X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
A better way of making money in stocks - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Oct 5, 2010

    A better way of making money in stocks

    If given a choice, what would you rather be? The purchaser of a full business or a part owner of a business. Well, what kind of a question is this you would ask? Almost anyone would want to be a full owner.

    Yes, we believe this is indeed the logical answer to an illogical question. If there is enough money and resources at disposal, then one would indeed want to buy a full business rather than have a fractional ownership of it.

    However, there is one place where this logic can virtually be turned on its head. And this place answers to the name of stock markets. You see, in stock markets, the person who buys a fractional ownership in a business can get in a much better position than someone who buys the whole firm.

    Buying a whole firm is a tricky affair. The transaction usually takes place between a very well informed buyer and an equally well informed seller. Furthermore, acquisition of a full company may not always be a one horse race. There could emerge several other players who would evince interest in the same company.

    Common sense tells us that such a scenario is never good from a purchase price point of view. There are some very strong chances that the firm that ends up buying the target company is paying a very steep price for the same. Thus, the possibility of the target company creating good long term value for the buyer gets diluted to that extent.

    Now contrast this with buying fractional ownership of a business from the stock markets. Sometimes, the stock markets are priced expensive and sometimes, they are priced very cheap like the environment that prevailed in late 2008 and early to mid 2009.

    This environment was a stock picker's dream come true. Even the best businesses were trading at a fraction of the price that they would have been sold at had it been a complete 100% acquisition. Thus, buying a fractional ownership in such an environment would have been indeed more profitable from a long term value creation point of view than buying the whole company.

    And this is the beauty of stock markets. A small part of some really fantastic businesses sometimes sell at a fraction of the price that it would command in a deal involving the entire company.

    It is this approach that would do an investor a world of good. Most investors view stocks as nothing but pieces of paper that have to be bought low and sold high. Very few people think of them as fractional ownership in businesses, one that has to be persisted with for a very long term.

    Firstly, only buy good businesses that are trading at a fraction of the price that they would command in a fully negotiated transaction involving the entire company. And once bought, never try coming out of it unless there is some real deterioration in the long term fundamentals of the company. Trust us, there are very few better ways of getting rich through stocks than the one just mentioned.

     

     

    Equitymaster requests your view! Post a comment on "A better way of making money in stocks". Click here!

      
     

    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    You've Heard of Timeless Books... Ever Heard of Timeless Stocks? (The 5 Minute Wrapup)

    Aug 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 (The 5 Minute Wrapup)

    Aug 18, 2017

    Buying the index now will hardly help make money in stocks even in ten years.

    Trump Takes a Beating (Vivek Kaul's Diary)

    Aug 18, 2017

    Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.

    How To Read Your Mutual Fund Account Statement Correctly (Outside View)

    Aug 17, 2017

    PersonalFN simplifies the mutual fund account statement for you.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    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.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. 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
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE SENSEX


    Aug 18, 2017 (Close)

    MARKET STATS