What To Buy From "Common Stocks And Uncommon Profits"

"Common Stocks And Uncommon Profits" remains one of the best books ever written on stock market investing. It has a very important chapter on what stocks to buy. Ideas mentioned there would add to the arsenal of any serious investor. One can also add these to the investing checklist to make better choices in future. Below is a short summary for future reference:

a. Size of Opportunity - Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years? E.g., Large number of Indian homes do not have toilets. As the economic status of people improve, they will install more and more toilets at home. That represents a huge size of opportunity for a company like Cera Sanitaryware.

b. Innovation/Related Products - Does the management have a determination to continue to develop products or processes that will still further increase total sales potential when the growth potentials of currently attractive product lines have largely been exploited. E.g. Cera Sanitaryware is trying to enter related areas like Faucet ware, Mirrors, Tiles and Air Fresheners. If any of these areas click, they can substantially increase their sale.

c. Effectiveness of R&D - How effective are the company's research and development efforts in relation to its size? Ajanta Pharma is the best example of such effectiveness. Company puts a lot of money on research and the kind of products it is producing is helping them grow their businesses tremendously.

d. Sales Strength - Does the company have an above-average sales organization? This should be directly visible in the kind of sale growth the company is showing.

e. Profit Margin - Does the company have a worthwhile profit margin? this data can directly be tracked from profit and loss account.

f. Profit Margin Improvement - What is the company doing to maintain or improve profit margins? This can be traced by looking at profit and loss account for several years.

g. Labor Relations - Does the company have outstanding labor and personnel relations? New tools like glassdoor may help us in extracting this information.

h. Executive Relations - Does the company have outstanding executive relations? Glassdoor should help us in getting this information.

I. Depth of Management - Does the company have depth to its management?

J. Accounting Standard - How good are the company's cost analysis and accounting controls?

k. Leadership Position - Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?

l. Long range outlook on profit - Does the company have a short range or long-range outlook in regards to profits?

m. Equity Dilution - In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders' benefit from this anticipated growth?

n. Candidness of Management - Does the management talk freely to investors about its affairs when things are going well but "calm up" when troubles and disappointments occur?

o. Candidness of Management - Does the company have a management of unquestionable integrity?

Himmat-e-Marda Toh Madad-e-Khuda

"Fortune favors the brave" is a popular saying. This proverb describes my stock market performance for the last year very aptly (though I prefer more rustic and local "Himmat-e-Marda toh Madad-e-Khuda"). After almost 10 years of active stock market investing, this year turned out to be the most fruitful for my investing career not only in terms of the percentage returns but also in terms of the absolute performance. I don't know any investor that have come close to my performance for the year. This year, I achieved returns in triple digits(110%).  It is important to note that these returns have come at a time when 110% of my net worth was invested in the markets. The importance of the last line increases in view of  an interesting tweet by venerable Samir Arora.

Interestingly, this tweet came exactly a day after I disclosed my portfolio performance on one of the equity forums while responding to a query. Is this too much of a co-incidence or the online equity world is really too small :). Anyways, we need to get back to the contributors of such a performance which is more important.

The biggest contributor to this performance has been the lesser number of mistakes made during the year. Actually, only one trade was a loss making trade this calendar year. AmaraRaja was purchased around 296-297 in Jan this year and it was sold around 260-270 in the march, causing a loss of close to 10-12%. The reason for selling at a loss was more pledging by the owners. I still don't consider selling this stock as a bad decision even though the share has bounced back to 325 levels. Staying with the stock would have given me a 20% return from the march time till now, but the opportunity cost would have been higher as my other picks have done much better.

Now with the bad news out of the window, let us discuss some brilliant decisions, which in hindsight appear almost divine.(P.S.- I was told by a friend that 2013 was my year because my birthday is on 13th).

a. Ajanta Pharma was suffering from taxation related issues at the start of the year. Most of the investors shunned the counter after receiving this news. My decision to stick with this scrip proved almost divine as the share went up by 250%  this year.

b. I was bullish on Bajaj Corp and have been buying this share from August 2012. I started buying this share from 165 levels and kept on buying till Feb 2013 when the price was almost 247. Towards the end of May 2013, the stock touched 275 levels for the first time and I sold all of the Bajaj Corp at that level. The decision hit the bulls eye as the stock never crossed that level and is trading currently at 214.

c. Last quarter Cera Sanitryware did not post good quarterly results. Its bottom line was almost flat. Many investors sold their shares seeing the results. I stuck with my position and Cera jumped from 550 to 700 in a quarter. Not a bad outcome for sticking with a company with bad results. Now, everybody and their cook are recommending this share.

d. My call on the Rupee that it will not fall below 65 turned out to be extremely correct (Please read the old blog for the thought process and analysis of the same here). From the stock market perspective, I switched from HCL Tech(exporter) to Astral(Importer) based on that call. Astral is up by 40% since then compared to a 20-25% jump in HCL Tech. Recently, I made a reentry into HCL Tech based on the better fortunes of USA and European economies and hoping to make money in that counter as well.

e. My firm belief on improvement in rural economy despite huge media outcry of sinking Indian economy fetched huge dividends with Kaveri Seeds up almost 40% and PI Industries up almost 90% for the year.

f. Some brilliant decisions were taken at the start of the calendar year 2013 to sell RS Software, Zensar Tech and PC Jwellers at a huge profit. These companies have struggled through out the year at best. RS Software has recovered itself to come closer to my sell price of 175 after an years' hiatus. PC Jwellers is in dumps and is trading at less than half of the price at which I sold it around a year back. The only decent performer is Zensar Tech which is trading 40% higher than my sell price. But most of the gains in this counter has been achieved in the last quarter only. This company has almost doubled in the last quarter and looks like a lot of froth is built into the price.

Now that this stupendous year is over, hoping to do good in current year as well. The ground is still fertile, but the terrain is becoming difficult with most of the under priced opportunities getting recognized by the market. These are the times when people tend to make stupid decisions and all the good performance of last year gets lost. Let us see how much I have learnt from my previous mistakes and can I avoid becoming dud this year after such a good run.

Happy New Year !!!

Disclaimer:
a. Above discussion is not an invitation to invest in the stocks mentioned.
b. One needs to put a lot of effort and energy to get buy/sell decisions right. Please do your own due diligence before making any investment decisions.
c. I sleep, eat, drink and watch only stock markets and hence I can exit or enter any stock in a jiffy and I may not inform anyone about my decisions before or after the trade.
d. The stocks mentioned above are small caps and they represent a minefield to navigate for any passive investor.