Mailbag: Why do you choose such simple criterias for shortlisting stocks?

We received a question in comment section of our last post on selecting 10 stocks to buy in next market crash. The question asked was very simple, but relevant…

“Why do you guys choose such simple filters for shortlisting stocks? There are more comprehensive and well proven methods of doing the same.”
We will first explain a little about these 5 filters and then answer the question –
Filter 1: Management (Atleast Decent)
The last two words of this filter, ‘atleast decent’, make this a completely subjective criteria. We believe that we are average investors. Hence, we are the last ones to receive company / promoter related news, leave alone insider information. Hence, in the event we do come to know that management is not trustworthy (read decent), then it means that there is more negative news which has not even come out in public domain. Isn’t it? Hence, we will prefer to stick with companies with ‘known decent’ promoters / management.
Filter 2: Not Highly Cyclical
Some experts say that one should buy cyclical business at high PEs. It is at these times, when things are about to turn around for better. They may be right. And sometimes, it seems logical on face value of the argument. But we are not sure. Frankly, we haven’t devoted adequate time to analyzing cyclical businesses. And hence, we don’t understand them too well. Also, highly cyclical businesses are highly uncertain. Such companies are at the mercy of the economic cycles. So it’s better that we avoid such companies.
Filter 3: Atleast Average Growth Potential
If the underlying business does not have any growth potential, then how can we expect the stock to move up? We should never forget how Kodak, a great company which did not embrace the advent of digital photography and how it paid the price with its bankruptcy.
Filter 4: God Dividend Record
We just love dividends. That is all we have to say. 🙂 But we have a reason for it. You can read it here.
Filter 5: Are we ready to hold the stock for 10 Years?
Mr Buffett once remarked, “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”Being self-claimed long term investors, we ourselves would like to hold stocks of great businesses. We would love to act like owners of companies. And when a great company is going through tough times, the owners don’t sell and runaway. They stick with it. They know that when times will change, the company would be back. And in a much better shape.
So now, we are back to our original question…
Why do we use such simple filters??
The primary reason for using such simple filters is that these have worked for us. It is easier to evaluate stocks on these filters than more complex quantitative ones. Though we do use such quantitative metrics in our case studies of individual stocks, we always prefer to keep things simple. We try to stick with proven businesses. We try to find indicators of overall pessimism in the market, so that we can be a little sure that we are being greedy when others are fearful. We know that by following these filters, we are simply eliminating the possibility of finding those 50 and 100 baggers. We are restricting ourselves to a very small universe of 40 (or max 50) stocks. But we accept this tradeoff. We don’t want to lose money in stock markets by taking very risky bets. We know what we are good at and we will prefer sticking to our strengths. Over time, we will increase our expertise in other areas and may be, would be able to find the next multibagger. As of now, we are happy to lay a strong foundation for our long term portfolio.
We hope this post clarifies the doubt which our reader(s) had. 🙂

Mailbag: Don’t pray for stock market corrections!!

If you are a regular reader of Stable Investor, you would know that we are very public about our interests in market corrections. This is because it gives ample opportunities to buy stocks at distressed valuations.

But in our post about Buying on Dips, we received a comment from ‘HP’… This comment made us sit down and think. Comment reply which we wanted to post, was too large to fit in the comment thread. So we thought of replying it with a post.

mailbag reply

You can read HP’s comment below:
Note: The reader used ‘HP’ as his name instead of his/her full/real name.
– – – – Start of Comment – – – –
I am not sure if you were already working in early 2009, but my guess is you were in school/collage back then.
Hence talking about it as just a random thing that had occurred.
The world went through Hell literally for what we call now as “Worst Financial Crisis” of last 100 years.
Every day people were fired from their jobs (Especially in IT and Finance) and those of us who still had a job were considering ourselves very lucky.
Each day gave lot of pain seeing our loved ones and friends getting fired and seeing an absolute uncertainty about what is going to happen to them (Specially the married folks)
So when you pray that situation like 2008-2009 to return just because we will get stocks at throw away prices, just be careful, your wish might just come true.
And if it does, My Friend I would like to see how you react, I am sure by now you are done with your graduation.

It would be interesting to see if you really stick to your principles or all this is just pep talk, especially when your entire so called world is falling down around you.

– – – – End of Comment – – – –

We agree completely with what HP has to say in his comment. It can be tough to think about making investments, buying stocks at cheap valuations when your own job is at stake. And it can be painful to see people around you losing their jobs. And for record, our site is young, but we were not school going kids in 2009. Like you, we consider ourselves lucky to be employed during 2008-2009.

When we say that we would love to have a correction, we don’t mean that we would like to see people losing their jobs. We pray for corrections (only in jest)… and we know that talking is easier than doing. We may or may not be able to hold on to our jobs during the next recession. In a way, it is beyond our control. But what is within our control, is our ability to remain prepared

Before even thinking of investing, we would have our emergency funds ready. Its a fund that would be capable of sustaining our family expenses for next 6-12 months (in case we lose our jobs). And if we are able to cling onto our jobs, it wouldn’t be a bad idea to invest whatever is possible. Because when you fall in hot water, you should take a bath instead of cribbing about the situation and your helplessness. And if you have an interest in investing, you would understand the power of 3Cs – Cash + Courage +Crisis. 🙂

So when crisis comes, we can’t say how well we will stick to our principles, but we would definitely give it a serious try. Till then, you can consider all this to be a pep talk which we are giving to ourselves.

dont pray
You should not pray for market corrections.

We are sorryto those who are hurt by our prayers for market correction. It was made in jest.