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.