I have always been quite passionate about Investing
and understanding the Capital Markets. And after carefully analyzing
everything, here are few of my learnings from investing;
- Never consider stock just as a piece of paper. You should always judge a stock as a part interest in a business. Look at the business underlying it. You cannot look at it in isolation, but you can more easily value a stock if you can value the business it represents as a whole.
- Have a good margin of safety.
It means that the price being paid is less than what a prudent investor might
consider a fair market price. This difference between price paid and the fair
price acts as a cushion during difficult times. In the worst of times, it would
minimize the chances of a loss; in the best of the times, it could lead to
super profits.
Benjamin Graham argued that investments could be made successful with such margins of safety. And such opportunities were more common than people thought.
- Finding Bargains. Often enough, one could find companies valued at less than the working capital it employed or less than the value of cash in hand plus its own portfolio of investments. A bargain? Are you serious? Yes. Are these opportunities common? Quite common during tough market conditions, but also possible during normal market conditions. Can you deploy big money for these? Yes. Not if you analyse things objectively.
- Look at the quality of management
of the company. The quality of management is judged by how often
they meet their budgets and how closely they stick to a proven formula. If you
want to know whether the management is honest and looking after its
shareholders, you can know this from the financial statements as well. For
example, if there are many one time accounting entries or special charges in
year-after-year financial statements, it probably means that the management
team is doing accounting jugglery, overstating the profits and is not being
transparent with its investors.
Further, if the prices of the stock options being given to the management are being revised downwards, it shows its tendency to make money at the expense of its shareholders.
- Analyze the financials of the company. Take a macro view of everything. And just to explain this point in greater detail, understand EBITDA (Earnings before Interest, Taxes, Depreciation and Adjustments) and ROCE (Return of Capital Employed). EBITDA is the profit from the core operations of the business. It reflects the operational performance of the company. ROCE is how much money a company makes on the total money it uses from debt and equity sources. A strong ROCE is a prerequisite for a good investment.
