52 Week Highs & Lows – How to Profit from Fluctuations in Sensex & Nifty Stocks

Fluctuations in share prices are as old as the concept of shares and stock markets themselves. Infact, had it not been for the regular fluctuations, stock market would have been a very boring place. It would be like a bond or a FD. And who would like that. 😉


As a long term investor, few things excite me more than the large fluctuations in share prices of individual companies. And I am not talking about small companies (having few crores market cap) here. I am referring to large caps, i.e. huge and well established companies of India.

Being a risk-averse investor, I have a liking for large businesses. Investing in well established and (supposedly) well-run businesses helps me sleep well at night. 😉 These businesses have witnessed and survived multiple bull and bear markets. So chances of them surviving again are pretty good.
And if we are patient enough, markets eventually do offer temporary mispricing in large caps shares.
But most investors believe that there are fewer opportunities to create money in large caps. I do not subscribe to this view and have already written about why it makes sense to consider large caps when others are looking elsewhere (This article was quotedby the CEO of a leading MF house in their monthly publication).
52-Week High Vs 52-Week Low
Now I did an interesting study comparing the 52-week lows with 52-week highs of various companies constituting Sensex and Nifty 50. Take a look at the analysis in tables below (share prices as of 30th June 2016). The column titled ‘% Change’ measures the difference between the 52-week high and 52-week low in percentage terms:

Sensex 52 week high low

As you can see, there is a huge difference between the two numbers for most companies. Infact, the average difference between the 52-week highs and lows is more than 50%.

Doesn’t that smell like opportunity to buy low and sell high, even in short term?

Now take a look at the Nifty 50 companies:

Nifty 52 week high low
The story remains the same. Here too, the 52W-high is almost 150% of the 52W-low.

Now these companies are well-established and safe businesses (ofcourse if bought at the right price). But think of it – does it really make sense that a company like (say) TCS, is worth Rs 4.2 lac crore today and worth Rs 5.5 lac crores after few months?

No – I don’t think so.

For most of these large companies, there isn’t much that changes at actual business level in the course of few months. Its only the perception of market participants that changes and moves the prices.

The reason for such wide difference in perception of actual value (which drives market price) can be many. In a post about fluctuations in market price of large companies, John Huber mentions about two sources of market’s inefficiencies: 1) Disgust and 2) Neglect.

Now large cap companies are generally not mispriced due to neglect, given the analyst coverage and popularity they have.

More often, mispricing is because of disgust or pessimism. This temporary disgust can be due to bad results, negative news, temporary legal problems, etc. Large caps (or even the stocks in other categories) can get beaten down even when the general market environment is pessimistic. In bear markets, shares of companies with no significant problems at all, are beaten down because of general economic pessimism. Its like all boats (good and bad) come down when the water levels reduce in river.

Mr. Market (and not Mrs. Market)

I am sure you have heard of the concept of Mr. Market (created by Benjamin Graham). This concept is quite relevant here and hence, I mention it:

Every day, Mr. Market will come up to you and quote a price for a stock (or stocks).

When he is optimistic about the future of the business, he will quote a high price to buy or sell. On days when he is not feeling great about the future, he would quote a very low price.

But luckily for you, he does not force you take a decision. You can choose to do nothing about Mr. Market’s quotes and he still won’t mind (maybe that’s the reason Graham created Mr. Market and not Mrs. Market). 😉

And if you are sensible, you would sell to him at a high price AND buy from him when his price is lower than what you consider low-enough.

And this is the beauty of this game. You can always wait. You can wait till the stock you want to buy is mispriced (on lower side).

Mr. Market’s continuous irrationality and urge to give a quote to you everyday creates the opportunity, which you should wait for.

And as Charlie Munger points out: “For a security to be mispriced, someone else must be a damn fool.”

So all you need to do is to wait to find a damn fool on the other side of the trade you want to make. If not a damn fool, even a fool would do. 🙂

A Real Life Example of Mispricing

A friend of mine is into poultry farming. Now without sharing the real numbers, lets assume that few years back his business was churning out annual profits of Rs 50 lacs.

One day, things got bad and some bird-disease spread in his farm. He had to take the drastic step of eliminating all birds as is the norm in poultry business. The business was in distress. At that time, he received an offer from a competitor to purchase his business (including physical assets) for about Rs 5 crore.

He declined the offer as it was too low. Also because poultry was one of the many businesses he owned, he could chose to wait for things to get better as he was not going to go bankrupt due to the poultry fiasco.

Eventually, he revived the business in an year or so and got another offer for about Rs 12 crore. He did not sell even then. I don’t know what price he would have sold at. Maybe Rs 50 crore (Sell high. Remember?). I don’t know.

But what I am trying to say here is that inspite of the business generating profits as earlier, there were buyers willing to give more than twice the original offer. Ofcourse, the original offer was made at a time of distress. But that was a temporary distress. Different people were valuing the same business at different times differently.

The same happens in stock markets.

Temporary problems (leading to disgust) or general pessimism (bear markets) causes share prices to go down. This doesn’t mean that that is the end of the road for the businesses. Businesses recover. And this what an investor should remember.

Market prices will continue to fluctuate more than actual intrinsic values. So as a discerning investor, if you are willing to look further than other investors and are also ready to accept short term losses and volatility, then you can indeed benefit from these opportunities.

This is what Warren Buffett had to say about how we as investors can benefit from these mispricings:

If you look at the typical stock on the New York Stock Exchange, its high will be, perhaps, for the last 12 months will be 150 percent of its low so they’re bobbing all over the place. All you have to do is sit there and wait until something is really attractive that you understand.

And you can forget about everything else. That is a wonderful game to play in. There’s almost nothing where the game is stacked in your favor like the stock market.

What happens is people start listening to everybody talk on television or whatever it may be or read the paper, and they take what is a fundamental advantage and turn it into a disadvantage. There’s no easier game than stocks. You have to be sure you don’t play it too often.

People tell me that small and mid-caps offer far more opportunities than large caps. That is true. And many times, these opportunities offer potentially higher returns than what mispriced large caps might offer.

But small cap investing comes with higher degree of risks and as I have already mentioned, I have a bias for looking out for mispricing in large cap stocks.

So if like me, you are also interested in large cap stocks, then do keep track of index (Sensex, Nifty, etc.) stocks and their 52 week highs and lows. I do it using simple Google sheet (screenshot below):

Tracking 52 week high low

I am sure that you will soon find large cap stocks getting mispriced. 🙂


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3 Cs of Cash, Courage & Crisis – Read This Post Again When You Start Losing Money in Stock Markets

Suppose your favorite car is a Honda… which is worth Rs 10 Lacs. And in your city, there is only one Honda dealer. Now this Honda dealer is facing some unprecedented personal crisis and decides to close down his dealership. And since he wants to close down quickly, he wants to clear his stock of available, unsold cars at throwaway prices. In fact, he is offering a whopping 40% discount on your favorite model, if purchased within next 7 days.

So here you are faced with an interesting situation…

– You always wanted that Honda car. And you have absolutely no doubt about the brand or quality of the car.

– You did not have (or want to pay) Rs 10 lacs for the same.

– You are now getting it 40% cheaper at Rs 6 Lacs.

– You have 7 days to buy it.

– You are still 100% sure about quality, efficiency and beauty of the car and that, it has not deteriorated at all (with prices coming down to Rs 6 Lacs)

So what is that you want the most right now?

Of course…Rs 6 Lacs!!

But here is the problem. You don’t have Rs 6 Lacs. And your 7 days are over. The offer and your dream Honda car are gone.

You had the CRISIS (dealer was closing down) and the COURAGE (your belief that Honda remains good enough even if dealer closes down). But the only thing missing was the CASH.

You did not have the CASH to take advantage of the opportunity.

Cash Courage Crisis Stock Markets


The same is applicable in stock markets as well.

Warren Buffett, in 2008 said:

“CASH combined with COURAGE in a CRISIS is priceless.”

With markets making new highs and being somewhat Overvalued, many people will laugh at those who are building up their cash reserves. And that is because of the perception that, it’s very easy to make money in markets and hence it does not make sense to remain in cash.

Yet CASH is the exact asset, which can help you buy wonderful businesses at really cheap prices (Remember 2009). Having a decent amount of cash (atleast when markets are not cheap) allows you to take advantage of any pullback in the market or any other opportunity that comes up. Holding Cash should be viewed as an opportunity, and not just as a cost. Now this strategy effectively means that you are ready to purposefully lose a small amount of money to inflation over this period. But that would be in exchange for the opportunity to offset it with a larger profit down the road. Now all investors may not have the mindset to endure this pain, caused by waiting for opportunity to strike. But for those who are patient enough, the gains can be, what Warren Buffet said – PRICELESS.

Also if you think that earning lower interest on your cash is bad and a drag on your portfolio, just wait until you are forced to liquidate stocks during the next bear market or in time of need.

Pardon me if all this makes me sound like a person advocating timing of markets. But this is not just about market timing. It’s more importantly about trying to avoid overvalued markets and trying to reduce the chances of making mistakes, and less about trying to find the bottom and pick the next multibaggers.

So if you think, I am making some sense here…then do bookmark this post for future reference. My idea of doing this post about market crisis during a bull run is simple. When markets around you are falling and you are losing your money, you will not be reading blogs about long term investing. 🙂

37 Quotes from The Best Book on Investing Ever Written

Benjamin Graham’s book – The Intelligent Investor is regarded as the Holy Bible of Value Investing. Even the master investor Warren Buffett has a very high regard for the book and refers to it as the best book that has ever been written on investing.

It has even been said that if you have to chose just one book on investing, it should be this one.

As for me, I have read this book quite a few times. Infact, I have made it a sort of annual ritual to go through it every January. 🙂

intelligent investor book

Sometime back, I found a large collection of quotes from this book here. So here I share a few of the better ones in this post:

  1. The sillier the market’s behaviour, the greater the opportunity for the business like investor.
  2. The intelligent investor is a realist who sells to optimists and buys from pessimists.
  3. No matter how careful you are, the one risk no investor can ever eliminate is the risk of being wrong.
  4. By developing your discipline and courage, you can refuse to let other people’s mood swings govern your financial destiny. In the end, how your investments behave is much less important than how you behave.
  5. No statement is truer and better applicable to Wall Street than the famous warning of Santayana: “Those who do not remember the past are condemned to repeat it”.
  6. The defensive investor will place chief emphasis on the avoidance of serious mistakes or losses. His second aim will be freedom from effort, annoyance, and the need for making frequent decisions.
  7. To enjoy a reasonable chance for continued better than average results, the investor must follow policies which are (1) inherently sound and promising, and (2) not popular on Wall Street.
  8. Speculative stock movements are carried too far in both directions, frequently in the general market and at all times in at least some of the individual issues.
  9. People who invest make money for themselves; people who speculate make money for their brokers.
  10. The beauty of periodic rebalancing is that it forces you to base your investing decisions on a simple, objective standard.
  11. There is no reason to feel any shame in hiring someone to pick stocks or mutual funds for you. But there’s one responsibility that you must never delegate. You, and no one but you, must investigate whether an adviser is trustworthy and charges reasonable fees.
  12. Thousands of people have tried, and the evidence is clear: The more you trade, the less you keep.
  13. In the financial markets, hindsight is forever 20/20, but foresight is legally blind. And thus, for most investors, market timing is a practical and emotional impossibility.
  14. A great company is not a great investment if you pay too much for the stock.
  15. It is absurd to think that the general public can ever make money out of market forecasts.
  16. It should be remembered that a decline of 50% fully offsets a preceding advance of 100%.
  17. Even the intelligent investor is likely to need considerable will power to keep from following the crowd.
  18. Price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal.
  19. Always remember that market quotations are there for convenience, either to be taken advantage of or to be ignored.
  20. Nothing important on Wall Street can be counted on to occur exactly in the same way as it happened before.
  21. Mr. Market does not always price stocks the way an appraiser or a private buyer would value a business. Instead, when stocks are going up, he happily pays more than their objective value; and, when they are going down, he is desperate to dump them for less than their true worth.
  22. The intelligent investor shouldn’t ignore Mr. Market entirely. Instead, you should do business with him – but only to the extent that it serves your interests.
  23. Mr. Market’s job is to provide you with prices; your job is to decide whether it is to your advantage to act on them. You do not have to trade with him just because he constantly begs you to.
  24. The best way to measure your investing success is not by whether you’re beating the market but by whether you have put in place a financial plan and a behavioural discipline that are likely to get you where you want to go.
  25. High valuations entail high risks.
  26. A defensive investor can always prosper by looking patiently and calmly through the wreckage of a bear market.
  27. The best values today are often found in the stocks that were once hot and have since gone cold.
  28. It’s nonsensical to derive a Price/Earnings ratio by dividing the known current price by unknown future earnings.
  29. Wall Street has a few prudent principles; the trouble is that they are always forgotten when they are most needed.
  30. Although there are good and bad companies, there is no such thing as a good stock; there are only good stock prices, which come and go.
  31. In the short run the market is a voting machine, but in the long run it is a weighing machine.
  32. The intelligent investor should recognize that market panics can create great prices for good companies and good prices for great companies.
  33. Losing some money is an inevitable part of investing, and there’s nothing you can do to prevent it. But to be an intelligent investor, you must take responsibility for ensuring that you never lose most or all of your money.
  34. By refusing to pay too much for an investment, you minimize the chances that your wealth will ever disappear or suddenly be destroyed.
  35. Before you invest, you must ensure that you have realistically assessed your probability of being right and how you will react to the consequences of being wrong.
  36. Successful investing is about managing risk, not avoiding it.
  37. Without a saving faith in the future, no one would ever invest at all. To be an investor, you must be a believer in a better tomorrow.

Have you read it? What are your thoughts?

Dissecting The 98 Most Powerful Words That Can Make You Really Very Rich

At 98 words, previous post on Stable Investor was the shortest one ever. But probably one of the most important ones, if I was to consider its potential impact on a genuine long term investor’s life.
 
Read these 98 words by Charlie Munger again…
 
“Experience tends to confirm a long-held notion that being prepared, on a few occasions in a lifetime, to act promptly in scale, in doing some simple and logical thing, will often dramatically improve the financial results of that lifetime. A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind that loves diagnosis involving multiple variables. And then all that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available as a result of prudence and patience in the past.”

I got a mail from a reader yesterday suggesting that I should have added something else to my previous post apart from just quoting Charlie’s words.

 
Honestly speaking, I thought that these words were so complete, useful and impactful, that there was no need to add anything else. And whatever I would have added would have been born out of my personal, biased and little experience which I have. So it would not have served any purpose.
 
But then I thought that may be its a good idea to do it as it will help me document my thoughts about these 98 powerful words. And hence I decided to write this follow up post.
 
 
I for the second time, quote these words in this post.
 
Emphasis below (in red) are mine:
 
“Experience tends to confirm a long-held notion that being prepared, on a few occasions in a lifetime, to act promptly in scale, in doing some simple and logical thing, will often dramatically improve the financial results of that lifetime. A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind that loves diagnosis involving multiple variables. And then all that is required is a willingness to bet heavilywhen the odds are extremely favorable, using resources available as a result of prudence and patience in the past.”
 
Now let’s see what we can make out of these highlighted words.
 
 
Being Prepared
 
These 2 words are not only applicable to markets, but life in general. Being prepared means to have thought through and be ready to take advantage of any situation, good or bad. In markets, there are times when stocks are undervalued compared to the real value which actual business behind the stock offers (Read: What we missed if we didn’t buy at Lows of 2009).
 
And during such times, it makes sense to put in money and buy those undervalued businesses. But for that, you need to be prepared. Prepared with the knowledge (based on study) that stocks are underpriced; Prepared with free money to buy such stocks; And a strong, disciplined mindset to be ready to hold onto these stocks till they become overvalued.
 
 
Simple & Logical Things
 
We are average investors. We don’t have access to inner circles of companies and hence have no clue about what these companies are planning to do in future. So the logical thing to do here is to not to make big guesses about future. And to stick with companies which have a track record of ‘not-fooling’ investors, have the ability to survive bad times and have potential for making money from their business for themselves as well as for their shareholders.
 
It’s plain and simple.
 
No need to rush for IPOs or companies selling future-changing technologies etc. The companies of latter type have mortality rates in excess 90%. And we are not capable enough to identify the remaining 10% of the companies.
 
 
Few Major Opportunities
 
If you have been in markets for last few years, you would know what happened in 2009. The markets were so undervalued that if you blindly bought stocks of any well known company, chances are that you would have doubled you money in next 2-3 years.
 
Now, lows of 2009 (in terms of valuations) are very rare. And during those times, it looked like a crisis situation from which markets could never recover. But markets move on. Yes. No matter how bad or how good the situations are, the markets move on. And those who realised this fact and took actions accordingly, were the ones who made truckloads of money in next few years.
 
 
Willingness To Bet Heavily
 
Now this one is not easy. It is possible that you are well prepared for the crisis. You also knew what you wanted to buy in case markets crashed. You had the money to buy. And once the markets tanked, you were getting the chosen stocks at prices well below your imagination.
 
But still you did not buy.
 
What was the problem?
 
You did not have the guts to go out their and make a big bet.
 
Its understandable that for average investors, its tough to make big bets which can alter their financial life dramatically. But its also a proven fact that unless and until you are ready to put substantial amounts of money in shares of good companies when markets and economy is down, you will not get life changing results.
 
You need all the 3 ‘C’s to become ridiculously rich,
 
CashCrisis and ofcourse…Courage.
 
 
Resources Available
This is very simple. You may be great at identifying opportunities, and also have the guts to go out there and bet big money. But unless and until you have the cash to invest, you cannot make use of this opportunity.
 
Once again, you need all the 3 ‘C’s to become ridiculously rich.
 
Crisis…Courage and ofcourse…Cash.
 
Patience In Past
 
You cannot easily become rich in stock markets. Though it is as simple as the 98 words being discussed, it is not easy at all. We can boast about how we can time the markets and know how to buy low and sell high.
 
But becoming rich in market, and staying rich (which is much tougher) takes time.
 
It takes years.
 
And unless and until you are patient enough, you will take some rash action which will hamper your chances of getting / remaining rich (read: Don’t disturb the magic of compounding)
 
It might be years before you get an opportunity of the type which can change one’s life. And during all these years, you would need to stay connected with developments of businesses which you have already shortlisted as ones worth buying. You would need to continuously accumulate resources (read: cash) to be ready when the opportunity comes. And you would need to continuously develop the mindset that you will need to buy heavily when the opportunity comes, i.e. you need to build your guts.
 

98 Words That Can Make You Very Rich

“Experience tends to confirm a long-held notion that being prepared, on a few occasions in a lifetime, to act promptly in scale, in doing some simple and logical thing, will often dramatically improve the financial results of that lifetime. A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind that loves diagnosis involving multiple variables. And then all that is required is a willingness to bet heavily when the odds are extremely favourable, using resources available as a result of prudence and patience in the past.”

– Charlie Munger


PS – I strongly suggest that you read this statement multiple times to understand its real importance. And please do share your thoughts too.

Some Stocks in My Portfolio are Up More Than 100%!! But…

Markets are rising. Now no credit to me for telling you that. Credit is only deserved by one person who has given us all a new hope to cling onto. 🙂

I am a perennial worshiper of stock market crashes…atleast for next 20 years.

But when everyone around me was talking about how stellar their portfolio returns were, I could not stop myself from having a look at my own portfolio. And when I did check, I saw shares of some very good businesses up more than 80% to 100% in last 3 to 6 months!

I want to believe that I am good at stock market investing.

But then I realized that markets are supreme and I am no good.

I repeat.

But then I realized that markets are supreme and I am no good.

And…

Rising Tide Stock Markets

Rising markets are loved by all. But it’s the pace of this rise that is frightening. Large caps are rising 10% to 15% every day and moving like big icebergs all over the place.

Not sure how long this would last. Lets see..

By the way, I hope you have pre-registered (free) for the launch of Ultra Long Term Stocks.

Pre-Registration closes on 25May-2014.

_________________________________________________________


More Than 400 Investors who have ALREADY Pre-Registered (Free) for Ultra Long Term Stocks.

Join them before 25th May 2014.


Pre-Registrations Have Closed.
_________________________________________________________ 

Answer to the BIG question – “Why Am I Not Getting Richer?”

Didn’t you always have this question? 

That even after earning so much, why are you are not getting any richer?

I guess you must have felt like this before. In a post I did some time back, a person earning more than Rs 1 lac every month was barely able to make his ends meet; but that is before he took matters in his own hands and retired at a young age of 37.

What does it mean?

This simply means that there is something fundamentally wrong about the way we manage our incomes and more importantly, expenditures. But all is not lost. If you are ready to take care of some really simple but critical factors while managing your finances, then chances of you getting richer are bound to rise.

So here are the 5 less-discussed but really important ways to help you become rich.

Reinvest your profits
I have seen people making the mistake of not reinvesting their profits many times (to be precise, 19 times out of 20). Don’t be tempted to spend your profits. If you reinvest profits from your investments, then you would be helping yourself in the long run as you would be contributing to the magic of compounding. And don’t worry if the profit is small. In the long run, compounding takes care of converting small amounts into very large ones.

Control small expenses
Be obsessive over controlling small but wasteful expenditures. For example, just because one of your colleagues has got himself a new phone, you decide to buy a newer one to satisfy your ego. Agreed that such expenditures can give you pleasure & satisfaction. But these would be short lived. And such useless expenditures also dent the process of long term wealth creation. Exercising vigilance over small expenses can help you divert funds from going towards unnecessary expenditures towards better investment (profit) opportunities.

Limit What You Borrow
It is simple common sense. Living on credit card and loans won’t make you rich. Period. It is only when you are debt-free that you can think of saving and investing to become rich. If you are not debt free, then most of your time would be devoted in servicing the EMIs and Credit Card Bills. Think about it.

Assess The Risk
Just because a family member or a good friend introduced you to something which looks-too-profitable-to-be-true does not mean that you should blindly do what you are being told. Asking ‘and then what’ can help you see all possible consequences and risks involved when making the final decision.

Be Willing To Be Different
Just because it did not work for somebody else does not mean it won’t work for you. But more importantly and similarly…just because it worked for somebody else does not mean that it would also work for you. Remember this and assess the risk provided by every opportunity. It’s always possible that life is offering you something unique to benefit from; and which was never offered to anybody else. So be ready and be capable of recognising such opportunities.
Warren Buffett Richest Man
To be rich (& not poor) is glorious and glamorous | 🙂
Note – Most of these 5 points/ways are based on Warren Buffett’s philosophy. Hence the picture above.

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I Am Jealous Of This 29 Years Old Girl!!

According to Bible, one of the Seven Deadly Sinsis Jealousy. And I must confess that I am committing this sin now.

I am jealous.

And I am jealous of a 29 years old young girl. The name of this girl is Tracy Britt. And believe me or not, this girl, employed by Warren Buffett, is his right hand!!

Warren Buffett Tracy Britt
Warren Buffett’s Right Hand.

Now being almost her age, and a worshipper of her boss, its only natural for me to feel jealous. Isn’t it? Anyways, I know Mr Buffett isn’t listening to me, so there is no point in cribbing about it.

Tracy Britt is almost 50 years younger to Warren & he hired her in 2009 when she graduated from Harvard Business School. While at Harvard, she started Smart Women Securities to educate women about finance and investments. It was through this venture that she came in touch with Warren. And as per online sources, she seems to be a tough and a decisive ‘young’ girl. She is known to dismiss company heads with ease!! And just the following statement by Warren Buffett is a testimony in itself about what this girl is capable off:


And though Warren hasn’t publicly identified his successor, he thinks that “Tracy [would] be of particular value, to [his] successor.” One thing which I like about her work is that she gets to travel to Berkshire Hathaway’s smaller subsidiaries, where Warren is ‘too busy or too lazy’ to spend time on!! 🙂 And she is even the chairperson of a few of them!!

I tried finding more about her, but it seems that it is still early days for this girl whom Warren hired as a 25 year old financial researcher, and who is now the Financial Assistant to the Chairman of Berkshire Hathaway. Financial Media has only recently started writing about her.


So for the time being, I will stop adding more fuel to this fire of jealousy. 🙂

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