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Important Things About Investing

  • “Investing is not supposed to be easy, and anybody who finds it easy is stupid.”
  • Keynes said the markets can remain irrational longer than you can remain solvent. That’s especially true of leveraged investors. That’s the danger of leverage.
  • In investing, to succeed you must survive.
  • There are two kind of forecasters – one who don’t know, and one who don’t know they don’t know. You must decide which are you.
  • Most investors act as if they can see the future. Either they think they can, or they must, or they try to. In my experience, they can’t.
  • We can make decisions not based on what we think could happen in the future, but based on what’s happening today.
  • The most important choice that any investor can make in the intermediate term is whether to be aggressive or defensive. Not whether it’s stocks or bonds. Not whether is a developed market or an emerging market. But whether it’s a good time to be aggressive, or it’s time to be defensive. And I believe this distinction can be made on the basis of observations regarding the current situation. They do not require guesswork about the future.
  • Superior results do not come from buying high quality assets but from buying assets regardless of quality for less than their worth. That is the most dependable way to achieve success as an investor. And it is essential to understand this difference.
  • There are three stages of a bull market – In the first stage, only a few exceptional people begin to realize that things are improving; In the second stage, most people believe improvement is actually taking place; and In the third stage, everybody thinks that things can only get better.
  • Markets are riskiest when there is a widespread belief there is no risk. This makes investors believe that it’s safe to do risky things.

10 Things About Multibagger Stocks

  1. They have a small market cap (less than ₹1000cr, smaller the better).
  2. The stock is illiquid. They are not tracked by brokerage houses and there is no/negligible institutional investor present.
  3. They have a first generation management. (Like Sunil Mittal of Bharti, Dhirubhai Ambani of Reliance, Poddar of Mayur Uniquoter, etc.)
  4. Zero debt or Debt to equity ratio of less than 0.5.
  5. High ROE (return on equity) and High ROCE (return on capital employed)
  6. Low P/E ratio. (It’s not a norm but chances are high since P/E re-rating exponentiates your return. There are many high PE stocks which go further up but that judgement will come from experience and knowledge. It can’t be taught.)
  7. Ethical and Efficient Management – The single most important factor to watch out for while hunting for a multibagger. Since, it’s an intangible factor and can’t be found by equations or an excel sheet. It can only be evaluated by reading annual reports, articles on the management, researching about their past, their views on the business, and if you need a shortcut then look out for the business’ ROE. If it’s high, then most of the time the management will be efficient.
  8. Scalable Business Model – One of the quoran gave example of Lupin, how it went up from 1 to 2000. It went up because the business was scalable. The Pharma industry is huge. It can accommodate 10 more Lupins.
  9. Sector Leader – There are high chances of sector leader in a scalable sector to become a multibagger.
  10. Future Growth Potential – In 1995, Hero Honda had a market cap of 200 crores. They sold one bike for ₹20,000. By conservative estimate, even if we assume that 10 million people will buy a bike, the whole 2 wheeler market was pegged at ₹20,000 crores (10m x 20,000). So, the sector leader was quoting at ₹200 crores and the whole sector was ₹20,000 crores. That itself gave Hero Honda 100x potential. Whoever spotted that potential, is happily retired.

The “best” companies are not always the very best investments.

Some stock market studies have shown that at times the “best” companies are not always the very best investments. A recent Barron’s article (The Trader, April 11, 2015) demonstrated this perverse outcome. The data revealed that the highest analyst-rated stocks had an average return of 9.5% per year. The lowest rated stocks? 13.2% per year. That’s a whopper of a difference. How can this be?


9 hard-won lessons about money and investing by Matt Cutts

  1. You are probably a bad stock picker.
  2. No one cares about your money as much as you do.
  3. Wall Street is not your friend.
  4. Think about working for equity vs. salary.
  5. If you’re investing, prefer index funds.
  6. Prefer credit unions over banks.
  7. Prefer Vanguard over almost anyone else.
  8. You probably don’t need a “assets under management” financial advisor.
  9. Consider municipal bonds.

Matt Cutts is the head of the webspam team at Google.