Category Archives: Fundamentals

So, … … , When’s Judgement Day?

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The “fiscal cliff” thingie has come and gone…

Gone?

People, nothing’s gone.

If something is ailing, it needs to heal, right?

What is required for healing?

Remedial medicine, and time.

Let’s say we take the medicine out of the equation.

Now, what’s left is time.

Would the ailing entity heal, given lots of time, but no medicine?

If disease is not so widespread, and can be expunged over time, then yes, there would be healing, provided all disease-instigating factors are abstained from.

Hey, what exactly are we talking about?

It is no secret that most first-world economies are ailing.

Specifically, the US economy was supposed to be injected with healing measures, which were to take effect from the 1st of Jan., ’13. Financial healing would have meant austerity and a more subdued lifestyle. None of that seems to be happening now. The healing process has been deferred to another time in the future, or so it seems.

You see, people, no one wants austerity. The consumption story must go on…

So now, since the medicine’s been taken out of the equation, is there going to be any healing?

No. Disease-instigating lifestyles are still being followed. Savings are low. Debt with the objective of consumption is still high. How can there be any healing?

Under the circumstances, there can’t.

So, what’re we building up to?

We’re all clear about the fact that consumption makes the world go round. What is the hub of the world’s consumption story? The US. That part of the world which does save, and where there is real growth, well, that part rushes to be a part of the consumption story. It produces cheaply, to sell where there’s consumption, and it sells there expensively. Yeah, like this, healthy economies get dragged into an equation with ailing economies. Soon, the entanglement is so deep, that there’s no turning back for the healthy economy. It catches part of the ailment from the diseased economy. Slowly, non-performing assets of banks in such healthy economies start to grow. The disease is spreading.

Hold on, stay with me, we’re not there yet. Yeah, what are we building up to?

Healthy economies take time to get fully diseased. Here, savings are big, domestic manufacturing is on the rise, and there a healthy demographic dividend too. Buffers galore, the immune system of a healthy economy tries to fight the contagion for the longest time. As entanglement increases, though, buffers deplete, and health staggers. Non-performing assets of banks grow to disturbing levels.

That’s what we are looking out for, when we are invested in a healthy economy which has just started to ail. Needless to say, we pulled out our funds from all ailing economies long back. Our funds are definitely not going back to economies which refuse to take medicine, i.e. which don’t want to be healed. Now, the million dollar question is …

… what’s to be done with our funds in a healthy economy which has just started to become diseased due to unavoidable contagion?

Nothing for now. Watch your investments grow. Eventually, since no one is doing enough to stop the damage and the spread, big-time ailment signs will invariably appear in the currently “healthy” economy, signs that appeared a while back in currently ailing economies. Savings will be disappearing, manufacturing will start to go down, and bad-debt will increase. Define your own threshold level, and go into cash once this is crossed. You might not need to take such a step for many years in a row. Then again, you might need to take such a step sooner than you think, because the ailing mother-consumer economy is capable of pulling everyone down with it, if and when it collapses. And it just stopped taking its medicine…

Let’s get back to your funds. In the scenario that you’ve gone into cash because you weren’t confident about the economy you were invested in, well, what then?

Option 1 is to look for an emerging economy that gains your confidence, and to invest your funds there.

Not everyone is comfortable investing abroad. What if you want to remain in your own economy, which you have now classified as diseased. There’s good news for you. Even in a diseased economy, there are pockets of health. You need to become a part of such pockets, just after a bust. So, remain in cash after a high and till after a bust. Then, when there’s blood on the streets, put your money into companies with zero-debt, a healthy dividend-payout record and a sound, diligent and honest management. Yeah, at a time like that, Equity is an instrument of choice that, over time, will pull your funds out of the gloom and doom.

You’ve put your funds with honest and diligent human capital. The human capital element alone will fight the circumstances, and will rise above them. Then, you’ve entered at throwaway prices, when there was blood on the streets. Congrats, you’ve just set yourself up for huge profit-multiples in the future. And, the companies you’ve put your money with, well, every now and then, they shower a dividend upon you. This is your option 2. Just to share with you, this is my option of choice. I like being near my funds. This way, I can observe them more closely, and manage them properly. I suffer from a case of out of sight, out of mind, as far as funds are concerned. Besides, when funds are overseas, time-differences turn one’s life upside down. This is just a personal choice. You need to take your own decision.

At times like this, bonds are not an option, because many companies can cease to exist in the mayhem, taking your investment principal out with them.

Bullion will give a return as long as there is uncertainty and chaos. Let there be prolonged stability, and you’ll see bullion tanking. Yeah, bullion could be option 3 at such a time. You’ll need to pull out when you see signs of prolonged stability approaching, though.

One can use a bust to pick up cheap real-estate in prime localities. Option 4.

You see, you’ve got options as long as you’re sitting on cash. Thus, first, learn to sit on cash.

Before that, learn to come into cash when you see widespread signs of disease.

Best part is, widespread disease will be accompanied by a big boom before the bust, so you’ll have time to go into cash, and will be ready to pick up quality bargains.

You don’t really care when judgement day is, because your investment strategy has already prepared you for it. You know what to do, and are not afraid. If and when it does come, you are going to take full advantage of it.

Bring it on.

Can We Please Get This One Basic Thing Right? (Part III)

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Yeah, we’re digging deeper.

How does an investor arrive at an investment decision?

It’s pretty obvious to us by now that traders and investors have their own rationales for entry and exit, and that these rationales are pretty much diametrically opposite to each other.

So, what’s the exact story here?

The seasoned investor will look at FUNDAMENTALS, and will exhibit PATIENCE before entering into an investment.

The versatile trader will look at TECHNICALS, and will NOT BE AFRAID of entry or exit, any time, any place. He or she will be in a hurry to cut a loss, and will allow a profit to blossom with patience.

What are fundamentals?

Well, fundamentals are vital pieces of information about a company. When one checks them out, one gets a fair idea about the valuation and the functioning of the company, and whether it would be a good idea to be part of the story or not.

A good portion of a company’s fundamental information is propagated in terms of key ratios, like the Price to Earnings Ratio, or the Debt to Equity Ratio, the Price to Book Value ratio, the Enterprise Value to EBITDA Ratio, the Price to Cash-flow Ratio, the Price to Sales ratio, etc. etc. etc.

What a ratio does for you is that in one shot, it delivers vital info to you about the company’s performance over the past one year. If it’s not a trailing ratio, but a projected one, then the info being given to you is a projection into the future.

What kind of a promotership / management does a company have? Are these people share-holder friendly, or are they crooks? Do they create value for their investors? Do they give decent dividend payouts? Do they like to borrow big, and not pay back on time? Do they juggle their finances, and tweak them around, to make them look good? Do they use company funds for their personal purposes? Researching the management is a paramount fundamental exercise.

Then, the company’s product profile needs to be looked into. The multibagger-seeking investor looks to avoid a cyclical product, like steel, or automobiles. For a long-term investment to pan out into a multibagger, the product of a company needs to have non-cyclical scalability.

After that, one needs to see if one is able to pick up stock of the particular company at a decent discount to its actual value. If not, then the investor earmarks the company as a prospective investment candidate, and waits for circumstances to allow him or her to pick up the stock at a discount.

There are number-crunching investors too, who use cash-flow, cash allocation and other balance-sheet details to gauge whether a coveted company with an expensive earnings multiple can still be picked up. For example, such growth-based investors would not have problems picking up a company like Tata Global Beverages at an earnings multiple of 28, because for them, Tata Global’s balance-sheet projects future earnings that will soon lessen the current multiple to below sector average, for example.

Value-based investors like to buy really cheap. Growth-based investors don’t mind spending an extra buck where they see growth. Value-based investors buy upon the prospect of growth. Growth-based investors buy upon actual growth.

The trader doesn’t bother with fundamentals. He or she wants a management to be flashy, with lots of media hype. That’s how the trader will get volatility. The scrips that the trader tracks will rise and fall big, and that’s sugar and honey for the trader, because he or she will trade them both ways, up and down. Most of the scrips that the trader tracks have lousy fundamentals. They’ve caught the public’s attention, and the masses have sprung upon them, causing them to generate large spikes and crashes. That’s exactly what the trader needs.

So, how does a trader track these scrips? Well, he or she uses charts. Specifically, price versus time charts. The trader doesn’t need to do much here. There’s no manual plotting involved. I mean, this is 2012, almost 2013, and we stand upon the shoulders of giants, if I’m allowed to borrow that quote. Market data is downloaded from the data-provider, via the internet and onto one’s computer, and one’s charting software uses the data to spit out charts. These charts can be modified to the nth degree, and transformed into that particular form which one finds convenient for viewing. Modern charting software is very versatile. What exactly is the trader looking for in these charts?

Technicals – the nitty-gritty that emerges upon close chart scrutiny.

How does price behave with regard to time?

What is the slope of a fall, or the gradient of a rise? What’s the momentum like?

What patterns are emerging?

How many people are latching on? What’s the volume like?

There are hundreds of chart-studies that can be performed on a chart. Some are named after their creators, like Bollinger bands. Others have a mathematical name, like stochastics. Names get sophisticated too, like Williams %R, Parabolic SAR and Andrew’s Pitchfork. There’s no end to chart  studies. One can look for and at Elliott Waves. Or, one can gauge a fall, using Fibonacci Retracement. One can use momentum to set targets. One can see where the public supports a stock, or where it supplies the stock, causing resistance. One can join points on a chart to form a trendline. The chart’s bars / candle-sticks will give an idea about existing volatility. Trading strategy can be formulated after studying these and many more factors.

Where do stops need to be set? Where does one enter? Exit? All these questions and more are answered after going through the technicals that a chart is exhibiting.

One needs to adhere to a couple of logical studies, and then move on. One shouldn’t get too caught up in the world of studies, since the scrip will still manage to behave in a peculiar fashion, despite all the studies in the world. If the markets were predictable, we’d all be millionaires.

How does the trader decide upon which scrips to trade? I mean, today’s exchanges have five to ten thousand scrips that quote.

Simple. Scans.

The trader has a set of scan criteria. He or she feeds these into the charting software, and starts the scan. Within five minutes, the software spits out fifty odd tradable scrips as per the scan criteria. The trader quickly goes through all fifty charts, and selects five to six scrips that he or she finds best to trade on a particular day. Within all of fifteen minutes, the trader has singled out his or her trading scrips.

Do you now see how different both games are?

I’m glad you do!

🙂

Due Diligence Snapshot – Mindtree Limited – Nov. 24 2012

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Price – Rs. 665.25 per share

Earnings Per Share (projected on the basis of quarter ended Sep 30 ’12) – Rs. 70.61

Price to Earnings Ratio (thus, also projected) – 9.42

Price to Book Value – 2.82 (it’s ok for small to mid-sized IT companies to have a high price to book ratio, because book value doesn’t reflect human capital, and small to mid-sized IT companies are more about human capital than about real-estate, hardware etc. Thus, since the real book value is not going to be available, the given price to book ratio could be treated as an artefact, unless it is unreasonably high, which is not the case here).

Debt : Equity Ratio – 0.03

Current Ratio – 2.10

Profit After Tax Margin – 12.11%

Return on Networth – > 25 %

Pledged Shares %age – Nil

Face Value – Rs. 10.00

Dividend Payout – 25% – 30% of face-value.

Average Daily Volumes – around 1 Lakh per day on NSE.

Product – Product Engineering Services, IT Services, worked on Bluetooth technology, also worked on UID (Aadhaar) project.

Promoters – Mr. Bagchi (set up Six-Sigma services at Wipro) and Mr. Soota (has now retired from Mindtree, ex-Wipro, amongst others, responsible for Wipro’s phenomenal growth). Mr. Natarajan is co-founder and current CEO, and is also ex-Wipro.

Share-holding Pattern – Foreign Promoters (3.5%), Indian Promoters (15.9%), Institutions (33.0%), Non-Institutional Corporate Bodies (30.2%), Public (15.7%).

Technicals – IPO days in March 2007 were big, with the scrip peaking at Rs. 1023.30 very early into its launch. By March ’09, though, Mindtree had bottomed out at Rs. 187.05. It then made a high pivot of Rs. 747.00 in Jan ’10, fell to Rs. 321.00 by August 2011, and is currently on the rise, forming a cup and handle pattern on the weekly chart, with the handle having broken out in Sep ’12 to 770.00 on average volume. This was a false breakout, and the scrip came down, to then move in a band between Rs. 633.80 and Rs. 699.90. Currently, Mindtree is quoting at Rs. 665.25, and Friday (Nov. 23rd, 2012) saw it rise by approximately 1 % on volume that was three times its 50-day moving average and many more times its 10-day moving average.

Comments – I like all the fundamentals. Couldn’t find any scams or frauds related to the company, looked only online though. Debt-equity ratio almost nil, great! Ex-Wipro people are the promoters. CEO is ex-Wipro. Friday’s higher volume has gotten me on alert. If all-round conditions in the markets remain stable, the scrip could break-out to beyond Rs. 770 soon. Glassdoor has “OK’d” work culture at Mindtree, with the same rating that Infosys has received. Salaries are considered on the lower side, though, at Mindtree. Also, some employees feel that company is stagnating. Reasons why Mr. Ashok Soota left the company are unclear to me. On the other hand, corporate governance still seems to be decent at Mindtree.

Buy? – Hmmmm, I like almost everything, except the salary and the stagnation bit. Mr. Soota’s presence would have been a bonus. I can take a “stagnating” company that generates good numbers. The ratios are all good, and profitability is decent. There’s almost no debt on the balance-sheet. No shares have been pledged. Dividend is decent. Excellent return on networth. Company does R&D too. Question is, will the scrip correct another 30 to 40 bucks to the lower end of it’s current band, so that one can pick it up 5 odd % cheaper? Anybody’s guess. One could actually go and pick it up now. Earnings are good, and so is the projected PE, well below the industry average, actually.

Disclaimer and Disclosure – Opinions given here are mine only. You are free to build your own view on the stock. Currently, I don’t hold a position in Mindtree Limited, but am considering long-term entry on the basis of what I have found and liked. Data given here has been compiled from motilaloswal.com, moneycontrol.com and equitymaster.com, and technicals have been gauged using Advanced GET 9.1 EoD Dashboard Edition.

Due Diligence Snapshot – Micro Technologies Limited – November 04 2012

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Price as on Nov. 04 2012 – Rs. 44.60 per share

Earnings Per Share (trailing 12 month earnings)- Rs. 37.77

Price / Earnings Ratio – 1.18

Price / Book Value – 0.21

Debt : Equity Ratio – 0.55

Current Ratio – 5.63

Quick Ratio – 4.43

Net Profit Margin – 5.98 %

Face Value – Rs. 10.00

Dividend Payout – 10% – 20% of face-value.

Product – IT-based security products.

Promoter – Dr. P. Sekhar, ” a creative entrepreneur”.

Share-holding Pattern – Promoters (36.2%), Non-Institutional Corporate Bodies (42.1%), Individual Investors (19.0%).

Technicals – Since its January ’08 high of Rs. 192.50, the stock has corrected majorly to Rs. 26.80, recovered a little more than half-way (to Rs. 114.00), corrected again to Rs. 50.40, then recovered again to Rs. 91.40, again corrected to a low of Rs. 38.05, and is now in the process of rising, although institutional volume is not accompanying this rise.

Comments – Fundamentals are strong. They absolutely do not match the sell-off to a low of Rs. 38.05 very recently. Why is there a mismatch between fundamentals and technicals?

Possible Reason – There seems to be employee dissatisfaction doing the rounds, owing to questionable corporate governance. Another case of highly debatable corporate governance seems to come to light. In my opinion, this case seems to affect all shareholders negatively. Primarily, this case affected all FCCB (Foreign Currency Convertible Bond) holders, but then the company’s actions concerning the FCCBs possibly disillusioned a part of the shareholders, who went on to sell the scrip. Increase in selling pressure led to a tanking share-price, and this was negative for all share-holders.

Outlook? – You need to decide whether a part of the company’s corporate governance policy is a deal-breaker that overrides the strong fundamentals on paper.

Disclaimer / Disclosure : The opinions given above are mine only. You are free to form your own view on the stock. I don’t hold any position in Micro Technologies Limited. Data given here has been compiled from motilaloswal.com, moneycontrol.com and equitymaster.com, and technicals have been gauged using Advanced GET 9.1 EoD Dashboard Edition.

A Tool By The Name of “Barrier”

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Come into some money?

Just don’t say you’re going to spend it all.

Have the decency to at least save something.

And all of a sudden, our focus turns to the portion you’ve managed to save.

If you don’t fetch out your rule-book now, you’ll probably bungle up with whatever’s left too.

Have some discipline in life, pal.

The first thing you want to do is to set a barrier.

Barrier? Huh? What kind of barrier?

And why?

The barrier will cut off immediate and direct access to your saved funds. You’ll get time to think, when hit by the whim and fancy to spend your funds.

For example, a barrier can be constructed by simply putting your funds in a money-market scheme. With that, you’ll have put 18 hours between you and access, because even the best of money market schemes take at least 18 hours to transfer your funds back into your bank account.

Why am I so against spending, you ask?

Well, I’m not.

Here, we are focusing on the portion that you’ve managed to save.

Without savings, there’s nothing. There can be no talk about an investment corpus, if there are no savings. Something cannot grow out of nothing. For your money to grow, a base corpus needs to exist first.

Then, your basic corpus needs a growth strategy.

If you’ve chalked out your strategy already, great, go ahead and implement it.

You might find, that the implemetation opportunities you thought about are not there yet.

Appropriately, your corpus will wait for these opportunities in a safe money market fund. Here, it is totally fine to accept a low return as long as you are liquid when the opportunity comes. There is no point blocking your money in lieu of a slightly higher return, only to be illiquid when your investment opportunity comes along. Thus, you’ve used your barrier to park your funds. Well done!

Primarily, this barrier analogy is for these who don’t have a strategy. These individuals leave themselves open to be swept away into spending all their money. That’s why such individuals need a barrier.

An online 7-day lock-in fixed deposit can be a barrier.

A stingy spouse can be a barrier.

Use your imagination, people, and you’ll come up with a (safe) barrier. All the best! 🙂

Dealing With a Bully

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I know a way of dealing with a bully – sock the bully a real tight one in the solar plexus. Inside, there’s only air, and that one tight punch is going to burst the balloon and reduce the bully to his real self, i.e. a meek failure.

What if this bully is the government itself?

Let’s just caste a very quick glance at the track-records of the governments of independent India till date.

Education has been a total failure. Whatever meaningful education is being imparted in India is being done so mostly by private institutions, at least till high school level, if not even after that.

Healthcare – another very big failure. The government’s hospitals, just like its schools, are a disgrace.

Left to the government, infrastructure would have been a massive failure too, which it was, till the private sector stepped in.

Let’s not even start speaking about the governmental airline carrier, Air India. Words fail me here.

You want to avoid the police lest they stick you one at a time when you have other problems.

You want to settle any disputes out of court, because the semi-dysfunctional judicial system will, in all probability, stretch the issue over decades, with much ensuing harassment.

I mean, I could go on and on. Point of the matter is, governance in independent India has been an overall and disastrous failure.

We are not a democracy – we are a joke.

Over the last few years, these and more blunders are coming to light. They are being flashed over the papers and on television, nationally and internationally. People are getting to see and know the quality of people that has been governing the country. Citizens are disgusted.

Instead of charting a course of rectification, what does the bully do?

It tries to hide its own failures by passing on the responsibility to private institutions. Governments and governments have robbed common citizens of their basic rights to education, healthcare etc. over decades. Now, when the deprivation has become too glaring, they want private institutions to accomodate the deprived, and that too quasi-free of cost. I’m talking about the current developments in the education sector. Rest assured, other sectors will be affected too, if one goes by the governmental mind-set.

The government is bullying private schools into reserving 25% (number could vary for different states) of their capacities for kids from backward classes. The government says it’s going to pay for this partly, but knowing the value of its words, this money is never going to come. Basically, it wants want private schools to lift this burden and pay for it too. Unbelievable.

The government’s massive failure in the field of education has caused downtrodden classes to finally start asking, “What have you done for us?” and “Where is our education?” and “Why is the quality of the schools built for us by you so pathetic?” and “Where does the education cess go, which you charge along with every monetary transaction in the country?” and again, “Where is our education?”

Now the government gets really cute, and says, “You see those private educational institutions over there, look at them, they are doing so well, they will make your kids rise, we will steam-roll them into admitting your kids, there is your education!”

Laws in India are basically stacked up against private institutions and in favour of the government. One false move here or there, and you could be breaking a law as a private player. Hence, as a private player, you are always in the government’s grip. To function smoothly and not show a loss, you could end up slightly bending a rule or two. The government agrees to look the other way, and lets you function, but then you have to mutually agree to get bullied by it every now and then. Sometimes, the bullying takes on ridiculous levels, like it has for the education sector. My remedy to deal with a bully (given at the top) like the government is not going to work, because I just wouldn’t know how to implement it. I wouldn’t even know what to implement.

And that’s the story, people. India Inc. is heavily burdened by its failure watchdogs. You need to incorporate this fact into any investment strategy that concerns India Inc. Right within its purchase price, any investment in India needs to discount for the governmental failure that will inevitably be patched onto the private institution that you are planning on buying into.

What does that mean for governmental institutions as investments? Frankly, looking at the mess, one can’t even think of buying into these, unless one wants to own companies with Ph.D.s in inefficiency and mismanagement.

Elephant in a China Shop

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Mr. Cool just plugged his trading exam.

Big time, and for the umpteenth time.

It all started out like this. He partied late night. Had one too many, of course. Slept till late morning. Woke up with a headache.

Then he made his first mistake of the new day. He decided to trade.

Why was this a mistake, you ask? After all, trading is his profession.

Two mistakes here, I’d say. Firstly, there was no market preparation. Secondly, health was not up to the mark. Deciding to trade after this backdrop – hmmm – bad call.

The next set of mistakes came right after that. Coolers asked his broker Mr. Ever So Clever the wrong question, this being “What’s moving, mate?”

True to his form was Mr. Cool-i-o. Two mistakes here again. Firstly, you don’t ask your broker technical questions. You tell your broker what to do. You instruct him or her. Asking your broker to instruct you is like asking the second hand car dealer to start ripping you off.

Next, if you are asking Mr. Ever So Clever anything at all, it can be about your funds in transit, or your equity in transit or basically something mechanical. You are not in this business to give Mr. Clever even an inch more of space by asking market questions like what’s moving or what’s going to move.

If you still do, as Mr. Coolovsky obviously proved, then of course Mr. Ever So Clever is going to tout to you what his other clients are squaring off. Specifically illiquid scrips. These need buyers, and if you’ve just announced yourself as a buyer and are asking what to buy, illiquid scrips that others are selling will definitely be touted to you for buying.

Also, a scrip doesn’t have to be illiquid to be touted. One can even be dealing with a very large order which a big player is looking to off-load at a relative peak. A whole set of brokers then does the rounds to get buyers interested.

The bottom-line is this – you are not giving your broker any kind of leeway with regards to what you are buying or selling. You need to do your own technicals, or fundamentals or whatever it is that you do, to gauge what is moving. You don’t ask what is moving.

On many occasions, rallies wind up soon after big players square off. This time was no different. Coolster had loaded himself with a scrip which had already peaked. With no buying pressure to push it up any further, its price started to sink.

Next set of mistakes.

He’d marked a vague stop-loss in his head because everyone had been ticking him off for not applying stops. Specifically our friend Mr. System Addict, remember him? He had been very vocal about it. Because the stop was vague, Mr. Cool wasn’t motivated enough to feed it into his trade as the price neared his stop.

Not feeding in a mental stop – mistake.

As the scrip’s price undershot his mental stop, Coolins did nothing except to hope it would climb back to his buy level, which is when he would exit.

Hoping in a trade – big mistake.

Not taking your loss once stop is undershot – even bigger mistake.

What happened after that can’t be called a mistake anymore (on humanitarian grounds), because Coolinsky had gone into freeze mode. The reason was the sinking scrip. Huge losses were piling up. Coolitzer answered two back to back margin calls in this frozen state of body and mind. He was frozen. Didn’t know what he was doing. Scrip didn’t turn back up before Mr. Cool was cleaned out.

This chronology of events is a kind of worst-case scenario. A grade F minus in an exam.

Every trade is an exam. One needs to tread carefully from step to step, from pre-trade preparation to actual trade to after-trade emotional wind-down.

Remember that, so you fare much, much … much, much better than our F minus candidate. And don’t worry about him, Mr. Cool-Dude will be back. He’s always able to get back, you’ve gotta give credit to Mr. Cool for that.

Is This Blood?

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When there’s blood on the streets, that’s when you should go out and invest.

That’s an ancient proverb.

The 64 million dollar question is, IS THIS BLOOD?

I’m going to focus on India, because that’s my playground.

So ICICI Bank breached the 700 mark, did it? The 2009 low was around 250 bucks. At 700, it’s not blood. True, the banking sector is down. However, we are nowhere near blood levels. State Bank of India might have fallen around 50 % this year, but it’s still double the price of its 5 year low.

The Sensex shows an average price to earnings ratio of around 14. Remember 2008 and 2009? Average PE of about 9? Well, in my opinion, those are blood levels. These aren’t.

True, the mid-cap segment has taken a hammering. Let’s take Sintex Industries. At 75 levels, this stock has fallen big. Nevertheless, it’s still double the price of it’s 2009 low. At 98 rupees, Jain Irrigation has really fallen too. The PE ratio has come down from 35+ to around 14, and this looks attractive. Even Sintex’s sub-5 PE ratio looks very attractive, also because the company is aggressively pursuing water-purification and “green-innovation”. Agreed, attraction to invest is present, especially in the mid-cap arena, where you’re likely to find quality in management too, as opposed to the small-cap area, where this is less likely. However, to say that there’s overall mayhem here would be going too far.

The BSE small-cap index has halved since late 2010, but is again at double the 2009 low. Many small-cap stocks are bleeding badly, though. Most small-caps haven’t proven their pedigree yet. Thus, people are letting them bleed.

Then there are stocks like Karuturi Global and KS Oils, that have been hammered down to penny-stock levels. One has problems getting into such stocks, because the underlying story can be shady. With penny stocks, there’s always the danger of oblivion, i.e. they might cease to exist down the line. Such stocks need to be traded at best, with small amounts and for the short-term. In their present conditions, they are not investment-grade stocks.

The picture that emerges is that there are selective attractive bets being offered by Mrs. Market. There are good investments to be made for long-term investors, if you possess patience and holding-power. I’m short on patience, so I like to trade India. That should not deter you. If you are a long-termer, and have what it takes, well, then you are a long-termer. And this market is offering you some good bets, so be very selective and go for it, but don’t bet the farm, since we’re not seeing all-out blood on the street yet.

Watch Out for Bottomless Pits

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A shareholder-friendly management?

Forget about it.

Very difficult to find, nowadays.

Gone are the days where you’d see an Azim Premji driving his 800, or a Narayana Murthy travelling economy class.

These legends believed in increasing the shareholder’s pie. And this they did, big time. Ask any Wipro or Infosys shareholder. These legends were very clear about one thing: there was no question of pumping in useless expenditure into their public limited company at the cost of the shareholder.

The norm, btw, is totally opposite. Public limited company managements live it up at the cost of the shareholder. Very few promoters are actually bothered about their shareholders. It is the norm to put medical bills, day to day living / wining / dining / entertainment costs, personal property purchases etc. into the company. Why should the promoter bear such costs when there is the public limited company to put these and such costs into? Logical?

Don’t expect too much from your average promoter. He’s not in the game for you.

Where does all this leave you, by the way?

Firstly, you need to look out for, and avoid bottomless pits. These are companies that bear huge amounts of expenditure emanating from the whims and fancies of the promoter. For example, the total sports sponsorship bill for Kingfisher Airlines is staggering. Then there’s this huge red flag in their balance sheet – the company is in under a mountain of debt. On top of that, this company just reported almost a 100 million USD Q2 loss. Math doesn’t add up for you to be investing in such bottomless pits, does it?

In your search for idealistic and shareholder-friendly managements, you might come up with a handful of names. Next you’ll find that it’s no secret. If there’s an idealistic and shareholder-friendly promoter around, people can see this in his or her deeds and of course in the balance sheet of his or her company. Savvy early investors make a beeline for such companies, with the result that by the time you get there, the concerned share-price is already quite inflated. You’ve identified a good investment, but you are not going to enter at an expensive price. If you do, you’ll not be able to sit on your investment for the long-term. Even slight volatility will shake you out of it.

Instead, you choose to wait for the right price to arrive, and then you enter. Well played.

The deal is, that more than 90% – 95% of managements don’t play it like an Azim Premji, or a Narayana Murthy, or an Anu Aga for that matter. However, shareholder-unfriendly promoters sometimes own companies that are lucrative investments. This can be due to niche, cycles, technology, crowd mentality, whatever. When do you buy into such companies?

As a long-term investor, you wanna be buying such companies at a deep discount to real value. My thumb-rule is a single-digit price to earnings ratio. You can have your own thumb-rule. You might have to wait a long time to get this kind of a price, but that’s what long-term investing is about.

As a trader, you buy into such a company with the momentum. You can buy after a resistance is broken. Or after a high is taken out. Or upon a substantial dip after the first burst of momentum. As a trader, what is far more important for you is to know when to let such a company go. Know the level by heart below which or at which you will exit such a company. In trading, exits are far more important than entries.

The mistake you don’t want to be making is to invest in a bottomless-pit, no matter how cheap the share price is.

When Cash is King

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I don’t like crowds.

The last thing I ever want to do is to conform to crowd behaviour.

That’s one goal defined.

What does this mean?

Very clearly, for starters, it means singing one’s own tune, i.e. defining one’s own path.

It also means not listening to anyone. That requires mental strength, and the power to resist. Very tough.

In life, generally, one likes to be in tandem with the Joneses. And then, smart cookies that we are, we like to go one up on the Joneses, which would be the cue for the Joneses to catch up and then overtake us. Hypothetically, this is how the Joneses and the Naths could blow up all their cash.

It doesn’t stop there. To keep up, the average citizen doesn’t think twice before leaping into debt.

Bottomline is, when cash is king, hardly anybody has cash. In fact, most people owe money at that time.

This is the age of black swans. Crisis after crisis, then a bit of recovery, then another crisis, then some recovery, followed by a mega-crisis.

When a master-blaster crisis ensues, cash becomes king. Quality stuff on the Street starts to sell so cheap, that one needs to pinch oneself to believe the selling prices. Margins of safety are unprecedented. Now’s the time one can salt away a part of one’s cash in Equity, for the long-term.

That’s if one has cash to spare. This is report card time. How have you done in your REAL investment exam? Have you learnt to sit on cash? Have you learnt to buy with margin of safety? The Street doesn’t care for your college degree, in fact, it vomits on your college degree. Your college degree has no value on the Street, it’s just a piece of paper.

Learning on the Street happens everyday, with every move, every investment, every trade, every observation. Unless and until your own money is on the line, this learning is ineffective.

Get real, wake up, so that when cash is king, you feel like an emperor!

An Elliott-Wave Cross-Section through a Crowd Build-Up

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At first, there’s smart money.

Behind this white-collared term are pioneering investors who believe in thorough research, and who are willing to take risks.

Smart money goes into an underlying, and the price of this underlying moves up. Wave 1.

At the sidelines, there are those who have been stuck in this underlying. As the price moves above their entry level, they begin to off-load. There’s a small correction. Wave 2.

By now, news of the smart money has perforated through the markets. Where is it moving? What did it pick up? Who is behind it? Thus, more investors following news or fundamentals (or both) enter. The price moves past the very recent short-term high of Wave 1, accompanied by a surge in volume.

This is picked up on the charts by those following technicals, who enter too. By now, there are analysts speaking in the media about the turn-around in company so and so, and a large chunk of people following the media do the honours by entering. Wave 3 is under way.

Technical trend-followers latch on, and soon, we are at the meat of Wave 3, i.e. the middle off the trend.

Analysts on the media then speak about buying on dips. All dips are cut short by a surge of entrants seeking to be part of the crowd.

The first feelings of missing the bus register. The pangs of these cause more people to enter.

Meanwhile, the short community has been getting active. Large short positions have been in place for a while, and they are bleeding. Eventually, the short community throws in the towel, and there’s massive short-covering, causing a further surge in price.

Short-covering is sensed by gauging buying pressure despite very high price levels. It is the ideal time for smart money to exit. That’s exactly what it does, without any dip in the price of the underlying whatsoever.

Short-covering is over. Smart money starts boasting about its returns of X% in Y days, openly, at parties, in the media, everywhere. This causes pangs of jealousy and intense feelings of missing the bus in those still left out. Some enter, throwing caution to the wind.

The price has reached a level at which no one has the guts to enter. Demand dries up. With no buying pressure, the price dips automatically. Bargain hunters emerge, and so do shorters. The shorters sell to the bargain hunters right through a sizable dip. This dip happens so fast, that most of the crowd still remains trapped. Wave 3 has ended, and we are now looking at the correcting Wave 4 in progress.

At this stage, technical analysts start advising reentry upon Fibonacci correction levels. Position traders buying upon dips with margin of safety enter, and so does the second-last chunk of those feeling they’d missed the bus. The price edges up to the peak of Wave 3 and past it. That’s the trigger for technical traders to enter.

We now see a mini-repeat of Wave 3. This is called Wave 5. Once Wave 5 crosses its meat, the last chunk of those still feeling they’d missed the bus makes a grand entry with a sharp spike in the price. These are your Uncle Georges, Aunt Marthas and Mr. Cools who know nothing about the underlying. They cannot discern a price to earnings ratio from an orangutan. They desperately want to be a part of the action, since everyone is, at whatever the price. And these are the very people that traders sell to as they exit. With that, the crowd is at its peak, and so is the price. There are no more buyers.

What’s now required is a pin-prick to burst the bubble. It can be bad news in the media, the emergence of a scandal, a negative earnings report, anything.

The rest, they say, is History.

Is Commodity Equity Equal to Commodity?

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Rohit likes Aarti, but has no access to her.

Priya wants to be friends with Rohit. Priya looks a bit like Aarti and behaves like her too, at times.

Rohit and Priya become friends.

Is Priya = Aarti?

Can this question be answered with a resounding yes or no?

Of course Priya is not equal to Aarti. Priya is Priya and Aarti is Aarti. Ask Rohit about it during one of Priya’s temper tantrums.

And, at other times, Priya is just like Aarti. At still other times, Priya is as calm as the Pacific Ocean. Even calmer than Aarti. At those times, Rohit feels he is even better off with Priya than he would have been with Aarti.

After this short diversion into human relationships, let’s study the correlation between commodities and commodity equity.

The average working individual does not have access to commodities as an asset class. He or she is not a farmer, and doesn’t have the time or the nerve to play futures and options, in an effort to put some money in commodities.

Is there any avenue such a person can access, to invest a piece of his or her pie in commodities.

It’s time to study the world of commodity equity.

For example, we are talking about agriculture stocks, precious and non-precious metal mining stocks, oil and natural gas stocks etc. etc.

Do such stocks always behave as their underlying commodity?

Can one put one’s money in commodity equity, and then feel as if one has put the money in commodities?

These questions can be answered in terms of correlation.

There are times when Gold moves x%, and Gold equity also moves x%, in the same direction. At such times, the correlation between Gold and Gold equity is 1:1.

At other times, the levels of movement can be mismatched. For example, the correlation can be 0.8:1, or 1.2:1. Sometimes, there is even a negative correlation, when Gold moves in one direction, and Gold equity in the other. At still other times, one moves, and the other doesn’t move at all, i.e. there is no correlation.

You see, Gold equity first falls under the asset class of equity. It is linked to the mass psychology of equity. When this mass psychology coincides with the mass psychology towards commodities, here specifically Gold, there is correlation. When there is no overlap between these psychologies, there is no correlation. When the public just dumps equity in general and embraces commodities, or vice-versa, there is negative correlation. These relationships can be used for all commodities versus their corresponding commodity equity.

What does this mean for us?

Over the long-term, fundamentals have a chance to shine through, and if there is steady and rising demand for a commodity, this will reflect in the corresponding commodity equity. Over the long term, the discussed correlation is good, since truth shines forth with time. That’s good news for long-term investors.

Over the medium-term, you’ll see correlation at times. Then you’ll see no correlation. You’ll also see negative correlation. Position traders can utilize this information to their benefit, both in the long and the short direction.

Over the short-term, things get very hap-hazard and confusing. It would be wrong to look for and talk in terms of correlation here. In the short-term, for trading purposes, it is better to treat commodity as commodity and commodity equity as equity. If you are trading equity, a gold mining stock or any other commodity equity stock might or might not come up in your trade scan. When such a stock does get singled out for a trade as per your scan, well, then, take the trade. Don’t be surprised if at the same time your friend the commodities trader is trading oil futures instead, or is just sitting out. That’s him or her responding to his or her scan. You respond to your scan. In the world of short-term trading, it is hazardous to mix and correlate commodities with commodity equity.

Phew, that’s it for now. It’s taken me a long time to understand commodity equity, and I thought that I’d share whatever I understood with you.

The Short-Term History of Idealism

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1989, Konstanz, Germany.

I’m quietly eating a Nutella sandwich in the commom-room of our student-hostel. There’s a commotion near the TV area. The Berlin Wall is falling. A few students rush to pack their bags. They are off to Berlin. The one’s not going, including me, request them to bring back a few extra pieces of the Wall. That’s one Nutella sandwich I’ll never forget in my life.

Slowly, communist infrastructure in the Soviet Union starts to fall apart too. With the exception of a few strongholds, most of it is gone today.

The most repeated pro-communism argument I have heard after the fall of the Wall is this: Communism failed (wherever it failed) because it was too idealistic for mankind. So, according to this argument, mankind could not live up to the ideals of communism. All people were equal, but some were more equal than others, to analogically quote George Orwell.

Maybe, maybe.

And here is mankind again, trying to be idealistic. The epicentre of this idealism is, well, Germany. Its leaders, including the Pope, are asking its citizens to dig into their pockets and support the Euro against breakdown, come what may.

No other European nation is financially capable of bailing out the Euro. France’s economic problems are visible. It is now up to Germany. The question that remains is: IS THIS FAIR to the German citizens, who will have to take on pressurizing austerities for the follies of others to achieve this idealistic goal?

Well, what’s fair in life and the History of the world? Sacrifices have to be made for the greater good. Is the existence of the Euro “greater good”?

There exist discrepancies between the Euro nations regarding work-attitude and work-ethics. Europe is NOT one nation with one government. We are looking at diverse nations with diverse needs. Some hate to work overall. One likes its retirement age to be 57. The call to behave like one nation to tackle bankruptcy is the imposition of an artificial existence. History has shown mankind, that artificial existences tend not to last.

Left to sink or swim, people much rather decide to swim. Although a sovereign default will impose upon the concerned nations huge austerities in the short-term, they will opt to stay afloat rather than sink. Long-term work ethics will change. Attitudes will change.

Never-ending bailouts will tend not to affect faulty or wanting work-attitudes. That’s the danger here, a repeat loop mechanism, till the bulk of Germany’s resources are drained in supporting the Euro. That’s what we are looking at. First there’s 370 billion Euros for Greece to clear. The figures for Spain, Portugal and Italy are still unclear to the common-man. Figures are being revealed one by one in the media, from mini-bailout to mini-bailout. How long can this go on? Is Germany some kind of holy grail with a never-ending supply of funds and resources?

The questions Germany and its leaders need to address are these: Is the short-term mayhem after a possible Euro collapse the worst-case scenario for Germany’s industry and people? Or is it the slow, long drawn sucking out of its hard-earned life-time earnings and resources, drop by drop, possibly to the last few drops.

Only after answering these two questions will German leaders be ready to vote for or against the Euro in parliament.

What are We, Really?

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One bout of torrential rainfall and our infrastructure comes to a stand-still.

What are we, really?

Is India a golden investment?

Not with the current state of governance.

Is India an investment?

Yes, but only at single-digit price to earnings ratios.

Why?

Because while investing in India, one needs to factor in very bad governance, terrorism, and fragile infrastructure. That’s why the margin of safety required is huge.

Is India a good trade?

Yes.

Why?

Because of the pull and push between the shining private sector versus the apathetic government sector. This contrast causes big moves, both up and down. Ideal for trading.

So how should one play India?

Again, up to you. Invest in it at single digit PEs. Cash out when PEs hit the early 20s. Or, just sheer trade it. Suit yourself.

Doofenschmirz Evil Incorporated Finds No Takers

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The Government of India has been just about getting everything wrong. It’s been a long time since they did anything right. Have they gotten anything right since coming to power? Don’t remember.

Confidence in India as an investment is sinking, perhaps temporarily. My gut feel says that fund managers worldwide are dumping India for the time being, till some semblance of sanity returns to stay on the political front.

Today, there is danger of riots and looting breaking out, if Doofenshmirz Evil Incorporated (the Government of India has earned that name, hasn’t it?) doesn’t tackle the current impasse properly.

To say the Rahul G was off the mark is an understatement. Apart from that, the husky delivery of his words added to the ridiculousness of the situation. He might as well have delivered his words in Doofenschmirz’s German accent.

I don’t think this is the right time to buy India. Of course I might be wrong.

Going by the goofy deeds of Doofenschmirz Evil Incorporated, there might be a huge buying opportunity setting up in the weeks to come.

Crowds Eventually Start Behaving in a Deluded Manner

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We’re human beings.

The majority of us likes forming a crowd.

Our crowd-behaviour eventually goes warped. History has shown this time and again.

In the market-place, I make it a point to identify crowds. The biggest money is to be made by capitalizing upon the folly of a crowd. That’s why.

So first let’s gauge very broadly, what the main aspects of market-study are, and then let’s see where crowd-behaviour fits in.

Market-study encompasses three broad areas. These are:

1). Fundamentals,
2). Technicals and
3). Sentiment.

You guessed it, crowd behaviour falls under “Sentiment”. Well, sentiment can knock the living daylights out of the best of “Fundamentals”. And, sentiment makes “Technicals”. Thus, for me, the most important factor while understanding market moves is sentiment.

A stock can exhibit the choiciest of fundamentals. Yet, if a crowd goes delusional, it can drive down the price of even such a stock for longer than we can remain solvent. Let’s write this across our foreheads: Delusional Crowds can Maraude Fundamentals.

Since we are now writing on our foreheads, let’s write another thing: Delusional Crowds can cause Over-Bought or Over-Sold conditions to Exist for longer than we can remain Solvent. There go the technicals.

A crowd thinks in a collective. All that’s required is a virus to infect the collective. A virus doesn’t have to be something physical. It can even be an idea. The space that we exist in is laden with disease-causing energies. Once a crowd latches on to a virus-like idea, its behaviour goes delusional.

Here are some examples of such behaviour. At the peak of the dot-com boom, in March 2000, a crowd of rich farmers from the surrounding villages walks into a friend’s office. They are carrying bags of cash. They tell my friend that they want to buy something called “shares”. They ask where these can be purchased, and if they are heavy (!). Since they are carrying their life-savings with them in cash, and plan to spend everything on this purchase of “shares”, they want to also effetively organize the transport of the “shares” to their homes in the villages. Thus they want to know if “shares” are heavy to transport!

In the aftermath of the dot-com bust, Pentasoft is down more than 90% from its peak. I think this legend is from 2001. A crowd of rich businessmen collects the equivalent of 20 million USD and buys the down-trodden shares with all of the money. The scrip goes down to zilch and today, one’s not even able to find a quote for it.

In the 17th century, people actually spend more than the price of a house for the purchase of one TULIP, for God’s sake.

You get the drift.

The current crowd is building around Gold. It’s behaviour as of now is still rational. In due course, it has high chances of going irrational.

Whenever that happens, we’ll definitely be able to see the signs, because both our eyes are OPEN.

Is it Over for the Long-Term Investor?

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Long-term portfolios are getting bludgeoned.

I can feel the pain of the long-term investor.

Is it over for this niche segment?

I really wouldn’t say that.

It’s not over till the fat lady sings, as somebody said.

What if someone trained hard so as to not allow the fat lady from starting her performance in the first place?

Well, for this breed, it’s not over by a long way. In fact, things are just getting started.

And what are the areas of training?

First and foremost, for the millionth time, one needs to understand what margin of safety is. In this era of black swans, one can fine-tune this area with the word “large”. So, simple and straight-forward: the long-term investor needs to buy with a large margin of safety.

This is a game of PATIENCE. Patiently wait for entry. Entry is the most important act while investing. If you cannot learn to be patient, change your line. Be a trader instead.

However scarce the virtues of honesty and integrity have become, keep looking. When you finally find them in a company, ear-mark the company for a buy. For you, managements need to be intelligent and shareholder-friendly too. They need to be evolved enough to take you into account as a shareholder. Keep looking for such managements, and you’ll be amazed at the unfolding potential of diligent human capital.

Before you enter this arena, answer another question please? Have you learnt to sit? If you don’t even know what this question means, you are by no means ready for the game.

So, when is one capable of sitting through some serious knocks, like now? If the money you’ve put on the line is not required for the next 5 to 10 years, you’ve totally helped your cause. Then, your risk-profile should fit the pattern. If a knock causes you an ulcer, just forget about the game and look for another game that doesn’t cause you an ulcer. Your margin of safety will help you take the knock. Knowing that your money has bought a stake with honest and diligent people who can work their way around inflation will help your cause even more.

If you are taking a very serious hit right now, you need to decide something. Are you gonna sit it out? Can you afford to, age-wise and health-wise? Yes? Fine, go ahead. I sat it out in 2008. If I could do it, so can you. It did take a lot. Taught me a lot too. I now know so much more about myself. Was a rough ride, is all I can say. Nevertheless, it’s a good option if age and health support you. If you decide to sit it out, please train yourself, from this point onwards, to do it right. Needless to say, don’t make the same mistakes again. Let’s be very clear about this point. If you are feeling pain at this point, it’s because you have made one or more investing mistakes. Don’t blame the market, or the times. This is your pain, because of your mistakes. Take responsibity for your actions. Do it right from here onwards.

If you can’t take the hit anymore, age-wise or health-wise, then you need to reflect. It’s none of my business to tell you to sell out. That would be inappropriate. All the same, as a friend, I would like you to ask yourself if you feel you are cut out for this niche segment. There are other very successful niche-segments. I know highly successful traders who started out as miserable long-term investors. So, just this one thing, get the questioning process started. Now. Then, listen to your inner voice and decide what you want to do.

There’s this one other point. Some people feel they can focus on both these segments simutaneously. You know, trade in one portfolio and maintain another long-term portfolio. Possible. People are doing it. I’m not about to start a discussion on focus versus diversification just now, because I’m leaving it for another day. Not because I don’t possess the mettle, but because I’m a little tired just now.

Wish you safe investing! 🙂

This is what it sounds like, When Kings Whine

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Back in the ’80s, musician genius Prince released the multi-generation blockbuster hit “When Doves Cry”. The song was unusual for its time, in that it gave R&B and rapping a pop twist. When something makes an impact, it sticks. The masses latch on.

The sound of whining coming out of Washington at S&P downgrading the US is something new. One’s not heard them whine before. It’s sounding unusual, but it’s provoking anger and dismay worldwide, and these feelings are catching on. S&P’s indication of further future downgrades are making the whining worse.

When Kings whine, their public loses faith in them. This new sound from Washington is dangerous for world markets. One likes to believe that one’s King has backbone. With that, one’s willing to die for one’s King. Which is something one is not willing to do for a spineless King. In that case, one would rather change one’s King.

If some resemblance of “spinefulness” doesn’t emerge from Washington very soon, the move from the Dollar to Gold is going to escalate even more.

A Strong Case for Equity (Part 2)

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Scams bother us. We panic, and then start cashing out of our Equities.

Can we stop and reflect?

There was some Jeep scam in ’57. Then Bofors. Fodder. Harshad Mehta scam in the ’90s. Dot cum bust. This century has been chockerblock with scams.

Let’s see how some holdings have performed over all these years. Reliance, ABB, Infosys, Wipro…these companies were microcaps at some stage in their lives. The long-term holders of these shares have raked it in big-time. Wipro has been a 300,000+ bagger over the last 31 years. The other three companies have been 1000+baggers. That’s BIG.

Some of today’s microcaps will make it as big or bigger over the very long term. They will be tomorrow’s blue-chips.

All of us want to set something aside for our kids. It’s human nature. So why can’t we think of holding equity for the very long-term, especially for our children?

What makes equity so special? Behind every scrip is human capital, which, if not involved in Scamonomics, fights inflation through innovation. The power to fight inflation is not inherent in other asset classes.

So let’s think seriously about very long-term equity holding.

What remains is the criteria for stock selection. That’s a deep topic, and we’ll delve into it some other day…

A Beautiful Concept called Margin of Safety

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The most beautiful, genius things in life are simple.

And therefore, they are difficult to implement.

We like complications. Sophistication. When something appears simple, our first impulse is that of rejection.

We get our families insured, our car insured, house, properties etc. etc. all insured, in fact, we are busy buying protection everywhere. During winter we wear protective clothing. Our children swim with protective gear. Our cars have seat-belts and airbags. The list of how mankind protects itself is endless.

Then why is it that when it comes to putting one’s hard-earned money on the line, all thoughts of protection go out the window, and one becomes malleable enough to jump into the next hot story at even seventy or eighty times earnings?

Why is it that here we are not clinging on to protection? Basic question – are there any protective measures prevalent in the world of investing? The answer is yes, and many. In this article, I’ll name two and address one.

There’s the protective stop-loss (to be differentiated from the trigger-stop). Let’s talk about this one some other day. Right now, let’s focus on the other major avenue for protection, called margin of safety.

Basically, what margin of safety says is “Buy Cheap”. Period. What it’s not saying is that one should buy any odd-ball, cheap stock. It’s referring to quality stocks and telling us to buy them as cheaply as we can. The result will be a buffer price-band, which in case of a major market-crash will still limit our losses and save us from the urge to abandon our investment at rock-bottom prices. So, this concept asks us to have patience and wait for opportunity, and not to be impulsive and plunge blindly.

Margin of safety is applicable while trading also. One can buy into market leaders upon dips. The dip gives one a short-term margin of safety.

The primary advocate of margin of safety is none other than Warren Buffett himself, from an investment point of view.

So, to implement this simple and beautiful concept, one requires the virtues of patience and discipline.

Wishing for you safe and lucrative investing!

Cheers!