The magic formula for finding good stocks
In this issue:
» This is perhaps the only bubble left, says Jim Rogers
» Even Pakistan is better than India Inc when it comes to dividends
» The sector that created the most wealth for investors
» OPEC sets a new production limit
» ...and more!
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So, what was Keynes' secret sauce when it came to investing? There were quite a few we believe. But we will make what we feel the most important one as the focus of this write up. Keynes observed back in the 1930s that stock markets exert a great deal of influence on the rate of investments by companies. As per him, there is no sense in building a new firm from scratch at a cost greater than that at which a similar existing enterprise can be purchased from the stock market. Similarly, the temptation to invest large amounts on a project cannot be avoided if the project can be floated on the exchange at an immediate profit.
This is a powerful concept indeed. And old as it may seem, we believe its relevance has not worn out one bit even today. Clearly, there is no point in building say a cement company from scratch if it costs Rs 5,000 per ton whereas the same is available at Rs 2,500 per ton on the stock market. One would certainly buy the stock than set up a cement plant. Alternatively, if a project that's worth Rs 100 m is fetching a price of Rs 300 m on the exchange, the owners are likely to go all out and list themselves on the exchange at the earliest. This perhaps explains why many infra and real estate companies fell over each other for their IPO listings few years back. They were indeed getting a lot of bang for their investment bucks as the market was valuing them much higher than the total investments they had made. In fact, try as much as you can and you will still not be able to come up with a more eloquent explanation of why stock market bubbles happen.
A situation of perhaps the opposite kind seems to be facing investors currently. Markets are way off their peaks and chances are very high indeed that you may bump into a firm that can be bought from the stock markets at less than what it would cost to build it from scratch.
Do you think the idea of buying stocks at cost well below their replacement value works very well in the long run? Please give your views or you can also share them on our Facebook page / Google+ page.
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Chart of the day | |
Source: Ministry of mines |
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However, the decision is incomplete. This is because while the aggregate limit for all 12 nations is fixed till June end, there has been no word on the individual members' production limits. This leaves lot of room for violation of self set limits, especially when Libya strikes back with full production. The possible fault lines for the crackdown are already visible as Saudi Arabia has suggested its supplies will not move in line with supplies by other OPEC members but market demand. This is a strong indicator that there will be a leakage above the new limit, disappointing OPEC's price hawks that want to maintain at least US$ 100 per barrel. Overall, even if the production limits are breached, it will be a reason to celebrate for non OPEC as it will keep inventories at healthy levels and keep oil prices tamed.
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Today's Investing Mantra |
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5 Responses to "The magic formula for finding good stocks"
P.S.SATHYAMURTHY
Dec 26, 2011In fact, this is the principle followed by the legendary Sir John Templeton. When the inflation is high, the replacement cost beomes still higher, and the stocks become more attractive.
madhav k.apte
Dec 15, 2011Assets need to be efficiently used & cheaper old might not confirm to this. Costlier new are at times for ulterior motive of getting kick backs by promoters.
Company law must provide for some minimum of net profit % for dividends, & future fund needs should be met as new requirements of business for which dividend enriched holders would willingly come forward
Bharat Shah
Dec 15, 2011It is not always so. When you acquire a company, lots of baggage comes along. Of much detriment is the cultural differences between an acquirer & the acquired. The failure of many M&A projects & also acquiring of a company is because of such hidden problems.
This is not to say that this is a wrong way of operating. If there is maturity and complmentarity then it can be a success story.
Greenfield project gives you the advantage of creating your culture, freedom to use newer technology and being more in sync with the times. Yes, Capital Cost may be a major impediment.
Sundar
Dec 28, 2011All these concepts are relevant only to global markets as there are very few companies owned by promoters. In Indian context it is totally irrelevant as promoter's holding is always more than 50%. Therefore, as a minority shareholder you won't get anything otherthan a bulky annual report.