The 'Selling policy' for big returns in little known stocks
(Jun 19, 2015)
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In this issue:
» Falling PE deals in non e-commerce businesses
» Will the MSP makeover be benign for inflation?
» Will sovereign bonds curb gold imports?
» ...and more!
A Google search on criteria for stocks to buy will give you terabytes of information. Experts will give you every possible scenario for the kind of stocks to buy. There will be criteria on the kind of sectors to buy, the themes to follow, the valuation metrics for buying, the management quality desired in stocks to be bought and so on...
But how often do you come across a solid and well thought through selling policy? Even the legendary Buffett, who has shared pearls of wisdom on investing all his life, has hardly offered any help in this matter. Obviously because his buying period is 'forever'! We that may be good for quality businesses. But what about 98% of other businesses that are not quality? As investors don't we need to have a well thought through selling policy? We certainly do!
And that is exactly why Rahul Shah's Money Multiplier formula makes so much sense to me!
Well, for those of you who are wondering what I am referring to, this is about the three simple rules that my colleague Rahul has recently explained. And what intrigued me the most about his formula was his selling policy. A policy, which he had adapted from none other than Buffett's teacher Benjamin Graham!
But what's so special about it?
Well simply the fact that his selling policy does not require one to become a valuation genius! It's so simple that even an investor with no qualification in finance can follow it to the tee.
So Rahul's selling policy is not about selling stocks when they are expensive in terms of valuations. It is about selling stocks when they reach 50% or two years, whichever is earlier. Now, this is very helpful because people have this tendency to hold on to losers for longer than required! But the two year rule forces them to move out of bad stocks no matter what. And the 50% rule allows them to book enough profits so that decent long term returns can be fetched.
Of course, in cases where there is more comfort level, the stocks can be held for more than 50% returns. But never beyond 2 years. And let me tell you Rahul has already proven the effectiveness of this selling policy by booking some fantastic returns for Microcap Millionaires!
I am tempted to tell you that one such stock, on which Rahul has booked 545% returns, in 1 year, thanks to such a definitive selling policy is Titagarh Wagons. But if you wish to know more about his portfolio and how he goes about implementing his formula, you will have to hear it from Rahul himself...
Do you have a well defined selling criteria for your stocks? Let us know your comments or share your views in the Equitymaster Club.
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With announcement of more and more money being raised by companies in the e-commerce space, their valuations have only being going through the roof over time. And with this development, many have termed the present times as the "e-com bubble" . And the term seems quite apt as similar sentiments do not seem to be shared in the private equity (PE) deals in the non-ecommerce and Internet space.
As reported by the Mint, research firm Venture Intelligence's data indicates that Indian companies have raised a mere US$ 465 m of growth capital in 2015 so far. This chart of the day shows the trend in the growth capital fund raising activity over the past few years (barring e-commerce and Internet deals).
Private Equity: Few takers for non ecommerce businesses
It may be noted that the data is very much comparable as the period of comparison in each year is from the month of January to June.
The uncertainty and economic slowdown seem to be the key reasons for the dullness in PE activity mentioned above. The sentiments in the traded stocks pretty much indicate the same given that the markets have seen a good amount of pull back in the year till date.
Well, what can retail investors take away from this? For one, it's the fact that sentiments are dull and outlook is uncertain. But that's it! As compared to the PE firms, retail investors do not have a limited investment horizon. That puts them at a huge advantage as compared to the PE guys, if one was to ask us.
While the long term outlook for Indian economy is positive, there are certain factors that can make or mar economic prospects in the short term. Oil prices and monsoons being some of them. And while we have been lucky so far as the former is concerned, a weak monsoon forecast weighs heavy on the economic and market sentiments. Not only can poor monsoon impact food production and let the inflation monster play havoc, but can also lead to depressed farm incomes affecting overall economy.
While the Government can do little about monsoons, it can utilise the minimum support price (MSP) for farm produce to deal with the issue. And this time, it has opted for only 'modest' hike in the MSP for summer crops. The move has been cheered by analysts for limiting the food inflation. But what about the farm incomes and rural economy?
MSPs are often used more as a political tool than a measure to support farmers. As an article in The Hindu Business Line suggests, around 80% of the procurement (which is where announced MSP leads to income for farmers), happens in just 5 states which are anyway surplus in agriculture and are independent of monsoon cycle. So if MSP is not targeting the intended recipients, raising it is unlikely to help anyone but middlemen and can only lead to food inflation. That said, the Government needs to ensure a radical makeover in the MSP policy to ensure access to more farmers and genuine buyers so that the former can benefit without leading to high prices at consumer level.
The Modi government appears to be quite intent on bringing the trade deficit down. The two main factors that were pushing the import bill higher so far were oil and gold. India imports around 70% of the oil that it consumes. Given that we have yet to achieve energy security, it may be a challenge to reduce oil imports. So the government is trying to come up with ways and means of reducing gold imports.
Indeed, as reported in an article in Reuters, India consumes nearly 1,000 tonnes of gold almost every year. Since most of this is imported, gold has become the second largest expense on the import bill after oil. Little wonder then that recently, government efforts have been directed towards bringing this down. Earlier, it hads come up with the gold deposit scheme, which was a way to mobilise idle gold lying with households. Now it is looking to issue sovereign bonds linked to the bullion price in an effort to curb gold imports. The idea is to give Indians an option to invest in paper gold rather than physical gold. The interest rate to be paid on these bonds would be linked to the international rate for gold borrowing. They could also be used as collateral for loans. While the government's intentions seem to be in the right direction, the success of these schemes and bonds will depend a lot on how well it gels with the investment objectives and return expectations of Indians.
The Indian stock markets were trading in the green at the time of writing. While the BSE Sensex was up by 200 points, NSE-Nifty was up by 58 points. Bluechips from the auto, banking and commodity sectors were the key gainers. However, the Asian equity markets were trading in the red at the time of writing. European stock markets too opened in red today.
"We don't have to be smarter than the rest. We have to be more disciplined than the rest." - Warren Buffett
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