Money does grow on trees.

Sell Axis Bank! I generally don't start by giving an unsolicited advice. My idea is that you don't give a fish to someone you care for, you teach them fishing. But today this advice was something that seemed necessary. I made a Rs 50 grand profit each on Axis bank and Kovai medical , both of which i bought 3 months back at around 50 grand each( Infact 65 for Axis and 50 for Koavi medical.) Anyways the point is they are trading at such a level which crosses our safety limit. Their P/E is way above 12.5, remember from our previous lesson and they are trading at way above their book value.

Now we begin with our third rule which pertains to growth. The company should be growing at a decent rate. When i talk about growth, it doesn't mean that the company should double its profit in 2 years. It means it should increase its profit at a decent rate and more importantly it should not have a year where it made an overall loss in last 5 years. There may be times when the company makes a profit less than the previous year but this trend should not be followed next year. As my father ,who is also a good investor, says a company's profit will not slide from 100 crore to 10 crore in 1 year. There would have been subtle signs in the Profit and loss of that company in last 5 years.

RULE 3: Invest in a company with a decent growth of around 5-10% and stable earnings and no year with loss in last 5 Years.
The formula: P/E=8.5+2Gwhere G is the growth of the company in percentage, if P/E of the company is less than 8.5+2G, its worth the buy.

So how do you calculate growth.It can be calculated by subtracting the last years net Profit from current years net profit and dividing it by last years net profit and multiplying it by 100. Simple maths! The other parameters that can be used instead of net profit are earning per share and Profit before interest, depreciation and tax (PBIDT).

For eg. A company's net profit in 2013 was 10 crore and in 2014 was 12 crore. so the growth of the company would be {(12-10)/10}x100= 20 percent. calculate similarly for last 5 years and take an average.

Be careful when you use EPS(earning per share) for calculating growth. Sometimes the company issues new shares or buy back old shares which can increase or decrease the number of shares and affect the EPS in subsequent years.

Another thing to be noted is that some times a company gets an exceptional profit. eg winning a case and compensation or makes an exceptional loss due to some unforeseen circumstances. As long as that gain or loss is not too huge, you should ignore that from your calculations.

Now time for the pick of the week.Venus Remedies Ltd. The company's P/E is as low as 3.84, which is good. Right!

its Price/ book value is 0.43. which means it is selling at a very cheap rate. and when you see the net profit or EPS in the balance sheet, it has grown at an average rate of 10%. Venus Remedies is trading at Rs 175 at NSE today, 29 Jan 2015.

Its All About What you Earn!

And so the market has hit an all time high of 28202 and as i keep saying its not the best time to invest, and why is that so, i shall brief you later.Its the time to learn some basics. The other day I was talking to a senior who also invests in stock market. When I asked him his style of investing, he told me that he invests in companies whose products he uses or finds in demand. Pretty rational explanation it seems, huh!
Actually its not. Its always good to check which companies are being commonly used by people and that should be an important consideration, which i shall explain in my Rule 5 pertaining to qualitative aspects of investing. But here is the catch, if it was so simple, everybody would have done so and become multimillionaires, but that is not possible since if all people have a lot of money, the importance of money or its purchasing power would depreciate. So much for the moral lecture but actually it is a fact in economics . The catch is that those companies which are popular would be in demand and you know what happens to the girl or guy who is most fancied by the opposite sex in college, his or her rates go up and its not worth the effort. Simple! If a company is already trading at a high price , probably it won't go further up.

So now coming to my second Rule of hitting it big in stock market.
Rule 2: Never Buy Any Stock with a P/E value of 12.5.

Now a lot of people would be wondering what is P/E. P/E means price to earnings ratio. Price is the market price of the share, and NOT the book value( Remember Market price and Book Value from our old post). and Earning is earning per share of the stock in one financial year. Suppose a company earned Rs 1o lakh from its last year's operations and there are 1 lakh shares. how much would the EPS( earning per share) be? yes ,you guessed it right. It would be Rs 10.

Now a company whose share price is Rs 100 with an earning per share would have a P/E of 10 which is okay. Now lets say this same company started having better sales and ended up having an annual earning of Rs 1 crore. That's cool! a growth of 900% in 1 year but its share price sky rocketed to Rs 2000. Now its earning per share(EPS) will be Rs 100(Rs 1 crore divided by 1 lakh shares) and so the P/E becomes 2000/100= 20. Now despite the fact that this company has done very well in the last year it is risky to invest in such a company. I am not saying its a bad company to invest in, it may continue its upward swing but thats a speculation.And I am not teaching you how to gamble.  Growth is an important consideration which i will talk about in my next Rule but for now even if the company is growing very fast, if it has a P/E of 12.5 or more, do not buy. 

See I already told you that the essence of investing is just like marriage. You don't look for the best features. You rule out the points that make living with that person impossible. So for now if a share has a book value of more than 1.5 its market price or if it has a P/E of more than 12.5, just back off. There are plenty of fishes in the sea.If you are wondering how I came to a P/E of 12.5, just check the rate of return of a bank fixed deposit or EPF and toggle it upside down. you would understand. An FD is the best rate of return which is assured to you in an indian scenario. In other countries the rates are different and so i will go for a different cut off for P/E.

Now time for the pick of the week. even when the market is skyrocketing. There are some stocks which are selling cheap. one of them is Syndicate Bank . At 128 Rupees a piece , it has a P/E value of 5 and book value of around Rs 190 with a Book value to market price of 0.68. Its a public sector bank where average P/E is 12.46 . Ya I know what you are thinking. Its CMD was embroiled in a controversy involving bribery and all. Guess what they are getting a new CMD. See here is how it goes.Its a government owned bank. Can government go bankrupt! No. And even if some rogue elements were indulging in wrong practice, it doesn't matter the entire bank is bad, plus even if they make a little less profit for a year or so because of the bad loans they gave, They still have a cushion of 150% when it comes to P/E of public sector bank. as market sentiments get better. it will pick up.Also the new BJP government is trying to revamp the public sector banks by infusing more money nad increasing its accountability because more than half of its shares belong to government and thus half its earnings

so Rule of the week:Never Buy Any Stock with a P/E value of 12.5.

and Pick of the week: Syndicate bank. it is trading at Rs 128.65 as of today, 19 January 2015

Seven Rules to make money

The Repo rate cut by RBI was received by much enthusiasm in the stock market yesterday. It was expected given the low rate of inflation and the need to kick start the economy to realise the vision of the current ruling party. With the sensex touching 28000, it may not be the best time to invest, but it keeps fluctuating.

For those of you who don't know much about stock market and the basics of economy and investment, i have started this blog to bring out some simple and easy to understand facts , which can help a novice or an expert immensely while investing be it stock market or other investment options.

When we talk of stock market or shares, we first need to understand what does a share of a company mean! A share of a company gives you an ownership of that company in the proportion of your share. Its also called equity. That means if you own 100 shares of Reliance Industries, you are an owner of RIL. you have the voting privileges and you will be invited in the annual general meeting of the company.

So how does that ownership transcend into income. Whatever the company earns, equitable proportion of its earnings belong to you. A portion of it is distributed as divident and the remaining is reinvested in the company for better results in future. Now not going further into the intricacies of share i will use a different method of enlightening  you about the stock market. Every week i will tell you one golden rule of investing, of what i look in a stock before buying and then pick one stock which i feel is good in that criterion but also passes other tests , which i will discuss in next section, There are total 7 simple rules. FYI i made a cool 50 percent return last year on my investments. Those of you who didn't understand that if you put your money in a fixed deposit which is by far the investment with best assured return, you get around 8 percent return. If you can manage a 50 percent return for 10 years, a sum of Rs 1 lakh can transform into Rs 60 lakh. Off course its an exception than the rule.

So starting with Rule no. 1, perhaps the simplest but the most important is a share's Book Value.

What is Book Value. Lets  say a company has total valuation including land, machinery etc of Rs 100 Crore. and there are 1 crore shares in total. so the book value would be rs 100. This is different from the price at which the share is selling, that is market value.

Now would you want to buy a thing more than what its actually worthy of! Sadly in shares its true. If people in investment community feel that a company has good future prospects, that company will have more demand and thus the price of that company and its shares go up.
Now what is that extra value between market price and book value. That is the goodwill value of that company. and sometimes market price is less than book value. It maybe because the company is embroiled in a legal scandal or is following wrong practices or the product it makes has gone out of use but it can also mean that you are getting something cheaper than it actually is, just because people in the investment community are not showing much interest, These are the shares that you got to hunt for, because over a period of time people will realize that its a good stock to invest in and it gradually takes up. That is why companies like Tata Consultancy Service which don't have much land or machinery sells at much higher price than its book value.

So here is the thing ,look at a share and see its market price and book value, under no circumstance should you buy anything more than 1.5 times its book value. Make a list of shares trading at below the book value. All this data is available on different sites like moneycontrol.

I am not saying that all companies trading at below the book value are good, but how I trade is that i have a set of 7 Golden rules and i only buy a company if it passes all the criteria. So these rules are more of ruling out criteria of what not to buy. All the companies that are not ruled out because of these rules are good investment options.

So Rule 1: Never buy a share at a market price more than 1.5 times its Book value.

Now go and check out Gitanjali Gems, which is my pick of the week. Look at its book value and market price. Its a company with good prospects. Did you hear about India signing an MoU with Russian government regarding direct import of rough diamonds thus bypassing middle east as middlemen. so much so for increasing the profit margin of Gitanjali Gems! Gitanjali Gems is trading at Rs 53.20 at NSE today.Watch out in next 3-4 months.