How should one find value while stock picking? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
PRINTER FRIENDLY | ARCHIVES

How should one find value while stock picking? 

A  A  A
In this issue:
» Banking business becoming tough for MNCs
» This breed of passenger vehicles has grown impressively
» Global GDP growth slows down
» Manufacturing in Asia takes a hit
» ...and more!


-------------------------- Latest Special Report Released: Equitymaster's Top 5 for 2015! --------------------------

What are 3 years worth?

If you ask our subscribers who invested on our recommendations in 2009...

302%, 221%,264% and even 403%...

These are the returns some of our stock picks from 3 years back have earned for a select group of investors.

And today, we have 5 Stocks that we've picked out for the next 3 years.

Full details published in our Latest Special Report: Equitymaster's Top 5 for 2015.

Click here to find out how you could claim your Free Copy of this report today...

---------------------------------------------------------------------------------------------------------------------------


00:00
 
Value investing has always been perceived as an intellectual discipline of sorts. But you would be surprised to know that the art is less mental and more temperamental. Before knowing what exactly value investing is, let us first understand what it is not. Fundamental analysts do not necessarily classify as value investors. Technical analysts, who use historical data to predict price patterns, do not even need a mention. Value investors are those rare breed who have the art of buying securities which trade significantly below their intrinsic/fair value. Value investors also have the temperament to resist themselves from market gyrations. And there lies the distinguishing factor between winning and losing. Their low sentiment quotient scores over the intellect of an experienced professional.

Now, since we know what it takes to be a value investor, let us touch upon the key takeaways related to value investing as preached by Bruce Greenwald. Let us start with how one should go about finding value. We know that the market is a constellation and everyone has urge to find the pole star. Basically, here is how one should start his search for that star.

The first step entails looking out for sectors where such gems may be located. Second is to find a strong valuation approach that has applicability across sectors. This makes valuations more comparative. Third is to determine what price to pay. And that's where the concept of margin of safety comes into play. Value investors have the knack of spotting winners at a reasonable price (below intrinsic value) when market is ignorant of them.

Last but not the least, is to have patience. You have to wait for Mr Market to offer you the right bargain. Let us tell you that sitting and doing nothing requires a lot of courage. That's a great hallmark of a value investor.

All these basic tenets that we have touched upon have been deeply explained by Bruce Greenwald in his book "Value Investing". If one really wants to learn the art of value investing then this book is a must have in your bookshelf.

We will continue to review more such books, which are a must have in an investor's shelf, over next few days. If you have already read the book let us know your views or post them on our Facebook page / Google+ page

01:26  Chart of the day
 
After slowing down to 5.3% in the March 2012 quarter, India's GDP growth showed no signs of picking up in the June 2012 quarter as well. Growth during the quarter came in at around 5.5%. However, as today's chart of the day shows, when compared to its peers, India fared much better as it was ahead of countries such as Russia, Japan and the US. Although it lagged behind China, the latter also displayed signs of a slowdown as growth came in lower than 8%. Japan saw some growth led by reconstruction activity post the earthquake and the tsunami that hit the nation last year. Not surprisingly, the Eurozone witnessed a dip in growth as debt problems continued to mar the countries in the region.

Data Source: The Economist


02:01
 
Making an exception for the poor does not help you top league tables! And that is all what counts in the hallowed precincts of top MNC banks. Of course, with the exception of a few. No wonder then that doing banking in India is proving to be a tough task for many MNC bankers. After all, our strict central bank is not just concerned about the profits of banks. It is equally concerned about equitable distribution of credit at affordable rates. At the same time it insists on keeping risks under control. Something that the Wall Street biggies are not used to. But what the MNC banks have a strong objection to is the compulsory 'priority sector lending' mandate. This is nothing but lending directly or indirectly to agricultural and allied activities. As per Economist's estimates such loans reduce bank profits by almost a fifth. But there is hardly any proof to confirm that. Nevertheless, even the Indian private sector banks have never shown any diligence in their priority sector lending. It is just the PSU banks that follow the rule to the tee. But going forward more will have to comply if the RBI's financial inclusion targets are to be met. Time that the MNCs learn to abide by the RBI's diktat.

02:38
 
Management guru Stephen Covey had quoted "Management is efficiency in climbing the ladder of success; leadership determines whether the ladder is leaning If we remember correctly, it was Steve Jobs who once said that you can't ask customers what they want. Because by the time you build it, they will want something new. With the kind of path breaking products Apple has churned out over the years, Jobs has certainly walked the talk. By the way, there is an altogether different industry and that too in India that also seems to have taken this lesson to heart. And the industry is none other than the auto industry. Previously, most of the owners of small cars who looked for upgrades could do so by opting for sedans or hatchbacks. But in a move reminiscent of Apple's maneuvers, car makers took to launching new SUVs (Sports Utility Vehicles) and compact MPVs (Multi Purpose Vehicles), segment that customers barely thought of. Did the move work? Brilliantly we believe. This new breed of passenger vehicles has taken the market by storm. So much so that manufacturers are finding it hard to meet demand. What more, they have also given the struggling auto industry something to look forward to.

03:12
 
The equity markets across the world have shown signs of improvement in recent times. But does that mean that the global economy is out of the woods? The economic data does not suggest so. In fact the economic indicators are showing all signs of worsening. As per a recent data study by The Economist, the global GDP grew by a mere 2.8% in the quarter ended June 2012. The indicators actually suggest that the slowdown is getting worse in the affected countries. And its roots are slowly creeping into all parts of the world. And if you think about it this seems quite plausible. The crisis in US and Europe seem to be getting worse by the day. The 'fiery' China and the 'shining' India have also seen their economies come under pressure. The other BRIC peers are not doing too well either. The thing is that when the rich part of the world goes through a crisis, the demand for goods slows down. And this affects the developing world as well as they rely heavily on exports to sustain their growth. So till such time as the developed or rich world improves, it is unlikely that the developing part would see much growth.

03:47
 
The world may be more connected than we think. And the slump in the developed world is causing the Asian economies to shrink. Asia's manufacturing downturn in August deepened on the back of a sharp slowdown seen in China. Chinese manufacturing activity shrank at the fastest pace since the global financial crisis. A weakness in China also affects Australia, which provides natural resources to the dragon nation. Exports from South Korea and Taiwan were also hit by weakening foreign demand. India continues to see growth, albeit at a slower pace, while in Indonesia activity has picked up steam. Now even while the Asian economies are slowing, they are beating the rest of the world hands down. But, with the Euro crisis still in full swing and a sketchy US recovery, the prospects for Asian exports remains muted.

04:08
 
India's exports during the month of July 2012 dropped to US$ 22.4 bn, a decline of 14.8% over the same month last year. It is worth noting that this is the steepest decline in the last three years. The main reason for the drop is the ongoing sovereign debt crisis in the Eurozone and the slowdown in the US. This is a clear indicator of the ongoing slowdown in the global economy. But India's domestic economy is also showing clear signs of a slowdown. While exports declined, imports during the same period also dropped by 7.6% to US$ 37.9 bn.

The government had set a lofty exports target of US$ 360 bn for this year. Looking at the current grim situation, the government has already admitted that achieving the target would be quite challenging. With all major economic indicators pointing towards a slowdown, the Indian economy is likely to face some serious challenges in the medium term.

04:45
 
In the meanwhile, the Indian equity markets traded in the negative for most part of today's trade. At the time of writing, BSE Sensex was down by 54 points (0.3%). Sectoral indices traded weak led by IT and banking stocks. Most Asian stock markets too ended in the red.

04:56  Today's investing mantra
"Individuals who cannot master their emotions are ill-suited to profit from the investment process." - Benjamin Graham
The 5 Minute WrapUp Premium is now Live!
A brand new initiative of Equitymaster, this is the Premium version of our daily e-newsletter The 5 Minute WrapUp.

Join us in this journey to uncover the sensible way of managing money and identifying investment opportunities across various asset classes including Stocks, Gold, Fixed Deposits... that over time can help you realize your life's goals...

Latest EditionGet Access
Recent Articles:
Why Hasn't Warren Buffett Rung the Bell Yet?
August 22, 2017
It's surprising Warren Buffett hasn't warned investors about the expensive stock market? Let us know why.
How Unique Are the Companies You Invest In?
August 21, 2017
One of the hallmarks of successful investing is to look out for companies that have a unique and enduring moat.
You've Heard of Timeless Books... Ever Heard of Timeless Stocks?
August 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
Why NOW Is the WORST Time for Index Investing
August 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.

Equitymaster requests your view! Post a comment on "How should one find value while stock picking?". Click here!

6 Responses to "How should one find value while stock picking?"

prashant maheshwari

Sep 7, 2012

i think yours might be the only fund having no exposure in reliance, as mr. dayal used to always say in seminars, top management and integrity is the first rule for investing in a company, if you really wish to become one company claiming unbiased opinions on investing in india - watch newshour daily by arnab goswami

Like 

prashant maheshwari

Sep 7, 2012

your headline says unbiased opinions on investing in india???

can i know whats your unbiased opinions for last five years and where can i find those???
unbiased opinions of banyantreeadvisors are given in their website, can i know yours ??

Like 

prashant maheshwari

Sep 7, 2012

read in several books and articles, great analysts are the ones who are not in office for 80% of the time, would like to ask you how many of your analysts are out of office, or are busy sitting in cabins and doing cutting - pasting ???

Like 

prashant maheshwari

Sep 7, 2012

i have attended many seminars of mr. ajit dayal, highly impressive as a speaker and a person, recommended quantum mutual fund from last 4-5 years, recently saw in etnow its one of the top 5 performing funds, had subscribed to stock recommendations also, my question how can you get great investment ideas once every week or month, i dont think great investors which you always mention in your five minute wrap could find stocks once a week or month, then how could you, there lies the catch, so you are required to do marketing, if at all you give 3-4 stocks ideas, or 3-4 sell ideas in a year, which is also more, could suffice,enjoy life and be happy,

Like (1)

Kannan

Sep 5, 2012

Value investing is interesting and that was Equity Master is doing. I have seen most of the recommendations are based on value investing which are shock proof in downward tread. We appreciate the way you are giving value addition by giving articles like 5 Minutes wrap up, Daily reckoning etc. Keep it up.

Like (1)

athmanathan

Sep 5, 2012

Your comment that the RBI is doing the right thing in insisting on the commercial banks to lend to priority sector does not show that you have a complete knowledge of the working of the commercial banks. I retired from SBI and make bold to say that public sector banks really suffer because of the stipulation of directed lending to priority sector. Most of the loans are written off. The less said the better as for lending to the agricultural sector. Most farmers take multiple loans from various banks, scattered lending is also rampant, and the politicians support this voting class with waiving the interest portion of the debt. The rest of the debt is not paid due to unwillingness of the borrowers who wilfully default on the loan knowing fully well that the banks will write off the loan. Court cases result in issuance of a decree,Execution Petition etc. but execution and recovery of assets whether agricultural or industrial assets is really, really impossible. The nation knows how the government is dilly dallying on taking decisions on Air India and Kingfisher Airlines whose debts are mounting. The banks, in fact, hate the government interfering in their affairs. Public sector banks are pawns in the hands of the ruling party. The day is not far off when the banks will fail completely with the last straw dumped on them by the ruling government.

Like (1)
  
Equitymaster requests your view! Post a comment on "How should one find value while stock picking?". Click here!

MOST POPULAR | ARCHIVES | TELL YOUR FRIENDS ABOUT THE 5 MINUTE WRAPUP | WRITE TO US

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407