Stock Market Survival Tools - Part 2

Today I'll be covering the 2nd survival tool which is Invest in expensive oars: Wealth Creators

Good for low-risk investors or the retired, is the strategy of buying wealth creators. These are companies, who on a long-term basis, continue to generate high levels of return on capital employed, require the least amount of capital, pay high dividends, have significant competitive advantages, completely write-off expenses, pay huge taxes and still manage to consistently grow revenues and profits year-after-year.

Not just dividends, the share price too grows year on year, though maybe at rates that are more mature than a pure growth play. Over the long term, these companies are real wealth creators, having thrown off income and given capital appreciation too.

And over a period of time, a small investment emerges as a pot of gold. For example, Gillette has a huge untapped market in India. The company has significant technological advantages, healthy margins and returns and, needs little money to keep its business growing, which is why it can continuously grow for many years to come.

But such companies don't come cheap. You need to pay a high price to be a part of this business as valuations are typically high for wealth creators. Companies with a consistent performance track record and capable of rewarding shareholders through handsome returns can be classified as wealth creators.

Not many manage to stay afloat on the stock market rapids. If we look at some 4,700 listed companies, less than a dozen will stay afloat on these parameters. Companies like Gillette, Proctor & Gamble, and GlaxoSmithkline, among a few others make it to this list.
However, it is not that once a wealth-creator will always be so. The company could do badly or some external factor could change the rules of the game. For example, Hindustan Lever went out of favour of the market for no fault of its own. The company was and continues to be efficient, but the big change that has happened is that its competitors have learnt the tricks of the trade and have become equally competitive.

They have managed to become negative in working capital, generate high return on capital employed, expand their distribution and supply chain in an efficient manner using the latest technology, and can now be said to be on par with Lever.

So, don't buy and forget. It is important to continuously monitor the company to ensure that its inherent strengths and competitive advantages remain in place, which in turn will enable it to consistently grow your money.

Stock Market Survival Tools

With stock market riding at all time high , people are really nervous about the market. When should a investor actually start pumping in money? Well its difficult to time the market. People who have tried to time the market have mostly incurred losses. So rather than timing the market lets look at some of the strategies which an investor should adopt to reduce risk involved as well as reduce losses.I'll be discussing 1 survival tool daily. For the day its value investing

Get a good boat and hold on tight: Value Investing

If Benjamin Graham in 1954 coined the term 'value investing', other investment gurus like Warren Buffet, Irvin Kahn and Charles Munger took it forward. Although value investing means different things to different people, the core of this strategy is to follow quantitative or fundamental analysis.

Thumbs Rules
Investigate before you invest and not vice versa.

Buy companies doing business that you understand.

In times of panic, be greedy and buy good companies.

Control your emotions -- greed and fear.

Be honest with yourself -- book a loss if you think you have gone wrong.

Avoid momentum investing.

Do not fall prey to herd mentality and take tips with a pinch of salt.

Buy more of a stock if it falls, provided you have confidence in the company.

Don't gamble -- no day-trading, no leveraged deals and no loan against shares. Follow your stocks periodically and see that all conditions (such as entry barriers and basic investment ingredients) continue to be in place.

Hold a company for 3-5 years.

Always look for bargains.

Look for businesses that are in potential growth areas.

Avoid companies that are in a dying business segment, even if they offer value.

Invest in businesses which have a sustainable competitive advantage.

It believes that all clues that are relevant to identifying a stock market winner are present in the balance sheet of a company. The company's annual report and share price data, it believes, gives enough pointers to arrive at whether a stock is expensive or cheap. So, apart from looking at how fast and consistently the net profit figure is growing, other clues are the debt-equity ratio that needs to be low, the dividend track record uninterrupted and the price-to-earnings and price-to-book-value ratio be low.

The trick is to identify and buy stocks that are cheaper than the intrinsic value of the company. The key determinant of the decision is value and not price. And just like white-water rafting needs you to hold on confidently, whatever the size of the drop, do the same with value picks: invest with conviction and hold on patiently.

Another approach to value investing looks at picking up high dividend yield stocks that throw off regular income, apart from gaining weight in price. Finally, as Manish Sonthalia, vice-president, equity strategy, Motilal Oswal, says: 'Don't take a short-term approach to value investing. If you believe the value will be much higher in future, you should not get out when the stock appreciates by 20-30 per cent.'

One way to get to these stocks is to check the value of cash, liquid or business assets a company owns and buy only those companies that are quoting much below their intrinsic value. This value at some point of time should get unlocked, though the ways in which it is done could differ.
For instance, we have seen in the past, and even recently, how demerger of different businesses owned by a company into separate companies results in the unlocking of value for its shareholders. Some examples include Godrej Consumer, Dabur India and Reliance Industries.
Also, many a times, the stock market tends to ignore companies that are largely under-performing in their respective businesses, and treats them with poor valuations. That's a perfect time to buy such stocks.

For example, Raymond was once (in April 2000) quoting at Rs 75, when it had reported Rs 32.6 crore (Rs 32.6 million) net profit for 1999-2000. Then, its enterprise value (market capitalisation plus debt of Rs 764 crore, or Rs 7.64 billion) stood at Rs 1,327 crore (Rs 13.27 billion). But, if one were to analyse the value of its net liquid assets (cash and investments of about Rs 100 crore, or Rs 1 billion), and its steel, cement and textile businesses, the company's worth was much more.In fact, excluding the steel and cement business, which Raymond sold for a consideration of Rs 1,126.9 crore (Rs 11.269 billion) a year later (resulting in profit on sale of assets of Rs 455 crore, or Rs 4.55 billion)), the company's value (mainly the textile business) in terms of value per share worked out to less than Rs 30. Today the stock is quoting at Rs 404.
However, in such situations, investors need to take a call on how soon and successfully the management can turn the business around. This last call -- will the management turn the company around or utilise the undervalued assets -- is where pure number crunching fails to work.

Vikram Pandit

Vikram Pandit is the current CEO of Citigroup.

Pandit worked for Morgan Stanley for two decades and was the President and Chief Operating Officer of the Institutional Securities and Investment Banking Group at Morgan Stanley where he was responsible for the overall management of the group and focused on the trading, sales and infrastructure aspects of the business (2000-2005). Before that, he served as the managing director and head of the Worldwide Institutional Equities Division (1994-2000), and as the managing director and head of the US Equity Syndicate (1990-1994) for Morgan Stanley. Pandit left Morgan Stanley with a few colleagues to start a hedge fund Old Lane Partners, which

Citigroup bought in 2007 for $800 million.
Pandit serves on the boards of Columbia University, Columbia Business School, the Indian School of Business and The Trinity School. He is a former board member of NASDAQ (2000-2003), the New York City Investment Fund, and the American India Foundation.
On December 11, 2007, Pandit was named the new CEO of Citigroup, replacing interim-CEO Sir Winfried Bischoff. Pandit is the effective successor to Chuck Prince who resigned in November 2007 due to unexpectedly poor 3rd quarter performance, mainly due to CDO and MBS related losses.

50-year-old Pandit was born in Nagpur, Maharashtra, India to a moderately affluent Marathi Karhade Brahmin family. At the age of 16, he moved to the United States to attend college at Columbia University. He received B.S. and M.S. degrees in electrical engineering in 1976 and 1977 respectively, and later earned a Ph.D. in Finance in 1986.