ready for another important things which are discussed below.
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In an ideal world, If I expect my portfolio to return 24% per annum, I would prefer to get 2% returns per month. That way at the end of each month, I would have a nice gain and would be feeling quite good about it.

Now all of us know that it does not work that way. In the last few years, however a lot of investors have come to expect that they ‘deserve’ to make 40% per annum and that too in equal increments with minimal drops along the way. If you think I am exaggerating, look at the mutual fund inflows and outflows to confirm my statement.

Impatience and mutual funds
If a mutual does well for a few months, they have a surge of new funds. If however, heaven forbid they drop for a few months, the money starts flowing out. In such a sceanrio a fund manager cannot be faulted for having a short term view. Mutual funds and fund managers have their faults too and I am not defending those faults. However impatient investors cause a lot of fund managers to take a short term view which affects the fund performance in the long run.

The above phenomenon is not limited to the indian markets alone. You can find it prevalent in almost all the foreign markets too. There is a lot of evidence that the average holding period for  investors has come down progressively. This shows up as higher volumes and more trading in the markets.
 
Patience and value investing
Value investing requires a lot of patience, maybe more than what most investors or individuals have. I recently analysed my performance for the last 8-9 years and noticed that quite a few of my picks (maybe 80%) have taken 1-2 years to approach intrinsic value. What does that imply?

If I buy a stock for 100 and think it is worth 200, I may end up holding it for 1-2 years without any action on the stock. Then suddenly, the gap closes. I have seen the gap close in a matter of a few weeks.  So my net returns after, say 1.5 years could be 5-10% at best and then in a matter of weeks the stock doubles.

Now if you think you can predict when the gap will close, then congratulations !!!. You are on your way to becoming very very rich. However I do not have such a sixth or seventh sense. So I end up analysing the stock, accumulate it slowly and then waiting patiently for the gap to close.

I think one of the key advantage, we can have over others is to have more patience. I have repeatedly seen it work, though the interimn period is painful and full of doubt. The other reality is also that patience is rarest commodity on the stock market.

Standard & Poor’s is a US based provider of financial market intelligence which includes ratings, investment research, risk evaluation and data, and various types of indices. Among multiple different indices with different focus areas, one index is the dividend aristocrat index.

The Dividend Aristocrats is an index which consists of S&P500 companies that have been raising dividends continuously for 25 years or more. That is, every year, the dividend per share keeps on increasing. If any company that reduces or cuts the dividend in any given year, it is removed from the index. Now this is the characteristics that can be viewed in multiple ways, but TIPBlog is about Indian investments. Therefore, I will not go into detailed discussion. But it gives the context for this posts further discussion.

In markets of Asia or other parts of the world, it has been difficult to find a single company that has consistently raised their dividends year after year. Outside United States, there has been lack of consistency in the way the corporate’s managed dividend strategy, or the way the government policies taxed dividends to companies and common shareholders.

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Why do I say this? Markets “Calls” are least important things in Stock markets (i believe) , and you only get that least important information from TV experts . What you don’t get is vital things like psychology to trade , Money management rules, Discipline to follow every time you take the trade . Those calls are in isolation , They are not generated by a consistent rule , you can get calls from here and there and all of them will be kind of random to you . Other problem can be that you don’t know the time frame of the call . If you don’t understand all this what I just told , the easy way to understand is to answer this

• “If listening to TV experts was really worth , Why am I not making money”
• “How many people do you know who make living or earn exceptional returns by trading what experts tell them”

At last , the point is not that there calls and advice works or not ? They may work , but not for you. There is lot more than getting calls and acting on them . Another important thing why you should stay way or listen less to them is because most of their calls are for “forcing you to trade more” , which will eventually generate more brokerage and commissions for trading companies , Read this article from Shyam Pattabi to understand more on this.

Question : Why do experts give more of BUY calls and very less of “SELL” calls My Answer : When some one “SELLS” , he is out of trap , he is out of stock market , he pays commission once . But when Someone “BUYS” , he is trapped in markets , He already paid once and has to pay one more time to get out , so SELL = Commission 1 time and BUY = Commission twice for sure , Ohh.. Did I discover something here

This article was written by Manish Chauhan who blogs at http://www.jagoinvestor.com

TV Channels blaring that India’s inflation rate slipped into the negative for the first time in 30 odd years. What does it really mean? It really means nothing to the common man!

Prices are still soaring or at least stable at their peak - and why is this not reflected in the Inflation numbers?

This is because India calculates Inflation differently than other countries

• India uses something called the Wholesale Price Index (WPI) to calculate and then decide the inflation rate in the economy.
• Most other developed and developing countries use the Consumer Price Index (CPI) to calculate inflation.

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Why it Attracts ?

You must have heard lots of stories about people who got millionaire over night or in a short span of time from stock markets, there are two kind of people who make money from stock markets

- First kind are the people who make money because of luck. They buy some thing , it goes up and they think it was your skill . Next time they buy something again and wooo!! .. it makes money again , and now they are the king !! . Then comes one day when there “best time in the market” is over and they start loosing money , this time its “bad luck” as they say !! and they keep on trying and trying to prove that they are knowledgeable . At last they go bust and return from where they came from . Smart people in this category are those who make money once or twice because of luck and don’t come back , I appreciate their smartness .

- Second kind of people are those who are real game players , they have done their home work , failed lot of times , learned from their mistakes and worked hard to make money . They know the rules of stock markets and take it seriously . They are successful traders or investors .

People hear that lots of people make lots of money in short span of time from stock market and how easy it is to just open your trading account , choose some stock , buy or sell and magic !!, you make money . Far from truth !! .

This thinking that “Lots of money can be easily made from stock market without much hard work” is the main reason why stock markets attract lots of people .

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This by far the most sensible statement I have read. And before someone yells at me let me clarify I am not berating Indicators or Oscillators. I myself use them extensively but after what I read today, I will try and use them more sensibly. Here is a brief note on the article I read. As we all know that our biggest enemy in trading (at least mine!) is the Emotional Behavior. Yet another culprit is, the misuse of indicators and oscillators (yes I am guilty on this front too!). We must understand that the movement in price, in any and all free markets, is a function of, the pure laws and principles of supply (resistance) and demand (support). Opportunity exists when this simple and straightforward relationship is out of balance, period. Let’s now explore reality through the eyes of objective logic. When prices are trading sideways, supply and demand are in balance. The only thing that can cause a price rally from an area of “balance” is when the supply and demand equation becomes “out of balance.” In other words, there were many more willing and able buyers than there were sellers. Simple economics at work!!!

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Let me try to answer this question from my point of view. My response may not be typical of what is usually recommended and may not suit your specific case.

I am wary of a simplistic approach of selling stocks at an X % profit or at predefined index or price level. A decision to sell, like buying is more nuanced and requires more thought than that.
 
Two criterias for selling
In my case, the selling criteria is part and parcel of the analysis done before buying the stock. I typically will have an exit criteria in mind based on fundamentals and valuation at the time of buying the stock. If the business fundamentals deteriorate more than expected (see my post on India nippon), then I will sell the stock if I think that the drop is not temporary and the intrinsic value will stagnate or drop in the future.

The second case where i sell the stock is when the current price exceeds the intrinsic value by 10-15% and the future increases in the intrinsic value is less than the returns I can get via other opportunities. So if the stock is selling at intrinsic value and I can find another idea at a 40% or higher discount, then I will sell the stock and re-invest the proceeds in the new idea.

You will notice a lack of reference to any pre-determined index levels or fixed increase in stock price in my sell criteria. For starters, index levels do not have a direct bearing on individual stock. My pick can stagnate when the index is rising and vice versa. So selling a stock just because the index has gone up would be foolish

Mental accounting
I will also not sell stock just because it has gone up by X% to ‘book’ some profit and leave my profits behind. This would be a clear case of mental accounting (put cost and profit in different mental accounts) and an attempt to avoid regret. If one breaks the investment into different mental accounts, there is tendency to recover the cost and let the profit run. I see no reason to treat profits any different from the cost. The entire money is just one single account (available capital) and it is important to take decision on the entire holding as such.

Avoiding regret
A common reason for selling is also to avoid regret. If the market drops, I will regret losing the profit. However I would say that in the short term, it is impossible to avoid regret. If the market rises, then you will end up regretting selling the stock and losing on the upside.

If I cannot predict the markets and avoid regret, the best option is to have an approach based on intrinsic value and accept the fact that I could face regret in the short term irrespective of my decision. The same scenario occurred for anyone who waited for the election results to commence buying. In order to avoid the regret of buying at a higher price and then see the price drop after the elections, they ended up watching the price shoot up and are now regretting missing the rise.
 
Final bias - hindsight bias
The silliest reason by far is to evaluate a decision based on how the market moves in the short term. If the market rises after I decide to hold the stock, does it make me smart or stupid if the market drops? absolutely not !!

All investing decisions have to be taken based on current information and in absence of knowing which way the market will move, my decision can appear to be very smart or stupid in the short run. However if you follow a rational approach of buying and selling stocks based on some measure of value, then short term market movements should not trouble you too much (which ofcourse is easier said than done)

Markets are now entering Overbought area . I am putting up two charts which shows up historical relationship between Nifty levels and Nifty PE . Nifty PE is now in around 21 and hence its the time to be cautious .

Overbought Examples

Oversold Examples

Also there was good time to buy in Mar when Nifty PE was around levels of 12-13 . historically it has been shown that markets reverses after those levels in nifty PE

Conclusion :

Markets are now in overbought region and hence its time for cautious moves . Invest for short term to get good returns as it can go little more up . But better book profits once PE reaches around 25 levels .

This is a strange day .. The pivot for tomm is same as close today . Nifty is making some DOJI these days inclding one today .

If you see 6 months charts of nifty , ADX is declining suggesting the weakness in trend , Its not a signal to SELL , but just to be cautious .

Better to trade light now !! , Dont take short positions just now , but wait for the moment and dont get caught in the madness of panic buying , This time if markets move fast and break 5000 mark , It would be wise to then wait and look for shorting opportunities .

At the time of writing , US markets are flat with little down moves . Markets are too confused all over the world on direction

Important Levels for Tomorrow

R2 4,303
R1 4,270
Pivot 4,238
S1 4,205
S2 4,173

Strategy

- Better to trade light tomm (actually whole week because of expiry) .
- Better to long positions based on oscilators signal (buy when RSI and Stocastics dip to oversold).
- BUY only above Pivot .

Disclamer : I hold a 4100 CA bought at 140 and it closed at 152 today . Looking to carry it further if its in profit , else i will sell it once Nifty hits below 4200 .

The last one week has seen one of the biggest spikes in stock prices. Almost every kind of stock, has recorded a big jump in prices. Those of us who were lucky or had the foresight or both in buying stocks in the last 6 months, are now sitting on decent gains and must be feeling pretty smart and good about themselves.
 
I would hold my horses on that.
 
There is no harm in feeling good about it, but I would not let this feeling stop me from thinking rationally on what to do next.
 
Planning based on market forecasts !
One cannot be sure whether these price levels will sustain themselves or not. You will find every tom dick and harry trying to forecast or predict on what is going to happen. Well, if you are basing your strategy on these kind of predictions, then good luck with that.
 
I, for one have no clue and will not plan based on anyone’s predicitions or my ‘feel’ of what is going to happen. I did not have a clue in march, that the market would go up so soon and I don’t have a clue about the future market direction now.
 
During the period october 08 to March 09, I was a net buyer and commited a decent amount of money on a simple logic - The prices of the stocks I liked were attractive and way below intrinsic value and when they dropped below 50% of the intrinsic value, I bought.
 
Plan going forward
I have been analysing the annual results of all the companies I hold and re-evaluating the intrinsic value. If the price after the runup is still below instrinsic value and I expect the company to continue to do well and accordingly increase the intrinsic value at a decent rate, I will continue to hold. It would be stupid of me to sell a stock which still sells below instrinsic value, just because it has gone up by x%.
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What happened on Wed , 20 May

- Profit booking
- Huge Volumes
- Close before the pivot of the day
- Choppy day
- Moving towards support of 4200 level .

The over all trend is UP , and its strong !! . But correction can also not be ruled out , Markets are resting for some time only to move up again . So what should be strategy for tomm .

Pivot levels for Thursday are

R1 - 4341
Pivot - 4293
S1 - 4222

I expect Nifty to open flat to negative tomorrow , what should be the strategy tomm .

- If markets Open flat , then go with the direction after 10 min
- If markets open low near levels of 4200 , dont look for shorts then , look for Long opportunities
- If markets gap up in opening, then you must see other factors like current news , asian and european markets . Better to take shorts only for intra day and not carry them .
- If you are trading in options , better to go for In the money options and not out of money options . use 4000/4100 CA or 4500/4400 PA .
This post is written by Manish Chauhan , he writes on http://www.jagoinvestor.com

In my previous post, I referred to a situation where I started buying maruti suzuki at 500 and when the price started going up, I hesitated and am still waiting to build a full position.

Although any price between 500-600 would have been good, I still ended up getting fixated with the price of 500 and lost a good opportunity. This bias is called as ‘anchoring‘. An individual under the influence of this bias gets stuck or anchored to specific value (in this case a specific price) and does not take a rational decision.
 
So how should one avoid it ? My antidote to this problem is generally to focus on the intrinsic value and have a range of discounts (40-60%) from intrinsic value at which to do the buying. So if we say that maruti suzuki has an intrinsic value of around 1000-1100 , then any price between 450-600 is a good buying point. So, why didn’t I do it ? hmmm still thinking of a good excuse !.
 
Another mistake I have done in the past is to wait for the price to hit the 50% mark (50% below intrinsic value) and then start buying. The smarter thing to do, would be to buy in a price range.
 
A sell
I had anaylsed GSK consumer products a year back and had built a small position in it. However as the price never fell below 50% of my own estimate of intrinsic value, I never built more than a token position. The price however crossed my estimates of intrinsic value recently and as a result I have closed my position.

The above idea is another example of anchoring where I got anchored to an exact 50% discount to intrinsic value.

Introduction

Stochastic oscillators are technical tools first devised by George Lane in the 1950s. They compare the closing price of a stock with its trading range over a given timeframe and can be used in a variety of ways to generate or confirm trading signals. 

The main principle behind the use of this type of momentum indicator is that in a rising bull market prices tend to close near their recent highs, whereas in a falling bear market prices often close near their recent trading lows. Monitoring trends in the position of closing prices, relative to the stock’s recent highs and lows, can therefore be useful in understanding the nature of the underlying price trend.

Calculation

There are two commonly used Stochastic Indicators; the slow stochastic (often called %D) and a fast stochastic (%K). The single parameter in the calculation of Stochastic Indicators is the period of time over which the trading highs and lows are consdered, 14 days, 9 days or 5 days are commonly used but in theory any time period can be used.

The fast stochastic oscillator (%K) calculates the ratio of two price ranges and converts it to an oscillator which ranges between 0 and 100. The two ranges used are the difference between the latest closing price and the lowest price in the last N days and the difference between the highest and lowest prices in the last N days.

%K=((Close-Period Low)/(Period High-Period Low))×100

If the latest closing price is the period low, then the numerator is 0, as is %K.  When the latest closing price is the periodic high, the numerator and denominator are equal and %K is 100.

The slow stochastic oscillator (%D) is just a simple moving average of %K over the last N days. Most commonly this is calculated as a 3 period moving average but this also can be varied according to the situation.

%D=SMA (%K)

The %K and %D oscillators are often plotted as lines on or below the price chart in most technical charting packages. 

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A temporary method of financing usually employed to secure a deal or to enact a transaction, with the intention of obtaining an alternative long term financing solution once the deal has been completed

A method of valuing a company by calculating the present value of forecasted future dividends by applying an appropriate discount rate to them

I often get a comment or email, which goes along the following lines - I have been analyzing this company and the company seems undervalued to me. Should I wait for a lower price before I start my buying?

My usual response to this question is - Do you want to delay an informed decision based on an uninformed guess?

Lets think through this dilemma further. Lets assume you have been analyzing a company for some time and feel that the company is easily worth 100, but selling at 50. Now the company is a great buy, but due to the sentiments of pundits, your friends and your milkman, you ‘feel’ that the stock could go lower. As a result you are thinking of holding on a bit longer so that you can buy the stock at 40.

Now this is a very tempting thought. Who doesn’t want to buy a stock at the cheapest possible price? I can bet a lot of us have engaged in this mental gymnastic (I definitely have!).

The only problem with this approach is that it is a waste of time and energy and muddles up the decision making process.

Is it possible to predict stock prices?

The key underlying assumption behind the above thought process is that somehow we know the direction of the stock price. Let assume for a moment that is true. If that is the case, then why bother buying the stock? Go ahead and buy calls or puts on the stock and you will be rich.

It is quite possible that in extreme markets such as seen in the last quarter, the market is on a sustained downward trend and you strongly believe it will continue to do so. However this kind of sustained movement happens only a few times and market can turn around abruptly (There were no sirens in the first week of march when the market started turning and has jumped 50% from the lows).

If however you still have a very strong reason to believe that the stock price will keep dropping, is it not smarter to buy in small lots and average your cost down, rather than wait for the absolute bottom.

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This post is about the New Pension System (NPS). Individuals will have to fill up the UOS-S1 registration form to the POP-SP (Points of Presence/Service Provider). Folks who accept your application are listed at http://www.pfrda.org.in

Some of the POPs include SBI and its associate banks, LIC, OBC, CAMS and Citibank.

In terms of contribution, individuals are required to make:

• a minimum per contribution of Rs 500
• a minimum contribution of Rs 6000 per year
• a minimum of 4 contributions per year

Individuals can invest in 3 asset classes

• Asset Class E - which is equity market instruments (stocks, mutual funds)
• Asset Class C - investment in fixed income instruments other than govt securities
• Asset Class G - which invests in Govt securities

One may choose to invest your pension entirely in C or G asset classes and up to a maximum of 50% in Asset Class E. If you subscribe to NPS, you will have to pay a fee to the central record-keeping agency (CRA), which will maintain all accounts and also to the PFM which manages the account. These charges will be deducted from your savings on a periodic basis. The fees and charges by the CRA and PFMs will be regulated by the PFRDA and is currently under discussion.

The fund management charge for mutual fund investors is 2.5 per cent of the investible corpus, deducted at the end of the year. There is a fund management fees that will be levied by the NPS and are expected to be the same as mutual funds.

Interested individuals can download this document and the form here.

This article was written by DeadPresident. He also writes on his own blog at Dead President - India Equity Research.

You could read the earlier parts on ratio analysis here and here.This post discusses the profitability and valuation ratios.

Profitability Ratios

The profitability ratios try to associate the amount of profits generated with the amount of resources used. These ratios measure the economic efficiency of the firm,

a) Return on assets

This is one of the most effective measures of resource utilization. This is defined as

Return on assets (ROA) = Net Operating profit after taxes/ average assets

The Operating profit is found by removing from the net profit other nonrecurring incomes. Since the operating profit includes, interest expenses as well the return on assets ratio will not be partial to the capital structure of the company.

b) Return on invested capital

This ratio measures the efficiency of the firm to generate income from all assets that are committed for longer periods of time. The ratio is calculated as

Return on invested capital (ROIC) = Net income (modified)/ (Total assets-Current assets)

As in the above case, to make this ratio independent of the capital structure of the firm the after tax interest expense given by Interest expense *(1-tax rate) is added back to the net income.

c) Return on equity

This is a measure of income generated to the stock holders on their investments. This is usually calculated as

Return on Equity (ROE) = Net income/Average stock holders’ equity

d) Net profit margin

This ratio measures the percentage of contribution to net income from each rupee of sales. It is calculated as

Net profit margin = Net Income/Net sales.

One should understand that a high profit margin does not necessarily imply a good performance. One should judiciously use this metric along with other ratios such as return on assets (ROA). For example a firm with very high profit margin, but a low return on assets might not be generating high value to the stockholders.

Valuation Ratios

a) Price to Earnings ratio (PE ratio)

This ratio measures how much investor is willing to pay for each rupee of earnings generated by the firm. One of the most commonly used valuation ratio, it is calculated as

PE ratio = Market price of the share/ Earnings per share

The Earnings per share used in the denominator is usually the forecasted earnings for the next year. This ratio being simple to calculate is widely used by the investors. Companies that are growing rapidly and are thought to have higher potential for future growth usually trade at higher PE ratios. A variation of the ratio called PEG ratio is also commonly used to value growth companies. It is calculated by dividing the PE ratio of the firm with its earnings growth rate. A PEG ratio of one usually indicates a fair pricing for the stock.

b) Price to Book value ratio (P/B ratio)

The book value of a company could be thought of as the amount the shareholders of the company receive if the company gets liquidated. This ratio is calculated as

P/B ratio= Market price of the share/Book value per share

As with PE ratio generally, lower the P/B ratio more the value for investors. ‘Value Investors’ traditionally look out for companies that are trading at a discount to their book value. But investors should be careful enough to use the P/B ratio along with other metrics. Most often stocks that are trading at a low P/B ratio are just ‘bad companies’.

c) EV/EBITDA

This ratio termed as the enterprise multiple, is often preferred over the PE ratio by analysts. The main reason for that being this ratio is neutral to the capital structure of the company. The Enterprise value of the firm might be thought of as the amount required to be paid if you are going to acquire the company today as valued by the markets. It’s calculated as

Enterprise value = Market capitalization of the stock + Long term debts –Cash and equivalents held

EBITDA = Earnings before interest, depreciation and taxes

Enterprise multiple = Enterprise value/EBITDA

As with PE ratio it’s common to use the EV/EBITDA ratio with forecasted earnings.

In the next part we will talk about some common mistakes to be avoided when using ratio analysis for investment decisions.

The purchasing of stock in order to cover a short sale. When a trader short sells a stock they borrow it and sell it into the market.  This means they have to buy it back again in the future to repay the institution they borrowed it from. Buying the stock back before the date on which they have to make the repayment protects them against any future price rises and is called short covering

Describes a situation where the only way for one person to gain a benefit is if the other party loses something. For example when negotiating the price at which you  are going to buy something every rupee gained (saved) by you is a rupee lost by the other party so this is a zero-sum game

The first post in this series of articles explaining the basic of ratio analysis covered Liquidity and Leverage ratios, it is available here . This post covers Activity ratios which indicate how efficiently the various assets and current liabilities of the organization are being used .The focus is usually on three areas; inventory, accounts receivables and accounts payable.

a) Asset turnover ratio

Asset turnover ratio measures the effectiveness of the organization in utilizing the assets of the organization. It’s defined as

Asset turnover ratio= Net sales/ Total Assets

Various sectors will be having different asset structures, hence it make no sense to compare the asset turnover ratios across industries.

b) Inventory turnover ratio

This ratio measures the number of times a firm sells its inventory in a year. It’s defined as

Inventory turnover ratio = Cost of goods sold/Average inventory over the year

The average inventory during the year is usually calculated by adding together the beginning and ending inventories during the year and dividing it by 2.This ratio also indicates how liquid an asset is inventory of the company. A low value of this ratio indicates that the inventory is an illiquid asset. A higher value for this ratio indicates that the threat of inventory obsolescence will be quite lesser for the firm. The inventory turnover ratio could be used to find out the days inventory the firm is holding.

Days inventory = 365/ Inventory turnover

c) Account receivables turnover ratio

This ratio calculates the number of times a firm collects the average account receivables each year. It’s calculated by

A/R turnover ratio = Net sales/Average accounts receivables

This ratio will be larger for firms that have a larger portion of their sales as cash sales. An approximate indication about the number of days that elapses between sales and receipt of payments from customers could be got from calculating the Days receivables

Days receivables = 365/ Account receivables turnover ratio

A higher days receivables may indicate poor collection efforts by the firm, the firms’ key customers in financial distress or delayed payments by customers.

d) Account payables turnover ratio

This ratio calculates the number of times a firm pays the average account payables each year. It’s calculated as

Account payables turnover ratio= Cost of goods sold/Average accounts payable

Days payables = 365/Account payables turnover ratio

e) Cash cycle

A related efficiency measure is the cash cycle. This could be thought of as the number of days taken to get back the cash once the firm has used cash. It’s calculated by

Cash cycle = Days account receivables+ Days inventory –Days account payables

An efficient firm will try to have a cash cycle as small as possible. Needless to say, cash cycle varies across industries. Most FMCG firms have a cash cycle close to zero or sometimes even negative. This means that they are able to run their day to day operations on the supplier’s money.

Typically leverage refers to the extend of debt funding which an entity has.  A highly “leveraged” firm has a large amount of debt relative to equity and a low leverage firm has low levels of debt compared to equity. 

However the phrase is also used in general business language to describe the act of taking advantage of any particular characteristic or competitive advantage. For example a business with experience in a certain type of activity may be said to “leverage’ that experience in other similar situations

We saw that markets corrected lately and this was a big cause of concern every where. Recession was googled every now and then. “Recession” has become a buzz word now. 

There are people how booked profits when the markets were at all time high and there are people who have not at all booked profits. So the idea being is Invest Smartly. Why cant we be one among those who booked profits at a higher levels.
It is said that “no one can ever buy at a bottom price and no one can ever sell a highest price , it can only be done by liers.”
As I always say don’t forget the Newtons law of Motion - Every thing which has gone up has to come down one day.

Here are a few ways to survive a stock market correction - 

1. Don’t Panic - Panic is not the solution to this. Instead invest wisely.
2. Don’t indulge in frequent buying and selling - Frequent buying and selling wont give any thing accept a huge loss.
3. Stock Market recession should be seen as an opportunity. Recession is always termed as an opportunity as things are available at a cheaper rate.
4. Don’t follow peoples advice where investment is concerned. Try and figure out things on your own.
5. Be confident in your decision. Make decisions after a detailed study , don’t make any harsh decision.
6. Stop following even analyst and also stop following their crazy tips. They give tips of rs 1 stock which will become Rs 20 in a year or so a 2000% return. Fake , stop trusting them.
7. Don’t look at your portfolio every now and then. This will give you nothing accept tension.
8. Being patient is a key to success.
9. Diversifying your portfolio. Recession is the best time to diversify your portfolio recession is the best time as things (stocks) you always loved are available at a dirt cheap rate.

You would love to read this.
Eight Things to do during recession.
Seven reasons to start a business during Recession.

The post was originally published by Chirag Jethmalani on Squamble.Com

Essentially this means betting that a security will decrease in value. Typically this means borrowing the  security and selling at the current price, in the expectation that you will be able to buy back the stock at a lower price in the future in order to repay the lender. It is also possible to use futures and options to go short and bet on a decline in price.

Rakesh Junjunwala rightly defined the stocks markets as “Markets are like women always demanding, unpredictable and volatile.” No one know whats next. For an instance take it - Does any one knows when this recession is going to end ? No, no can say it accurately, one can just predict but as all know that the future is uncertain.
But what one can do is spot out some value stocks in this badly beaten markets and think of long term investment in them. But a question comes here that which company to invest in?
The answer to the above question is invest in the company in which you have faith and confidence and more over of which you are aware of.

Here are few easy steps to identify Multibagger stocks.

1. Go for a company which gives regular dividend. Dividend paying stocks mostly lie in A group category.
2. Preferably go for a Mid cap stock which in future can become a large cap. Mid cap stock have a greater chance to move upwards and that to fast. Preferable a stock whose market cap is less than 1000 Crores.
3. Go for a stock in a particular sector which is in boom.
4. Look out for the companies financial. In this check out the companies profit f last 4-5 years and check it out that it is increasing every year. One can also check out EPS of the company.
5. Check out whats running these days, Say for example there is a invention of a new technology which will be in demand in a near future. An excellent example is invention of 3G. Even TATA Nano can be taken in consideration as it is only one of its kind being the cheapest car in the world.
6. Check out for a companies order value. There are various companies which have a good amount of orders for future which are of great importance to a company.
7. One can also look out for a company which has good amount of land / property. Unitech had a lot of lad which can in the eyesight by end of 2005. An investment of Rs 40,000 then would be worth over 1 crore by the end of 2007.
8. Last and not the least be confident in your stock.

Few don’t s in selecting a multibagger stock.

1. Don’t select a Penny Stock.
2. Don’t loose hope in your company.
3. Don’t depend on others , do your own research.

Happy Investing.
Post originally written by Chirag Jethmalani on www.Squamble.Com