Saturday, August 04, 2007

Investment Philosophy

There are three aspects to my investment philosophy-
1.Quantitative Analysis spearheaded by Benjamin Graham who wrote the book Security analysis.

2.Qualitative analysis spearheaded Phil Fischer who wrote the book Common Stocks Uncommon Profits.

3. Portfolio Management

Quantitavive Analysis
1. Make Enterprise Value/Revenues is selling at a discount to its peers. So if a stock trades at ev/r=0.3 then we need to have its peer trading at 1. One of the most common mistakes is to buy a ev/r=0.3 for a commodity business if gross margin is 20% . If gross margin is 50% then ev/r=1 is fair value.
2. MAke sure you understand working capital of the company. If Working capital is half of marketcap then we are close to the bottom.
3. Dodd & Graham formula Fair value = 1*cash+0.8*A.R+0.66*inventory+0.1*fixed assets - 1 * Liabilities.

4. Buy stocks between $1 to $4 with Market cap above 100million.

Qualitative Analysis
1. First totally understand the competition. Basically competitive structure will tell you lot about the whether to invest in a business. Use Porters Five - Power of Buyer, Power of Supplier, Power of Substitute, Power of Rivalry, Power of Substitute and Entry/Exit into the business. Identify whether each element is positive negative or neutral. Donot get into businesses which are overtly negative on Power of Buyer.

2. Identify whether there are any catalyst for the businesses in the near term future.

3. Finally identify the market factors for the business - whether it is Size of the Market, Cyclical, seasonal, Life cycle of the product

Portfolio Management and Market Timing Rules

1. Stay Diversified.

No More Than 20% of your portfolio in a single stock.
This is
· is a very strict rule which need to be followed;
No amount of promise of stock can break this rule.

2. Buy Slowly by Averaging Down
- 30% is your first buy,
- 30% buy a week from the first buy or stock sells of 10% from first buy
- 30% buy a week after the 2nd buy or stocks sells another 10% from second buy.
Dont chase a stock always buy below the initial purchase period.

3. Holding Period
Minimum of 1 year.
- This is a strict rule, no amount of valuation will let you change your rule.

4. selling Strategy
1. At least give a stock a year to give you good returns. Never sell before a calendar year because it takes time to turn around something.
2. Sell if you attain or exceed fair market value, Rule 1 precedes this rule.
3. Never sell already established positions because you found something undervalued. Every position you take need to be built up from the ground up. Once a position is built it must be held for atleast 1 year.

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