Long Term Investment

Hello again

Some time back, I attended a friend's sister's wedding. They are a middle class family, but they spent around 35 Lacs on that wedding (excluding 'dowry' and other customary gifts). I asked my friend how they managed to do that, and he said that it was possible only because his father had invested some money in some stocks a long time back.

This incident set me thinking.

So, I would like to start this thread to discuss various methods and techniques that can be used to decide which stocks to buy and hold as long term investments.

We are looking at conservative, deep-value investments that will serve as our retirement funds :thumb:

I'll be focussing mainly on tried and tested strategies given by many well-known investors.

Lets start with Benjamin Graham's Strategy.

He wrote the book 'The Intelligent Investor' where he described in great detail, his methods of choosing stocks.

I'm writing down his strategy in simple steps so we can directly go to analyzing it and see what kind of stocks it picks. It has been modified slightly to make it relevant to today's markets.

Rules

1. Look only for large, prominent companies. (High Sales)
I know this is subjective, but we can decide later what exactly to use as a threshold level.

2. Current Ratio should be greater than 2.

3. Long Term Debt should be lesser than Net Current Assets.

4. Earnings per Share should have grown by more than 30% in the last 10 years, with no negative annual EPS in the last five years.

5. Price-Earnings Ratio should be less than 15.

6. Price-Book Ratio multiplied by the Price-Earnings Ratio should be less than 22.

7. Debt-Equity Ratio should be less than 1. (Utilities and Telecom companies are an exception, and their D/E can be upto 2.3)

Kenneth Fisher's Strategy

His book 'Super Stocks' outlines his stock selection procedure.

Rules

1. Price-Sales Ratio
It is the total market capitalization of the company divided by the last 12 months' corporate sales.

a. Non-Cyclical & Technology Stocks
PSR should be less than 0.75

b. Cyclical Stocks
PSR should be less than 0.4

2. Total Debt-Equity Ratio
D/E ratio should be less than 0.4
(Financial companies are not required to pass this criterion as they carry a lot of debt due to the nature of their businesses)

3. Price-Research Ratio
(Company's market cap divided by the amount it has spent on R&D over the past 12 months)
This ratio is used exclusively for Tech and Pharma companies.

PRR should be less than 5 which implies that the stock is undervalued.

4. Inflation-Adjusted Earnings per Share growth rate should be more than 15% for the past 5 years.

5. Free Cash Flow per share should be positive.

6. Three Year Average Net Profit Margin should be more than 5%

Thanks Pride,

Really a nice initiative.
But could you please explain all these steps by taking an example of any company (eg. RIL or PUNJLYYOd or any any company). Bcoz it is very difficult to understand for new members like me.
Only If possible for you.

Sorry to go off just like that BUT to be very frank -- nothing beats a LT portfolio - nothing (except if the cos are not good i.e)

And thats all to say. QED.

For me -- I'm trying to build one for myself too BUT not much moolah as of now so trying to get some using day-trading.
It should be such that
1. You are not worried about fluctuations -- like say I have Bharat Forge in my portfolio which was bot @ 40/-!!!! Now its 190x5=950/-!!!
Do small fluctuations matter in these levels unless the company is going completely haywire.
2. Dividends will ensure that you still have money to spend -- like say Nestle and HUL in my portfolio which was bot at 650/- n 100/- (i.e. 20/- now) respectively.
Nestle gives approx 150 bucks a year per share (FV10) and HUL around 20 bucks a year (FV2) per share

Just to imply the importance --- Infy shares bot at IPO @ 100/-, today's valuations (w/o selling any part) would be Rs 1.25 crores approx if not sold. Dividend extra.!!!!!!

Get the drift .......

Another point to note is -- do not go completely textbook -- u think Infy @ 100/- or for that matter at 300/- bucks had that kind of ratios, free flow cash et al??

My view and I could be wrong .......

hi murtaza
thanks for giving your views...

but I did not understand your infy example. It is true that we would all be billionaires had we bought a tiny number of shares in Infy. But why didn't we? Why didn't everyone sell off their house and emptied their savings account to subscribe to the IPO?

Thats because no one knew at that time. Even today, there may be a 100 such companies, just about to grow into huge corporations...but we cannot identify those companies.

Buying on a gut feeling that the company is going to do great in the future is very very risky. This thread shows methods by which we can pick companies that have high chances of staying profitable in the long term but are currently undervalued.
It is a conservative method, I agree, but all long term investments should be thoroughly researched if we want our stocks to have any value 10-15 years in the future.

Also, your point about not worrying about fluctuations is not relevant for someone who is just about to form his/her portfolio. We are looking to buy stocks in the present market, at current prices. There are bound to be minor fluctuations, and they will affect the portfolio's value. Maybe 3-5 years later, the stock's price may have increased to a certain level where minor fluctuations may not affect it, but as I said, we are buying in the present.

If you go deeper into the rules of these models, you will notice that all that these rules are trying to do is filter good businesses with long term profit potential, whose stocks are undervalued. Excellent companies, whose stocks are overbought at the moment are of no use to us as prices will come down sooner or later.

The strategies that I am mentioning here are time-tested and the people who created them have beaten the markets decades in a row.
All that we have to do is try to find out how good they are, and how well they work in the Indian markets.

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What I meant was not to subscribe by selling all and sundry, but if now we see, at the time of the IPO did Infy, or for that matter when RIL came to the market or any such good co -- did it have such ratios, cash flow etc which you are trying to look for. They were bot into and held by investors with just basic knowledge that the co is doing or will do good. That they have scope to earn profitably etc.

At that time - such transparency too was not available, such data, communications was not there that one made investments after looking into the books of the companies.

Thats what I feel and is my opinion and I could be wrong .....

AND yes you are right in asessing the cos bcoz u r buying higher, where the market is now competitive, pricing sensitive to micro-issues etc. BUT then again, where the co's biz model is good, management excellent then all these factors are taken care of automatically.. is it not?

See buy and hold is not indefinite. We are buying shares so that we profit out of it. If we do not sell then how do we profit?
The point here is to identify scrips which will do very good in the long term and hold it.
Again there are various reasons for ppl to manage LT portfolio
1. Dividends
2. Investment incase of extra moneies OR
. Investment from hard earned and much needed money to increase wealth
3. No time to monitor the markets RT

Why people do not sell much of their LT portfolio is because they do not need the money. (Once required I think even the most hardcore of LT portfolio managers will sell - if not all at least part.)
Cos over a period of time become bigger and value of investment then becomes very big from a small amount, dividends are richer and the total dividends itself suffices, no need for extra money. Then why sell.

I for myself do this sometimes, for eg - MROTEK bot 300@31, sold 100@90, 100@113. Balance scrip in LT portfolio coz its free and paying 2-3 bucks a year.
Bot Steel Exchange 300@65, sold 100 for 165. Balance 200 holding for free.
Get the drift ....

Also someone had pointed out to me another way of building portfolio -- Whatever trading you do, 50% of the profits u re-invest in the equity scrip of the stock you traded i.e. say for eg. RIL bot 100@1280, sold @1600. Profit 32000. So invest 16K in RIL equity. Balance 16K increase in your trading a/c.

Pardon my unorganised way of putting the points, I'm not as perfect gramatically and no flair for writing too