How to be an intelligent investor

When do we like to purchase any goods or services - when their prices are high or when they are low? Are discounts good for us or are they bad? While all of us run when we hear word discount and sale, our actions are exactly opposite when it comes to equity investing.

Legendary investor Benjamin Graham in his book "The Intelligent Investor" has stated that stocks become more risky when prices are high and less risky when prices are low. This we know is also true for all our purchases. Goods and services are less attractive when prices are high and more attractive when prices are low. However while investing in equity markets we sell our stocks when prices are falling (low) and when they are rising we feel safe to invest.

Investing is a strange business. It's the only one we know of where the more expensive the products get, the more customers want to buy them - Anthony M Gallea

In year 2002 when equity markets were at its bottom after technology bubble had busted, one of my new client was shocked when I recommend 25% of his allocation into equity. According to him equity market was speculation den. Same client about six months ago called me up to check if it was alright to park his entire PPF maturity proceeds into equity.

Another interesting observation made by Benjamin Graham is that an individual considers someone a speculator if that person was to invest in equity markets after they have fallen massively – say may be after a bubble burst. Same individual will treat someone as an investor when that person invests into equity markets after they have risen sharply. What is more speculative in nature - to invest at low levels or high levels?

Since it is difficult to see future, we take shelter in past to predict future. It is like driving the car by only looking into rear view mirror. Rear view mirror only reflects the road, which has already been traveled. The reason we consider an investor speculator when he invest after markets have fallen is because we are referring our judgment on past events. The same is true when we refer to someone as an investor after markets have risen. However we all know that “past performance may or may not be repeated” – To drive ahead we need to look in front and not in rear view mirror.

It is common sense that to earn good returns we need to buy low and sell high. This also means sailing against the tide. Buy when everyone is selling and sell when everyone is buying. This strategy is called contrarian strategy.

It takes patience, discipline and courage to follow the contrarian route to investment success: to buy when others are despondently selling, to sell when others are avidly buying - Sir John Templeton

The reason Sir John Templeton says it requires courage to be contrarian is because as human beings we prefer being with the crowd. We are not comfortable being seen opposite the crowd. When we are on opposite side of the crowd whole world can see us. We feel that if we make mistake then crowd will laugh at us. On the other hand if we are with the crowd and even if our strategy goes wrong nobody will laugh as everybody would have gone wrong.

Finally ending with one more quote from Benjamin Graham “Individuals who cannot master their emotions are ill-suited to profit from the investment process”.

-Gaurav Mashruwala
The author is a Certified Financial Planner. He may be reached at gmashruwala@gmail.com

Open message to Indian PIGS!

I am an Indian. We, Indians are PIGS. We are happy dwelling in drainage. Like PIGS, we are happy with drainage outside and in minds. We do not want to come out of drainage. Like PIGS, we just grow in number.

We do not think better than PIGS. We are just as mad as PIGS.

Let's change being like PIGS.

Let's give new meaning to PIGS : Persist in Going Strong; Promote India (to) Global Standard; Power Inside is Great Strength;

I am a PIG; (PIG: Power in GOD*! ) I think, if I can change the meaning of PIGS, so can every other PIG.

- Meganathan, an Indian PIG!
*GOD - Generate - Order - Develop*

Five Tips to Increase Your Likeability In the office and the world

By Justin Hartfield

Being likeable isn’t required in order to achieve the position or job of your dreams, but it helps. When other people are on your side providing you with encouragement, helpful tips, and even free resources, it can greatly increase the chances of success in your chosen field and in life. Many times, it is not what you know but who you know.

While the listing below may seem to be cursory and easy to implement, they are not. It is difficult to make real and permanent changes in your personality. The process of becoming an exceptionally likeable individual takes years. Do not let that intimidate you, however. Remember: the journey of a thousand miles begins with a single step. Likeability, like drawing, writing or golf, is something which must be practiced.

1. Be positive.

The single most common problem facing individuals who want to become more popular/successful/likeable is their own attitude. Attitude is everything. Attitude is the reason why you aren’t as popular now as you want to be. More specifically, it is a negative attitude which can poison your relationships with your coworkers, and indeed the world. Developing a more positive attitude does not mean ignoring hardships or failures. It is simply reframing those difficulties and negative emotions to healthier positive ones. The old cliche, "When life gives you lemons, make lemonade," has been around for a while because it is exactly the winning attitude which people are attracted to, and it is exactly the attitude which brings rewards.

Why do you complain? Why do you have pet-peeves? What is the point of harboring all of these negative emotions? Be big enough to let them go. Use your rational mind and refuse to be overcome by these negative emotions. My pet peeve used to be people who had poor pronunciation. Like 'nuclular' instead of 'nuclear' or 'basttitized' instead of 'bastardized'. However, I realized that it really didn't matter how the person pronounces the word as long as I can understand the point they are making. I can fix their errors mentally. I know now that even I, yes even the great I, is prone to mispronounce a word once in a while as well. Instead of highlighting failures and differences try to build commonalities and connect with your peers.

"Don't be discouraged by a failure. It can be a positive experience. Failure is, in a sense, the highway to success, inasmuch as every discovery of what is false leads us to seek earnestly after what is true, and every fresh experience points out some form of error which we shall afterwards carefully avoid." - John Keats

2. Control your insecurities.

Insecurities oftentimes come leaping out of a person's brain and mouth so quickly that the speaker has no idea what words he just blurted out. People that always have to be correct are insecure. People that constantly saying "just kidding!" after every single joke are insecure. People that respond to a joke at their expense with anger or insult are insecure. Insecurity beguiles confidence and weakens your Self. Becoming a better individual means accepting your Self, and not hiding it under the veil of insults, "just kiddings", or factoids.

Either you accept mediocrity about your personality completely and without shame, or you change it. Period. If you're fat, either go on a strict diet and exercise regime or accept it and even be willing to poke fun at yourself. If you have a high voice, buy some tapes to help you improve your tone or be willing to not only accept but love your squeaky vocals. Display your faults for all the world to see - mistakes are unifying characteristics which all humans can empathize with. Not only is perfection limiting, it's boring as well. The mark of a mistake-free life is one which has not been fulfilled.

"The only man who never makes a mistake is the man who never does anything." - Theodore Roosevelt

3. Provide value.

The only thing worse than an insecure person is one who is so completely and utterly shutdown from the world that they refuse to display any personality at all. If you work in an IT company like I do, you know exactly what I mean. There are developers there who display exceptional intellect and foresight on their projects but when it comes to simple human interaction they lack the social graces (or *gasp*, bravery) to wish you a good morning. In order to be around people with value you must be able to convey value. There is no alternative. If you are humorless, read books on comedy writing; if you are boring, go out and do something adventurous. Experience life and share your findings with your coworkers.

Have you ever noticed that successful people often flock together? I have heard countless stories of brilliant scientists or businessmen who were close friends with other successful individuals before they gained their notoriety. In parallel, have you noticed that drug addicts and criminals often associate with each other? This isn't coincidence. You are the sum of all of your friends and close associates. Choose your friends with care, just because you grew up with someone does not mean you are forced to be their friend for the rest of your life. Start surrounding yourself with people of value and it will become a self-fulfilling prophesy.

"The art of being yourself at your best is the art of unfolding your personality into the person you want to be... Be gentle with yourself, learn to love yourself, to forgive yourself, for only as we have the right attitude toward ourselves can we have the right attitude toward others." - Wilfred Peterson

4. Eliminate all judgments.

Judgmental people are usually easy to spot because they are the ones eating alone in the lunch room. They think of themselves as 'too [flattering adjective]' to have lunch with those guys in shipping and 'too [unflattering adjective]' to eat with the guys in IT. No one is above you and no one is below you. We are all mammals - humans, more distinctly - just trying to get by the best way we know how. Do not believe for a second that there are unwritten 'leagues' or 'classes' which people must adhere to. All of these boundaries are artificial, put in place by people who are in desperate need for justifications of their own failures. No judgments means treating everyone with the respect you would give to a 120-year-old man and the understanding you would give toward your seven-year-old cousin.

"Beginning today, treat everyone you meet as if they were going to be dead by midnight. Extend them all the care, kindness and understanding you can muster. Your life will never be the same again." - Og Mandino

5. Become a person of conviction.

In order to gain respect you must start respecting yourself first. You must set boundaries on behavior and let people know that you are not a pushover. Make no mistake, people will test you in order to find out exactly where your boundaries are. This means saying 'no' to disrespect and letting the offending party know that he or she crossed the line with their comment and you did not appreciate it. People will respect you more when they realize that you are not someone who is malleable or valueless.

Set your own personal unbreakable code of ethics. Make it as rigid as your morals will allow. When you are faced with an ethical dilemma, reference this code. If no precedent exists, create one. Let it be your ever-expanded guide which will provide you stability in an otherwise chaotic world. If your boss requests you to do something that is in incongruence with your core values, simply refuse and explain your reasoning. You may be surprised how understanding they might be.

"One needs to be slow to form convictions, but once formed they must be defended against the heaviest odds." - Mahatma Gandhi

Billion dollar investing tips from Warren Buffett by N J Yasaswy

Excerpted from Intelligent Stock Market Investing by N J Yasaswy.

Widely considered the most successful investor of all time, Warren Buffett is a luminous example of the school of value investing. Starting with an initial fund of $105,000 in 1956, Buffet grew it to $45 billion over the next 50 years, making him the second richest man in the world. Though he is widely recognized as being an investor, the bulk of Buffet's wealth was built through intelligent use of leverage offered by his insurance companies. Since most individual investors do not have access to the type of capital that Buffet does, it is not easy to replicate his astounding wealth-building feat. However, by understanding and applying the basic guidelines of Buffett's investment approach to their own investing decisions, most long term investors can comfortably beat the returns of all but the best mutual fund managers.

So, how did Buffet accumulate the huge fortune that he eventually gave away to the charitable foundation run by his best friend, Bill Gates? One of the greatest attractions of Buffett for investors is that his investment methodology is easy to understand. However, it is far more difficult to apply because it calls for large amounts of patience and calm when your stocks move against you. It is also difficult to apply because it requires an orientation towards research and the ability to understand the complexities of accounting and finance. But for those willing to invest time and effort into mastering this approach, superlative investment performance over the long term is guaranteed.

Invest in Businesses, Not in Stocks

"Whenever we buy common stocks for Berkshire's insurance companies (leaving aside arbitrage purchases), we approach the transaction as if we were buying into a private business. We look at the economic prospects of the business, the people in charge of running it, and the price we must pay." -- Warren Buffett

This is the cornerstone of Buffett's investment style. Whenever he evaluates an investment opportunity he analyses it as a business and not as a stock. This makes him look closely at the company's fundamentals, earnings prospects, financial health and management. Conversely, this style of evaluating a business prevents him from buying a stock just because it is going up even though it has dubious prospects. A lot of investors tend to buy stocks based on tips from friends, acquaintances or brokers. By adopting Buffett's approach, you can save yourself a lot of grief later on.

Only Buy Businesses that You Understand

"Did we foresee thirty years ago what would transpire in the television manufacturing or computer industries? Of course not. Why, then, should Charlie and I now think we can predict the future of other rapidly evolving business? We'll stick instead with the easy cases. Why search for a needle buried in a haystack when one is sitting in plain sight?" -- Warren Buffett

Buffett has a track record of generating 21 per cent annually compounded returns over a 50-year time frame, a feat matched by very few investment managers. Though technology companies delivered some of the best returns during this period, Buffet has never owned one for the simple reason that he could not understand the long term prospects of these companies and evaluate them thoroughly. So the next time you get a tip to buy a "hot" company that you do not understand, you should ask yourself: "If the greatest investor in the world will not invest in something he doesn't understand, should I?"

Buy Companies with Defensible 'Franchise'

"As Peter Lynch says, stocks of companies selling commodity-like products should come with a warning label: 'Competition may prove hazardous to human wealth'." -- Warren Buffett

Most of Buffett's portfolio companies, such as Coca Cola, Gillette (now Procter and Gamble), American Express and Washington Post, are businesses which have a significant hold over their market. This is because they have inherent competitive advantages, whether it be a highly recognizable brand, or near-monopoly status in a geographic area. Such companies can typically raise their prices without fear that customers will walk away. This in turn produces fantastic earnings growth and, consequently, great investment performance. So, before you make an investment in future, try to understand whether the company you are investing in has a strong and defensible market position and whether it can raise prices if it needs to.

Hold for the Long Term

"We are willing to hold a stock indefinitely so long as we expect the business to increase in intrinsic value at a satisfactory rate . . . we do not sell our holdings just because they have appreciated or because we have held them for a long time." � Warren Buffett

Buffett's companies have generated enormous returns for him. For example, his investment of $10 million in 1973 in the Washington Post Company had grown to more than $1 billion by 2003. While a lot of us may be able to do this occasionally, Buffett has generated such returns with startling regularity. One of the reasons he is able to do so is because he holds for the long term and is not quick to enter or exit businesses. In fact, he stuck with WPC for two years even though its price fell below his purchase price because he understood the fundamentals of the business and believed that it was undervalued. Even once it became profitable, he was not quick to exit because he believed that it had greater potential. He held it through several bull and bear markets and no greater proof is needed than the return he achieved to show that he was right in holding it for so long.

Ignore Short-Term Fluctuations in Price

"Charlie and I let our marketable equities tell us by their operating results�not by their daily, or even yearly, price quotations�whether our investments are successful. The market may ignore business success for a while, but eventually will confirm it." � Warren Buffett

The stock market has a tendency to overreact on both the upside and downside. Often the market ignores the fundamentals of a business and reacts sharply to news flow. Sometimes entire sectors become either unduly depressed or overpriced. One of the key pillars of Buffett's approach is to ignore short-term fluctuations in price. He does not sell a stock because the market suddenly decides to drop. Neither does he buy one because it is going up. Once Buffett has calmly evaluated the fundamentals, he will buy the stock if its price is right. If the stock dips after he has purchased it, he does not worry so long as its fundamentals are good. Had he gotten jittery due to short-term price fluctuations, he would have been a lot less richer than he his currently.

Buy Good Businesses When Prices are Down

"If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they feel elated when stock prices rise and depressed when they fall. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices." � Warren Buffett

On 19 October 1987, all global stock markets crashed. The Dow Jones Industrial Average actually suffered a decline of 22 per cent, the greatest single-day drop in its history. Every stock on the market fell. Most people sold their holdings in panic that day. Buffett, however, was buying! He made the single largest stock purchase of his life that day. While all others around him hit the panic button, Buffet bought 10 per cent of Coca Cola for $1 billion. Not only was it his largest single stock purchase, he also became the single largest shareholder in the company. In his analysis, Coca Cola had a great business, great long-term prospects and the ability to expand because of globalisation. If the market was willing to sell it at an unreasonably cheap price, he wanted to scoop it up with both hands. And scoop it up he did! Coca Cola became one of the most successful investments in Berkshire's portfolio. By 2006, Buffett had made over $11 billion on Coke since he bought it.

Don't Be an Active Trader

"Indeed, we believe that according the name 'investors' to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a romantic." � Warren Buffett

Buffett is an atypical investor not only because he is highly successful, but also because he does not even look at stock tickers. He believes that trading too much is a tax-inefficient and costly approach to investing. Consequently, he has a very low turnover portfolio, very low brokerage charges and has not paid very much in the nature of capital gains taxes.

Do Not Over-Diversify

"If you are a know-something investor, able to understand business economics and to find five to ten sensibly priced companies that possess important long-term competitive advantage, conventional diversification makes no sense for you." -- Warren Buffett

A striking aspect of Buffett's portfolio at Berkshire is the small number of stocks in it. This number has rarely exceeded 10 stocks. Buffett believes that there are very few outstanding investment opportunities at any given point of time and that one should invest enough in each of those to make a substantial difference. In contrast, most people fill up their portfolios with more than fifty stocks. As a result, even if a stock appreciates 100 per cent, the impact on their net worth will only be 2 per cent. Investors who want to generate truly outstanding returns should identify a small number of great businesses at the right prices and invest a significant amount of their money in each of them.

Invest Only When There is a Margin of Safety

"Margin of safety" is a slightly difficult concept to understand. It can be loosely defined as the difference between value and price. If the value of what you buy is higher than the price you pay for it, you have a high margin of safety. If the price you pay is greater than value, you have a low margin of safety. When the margin of safety is high, the investor need not worry about short-term fluctuations in price and can buy more if he or she has the resources to do so. Also, if you are investing in a situation with a significant margin of safety, you are likely to make a higher return because you are buying at a relatively low price.

However, how does one quantify this margin of safety? It is admittedly a grey area. There are seemingly scientific approaches, such as the discounted cash flow, which are taught in most corporate finance textbooks. In practice, though, it is both very subjective and very difficult for an individual investor to apply. However, there are other short cuts which are more approachable. Since the discounted cash flow ultimately crystallizes into the price / earnings (P/E) ratio, one way of estimating the margin of safety is to look at the P/E ratio. A low P/E means there is a margin of safety. But even this approach has its pitfalls. Slow growing, lousy companies often tend to have low P/E ratios. And, sometimes, very promising companies have high P/E multiples.

One way around this problem is to divide the P/E ratio by the growth rate of the company's profits to arrive at its price-earnings to growth ratio. Thus, if a company's P/E is 20 and the growth rate of its profits is 20 per cent, its PEG is 1. Oftentimes, a PEG of less than 1 implies that there is a significant margin of safety. A PEG of greater than one means that the margin of safety is not very high.

That said, PEG is not the holy grail of valuation and there are several ways to value a company -- and all these approaches have their flaws. You can consider your time well invested if you spend some time researching valuation by reading a corporate finance textbook.

Thus, Warren Buffet's investment approach is easy to understand, but calls for significant effort on your part to understand businesses, evaluate them and invest successfully but then, nobody said that becoming a billionaire was easy!