Thursday, April 20, 2017

My Stock Market Journey

road to horizon-snow capped mountains

Actual Question:

What is your story about getting rich from stock market?

Answer:

Dear Friend!

I started my relationship with the stock market as a day trader.

Being a chartered accountant by qualification, I dumbly presumed that I know everything about companies, shares and finance and therefore I am the most suited to play the stock market.

I set a goal to earn Rs.2500 a day. This is some somewhat about 20 years back.

Most of the days I used to loose small sums - a couple hundreds a day. Some days I used to end up with small profits - again a couple of hundreds normally but occasionally Rs.500 or a thousand a day.

The constant need to watch the market, anxiety, fear of loss and greed had their impact on my health. I developed high blood pressure.

One day, suddenly the BSE Sensex fell about 400 points within a fraction of a second.

My bets backfired.

I lost almost all my life’s savings.

I vowed never to think about the stock market again in my life.

A few years passed.

I kept my vow.

One day while my family was shopping in a busy local market, I was occupying myself browsing through books being sold on the pavement, when my gaze fell on a book, “The Intelligent Investor”.

Having already realised by now that I certainly was a dumb investor, I wondered how different could an intelligent investor be.

But my inner voice sternly reminded me about the vow not to dabble in stocks ever again in life. My mind reasoned with me that there was no harm in reading - the vow pertained to real action only.

Curiosity eventually won.

I bought the book and devoured it.

It changed my life!

picture of the book "The Intelligent Investor"

Benjamin Graham, who taught at Columbia University, wrote the book. Warren Buffett had studied and apprenticed under Graham. Incidentally for that particular edition Buffett had written the foreword.

I became a value investor.

I took Warren Buffett as my guru.

I resumed my relationship with the stock market, but under a totally new avatar; a value investor.

I started regular investing; the period was somewhere between 2006–2008.

Then the great crash, post Lehman Brothers, happened.

There was slaughter everywhere.

crashing graph-people fall-bear roams wild

But it was a great opportunity for value investors.

I used to invest without fear, only to see my investment depreciate as much as 25% in a few days. I used to buy more - without fear - for I knew the shares were worth much more and are available at throwaway prices.

Warren Buffet mad a huge investment in Bank of America.

I think the BSE Sensex plunged from 20,827 to below 8000 - a crash of over 60%!

Unfortunately I had no big corpus to invest at that time.

By about March 2009 the Sensex had recovered to 15000 levels.

While the market was fast recovering on the back of a globally coordinated stimulus program, I was worried that the recovery was not sustainable and crash again.

I was not yet a seasoned value investor. While I had mastered the art of buying I had not mastered when to sell. I am still not on a firm ground when it comes to selling stock that have gained in price significantly, and very little wisdom is available in the public domain.

Anyway, I sold the entire portfolio at one stroke, at about 250–300% profit.

On hindsight it was a bad decision for the market galloped and I was thrown out of the market.
I re-entered the market after a few years.

In the mean time I had started the value investing blog “Wealth Vidya”. In February 2015 I created the academic portfolio, “Portfolio 2K15” for teaching purposes. I have been making regular investments of about Rs.20000 per month.


The results are as follows:

  • Money Invested: About Rs.5,50,000/-
  • Dividends Received: About Rs.40000/-
  • Market Value: About Rs.8,00,000/-
  • Un-realised gains: About 45% in about two years.

To conclude I am on the journey, on the sure path to riches, even though I have not reached the goal post yet.

Anyway, what is the finish-line? Has Warren Buffett reached the finish-line? Has he stopped investing?

It is the journey that matters - not the destination - is it not?

Thank you,

With Best Regards,

Anand


Wednesday, April 19, 2017

How to Select the Best Company with EPS Information?

Green rectangle depicts EPS

Actual Question:

Companies A,B, C with Share Price 40 each and EPS is 2,4,10 respectively which one is better to invest and Why? Considering EPS is the only Factor.

Answer:

Dear Friend!

Thank you for the nice question.

Earnings Per Share (EPS) is one of the key parameter on which companies can be evaluated both individually as well as relatively.

However absolute figures of EPS are not readily comparable when the share prices are different. Luckily in your question you have kept the prices constant. Therefore, from the earnings per share and the market price we should draw a ver crucial as well as readily comparable information called the ‘Price to Earnings (PE) Ratio’.

The PE Ratio is obtained by dividing the current market price (CMP) by EPS. The PE Ratio as per standard value investing practices shall be any positive number that is below 15. Lower this number better it is. It should not be negative as only a negative EPS can yield a negative PE Ratio and a negative EPS menas the company has suffered a loss.

Now lets calculate the PE Ratios of all the three companies.
table showing calculation of price to earnings ratio of the three companies

It is evident from the above table that company C has the lowest positive PE ratio and therefore is the best. The PE Ratio of company B is below 15 and standing at 10 which is perfectly alright. Company A with a score of 20 (over 15) is the worst and therefore shall be rejected.

Incidentally the PE ratio also indicates in how many years the company earns back our investment. Therefore the lowest number is the best. Company C earns back the investment in four years (an ROI of 25%) which is wonderful.

One year EPS and PE Ratio can be by fluke and therefore misleading. therefore the PE Ratio computed from the average EPS of the last five years or the latest year, whichever is lower shall be considered.


Please note that besides the price to earnings ratio, for a thorough evaluation of a company, there are many more parameters that need to be considered. Following are some of the parameters:
  1. Price to Book Value
  2. Dividend Yield
  3. No or low indebtedness
  4. Distance from 52 week high
  5. Last five year share price returns
In conclusion best company can be selected from the EPS  and price information by computing the price to earnings ratio. Many other techniques also shall be employed complementary to the PE Ratio.

Thank you,

With Best Regards,

Anand