Value Investing Tips

Value Investing

Hello Investors, Happy New Year 2019 to all of you. This is my first post of the New Year on my Blog of my website In the last post we saw which stocks were the wealth creator of 2018. I also discussed the future outlook of the year 2019 briefly. This is a very important year for Indian Share Market as there will be General Elections 2019 to decide the fate of Modi Government. The trumping victory in three states and the alleged Rafael Deal scam has shifted momentum towards Congress after a really long time. The popularity of Prime Minister Narendra Modi has decreased as compared to 2014 elections due to some of the worst decisions by Government like demonetization and bad implementation of GST which directly affected the general public. This shift in sentiments of voters has started affecting Indian share Markets too. When crude oil started correcting from 3rd Oct. domestic institutional investors started buying in the market heavily thanks to the corrected valuations post-IL&FS Crisis. FIIs soon joined the rally which extended up to December end. As the January month started Investors started taking positions in stocks of the companies which can benefit from the victory of BJP in the LokSabha elections. I personally feel this time the speculations of Investors who have started taking earlier positions in such stocks will completely go wrong. Being Indian we understand politics better than FIIs. So, we clearly know how wise Indian voters are. I think Market will become nervous as the elections will come closer. We will see high volatility in the coming months. Globally, experts are expecting a slowdown in the economy, increase in trade-war between USA and China and some risk-off trading in the year 2019. This calendar year will give subdued returns to Investors. October to December, Indian Markets have performed really well. If it starts correcting again, we will get one more opportunity to enter in Market and take positions for Loksabha Elections 2019.

Investors have made killing profits during Loksabha elections of 2014. It is obvious that they are hoping to repeat the history again in LokSabha Elections 2019. But, the important rule of trading is – too much consensus among market participants – is never good. There are smart traders with deep pockets who trap retail investors on wrong sides all the time. So what should we do now? The answer is very simple. Instead of timing the market, spend some time in Market. Falling Markets always gives an opportunity for long-term investment. During the period of high volatility it is always important to stick to the basic – buy right and sit tight. It is important to understand that Wealth can be created only by long-term investment because the magic of compounding happens with time. The more you hold your positions, the more you will get benefited from it. To protect our capital and gain from it simultaneously is easy only if we invest in high-quality companies with sound business models and good management teams. Businesses which are generating good cash flow from their existing operations can invest in their growth. Stocks of such companies will always trade at premium valuations. One should focus only on such companies and buy in them in bad markets when prices correct to some extent. There is no point in chasing risky midcaps and small caps which are not well researched and have the potential to destroy 60-70% of your wealth in no time. I agree that Midcaps and Small Caps have given more returns than Large caps in past. But do you really know how to find reliable Midcaps and SmallCaps? Isn’t it safer to take exposure in them through Mutual Funds instead of directly taking exposure in equities? The choice is all yours.

Value investing is an art mastered by few Investors. It is easy theoretically but very difficult practically. It requires huge patience to hold your shares for really longer durations. Warren Buffet says he can hold stocks of excellent companies ‘forever’, clearly shows what long-term means for him. To pick a stock of financially strong company trading cheaper than its intrinsic valuations and having huge growth potential also is really difficult. That is why diversification is important. When we choose some stocks of such multi-bagger return traits, we must behave like a partner of the company instead of being just a shareholder. It needs lots of conviction that the stock you have carefully picked will eventually give you super returns in the long-term horizon. Sometimes, people don’t make money in long-term investments too. That is because they invest in businesses which are cyclic in nature. Porter’s five forces theory should be used while selecting the stock for long term. It is important to stay updated not only with the stock you selected but also the sector in which the company is working. Macroeconomic factors, changing trends, global cues, and many other aspects determine where will the company go? Inherent strengths of the company and favorable external factors can definitely give you your next multi-bagger stock.  When the stock gives a huge return on investment it is important to take some profit home by trimming the position or selling it completely. You can remove the profit completely and re-invest the capital in the next value pick. The market keeps offering value investing opportunities time to time. The only thing is that we should grab them and ride profits for longer without being skeptical about the profit potentials. The best way to supersede fear and grid emotions is to have ‘risk management system’ in place and follow it stringently. Stop losses are important and should be respected properly. Value investing needs the discipline and persistence. It is the best method of investing and we should learn it properly. This was my introductory post on Value Investing. In the future, I will definitely come up with some good posts on ‘Value Investing’. If you haven’t read any books by Warren Buffett yet, you must start reading it immediately after you finish reading this post.


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