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A Short Story About Monkeys & Goats – To Convince You To Buy Stocks of Only Good Businesses

Markets are making new highs. And increasing number of people around you are discussing about stock markets these days. Though we still haven’t reached a point where housewives start discussing stocks, there does seem to be an underlying current in market, which is making people believe that it’s easy to make money in stock markets.

I know that most people won’t agree with me if I say that it’s best to bet against the crowd in stock markets. Even though the same has been advocated by Warren Buffett when he asks us to Be fearful when others are greedy and be greedy when others are fearful.

So frankly speaking, there is no point in trying to convince someone who has already made up his/her mind to invest in a rising market. So instead, what I feel is that it’s more important for such people to understand something else…

Read the story and you will understand…

Monkeys Goats Stock Markets


Note – This story isn’t quite the same as the monkey story you may have got in one of those chain-forwarded emails.

So there was this village where one day a man appeared and said that he wanted to buy monkeys. He said that he would pay Rs 100 per monkey. The villagers caught all the monkeys in the neighbourhood and sold them to him for a hundred rupees each. Soon another man appeared and said that he would pay Rs 200 for each monkey. But there weren’t any more monkeys around. They were all owned by the first man. So the villagers went to him and said that they were willing to take the monkeys back and return his money. But the monkey owner was unwilling to sell. The villagers raised the offer price to Rs 150 per monkey, then Rs 175 and finally to Rs 199 but the man just didn’t want to sell, even though he clearly didn’t have any use for the monkeys. Eventually, just to see whether he would sell, they offered him Rs 200 but he still refused.

The villagers were puzzled by this. Finally, one of them figured out that there must be someone else who was going to come to the village and offer even more money for the monkeys. Convinced that this was the real explanation, they went and offered the man Rs 300 for each monkey and sure enough the man accepted. Joyous at having landed such a good deal, they quickly paid him off before he changed his mind and took possession of the monkeys. The man went away with his money and lived happily ever after. The villagers waited for the next buyer. And waited… And waited… But no one ever appeared who wanted to buy a monkey.
But wait.

If you think you’ve guessed the moral of the story, you are wrong because the story isn’t over yet.

There was another village nearby. In this village a man appeared one day and offered Rs 1000 each for a goat. Now goats were valuable, but not as much as a thousand rupees so the villagers sold the goats to this man. A similar thing happened here too. A second man appeared, offered Rs 2000 for each goat, the first man refused and eventually the villagers ended up buying the goats back for Rs 3000 each. Here too, the two men disappeared and no one ever came and offered so much money for a goat again.

But there was a difference.

Goats aren’t monkeys. They could be milked every day and the milk was good and healthy. Even the goat droppings could be used as fuel (not sure of it though). When the goats eventually grew too old to be milked, the villagers could kill them for mutton. All in all, it wasn’t a complete disaster.

But the monkey-owners were not so lucky. Since these weren’t demat monkeys, they actually had to be kept in one’s house. The monkeys ate too much, shouted and shrieked all day and sometimes bit people.

Eventually, when it became clear that the monkeys were worthless, their owners abandoned them and tried to forget about their losses.

And that’s the Moral of the Story.

In the stock markets today, there are good companies that are overpriced and there are worthless companies that are overpriced. If you are going to be a fool and pay absurd prices because you think that a greater fool will appear in the future, make sure you buy a goat and not a monkey.

Note– The story is sourced from here.
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Mailbag: I am 45 years old & want to accumulate shares of good companies for next 20 years

A reader aged 45 had the following query. Though he asked the question on Stable Investor’s Facebook page, I thought it would be a good idea to share it with loyal website readers to know their views.
 
 
 
So here is his question:
 
“I am 45 years old and wish to invest in equities for long term. My goal is to create a corpus, which I may use when I’ll cross 65. Hence in which Indian companies should I invest? I plan to buy stocks of the chosen companies regularly in small quantities in “buy-and-forget” mode. I don’t want to be bothered about daily price fluctuations or viability of company’s business. Please recommend a few companies which you think would keep performing well for years to come. I assume that at whatever price I buy these stocks, I would eventually have significant capital appreciation over the next 20 years.”
 
Now this is what I think:
 
I am assuming that you are adequately insured and have sufficient money in your emergency funds. With this assumption, I would say that it is always advisable that one should invest in multiple asset classes, so that there is no concentration risk. I am assuming that since you plan to invest in the so-call-risky asset class, you already have decent positions in less risky ones like PPF, PFs, NSCs, bonds, FDs & RDs etc.
 
Now Buy and Forget kind of investing requires that you pick companies which you are sure are going to survive for next 20 years. These are companies which essentially, have a greater ability to suffer than other listed companies.
 
Once you have taken care of survival, you need to shortlist those which have a good probability of flourishing in next 20 years. Just these 2 filters would reduce the list of probable companies to less than 10-15. And that in itself is a pretty manageable number.
But having said that, I would digress a little from this topic of direct equity investment. You can, or rather should consider routing a substantial part of your planned monthly investments through index funds. You might argue that investing in index funds would eliminate the probability of picking up multibaggers, even when considering a 20 year time frame. That’s correct. But this would also eliminate the possibility of ending up with stocks of companies which might be very close to being shut down at end of 18-19 years of your stock accumulation period.
 
Now no one would want to accumulate shares of a company for 19 years, only to find that when he requires that money in 20thyear, share prices have crashed down and business is about to close. 🙁 So, I would suggest that you should give index fund investing a serious thought.
 
Sometime back, I had suggested a similar approach to two young readers who also intended to invest for next few decades! You can read those discussions here and hereBut if you still want to go ahead with a Direct-Equity-SIP sort of a program where you buy few shares of companies every month for next 20 years, you should stick to companies which pass the following criteria –
 
First
 
Provide products and services which would have increased demand in years to come and are ideally placed to benefit from India’s demographic profile over next 20 years.
 
Second
 
To meet this demand, these companies should depend as little as possible on debt and should be able to fund their expansion through cash flows itself.
 
Third
 
The companies should be run by trustworthy and proven management. You don’t want to handover your hard earned money to companies which are not run by people whom you would personally not like to interact with. Isn’t it?
 
Fourth
 
Personally speaking, dividend paying companies ring a bell for me. But you can choose not to consider this criteria.
 
So once you have shortlisted companies according to these criterias, you would have very few companies which you would like to invest for next 20 years.
 
One such company which comes to mind is ITC. You can create your own list of such companies.
 
It is always better to have a framework (structure) before you go ahead picking specific stocks. Hopefully, this post will help you in coming up with a correct framework to pick stocks worthy of long term investments.
 
This is what I feel should be done by the reader. What do you all think?
 

Best Indian stocks to buy

While searching Nifty50 stocks for safe investment ideas, we thought that what benefit could be derived, if all stocks were ranked according to a few important stock analysis parameters like –

  • Earnings Yield (Inverse of P/E Ratio)
  • Return On Capital
  • Price/Book Value Ratio
  • Debt/Equity Ratio
  • EBITDA Margin
  • Net Profit Margin
  • Dividend Yield

We did the dirty part of ranking and the result is evident in table below. All the stocks have been ranked on all 7 parameters. 
We have also summed up these 7 ranks to arrive at a cumulative ranking (which might be totally useless: but a good starting point for shortlisting stocks).

Note- Numbers don’t tell everything. So this should not be taken as a buy or sell recommendation.

Note – We have removed the banking stocks from this list.

Click image to enlarge
Some of these stocks (with more green than red) can give good returns in the long run. However, there’s a caveat: A better rank does not mean that the stock is investment worthy. Individual stocks with higher ranks could still be much better Buys than ones with lower ranks.

You can also read our comprehensive analysis of Indian markets & P/E ratios, P/BV ratios & Dividend Yields.
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