I have been noticing in the past few weeks that interest rates have started hardening. I do not have the exact figures, but it seems that the rates for housing loans have started approaching double digits now.
I wrote a post on interest rates a year back (see here). Back in 2003-2004 the rates were at an all time low (as low as 7.5% fixed and 7.25 % variable). However everyone looking at the immediate past, were prediciting further drops (what else would explain almost everyone’s preference for variable rate loans?). I almost got into an argument with the loan officer in getting a fixed rate loan (the loan officer kept telling me that I was making a big mistake).
My logic in working out a rough pricing level for loans was detailed here. General extremes in valuations, whether stock or interest rates are easier to spot (although I cannot predict them). However I do not know if the rates are high now, will rise or fall in the future. What I feel strongly is that any rate lower than 8% is good and should be locked in via a fixed rate loan.
There are a few new conventional ideas now prevalent such as
- real estate is great investment at any price and will rise 20-30 % per annum due to the extreme shortage of real estate in india (for better idea of real estate bubbles, read about the 90’s real estate bubble in japan)
- Indian economy has entered a new era and stocks are worth more now. Every drop in the market as a result presents a new opportunity to buy
I don’t claim that I know any better on the above two new convential ideas in vogue currently. I am however unwilling to pay for the bright and shiny new future in these investment classes (stocks and real estate)
Sunday, December 31, 2006
A new Era
I have been noticing in the past few weeks that interest rates have started hardening. I do not have the exact figures, but it seems that the rates for housing loans have started approaching double digits now.
I wrote a post on interest rates a year back (see here). Back in 2003-2004 the rates were at an all time low (as low as 7.5% fixed and 7.25 % variable). However everyone looking at the immediate past, were prediciting further drops (what else would explain almost everyone’s preference for variable rate loans?). I almost got into an argument with the loan officer in getting a fixed rate loan (the loan officer kept telling me that I was making a big mistake).
My logic in working out a rough pricing level for loans was detailed here. General extremes in valuations, whether stock or interest rates are easier to spot (although I cannot predict them). However I do not know if the rates are high now, will rise or fall in the future. What I feel strongly is that any rate lower than 8% is good and should be locked in via a fixed rate loan.
There are a few new conventional ideas now prevalent such as
- real estate is great investment at any price and will rise 20-30 % per annum due to the extreme shortage of real estate in india (for better idea of real estate bubbles, read about the 90’s real estate bubble in japan)
- Indian economy has entered a new era and stocks are worth more now. Every drop in the market as a result presents a new opportunity to buy
I don’t claim that I know any better on the above two new convential ideas in vogue currently. I am however unwilling to pay for the bright and shiny new future in these investment classes (stocks and real estate)
I wrote a post on interest rates a year back (see here). Back in 2003-2004 the rates were at an all time low (as low as 7.5% fixed and 7.25 % variable). However everyone looking at the immediate past, were prediciting further drops (what else would explain almost everyone’s preference for variable rate loans?). I almost got into an argument with the loan officer in getting a fixed rate loan (the loan officer kept telling me that I was making a big mistake).
My logic in working out a rough pricing level for loans was detailed here. General extremes in valuations, whether stock or interest rates are easier to spot (although I cannot predict them). However I do not know if the rates are high now, will rise or fall in the future. What I feel strongly is that any rate lower than 8% is good and should be locked in via a fixed rate loan.
There are a few new conventional ideas now prevalent such as
- real estate is great investment at any price and will rise 20-30 % per annum due to the extreme shortage of real estate in india (for better idea of real estate bubbles, read about the 90’s real estate bubble in japan)
- Indian economy has entered a new era and stocks are worth more now. Every drop in the market as a result presents a new opportunity to buy
I don’t claim that I know any better on the above two new convential ideas in vogue currently. I am however unwilling to pay for the bright and shiny new future in these investment classes (stocks and real estate)
Fortune’s formulae – II
I just finished reading the book. In addition to my previous post on the topic (see here), I found the following important points and learnings
- Size your bet/ stock position based on the edge or odds. Although I don’t have a scientific formulae behind it, my typical approach is to put 2-5 % of my portfolio in a stock where the odds are 3:1 or less. For cases where the risk is low and I have a very high level of confidence, my typical wieghtage is around 10%. I however rarely exceed 10% in a single stock. I however do not resort to portfolio rebalancing and allow my winners to run.
- Geometric return is more important than arithmetic return. Geometric returns are the compound returns from an investment whereas arithmetic returns are the average of the annual returns.
- Fat tails in the distribution of returns can cause large fluctuations in the portfolio value. As a result managing risk through optimal portfolio sizing and diversification is important (personal thought: buying real estate in 5 different cities is not diversification. More important diverisification criteria is to spread money across asset classes)
- Size your bet/ stock position based on the edge or odds. Although I don’t have a scientific formulae behind it, my typical approach is to put 2-5 % of my portfolio in a stock where the odds are 3:1 or less. For cases where the risk is low and I have a very high level of confidence, my typical wieghtage is around 10%. I however rarely exceed 10% in a single stock. I however do not resort to portfolio rebalancing and allow my winners to run.
- Geometric return is more important than arithmetic return. Geometric returns are the compound returns from an investment whereas arithmetic returns are the average of the annual returns.
- Fat tails in the distribution of returns can cause large fluctuations in the portfolio value. As a result managing risk through optimal portfolio sizing and diversification is important (personal thought: buying real estate in 5 different cities is not diversification. More important diverisification criteria is to spread money across asset classes)
Fortune’s formulae – II
I just finished reading the book. In addition to my previous post on the topic (see here), I found the following important points and learnings
- Size your bet/ stock position based on the edge or odds. Although I don’t have a scientific formulae behind it, my typical approach is to put 2-5 % of my portfolio in a stock where the odds are 3:1 or less. For cases where the risk is low and I have a very high level of confidence, my typical wieghtage is around 10%. I however rarely exceed 10% in a single stock. I however do not resort to portfolio rebalancing and allow my winners to run.
- Geometric return is more important than arithmetic return. Geometric returns are the compound returns from an investment whereas arithmetic returns are the average of the annual returns.
- Fat tails in the distribution of returns can cause large fluctuations in the portfolio value. As a result managing risk through optimal portfolio sizing and diversification is important (personal thought: buying real estate in 5 different cities is not diversification. More important diverisification criteria is to spread money across asset classes)
- Size your bet/ stock position based on the edge or odds. Although I don’t have a scientific formulae behind it, my typical approach is to put 2-5 % of my portfolio in a stock where the odds are 3:1 or less. For cases where the risk is low and I have a very high level of confidence, my typical wieghtage is around 10%. I however rarely exceed 10% in a single stock. I however do not resort to portfolio rebalancing and allow my winners to run.
- Geometric return is more important than arithmetic return. Geometric returns are the compound returns from an investment whereas arithmetic returns are the average of the annual returns.
- Fat tails in the distribution of returns can cause large fluctuations in the portfolio value. As a result managing risk through optimal portfolio sizing and diversification is important (personal thought: buying real estate in 5 different cities is not diversification. More important diverisification criteria is to spread money across asset classes)
Monday, December 18, 2006
Fortune’s formula
I have been reading this book : Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street.
I have found this book quite good especially if one wants to learn about odds, betting etc.
I am just halfway through the book. The book discusses about the kelly’s formula.
F = edge/odds. I have written about this formulae earlier (see here).
I found the above formula intersting although I have yet to figure out, how to use it directly in investment management. The formulae works well for betting situations like blackjack, horse betting which have limited outcomes. Its diffcult to work out mathematically the value of edge and odds in a common stock situation.
I have also been doing some analysis on the NSE data and have the following data
I have found this book quite good especially if one wants to learn about odds, betting etc.
I am just halfway through the book. The book discusses about the kelly’s formula.
F = edge/odds. I have written about this formulae earlier (see here).
I found the above formula intersting although I have yet to figure out, how to use it directly in investment management. The formulae works well for betting situations like blackjack, horse betting which have limited outcomes. Its diffcult to work out mathematically the value of edge and odds in a common stock situation.
I have also been doing some analysis on the NSE data and have the following data
The above is the distribution of PE ratio for the last 7 years. It clearly shows that the only for around 8% of the trading days has the PE ratio been higher than 22.
If we take the above numbers as proxy for probability of occurrence and multiply that with the gain/ loss ( current PE – PE of the particular day / current PE) for each day, the expected value is around –19%.
To cut a long story short, the market seems to be overvalued by historical measures (which may not mean that the market is overvalued if the future performance is better than expected). Overall, I am planning to be more cautious especially in investing in the index (via index funds or ETF)
update : 8-Jan : Found this interesting discussion thread on the Berkshire board on MSN on the same topic. For those interested in kelly formulae, i would recommend reading the thread
Fortune’s formula
I have been reading this book : Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street.
I have found this book quite good especially if one wants to learn about odds, betting etc.
I am just halfway through the book. The book discusses about the kelly’s formula.
F = edge/odds. I have written about this formulae earlier (see here).
I found the above formula intersting although I have yet to figure out, how to use it directly in investment management. The formulae works well for betting situations like blackjack, horse betting which have limited outcomes. Its diffcult to work out mathematically the value of edge and odds in a common stock situation.
I have also been doing some analysis on the NSE data and have the following data
I have found this book quite good especially if one wants to learn about odds, betting etc.
I am just halfway through the book. The book discusses about the kelly’s formula.
F = edge/odds. I have written about this formulae earlier (see here).
I found the above formula intersting although I have yet to figure out, how to use it directly in investment management. The formulae works well for betting situations like blackjack, horse betting which have limited outcomes. Its diffcult to work out mathematically the value of edge and odds in a common stock situation.
I have also been doing some analysis on the NSE data and have the following data
The above is the distribution of PE ratio for the last 7 years. It clearly shows that the only for around 8% of the trading days has the PE ratio been higher than 22.
If we take the above numbers as proxy for probability of occurrence and multiply that with the gain/ loss ( current PE – PE of the particular day / current PE) for each day, the expected value is around –19%.
To cut a long story short, the market seems to be overvalued by historical measures (which may not mean that the market is overvalued if the future performance is better than expected). Overall, I am planning to be more cautious especially in investing in the index (via index funds or ETF)
update : 8-Jan : Found this interesting discussion thread on the Berkshire board on MSN on the same topic. For those interested in kelly formulae, i would recommend reading the thread
Wednesday, December 13, 2006
Classification of companies based on nature of competition
I was reading a book on economics and found the following basic types of competition
- Perfect monopoly
- Oligopoly or duopoly
- Monopolisitic competition
- Perfect competition
I find the above types instructive and a good way to analyse the long term economics of an industry. Let me define the specifics of each type and add a few more subtypes under each
Perfect monoply – As the name suggest, there is just one firm and can charge any price it wants. Obviously this is more in theory than practise, although we have had several monopolies in india till date. Overall monoplies are very profitable (if private) for the investor and bad for the consumer. Several examples come to mind – BSNL, MTNL, Indian airlines (in the past) and now Indian railways. These were (or could have been) extremely profitable (excluding railways) even after all the mismanagement and waste. In a nutshell a perfect monopoly or a close one is extremely profitable for an investor. I would also define a company a monopoly if it has a huge market share in its specific segment and can hold on to it due to some competitive advantage.
Oligopoly or duopoly – A limited number or just two firms in the market. Although not as profitable as a monopoly, I would say these companies are quite profitable and extremely good investments for the long run. Several companies come to mind in this group. For ex : Crisil and other rating agencies, asian paints and other paint companies. One specific point worth noting is that the barrier to entry in this industry are high and hence new entrants cannot enter easily into the industry. As a result the incumbents can earn good profits.
Monopolistic competition – A large number of companies with limited profitability. Barriers to entry are not too high and as a result new companies can enter the industry more easily. I would say most of the commodity companies fall under this group. For ex: cement, steel, Auto, Telecom etc. Few companies in this kind of industry enjoy high profits and generally the lowest cost provider has some kind of competitive advantage. As an investor I would look at companies which have some kind of low cost advantage, some other local or national competitive advantage and a good management. Bad management in such an industry can kill the company.
Perfect competition – A ideal or theorotical construct more than a practical scenario. In such an industry there is no competitive advantage at all, all companies are price takers and they earn only the cost of capital. I would say very few industries would fall in this group. Brokerage firms come close to perfect competition, but still this is more theory than reality.
The way to classify an industry in anyone of the above groups is to look at the following variables
- no of companies in the industry controlling 60-70% of the sales in the industry
- Avg profitability of the companies
- Relative Market share changes between companies over a period of time
By doing the above analysis, one can figure out the level of competition and as a result have a rough idea of the long term economics of the industry.
The above analysis is just a rough guideline or a starting point of a more detailed analysis of the industry and individual companies. However by doing the above assesment, I am able to understand the intensity of competition in an industry over a period of time
- Perfect monopoly
- Oligopoly or duopoly
- Monopolisitic competition
- Perfect competition
I find the above types instructive and a good way to analyse the long term economics of an industry. Let me define the specifics of each type and add a few more subtypes under each
Perfect monoply – As the name suggest, there is just one firm and can charge any price it wants. Obviously this is more in theory than practise, although we have had several monopolies in india till date. Overall monoplies are very profitable (if private) for the investor and bad for the consumer. Several examples come to mind – BSNL, MTNL, Indian airlines (in the past) and now Indian railways. These were (or could have been) extremely profitable (excluding railways) even after all the mismanagement and waste. In a nutshell a perfect monopoly or a close one is extremely profitable for an investor. I would also define a company a monopoly if it has a huge market share in its specific segment and can hold on to it due to some competitive advantage.
Oligopoly or duopoly – A limited number or just two firms in the market. Although not as profitable as a monopoly, I would say these companies are quite profitable and extremely good investments for the long run. Several companies come to mind in this group. For ex : Crisil and other rating agencies, asian paints and other paint companies. One specific point worth noting is that the barrier to entry in this industry are high and hence new entrants cannot enter easily into the industry. As a result the incumbents can earn good profits.
Monopolistic competition – A large number of companies with limited profitability. Barriers to entry are not too high and as a result new companies can enter the industry more easily. I would say most of the commodity companies fall under this group. For ex: cement, steel, Auto, Telecom etc. Few companies in this kind of industry enjoy high profits and generally the lowest cost provider has some kind of competitive advantage. As an investor I would look at companies which have some kind of low cost advantage, some other local or national competitive advantage and a good management. Bad management in such an industry can kill the company.
Perfect competition – A ideal or theorotical construct more than a practical scenario. In such an industry there is no competitive advantage at all, all companies are price takers and they earn only the cost of capital. I would say very few industries would fall in this group. Brokerage firms come close to perfect competition, but still this is more theory than reality.
The way to classify an industry in anyone of the above groups is to look at the following variables
- no of companies in the industry controlling 60-70% of the sales in the industry
- Avg profitability of the companies
- Relative Market share changes between companies over a period of time
By doing the above analysis, one can figure out the level of competition and as a result have a rough idea of the long term economics of the industry.
The above analysis is just a rough guideline or a starting point of a more detailed analysis of the industry and individual companies. However by doing the above assesment, I am able to understand the intensity of competition in an industry over a period of time
Classification of companies based on nature of competition
I was reading a book on economics and found the following basic types of competition
- Perfect monopoly
- Oligopoly or duopoly
- Monopolisitic competition
- Perfect competition
I find the above types instructive and a good way to analyse the long term economics of an industry. Let me define the specifics of each type and add a few more subtypes under each
Perfect monoply – As the name suggest, there is just one firm and can charge any price it wants. Obviously this is more in theory than practise, although we have had several monopolies in india till date. Overall monoplies are very profitable (if private) for the investor and bad for the consumer. Several examples come to mind – BSNL, MTNL, Indian airlines (in the past) and now Indian railways. These were (or could have been) extremely profitable (excluding railways) even after all the mismanagement and waste. In a nutshell a perfect monopoly or a close one is extremely profitable for an investor. I would also define a company a monopoly if it has a huge market share in its specific segment and can hold on to it due to some competitive advantage.
Oligopoly or duopoly – A limited number or just two firms in the market. Although not as profitable as a monopoly, I would say these companies are quite profitable and extremely good investments for the long run. Several companies come to mind in this group. For ex : Crisil and other rating agencies, asian paints and other paint companies. One specific point worth noting is that the barrier to entry in this industry are high and hence new entrants cannot enter easily into the industry. As a result the incumbents can earn good profits.
Monopolistic competition – A large number of companies with limited profitability. Barriers to entry are not too high and as a result new companies can enter the industry more easily. I would say most of the commodity companies fall under this group. For ex: cement, steel, Auto, Telecom etc. Few companies in this kind of industry enjoy high profits and generally the lowest cost provider has some kind of competitive advantage. As an investor I would look at companies which have some kind of low cost advantage, some other local or national competitive advantage and a good management. Bad management in such an industry can kill the company.
Perfect competition – A ideal or theorotical construct more than a practical scenario. In such an industry there is no competitive advantage at all, all companies are price takers and they earn only the cost of capital. I would say very few industries would fall in this group. Brokerage firms come close to perfect competition, but still this is more theory than reality.
The way to classify an industry in anyone of the above groups is to look at the following variables
- no of companies in the industry controlling 60-70% of the sales in the industry
- Avg profitability of the companies
- Relative Market share changes between companies over a period of time
By doing the above analysis, one can figure out the level of competition and as a result have a rough idea of the long term economics of the industry.
The above analysis is just a rough guideline or a starting point of a more detailed analysis of the industry and individual companies. However by doing the above assesment, I am able to understand the intensity of competition in an industry over a period of time
- Perfect monopoly
- Oligopoly or duopoly
- Monopolisitic competition
- Perfect competition
I find the above types instructive and a good way to analyse the long term economics of an industry. Let me define the specifics of each type and add a few more subtypes under each
Perfect monoply – As the name suggest, there is just one firm and can charge any price it wants. Obviously this is more in theory than practise, although we have had several monopolies in india till date. Overall monoplies are very profitable (if private) for the investor and bad for the consumer. Several examples come to mind – BSNL, MTNL, Indian airlines (in the past) and now Indian railways. These were (or could have been) extremely profitable (excluding railways) even after all the mismanagement and waste. In a nutshell a perfect monopoly or a close one is extremely profitable for an investor. I would also define a company a monopoly if it has a huge market share in its specific segment and can hold on to it due to some competitive advantage.
Oligopoly or duopoly – A limited number or just two firms in the market. Although not as profitable as a monopoly, I would say these companies are quite profitable and extremely good investments for the long run. Several companies come to mind in this group. For ex : Crisil and other rating agencies, asian paints and other paint companies. One specific point worth noting is that the barrier to entry in this industry are high and hence new entrants cannot enter easily into the industry. As a result the incumbents can earn good profits.
Monopolistic competition – A large number of companies with limited profitability. Barriers to entry are not too high and as a result new companies can enter the industry more easily. I would say most of the commodity companies fall under this group. For ex: cement, steel, Auto, Telecom etc. Few companies in this kind of industry enjoy high profits and generally the lowest cost provider has some kind of competitive advantage. As an investor I would look at companies which have some kind of low cost advantage, some other local or national competitive advantage and a good management. Bad management in such an industry can kill the company.
Perfect competition – A ideal or theorotical construct more than a practical scenario. In such an industry there is no competitive advantage at all, all companies are price takers and they earn only the cost of capital. I would say very few industries would fall in this group. Brokerage firms come close to perfect competition, but still this is more theory than reality.
The way to classify an industry in anyone of the above groups is to look at the following variables
- no of companies in the industry controlling 60-70% of the sales in the industry
- Avg profitability of the companies
- Relative Market share changes between companies over a period of time
By doing the above analysis, one can figure out the level of competition and as a result have a rough idea of the long term economics of the industry.
The above analysis is just a rough guideline or a starting point of a more detailed analysis of the industry and individual companies. However by doing the above assesment, I am able to understand the intensity of competition in an industry over a period of time
Monday, December 11, 2006
The mirage of holding companies
I found these two investment ideas on the blog ‘Indian equity guru’.
http://equityguru.blogspot.com/2006/12/stock-idea-srf-polymers.html
http://equityguru.blogspot.com/2006/11/stock-idea-maharastra-scooters.html
Both the ideas are of holding companies. For ex: SRF polmers has a substaintial holdings of SRF. As a result if you add the value of the business to the value of holdings, the company is selling at a substantial discount to intrinsic value.
One can make a similar case for Balmer lawrie limited and BMIL. Actually I would not be surprised if there are several such stocks available. I find such ideas interesting and cannot argue against the basic logic. What I cannot get my arms around is how will the value get unlocked? There seems to be no catalyst in sight as the holding company is a means for the promoter to exercise control. As a result the holdings may never get sold. What will unlock the value then in such cases?
Somehow these ideas seem to have a mirage like quality. You can see the value out there, but may never gain from it (unless there is an underlying catalyst to unlock the value)
http://equityguru.blogspot.com/2006/12/stock-idea-srf-polymers.html
http://equityguru.blogspot.com/2006/11/stock-idea-maharastra-scooters.html
Both the ideas are of holding companies. For ex: SRF polmers has a substaintial holdings of SRF. As a result if you add the value of the business to the value of holdings, the company is selling at a substantial discount to intrinsic value.
One can make a similar case for Balmer lawrie limited and BMIL. Actually I would not be surprised if there are several such stocks available. I find such ideas interesting and cannot argue against the basic logic. What I cannot get my arms around is how will the value get unlocked? There seems to be no catalyst in sight as the holding company is a means for the promoter to exercise control. As a result the holdings may never get sold. What will unlock the value then in such cases?
Somehow these ideas seem to have a mirage like quality. You can see the value out there, but may never gain from it (unless there is an underlying catalyst to unlock the value)
The mirage of holding companies
I found these two investment ideas on the blog ‘Indian equity guru’.
http://equityguru.blogspot.com/2006/12/stock-idea-srf-polymers.html
http://equityguru.blogspot.com/2006/11/stock-idea-maharastra-scooters.html
Both the ideas are of holding companies. For ex: SRF polmers has a substaintial holdings of SRF. As a result if you add the value of the business to the value of holdings, the company is selling at a substantial discount to intrinsic value.
One can make a similar case for Balmer lawrie limited and BMIL. Actually I would not be surprised if there are several such stocks available. I find such ideas interesting and cannot argue against the basic logic. What I cannot get my arms around is how will the value get unlocked? There seems to be no catalyst in sight as the holding company is a means for the promoter to exercise control. As a result the holdings may never get sold. What will unlock the value then in such cases?
Somehow these ideas seem to have a mirage like quality. You can see the value out there, but may never gain from it (unless there is an underlying catalyst to unlock the value)
http://equityguru.blogspot.com/2006/12/stock-idea-srf-polymers.html
http://equityguru.blogspot.com/2006/11/stock-idea-maharastra-scooters.html
Both the ideas are of holding companies. For ex: SRF polmers has a substaintial holdings of SRF. As a result if you add the value of the business to the value of holdings, the company is selling at a substantial discount to intrinsic value.
One can make a similar case for Balmer lawrie limited and BMIL. Actually I would not be surprised if there are several such stocks available. I find such ideas interesting and cannot argue against the basic logic. What I cannot get my arms around is how will the value get unlocked? There seems to be no catalyst in sight as the holding company is a means for the promoter to exercise control. As a result the holdings may never get sold. What will unlock the value then in such cases?
Somehow these ideas seem to have a mirage like quality. You can see the value out there, but may never gain from it (unless there is an underlying catalyst to unlock the value)
Wednesday, December 06, 2006
Evaluating past performance
I have been doing an analysis of my past stock picks and comparing my notes with how the stock picks have turned out over time.
I have been able to divide my picks into broadly three groups
Group A – The multibaggers. These were picks like concor, marico , asian paints, blue star etc. I had no inkling that these companies would do so well and the stock price would appreciate multiple times over the last few years when I first analysed and purchased the stocks. However on deeper analysis I found that the key reason the pick turned out well was due to a double dip I received. First the gap between the intrinsic value and the stock price closed. At the same time, these companies have been able to increase their intrinsic value through some great perfromance in the last couple of years. As a result of these two happy occurences, I have been able to get good profits
Group B – Good return stocks. These were picks like kothari products, macmillan, KVB bank etc. In case of these picks there was a narrowing of the gap between stock price and intrinsic value. As a result I was able to get decent returns as a whole. However in some cases where I was late in selling the stock, the eventual returns were lower.
Group C – The dogs. These were picks like Larsen and tubro (ouch !! see here), SSI, arvind mills etc. Each pick had its own reason for going wrong from over paying for the stock, poor performance of the business, sloppy analysis etc.
The above analysis is definitely not earth shattering and I have known it vauguely for some time. But after almost 8-9 years of buying, selling and analysing stocks, I thought of doing some analysis so as to improve my future performance.
Ofcourse the logical conclusion would be to always buy stocks in group A. However most of the stocks in that group seem to be fairly or over priced. I am finding more picks in group B. Not too exicted about it, but beats overpaying for quality stocks or picking dogs. Key point for me to remember would be to sell these stocks in time if they do not show promise of improvement in intrinsic value
I have been able to divide my picks into broadly three groups
Group A – The multibaggers. These were picks like concor, marico , asian paints, blue star etc. I had no inkling that these companies would do so well and the stock price would appreciate multiple times over the last few years when I first analysed and purchased the stocks. However on deeper analysis I found that the key reason the pick turned out well was due to a double dip I received. First the gap between the intrinsic value and the stock price closed. At the same time, these companies have been able to increase their intrinsic value through some great perfromance in the last couple of years. As a result of these two happy occurences, I have been able to get good profits
Group B – Good return stocks. These were picks like kothari products, macmillan, KVB bank etc. In case of these picks there was a narrowing of the gap between stock price and intrinsic value. As a result I was able to get decent returns as a whole. However in some cases where I was late in selling the stock, the eventual returns were lower.
Group C – The dogs. These were picks like Larsen and tubro (ouch !! see here), SSI, arvind mills etc. Each pick had its own reason for going wrong from over paying for the stock, poor performance of the business, sloppy analysis etc.
The above analysis is definitely not earth shattering and I have known it vauguely for some time. But after almost 8-9 years of buying, selling and analysing stocks, I thought of doing some analysis so as to improve my future performance.
Ofcourse the logical conclusion would be to always buy stocks in group A. However most of the stocks in that group seem to be fairly or over priced. I am finding more picks in group B. Not too exicted about it, but beats overpaying for quality stocks or picking dogs. Key point for me to remember would be to sell these stocks in time if they do not show promise of improvement in intrinsic value
Evaluating past performance
I have been doing an analysis of my past stock picks and comparing my notes with how the stock picks have turned out over time.
I have been able to divide my picks into broadly three groups
Group A – The multibaggers. These were picks like concor, marico , asian paints, blue star etc. I had no inkling that these companies would do so well and the stock price would appreciate multiple times over the last few years when I first analysed and purchased the stocks. However on deeper analysis I found that the key reason the pick turned out well was due to a double dip I received. First the gap between the intrinsic value and the stock price closed. At the same time, these companies have been able to increase their intrinsic value through some great perfromance in the last couple of years. As a result of these two happy occurences, I have been able to get good profits
Group B – Good return stocks. These were picks like kothari products, macmillan, KVB bank etc. In case of these picks there was a narrowing of the gap between stock price and intrinsic value. As a result I was able to get decent returns as a whole. However in some cases where I was late in selling the stock, the eventual returns were lower.
Group C – The dogs. These were picks like Larsen and tubro (ouch !! see here), SSI, arvind mills etc. Each pick had its own reason for going wrong from over paying for the stock, poor performance of the business, sloppy analysis etc.
The above analysis is definitely not earth shattering and I have known it vauguely for some time. But after almost 8-9 years of buying, selling and analysing stocks, I thought of doing some analysis so as to improve my future performance.
Ofcourse the logical conclusion would be to always buy stocks in group A. However most of the stocks in that group seem to be fairly or over priced. I am finding more picks in group B. Not too exicted about it, but beats overpaying for quality stocks or picking dogs. Key point for me to remember would be to sell these stocks in time if they do not show promise of improvement in intrinsic value
I have been able to divide my picks into broadly three groups
Group A – The multibaggers. These were picks like concor, marico , asian paints, blue star etc. I had no inkling that these companies would do so well and the stock price would appreciate multiple times over the last few years when I first analysed and purchased the stocks. However on deeper analysis I found that the key reason the pick turned out well was due to a double dip I received. First the gap between the intrinsic value and the stock price closed. At the same time, these companies have been able to increase their intrinsic value through some great perfromance in the last couple of years. As a result of these two happy occurences, I have been able to get good profits
Group B – Good return stocks. These were picks like kothari products, macmillan, KVB bank etc. In case of these picks there was a narrowing of the gap between stock price and intrinsic value. As a result I was able to get decent returns as a whole. However in some cases where I was late in selling the stock, the eventual returns were lower.
Group C – The dogs. These were picks like Larsen and tubro (ouch !! see here), SSI, arvind mills etc. Each pick had its own reason for going wrong from over paying for the stock, poor performance of the business, sloppy analysis etc.
The above analysis is definitely not earth shattering and I have known it vauguely for some time. But after almost 8-9 years of buying, selling and analysing stocks, I thought of doing some analysis so as to improve my future performance.
Ofcourse the logical conclusion would be to always buy stocks in group A. However most of the stocks in that group seem to be fairly or over priced. I am finding more picks in group B. Not too exicted about it, but beats overpaying for quality stocks or picking dogs. Key point for me to remember would be to sell these stocks in time if they do not show promise of improvement in intrinsic value
Tuesday, December 05, 2006
Postmortem of an arbitrage opportunity
I was analysing a potential arbitrage for Infomedia Limited in april. I posted my analysis here and here.
At the time of analysis the stock was selling at 210. Based on a quick analysis, I felt the intrinsic value for the stock was around 180-190. As the terms of the buyback stated that for any holding greater than 50 shares, the acceptance ratio would be around 14%, I passed the opportunity as I felt that post the buyback, I may not be able to sell the stock at a price higher than the purchase price and I was not comfortable buying and holding the stock at 210.
At the time of analysis the stock was selling at 210. Based on a quick analysis, I felt the intrinsic value for the stock was around 180-190. As the terms of the buyback stated that for any holding greater than 50 shares, the acceptance ratio would be around 14%, I passed the opportunity as I felt that post the buyback, I may not be able to sell the stock at a price higher than the purchase price and I was not comfortable buying and holding the stock at 210.
So how did my thesis play out?
Well my thesis proved to be correct, but I still missed an opportunity as I did not track the stock subsequently. Let me explain,
If I had bought the stock at 210 and attempted to arbitrage, I would have suffered a loss of 16% on my investment (assuming a sale price of the stock at 170 after the close of the buyback on 8th August).
However had I continued to track the stock, there was a buying opportunity in june (see graph above, around 8 – 15th) when the stock traded briefly between 115- 140. A purchase at that price (and sale at 170 after buyback) would have given me an annualised return of 135 %.
So lesson for me is that I need to keep tracking an arbitrage stock till the end of the event to take advantage of any sudden opportunities which may come up.
Well my thesis proved to be correct, but I still missed an opportunity as I did not track the stock subsequently. Let me explain,
If I had bought the stock at 210 and attempted to arbitrage, I would have suffered a loss of 16% on my investment (assuming a sale price of the stock at 170 after the close of the buyback on 8th August).
However had I continued to track the stock, there was a buying opportunity in june (see graph above, around 8 – 15th) when the stock traded briefly between 115- 140. A purchase at that price (and sale at 170 after buyback) would have given me an annualised return of 135 %.
So lesson for me is that I need to keep tracking an arbitrage stock till the end of the event to take advantage of any sudden opportunities which may come up.
Additional note: I read a few analysis from some brokerage houses of the above arbitrage and found that the analysis covered only the upside and had no mention of the risk or downside.
Postmortem of an arbitrage opportunity
I was analysing a potential arbitrage for Infomedia Limited in april. I posted my analysis here and here.
At the time of analysis the stock was selling at 210. Based on a quick analysis, I felt the intrinsic value for the stock was around 180-190. As the terms of the buyback stated that for any holding greater than 50 shares, the acceptance ratio would be around 14%, I passed the opportunity as I felt that post the buyback, I may not be able to sell the stock at a price higher than the purchase price and I was not comfortable buying and holding the stock at 210.
At the time of analysis the stock was selling at 210. Based on a quick analysis, I felt the intrinsic value for the stock was around 180-190. As the terms of the buyback stated that for any holding greater than 50 shares, the acceptance ratio would be around 14%, I passed the opportunity as I felt that post the buyback, I may not be able to sell the stock at a price higher than the purchase price and I was not comfortable buying and holding the stock at 210.
So how did my thesis play out?
Well my thesis proved to be correct, but I still missed an opportunity as I did not track the stock subsequently. Let me explain,
If I had bought the stock at 210 and attempted to arbitrage, I would have suffered a loss of 16% on my investment (assuming a sale price of the stock at 170 after the close of the buyback on 8th August).
However had I continued to track the stock, there was a buying opportunity in june (see graph above, around 8 – 15th) when the stock traded briefly between 115- 140. A purchase at that price (and sale at 170 after buyback) would have given me an annualised return of 135 %.
So lesson for me is that I need to keep tracking an arbitrage stock till the end of the event to take advantage of any sudden opportunities which may come up.
Well my thesis proved to be correct, but I still missed an opportunity as I did not track the stock subsequently. Let me explain,
If I had bought the stock at 210 and attempted to arbitrage, I would have suffered a loss of 16% on my investment (assuming a sale price of the stock at 170 after the close of the buyback on 8th August).
However had I continued to track the stock, there was a buying opportunity in june (see graph above, around 8 – 15th) when the stock traded briefly between 115- 140. A purchase at that price (and sale at 170 after buyback) would have given me an annualised return of 135 %.
So lesson for me is that I need to keep tracking an arbitrage stock till the end of the event to take advantage of any sudden opportunities which may come up.
Additional note: I read a few analysis from some brokerage houses of the above arbitrage and found that the analysis covered only the upside and had no mention of the risk or downside.
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