Oct 10, 2012

NIFTY OUTLOOK (11th October, 2012)


The NSE Nifty spot closed at 5650 which was low level in previous trading session. From last 4 trading sessions, nifty spot loses its strength and shows the profit booking in the market. Technical lower indicators are showing sell signal and moving in overbought situation. On the other hand, nifty spot price line is coming nearer to short-medium-long term moving averages. Day traders are advised to sell nifty future below 5635 level. 5546 will be next support level after 5635.

Happy Trading !!

Megha Investments & Research Team
Posted on Wednesday, October 10, 2012 | Categories:


Book name= Investing the Templeton Way
By= Lauren C. Templeton and Scott Phillips

Some excerpts are views directly from Sir John Templeton while some are views of the authors.
Sir John Templeton is also known as ‘Dean of Global Investing’.
Most of quotes and views are of Sir John Templeton, however some may be of the authors as well, we have tried to clearly state that wherever possible.
Quotations in brackets are our comments.

Major Ideas:
Investing at the point of maximum pessimism.
Divesting at the point of maximum optimism time.
Buy low and sell high.
Invest across geographical markets, in different countries.
Be a bargain hunter in life as in investing to cultivate spontaneous bargain hunter attitude.

     A portfolio with investments around the world is likely to yield, in the long run, a higher return at a lower level of volatility than will a simple, diversified single-nation portfolio.
     There is only one reason a stock is being offered at a bargain price: because other people are selling. There is no other reason. (To get a bargain price, )you have to look where the public is most frightened and pessimistic. (Comment: Think also about the problem with the investor and not just the problem with the company)
     Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.

     ...bargain hunting does not have to be relegated to investments alone.
     ...a great bargain is for example when an asset is selling at an 80% discount to its value.
     ...buying stocks when no one else will is difficult for the majority of investors.
     Contrarian investing is not commonplace because the approach in it is counter intuitive to the way we conduct our normal day-to-day lives-we always look for optimistic scenario and promising horizons.
     Sir Templeton moved away from Wall Street so that he can develop ability to think differently than the people on Walls Street.
     To make the jump from just another smart guy or gal placing money in the stock market to a successful investor requires a little something extra, and that something is called good judgement.
     ...if the courthouse steps are full of bidders shoving each other and screaming bids to good bargain. (The important thing to remember is that ) if you buy and sell stocks, mutual funds, or anything else in the same fashion as everyone else, your returns will be just like everyone else’s.
     The Great Depression had persisted for a decade.
     ...buyers and sellers of stock change their opinion about the company for any number of reasons.
     It is important to realize that people in the stock market sell the stocks they own for reasons that sometimes have little or nothing to do with what they suppose a company is worth.
     ...brokers like news and hypes about stocks...in fact, they accomplice in many ways in dispersement of rumors and news so that we buy and sell stocks on impulsion or to discount the rumors or news.
     A tremendous body of research conducted over the last 50 years empirically confirms that stocks carrying a high ration of price to sales, price to earnings, or price to book value make bad investments over the long run.
     ...learn what has caused the stock to lose favor.
     When people start to lose money in s stock, they instinctively ‘stop the bleeding’ by selling stocks. (however, there is also another counter argument, that people do not sell and hold on to stocks even when it is falling constantly because of loss-aversion bias and thus lose a lot of money in trading and investing both)
     ...look to purchase a company whose problems have been exposed to the stock market.
     You should learn to distinguish ‘small problems’ from ‘big problems’ and take advantage of situations in which the stock market has overreacted to a small problem...
     Understanding the history of the market is a huge asset for investing.
     ...people overreact to surprises in the stock market. They always have and always will.
     In stock markets, a group of individuals bring their money and opinions into the stock of a specific company and then bid the price of that stock up and down on the basis of events that unfold in front of them.
     ...the importance of studying the situation ahead of time.
     You can not identify, predict, and prepare for every little risk you may face in the future. However, you can prepare for common types of events.
     There is no substitute for donig your homework when it comes to investing.
     In value investing the price of success is paid in advance.
     ...the only thing that changed was the onlookers’ perception of the stock. ….In sum, the only variable that changed were the ‘investing environment’.
      ...is to condition yourself to purchase stocks on rainy days in the market and sell them on sunny days.
     Volatility presents opportunities. The greater the volatility, the greater the opportunities to locate a bargain......if you are a purchaser of popular story stocks, volatility is your enemy.
     The truth is that all companies face problems; some are better known than others, and some are more serious than others.
     Ask for where the outlook is most miserable, than looking for where the outlook is good for successful bargain hunting as per Sir Templeton.
     When sentiment changes, it changes very quickly. If you wait for sentiment to change before you invest, guess what? You are following the crowd. (...so you have to ignore ‘investors’ sentiment’ and ‘investment environment’ thesis...)
     When sentiments changes, it changes very suddenly, and if you are not invested, you will miss out on a large proportion of the returns. These initial returns may be enough by themselves to separate you from the average returns of the market.
     The only investors who shouldn't diversify are those who are right 100 percent of the time.
     ...combining diversification and bargain hunting into one strategy.
     Does the stock market have to go up for you to make money? The simple answer is no.
     ...the stock market contains a number of individual bull markets and bear markets. In fact, each stock is its own stock market; that is, each stock is composed of a number of buyer and seller. In applying this perspective, it is possible to locate a number of stocks that could perform well during a bear market for the indexes or poorly during a bull market for the indexes.
     Many great investors...went through periods of under performance in spite of their long-term ability to outperform the market.
     The time to reflect on your investing methods is when you are most successful, not when you are making the most mistakes.
     ...working harder than the next person is what he refers to as the ‘doctrine of the extra ounce’.
     Henry Ford: ‘Genius is 1 percent inspiration and 99 percent perspiration’. Uncle John believes that in all walks of life, those who became moderately successful did almost as much work as those who were the most successful. In other words, what separates the best from all the rest is a willingness to put in that one extra hour of reading, that one extra hour of conditioning, that one extra hour of training, that one extra hour of study.
     ...we have found that the market is still teeming with stocks that have no research coverage or only a few analysts covering them. These stocks should be considered a prime hunting ground for bargain hunters...
     For Uncle John the guiding light most often has been the P/E ratio...is a good proxy or starting point for valuation....one of the basic premise is to pay as little as possible for future earnings.
     Uncle John often looked for stocks that were trading at no more than five times the current share price divided by his estimate of earnings five years into the future. (P/E of 5 in 5th year’s estimated earnings)
     ...Most analysts tackle this question by forecasting a reversion to the average historical results of the company, provided that no substantial changes appear to be on the horizon for the company or its industry.
     ...A conservative bargain hunter may forecast with the 5 per cent margin...
     This method of applying conservative assumptions in one’s forecast creates a ‘margin of safety’.
     Uncle John believed that currency trends last for years.
     ...USA is poster child of spending.
     Asian financial crisis came in 1997-98, and Argentina crisis in 2001.
     If you want to avoid companies operating in riskier currencies, focus on companies with over 25 percent of their business performed in countries that export more goods than they import. (countries having trade account surplus)
     ...the country does not have government debts that exceed 25 percent of its annual gross national product. This measure gives bargain hunters a benchmark for what a conservatively managed government balance sheet should look like.
     The basic idea here is that when you locate bargain stock ideas, you need to make an honest attempt to find out why they are mispriced.
     ...group of stocks are underpriced because of a common factor..a single stock is mispriced because of individual factor.
     In the early 1960s, the Japanese economy was growing at an average rate of 10 percent and the U.S economy was growing at an average rate of around 4 percent.
      The investors can create negative biases against stocks, industries, stock markets, and asset classes. Those biases serve as a set of blinders that keep investors from even considering bargain ideas.
     The problem with neglected stocks is that they reward patience. The wait literally can be several years.
     Those who still resist the idea of selling ‘too soon’ must realize that if you hold on to your stocks as they rise above their estimated worth, you are joining a game of speculation and have left the sphere of investing. (we can overcome this conceptual difficulty by booking out some stocks when the stock price is overvalued and collect back the return or even the original investment (you can hold stocks with zero cost only when the stock price has doubled or the stock price and the dividends, bonus etc have in combined resulted into doubling the present stock price from your actual purchase price. The point is there are ways you can hold for ‘speculative gains’. However, you must be aware of that. Also, if you follow the ‘booking out whenever overvalued’ doctrine, you have to remain very active in buying and selling stocks, as every (most if not all, in its lifetime) stock become overvalued. This will amount into churning every stock at regular interval or say, 5 year at max, so if you are a lifelong investor, you can choose to remain invested even if the stock prices are soaring to speculative euphoria and you are gaining thousand fold returns. These is called lifelong investing. This is Buffett style investing. These is investing for dividends and wealth for next generation. So, in such case don’t worry about the ‘doctrine of booking out when overvalued’.
     ..not to invest blindly in situations in which information is lacking.
     ...bargain hunting should not run from misinformation should not run from misinformation but embrace it and seek the truth.
     ...as a successful bargain hunter you must remain an agnostic about the superficial distinction between a value investor and a growth investor and resist creating biases that prevent you from spotting bargains.
      the PEG (price/earnings to growth) is simply the price/earnings ratio of the stock divided by the long-term estimate of growth in earnings. (the less the PEG ratio, the better it is)
     Ratios are not necessarily the beginning and end to investing unless you have investigated everything in between and trust that the relationship is true.
     To prevent possibility of churning your stocks and creating wasteful activity, Uncle John recommends that you purchase a replacement only when you have found a stock that is 50 percent better.
     To have staying power in the game, you must remain focused on the next opportunity.
     ...mechanical, quantitative process of comparing bargains with one another should continuously push you into the best bargains available and out of harm’s way.
     First and foremost, bargain hunters are not looking to follow the masses anywhere, period.
     Uncle John was asked about finding the point of maximum pessimism, and his advice was ‘to wait until the ninety-ninth person out of a hundred gives up’.
     ...and now the last group of buyers was coming into that market. Once they were in, who else was left to buy commodities and bid them higher? No one.
     ...if you have only one method for selecting bargains, you may miss obvious opportunities elsewhere.
     ...stock prices relative to the replacement values of assets.
     ...one always should be an active interpreter of financial ratios.
     Bargain hunters are active interpreters of the data and dig deeper to interpret accurately what is being presented to them in accounting terms and then compare and contrast the data with what they see as the real world economic reality of the situation.
     Remaining in a constant search for the best bargains in the market prevents the bargain hunter from missing opportunities...
     ...spend nearly as much time researching the company’s competitors as they do researching the company itself. Best information on any company often came from competitors rather than the company under consideration.
     Enterprise value= equity market value (market cap) + total debt - cash
     ...the company’s enterprise value is 3 times its EBITDA and we have observed competitors in the industry buying other companies for 6 times their EBITDA, we may be able to conclude that the stock is bargain on this basis.
     Uncle John reasoned that companies purchasing their own shares provided good confirmation that share prices had fallen too low relative to the worth of the companies....
     The way to overcome this human handicap is to rely on quantitative reasoning versus qualitative reasoning. Uncle John always told us that he was quantitative in practice and ‘never liked a company, only stocks.’
     Tulip bulb bubble was in 1630s in Holland. There was a Mississippi bubble conceived by French speculators. There was a South Sea bubble in England in 1720. The wireless telegraph bubble of 1904 was in USA.
     Remember the first rule in bargain hunting for stocks: Distinguish between the stock price and the company the stock represents.
     Many day traders committed the cardinal sin of confusing a bull market with genius and quit their jobs to trade full-time.
     Day traders have been an ongoing fixture in bubbles dating back at least to eighteenth-century England. In every instance, their willingness to leave all their worldly duties behind in exchange for stock market riches has been unquenchable.
     Julian Robertson was a successful value investor.
     ...individual investors now account for more than 30% of the New York Stock Exchange’s trading volume, up from less than 15% in 1989.
     Short selling is not for the meek investor because the most you can make in a short sell is 100 percent.
     John Maynard Keynes said ‘Market can stay irrational longer than you can stay solvent’
     Story stocks typically are backed by some product on which investors become fixated. Some of those stocks did not even have products backing them. These were stocks representing companies that in many cases were not really companies in a traditional sense but were just ‘business ideas.’
     ...day traders were running the show, and the main feature was momentum.
     It is not unusual to invest a little early and feel the pain of watching continued selling in your stock and seeing its price drop.
     ...Sir John bet $185 of his own money that tech stocks would plummet at the height of the bubble.
     ...the point of maximum pessimism is-when the last holder decides to throw in the towel and sell the stock, all the sellers by definition are gone and buyers are all that can be left.
     ...the path from euphoria to pessimism takes time, at least months but more often years, just as the path from pessimism.
     ...when sellers are scared and driven by fear, represents the best of these opportunities.
     Typically, the best opportunities to capture these bargains come during periods of highly volatile stock prices.
     Bargain hunters seek misconception, and panicked selling is the height of misconception because of the overwhelming presence of fear. People’s fear become exaggerated in a crisis, and so do their reactions.
     ..investors can be assured that there will be future instances of stock market selling that are based on a crisis or panic. However, you also may notice that these events do not happen every day. In fact, you could surmise that only a few pop up every decade.....you need to realize that these are precious opportunities.
     ..best time to buy is when there is blood in the streets, even if some of it is your own.
     The goal in investing is to raise your long-term returns...
     One of the simple truths in media is that negative news gets attention and positive news does not.
     ...journalists covering the events are experts at focusing on the problems at hand and magnifying them for the public.
     1962 sell of in USA stocks known as Blue Monday.
     The simple fact that bad news sells newspapers is good news for the bargain hunter. The public’s fixation on bad news and the media’s willingness to supply it to the public ensure that the stock market periodically will receive too much negative attention.
     ...leader’s behaviour under great pressure. Leaders are defined by their actions when the chips are down.
     Similarly, the most successful investors are defined by their actions in a bear market, not a bull market.
     ...to buy in a panic and free fall market requires far more than the ability to analyze a company.
     One way Uncle John used to handle this was to make his buy decisions well before a sell-off occurred.
     Keep a ‘wishlist’ of securities that you want to buy at prices.
     Each crisis probably will look at least somewhat different from precious ones...
     The Asian financial crisis is acknowledged to have begun with the devaluation of Thailand’s currency (the Thai baht) in July 1997.
     John Templeton published a book called ‘The Templeton Touch’ in 1983.
     South Korea often is referred to as the best case of an economy rising from poverty to industrial power. The country’s economy had the highest average growth in the world over the 27-year period leading up to the Asian financial crisis.
     Chasing good performance in mutual funds is often no different from chasing good performance in individual stocks.
     The truth is that bargain hunters should look to buy mutual funds after their performance has been bad rather than good, provided that the managers are capable investors.
     ...how long the fund manager holds the average stock in his or her portfolio.
     The internet (NASDAQ) bubble of 2000 was the biggest bubble of all.
     Bond investors can operate the way stock bargain hunters do and look for mispricings, good deals, and so on.
     The concept of ‘imputed interest’.
     ‘Greenspan put’= the idea that markets will always be bailed out by Federal bank’s expansionary monetary policy.
     Japan had exceedingly low interest rates because of the lasting effect of an economic downturn that was precipitated by its own stock market and real estate bubble. Japan had kept its interest rates at very low levels since its 1990s.
     Manhattan is the commercial and financial center of USA.
     Forward thinking is the calling card of successful bargain hunters.
     Always looking for investments differently than others do (whether in a different country, with a different method, with a different time horizon, with a different level of optimism, or with a different level of pessimism) is the only way to separate yourself from the crowd.

Our disagreement points:
There are some ideas, tactics and concepts given which are given as bargain hunting investing strategy, however we believe they are not ‘investing’ or ‘value investing’ but are ‘trading’ ideas.
At one place the authors have mentioned that ‘if you are reading a research report, the information is already into the stock’. We strongly disagree, as this is implying ‘perfect discounting’ which can not be possible in markets. Market discount past, present and future (information available in public domain, information available in private domain, event which has occurred, event which is occurring, even which is yet to occur) information/inputs in completely