Fastest Way of Making Money

Do you believe that doubling your money every four-five years is a slow and boring process? Do you think you/your fund manager can surely get 40-50% return from stock market every year? Do you think that you can time the market? If your answer is Yes, then this post is for you, my dear friend.

Today, I plan to reveal the Fastest Way of Making Money as a Diwali Gift!! Yes, I have a strategy for that. Just follow my strategy & you ll make money so rapidly that even Jhunjhunwala ll come to you for tips! I am not kidding. Strategy is not too complicated either. In fact, it is very very simple & easy strategy.

Here is the strategy- BE A FOOL. No, this is neither a typo nor am kidding. The strategy is this only. BE A Fool.

Let me explain- There are three kinda people who operate/compete in the market.

1) Intelligent- These investors try to value a business & compare value with price & take their decisions irrespective of emotions. They follow their father's approach which he has given to them in a book called "The Intelligent Investor". As 'magic formula' man and value investor Joel Greenblatt says- "If we don't know how to value a business, we can't invest in it intelligently." So, these 'alleged' intelligent investors try to value a business & buy with a margin of safety. If they can't value, they move on.

2) Greater Fool- These investors (Forgive me Graham for calling them investors) follow the herd & are always late to the party... Because of chasing consensus, they buy at sky-high prices & sell at rock-bottom prices and a result lose everything.

3) Fool- Now since, intelligent investors walk away when they can't value something or if something is not dirt cheap; they leave a lot of money on the table. These guys pick that money & some more from greater fools & hence can make huge money. Read here.
True There Are No Free Lunches, but You Can Make Someone else Pay For Your Lunch & greater fools pay for their lunch.

If you fall in this category of stock market players, there is huge money in the making. Let me give an example. A overpriced IPO has come in bull market. You Subscribe.... Intelligent guys ll avoid it... so less competition... You ll get a lot of shares.... Bull market has become peak of bull market... Sell on listing day to greater fools at huge premiums... Make a killing... Bull market ll run of steam... Greater fools ll lose money... U enjoy!!!

You may ask- "Why ll it list at a premium on listing day?" I ll say- "Buy Low and Sell High. Subscribe only if it ll list up. Don't subscribe, otherwise."

Yes a little problem is there.
"If You find Greater Fool, you make a killing. If you don't find, Then You are the Greater Fool, my dear friend".
Kinda similar to Warren Buffet saying, "If you have been playing poker for half an hour and you still don't know who the patsy is, you're the patsy".

Irrational & illogical Market??

Do you understand the stock market? You think stock analysts understand the market & that's why they are able to justify the movement with a sound, logical and rational explanation? Yes?
Lets discuss the points further with a few examples from recent times (No, I am not suffering from recency bias but would like to take some vivid {Read- widely discussed and in news for a long time} example).

• US downgrade by S&P- Rationality would go something like this- US less likely to meet its financial commitments now....Cost of raising new debt should be higher now.. Bond prices should go down.... Yield should go up.  But on the next day of downgrade, yields actually fell !!! WTF!! But, man, you can explain any damn thing. Here is my favourite explanation to the event- The downgrade of Treasurys made people so worried about the elevated risk in the world that they ran to Treasurys for safety. (I don't know he was serious or surprised). I found the explanation extremely hilarious.

• Lets come to our own Indian markets now. RBI increases repo again. Market says what's repo & moves up. Analysts say hey! This hike was already factored in. Factored In... is another one of the most common explanations used. I have never been able to understand this term. When was it factored in? I mean which day? How much points? Why didn't you tell it then? How do you know? Can you please tell now exactly what all are factored in and what all are not?

As Taleb says if you try hard enough, you can find points supporting your views (Confirmation Bias) and if you try a bit more, you can present a nice, convincing story based on your views and supporting points (Narrative fallacy). But, then presence of one, just one, black swan is enough to conclude - Not all swans are White!!! 

Beginner's Luck

One of the first stocks I had put my hard-earned money in was Blue Bird (India) Ltd. My rationale for that investment was like this-

1) The company had applied for Debt Restructuring under CDR package which was approved. Without debt and interest (for some time, moratorium period i.e), company's profit was expected to swing back to black as it had operating profit in the past.

2) Price-to-Sales ratio, PSR, a very important ratio (for these kinda investments) was just about 6%. Hence, there was huge margin of safety.

3) About 93% of promoters shares were pledged. So, only way for promoters to make money was to run the company effectively. It was not possible to make money off minority shareholders now.

In fact, I was so positive that I placed order at 5% more price than the last day's closing.

Fast forward to today......... So, how did the stock and the company performed? Comp first.

1) Nothing good happened. CDR is taking a lot of time to materialize.

2) PSR proved to be a mirage. Quarterly sales were just not in same terms as annual sales. Probably they were cooking the books earlier.

3) Management seems to least bothered about the company. They are quite busy somewhere else.

And so stock should have nosedived.    

Yes, it was down about 95% of the time I was holding it. But briefly, rather strangely, twice it took U-turn and gave me an opportunity to exit. Couldn't exit first time. In fact, new shareholders gave me some profits also... strangely. See below-

Lessons Learned-

1) Don't invest all money in one go. Something which is cheap, can become even cheaper. Have patience. SIP.

2) Long term view is good. But don't completely ignore quarterly numbers. Do look for very large drops in numbers.

3) Good management can do no harm to your investments. Same can't be said about bad management.

4) Don't feel ashamed to take losses if things are not going well.

Comment Plz... :)

Hi,

Just realized that due to settings problem, it wasn't possible to comment on previous few posts.

Kindly share your comments now on this post. Thanks. :)

Asset-Liability Mismatch

In accounts classes, we are taught that Assets and Liabilities are always equal.
But we, middle class, can make any accounting principle look absurd.

Recently, a known brought a Four Wheeler.... A Car. Great. But.... 
Is it an asset or a liability? In my book, Asset is something which gives you cash flows in the future; while liability is something which eats cash in the future. ( I believe most financial advisers would agree on this). Robert Kiyosaki explains this difference beautifully in his book Rich Dad Poor Dad.

Now, Car will have have running expense, maintenance expense and depreciation.
Petrol is already touching sky and is not expected to come down... Hence running expense will be much higher as compared to a two-wheeler. Same can be said about maintenance. And Resale value of car will go only in one direction with time .... And you already know that direction.

So, in nutshell, car is a liability. Let me know if you disagree.

So, basically, we are purchasing a liability. To make matters worse, the concerned person has taken a loan for purchasing this liability. If you think a bit more, isn't it like taking a liability (loan) for taking another liability (car)? Asset= Liability. Ohh really????  Where is the asset??

What are the possible reasons for buying a liability (car)?
(1) Comfort (2) Social proof {Everyone is having one} (3) Pavlovian misassociation {Car= Status symbol} (4) Envy {big brother of social proof, in this case}.

So, should one never buy comforts? No, one should. But, first, one should add assets. And secondly, not by taking another liability, at least.

Plz share your views on the same.

A Graham kinda Stock...

I have just came across a cheap stock based on Graham's criterion. This stock passes the following Graham's tests-

• Cash Bargain
• Net net bargain
• Book Value Bargain

Current Stock Price= Rs 87/-

Let see each criteria in detail-

Cash Bargain- As of latest Balance sheet, Cash is 339 crs. Add investments of 92 crs. Subtract debt of 34 crs. And we get a Cash per share of 103 Rs/- (I have taken investments at 60% of Book Value to arrive at Cash/ share).

Net Net Bargain- Net Working Capital minus debt comes out to be Rs 225 per share.

Book Value Bargain- Being a financial stock, comparing Price with Book Value makes sense. Book Value stands at Rs 226 per share. Hence, P/B is less than 0.4

Hence, current stock price looks very low on Graham's scales.

Mr. Market should be having some reason for this low valuation. Yes, there is a reason. Some top executives are involved in a bribery case by CBI. Stock has fallen 90% from its highs due to that CBI case. But company has no liability due to that.

I would not like to name the stock here to avoid Endowment Bias. But I expect it to go up by 100%.
P/B less than 1 for a financial stock which is not a cash burn looks absurd to me!!!!

Dealing with Cash Bargains

One of Graham's famous theme was Cash Bargain. When market cap of company is less than net cash (cash minus debt), then essentially everything ( fixed assets, working capital, management, intangibles) is available for free. This strange situation is what he used to call as cash bargain.

But those times and location were different. Such companies were take-over and/or liquidation candidates and shareholders used to receive cash after liquidation (worst case scenario). But this is India.
Hardly any take-overs attempts (Exception- GESCO Corp. in 2000.). Hardly any liquidation..

So, we need to be skeptical even with cash bargains. Lets try to see the negatives. Why should a company deserves to be available at less than cash-

1. Cash is only on the books. Actual availability is uncertain. Market is basically saying- Show me the money!!!
2. Management is fraud. They are taking away the cash from the company.
3. Business is burning cash & is expected to burn cash for a long long time.
4. Cash in balance sheet is not cash of the business but is customer's cash (basically get money from customers in advance while giving to suppliers sometime later)
5. If company can't invest the cash to earn returns at rate more than WACC, then also they deserve to be valued less than cash. (They are not returning cash & are not investing it properly, either)

Plz share if i am missing something and there is some other logical reason for cash bargains!!

PS- As I write this, there are a few cash bargains that are available & I am trying to find whether they deserve to be cash bargains or not!!