Thought Garage

BanyanTree is a group of friends that hang around once a month to discuss a variety of topics of interest. I would like to share some notes and ideas from those meetings.

The following is a Questionnaire from such a discussion on Value Investing moderated by Harish. I understand in concept what is value investing all about, but haven’t got a chance to read any literature yet to fully grasp strategies based on Value. For those like me that don’t know much about ‘Value Investing’, here is a quick excerpt from Wikipedia :

Value investing is an investment paradigm that derives from the ideas on investment and speculation that Ben Graham & David Dodd began teaching at Columbia Business School in 1928 and subsequently developed in their 1934 text Security Analysis. Although value investing has taken many forms since its inception, it generally involves buying securities whose shares appear underpriced by some form(s) of fundamental analysis. — Source: Value Investing – Wikipedia

Update : You can preview and read portions of the Benjamin Graham’s books at Amazon (No Affiliate links)here: The Intelligent Investor, The Interpretation of Financial Statements and Security Analysis

or at Harper Collins below:

Nevertheless I love to look at questionnaires and seriously answer them in writing, as they will help consolidate our own understanding of a topic and clarify our positions. Here is the questionnaire and my answers to each of those questions.  The questionnaire must be looked at in context with the discussion to see why and how those questions matter. However, the questionnaire still stands a good chance on its own, in getting clarity on how you invest.

Thank you Harish for sharing the questionnaire and allowing me to publish it on my blog.

Do you think that stock market is risky or it is in a way gambling?

Most investments (whether they are made in the stock market or elsewhere) are by nature have an inherent risk in it, as there is an element of expectation in each investment.  Essentially we are trying to predict a favorable outcome and invest, so in a way it can be considered as a gambling activity as other outcomes are always a possibility and you have no control on any of those outcomes.

What is the most important criteria in your analysis for buying a stock? 

Prefer solid fundamentals and potential for an upward market swing for established stocks. I also focus on startups and smaller businesses where potential for an upswing becomes the major factor rather than sound fundamentals.

If there is no stock price quote (ticker) available for the stocks you buy would you feel comfortable holding the stocks for a year or two?

Stock price is very important factor in all investment decisions (Buy or Sell), and I won’t be comfortable without a stock price for a longer period of time (no more than a week).  The investment in stock is only worth what the market is ready to pay and one quarter can change a lot particularly if there are any significant directional changes by the company or market in which it operates itself change.

What is most important criteria in your view of a sound business?

Differs for established and startups. For established, it is again solid fundamentals and potential for an upward market swing. For startups, it is about the size of the opportunity and potential for a given startup in that market.

What is your upper bound for P/E ratio when you buy a stock?

P/E is normally not a significant factor in my decision. For instance Google P/E is around 35, is still one of my favorites for some time.

Do you ever purchase a stock which did not come as recommendation from TV, News, Friend, analysts?

I never made a decision myself alone (except when I am swing trading). I discuss at least with one other friend before I make any decision. I don’t research for stocks using TV, news, magazines or exclusive financial sites like WSJ.

Do you attempt to read the annual reports of the company you purchase stock for?

Not really. I prefer reports that are summarized in easily understandable 3 to 4 parameters (and sometimes on top, purchase some analysis on those annual reports) than trying to decipher all of them myself.

I love the way Paddy Hirsch explains complex market place dynamics in the simplest way possible that even I can get a glimpse of how it works. In this week, he explains how banks are making money without practically lending to people or small businesses that desperately need it.

How the big banks make the big bucks from Marketplace on Vimeo.

This is almost like a scam. How can this be all legal and allowed? Why do Government allow these banks to buy Treasury Bonds with money given by Federal Reserve for lending activities. Wouldn’t buying treasury bonds considered as an investment?

If you are investing in stock market, it pays to understand how a company (that you love to invest in) works. Like,  how does a company makes money: what kind of products/services it sell, where it is making money, what markets it operate and what are its strategies for both short term and long term revenue generation.

Easier and the cheapest way to understand where the money is made, is to look through the Financial statements. But, sifting through 100s of pages of SEC filings and financial statements is not easy and decipher the meaning hidden in complex market jargon.

If you are looking for a simpler way, meet Trefis.

Its a nice tool, that will help understand the revenue part, in a way that is quite intuitive and easy to understand. It breaks down revenue stream as a % of each product/service a company is offering. Another wonderful part of this tool is it will let  you forecast each of those based on your understanding of market conditions. For instance, you can forecast whether more iPhones will be sold in the next quarter or lesser. And the tool takes that input and predict a fair market value of the share price.

And you can also see how others are predicting for the same company.

I found it quite useful. If you are interested, give it a try. http://www.trefis.com

Stumbled upon this website that appears to be a Mint.com for Indian consumers. Collect data from all your Banks, Credit cards, investments etc and provide analysis, alerts and reports at one place.

Perfios is for anyone who wishes to solve the problem of managing wealth distributed among various asset classes and among various institutions. If you have bank accounts, credit cards, Mutual Funds, Equity etc with multiple institutions, how often have you felt that – ‘what if all of this could be accessed at one place?’ Perfios addresses exactly this aspect (and more!) and provides access across asset classes on one platform and in the process takes care of your other worries too!

Source: Perfios Website

If you have watched this wonderful talk by Rory Sutherland “TED Talk : Rory Sutherland: Life lessons from an ad man”, you must have seen this big Red button, showed while explaining that “interface” determines the behavior.

Paraphrasing a bit, “if there is a large red button on a wall in your home and every time you press this button it will save you $50, then you will save a lot. Because interface fundamentally determines our behavior. Marketing has done a very very good job of creating opportunities for impulse buying but never for impulse saving”.

And of course, as he admits, that is against consumerism and act against the very ambitions of companies that create these advertisements, so probably will never build such an interface.

So, when a company says they built an interface that makes saving money a lot easier, you better bring your instincts and not believe it at once.

When I saw the promotional advertisement “Keep the change” by Bank Of America that will make saving a lot easier, I did not believe it. It almost looked like that “simple red button” interface that could help you save more.

Well, its not. More over, this is a perfect example of marketing mentioned in that presentation. I went on to its website and read here the details of “Keep the change”.

Basically, when you pay with your charge card, BoA will round up to the nearest dollar and put those (your own) pennies in to a savings account.  What it means? BoA wants you to spend dollars with their charge card more so that you can save ‘your own pennies’ more. Of course, first 3 months they will match those pennies 100% and 5% afterwards. And the tag line, “keep the change” try to infer that you may loose the change if you don’t enroll in this program. Isn’t it true that you always keep your change?

And here is one thing to remember. If those pennies add up to a significant amount, if you think or BoA thinks, then your checking account is also depleted faster now. Here is the magic part. Now, if you accidentally run over your balance even by a few pennies, you may attract a hefty overdraft fee, which wouldn’t have happened if you had left those pennies in your checking account.

Hmmmmm!!!!!!!!!!!!

A better way to save money is if Bank of America offer to move some pennies automatically and for free from Savings account to the Charge card when it runs out so that customers don’t have to pay about $35 or more in overdraft fee to cover say 35 cents over the balance.

If they can move money from Checking to Savings for free, why can’t they offer to move money from Savings to Checking when needed for free.

What do you think?