Investing Legends : Benjamin Graham

Benjamin Graham : The Father of Value Investing

“The individual investor should act consistently as an investor and not as a speculator. This means.....that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money's worth for his purchase.” Ben Graham

“Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble... to give way to hope, fear and greed.” - Graham on Market Moods

"The one principal that applies to nearly all these so-called "technical approaches" is that one should buy because a stock or the market has gone up and one should sell because it has declined. This is the exact opposite of sound business sense everywhere else, and it is most unlikely that it can lead to lasting success in Wall Street. In our own stock-market experience and observation, extending over 50 years, we have not known a single person who has consistently or lastingly made money by thus "following the market." We do not hesitate to declare that this approach is as fallacious as it is popular." Graham on market Startegy

Yes, I know I made you wait a lot to put forward the second article in the series of knowing about legendary Investors and their investing styles. In this article we are going to discuss about none other than the Guru of the Gurus, "Benjamin Graham". Yes, We are talking about the man who taught Investing skills to the most well known Investment Guru "Warren Buffet".

Childhood Struggles and the Natural Investor
Benjamin Graham was born in London in 1894, the son of an importer. His family migrated to America when Ben was very young and opened an importing business. They did not do well, Graham’s father dying not long after moving to America and his mother losing the family savings in 1907 during an economic crisis.

Destiny had something else for this Genius
Graham was a star student. He managed to get to Columbia University and after graduation, offered a teaching post. However, destiny had somethign else in store for this genius and he took a job as a chalker on Wall Street with Newburger, Henderson and Loeb. It did not took him long when he began doing financial research for the firm and he became a partner in the firm.

Learning the hard way
In 1926, Graham formed an investment partnership with another broker called Jerome Newman. He also started lecturing at night on finance at Columbia, a relationship that was to continue until his retirement in 1956.

The Crash of 1929 almost wiped Graham out but the partnership survived with the assistance of friends and the sale of most of the partners’ personal assets. Graham’s wife was forced to return to work as a dance teacher. Graham was soon back on his feet but he had learned valuable lessons . These lessons build the edifice for the greatest book to be ever written on Investment.

The partnership between Graham and Newman continued until 1956 but never again lost money for its investors, earning an annual return of about 17 per cent.

Security Analysis
In 1934, Benjamin Graham together with David Dodd, another Columbia academic, published the classic Security Analysis which has never been out of print. Despite the crash, the book proposed that it was possible to successfully invest in common stocks as long as sound investment principles were applied. Graham and Dodd introduced the concept of ‘intrinsic value’ and the wisdom of buying stocks at a discount to that value. This books has been regarded as the "Bible " for the students of Investments for a decades. However this was just a beginning and the history had yet to unfold another gem written by benjamin.

The Intelligent Investor
The Intelligent Investor was published in 1949, is a widely acclaimed book on investing. Famous investor and billionaire Warren Buffet describes it as "by far the best book on investing ever written".

Ben Graham taught investments for 28 years at Columbia University, and perhaps his success as a professional investor is matched by his success as an academic, which is most unusual. His published works have instructed many thousands of students and, indeed, his strength as an academic is derived from his many years experience on Wall Street.

Understanding Ben Graham's Investment Philosophy

Margin of Safety
"To have a true investment, there must be a true margin of safety. And a true margin of safety is one that can be demonstrated by figures, by persuasive reasoning, and by reference to a body of actual experience" - Benjamin Graham

Graham looks for what he calls a "Margin of Safety" when investing in stocks. This is defined by how much a stock is trading below its intrinsic value which is what the business would be worth if it were sold today.

Graham was most insistent that any security purchased should represent good value. He felt stocks should be bought like groceries, not like perfume, and he distilled his investment philosophy down to just three words, "MARGIN OF SAFETY". By margin of safety, he meant that any stock bought should be worth considerably more than it costs. He sometimes suggested at least 50 percent more. Stocks bought with a margin of safety give some assurance that one has invested wisely. And stocks bought with a margin of safety should be low risk, high return investments.

Investment Versus Speculation
The distinction between investment and speculation is central to Graham's investment philosophy. He defined these terms thusly: "An investment operation is one which, upon thorough analysis promises safety of principal and adequate return. Operations not meeting these requirements are speculative.

Buying and Selling points - Mr. Market Theory
Stocks will fluctuate substantially in value. For a true investor, the only significant meaning of price fluctuations is that they offer ". . . an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal."

Using his famous Mr. Market parable, Graham suggests the attitude one should adopt toward fluctuations in prices.

Graham's favourite allegory is that of Mr. Market, an obliging fellow who turns up every day at the shareholder's door offering to buy or sell his shares at a different price. Often, the price quoted by Mr. Market seems plausible, but sometimes it is ridiculous. The investor is free to either agree with his quoted price and trade with him, or to ignore him completely. Mr. Market doesn't mind this, and will be back the following day to quote another price. The point is that the investor should not regard the whims of Mr. Market as determining the value of the shares that the investor owns. He should profit from market folly rather than participate in it. The investor is advised to concentrate on the real life performance of his companies and receiving dividends, rather than be too concerned with Mr. Market's often irrational behaviour.

Select Low Price/Book Value Stocks
Graham felt rather strongly that an investor should not pay much more than book value for a stock. In his word, "Strangely enough we shall suggest as one of our chief requirements . . . that our readers limit themselves to issues selling not far above their tangible-asset value."

Selecting Unpopular Stocks If an investor is to do better than average, Graham argued that his or her investment policies should not be popular. He believed that most Wall Street professionals tend to seek out stocks with the best growth prospects and to ignore other stocks. This bias causes unpopular stocks to become undervalued and good buys.

Benjamin Graham’s investment principles

Know the business
The investor needs to become knowledgeable about the business or businesses carried on by the company in which they propose to invest – what it sells, how it operates, what is the competitive environment, what are the threats and opportunities, the strengths and weaknesses.
An investor who bought a fruit shop, or a shoe factory, without investigating these things, and knowing them, would be foolish. The same applies to share investment. An investor who does not understand the business should not be investing in it.

Know who runs the business
An investor who cannot operate the business for himself or herself, needs a manager. This is the position of the average share investor, who owns a share of an enterprise that is run by others.
The owner of a business in this position would want a manager who will manage the business competently, efficiently and honestly. The share investor should not be satisfied with less. Unless the investor believes, through sound research, that the company is managed efficiently, competently and honestly, in the best interests of the shareholders, the investment should not be made.

Invest for profits
An investor would not normally buy a business that did not, on proper research, appear to have reasonable expectations of producing good profits over time. Share investors should take the same approach and buy, as Graham says, "not on optimism, but on arithmetic".

Have confidence
Graham encourages investors to properly research their investments and, if they believe their investment judgment to be sound, to act on it. He cautions investors in this position against listening to others.

"You are neither right nor wrong because the crowd disagrees with you. You are right [or wrong] because your data and reasoning are right [or wrong]."

Let's Salute the wisdom of this Investing legend who has been referred to as "Father of Value Investing" for propogating the Investment wisdoms through his everlasting writings.

Read More!

Sebi allows Short Selling by FII & MF, IPO Grading

Sebi authorises FII's and MF to short sell

In a significant decision which was being considered for some time now, Sebi has decided to allow FII's , FI's and Mutual Funds to Short sell in the Stock Markets. Currently, only the retail investor can do an intra-day short selling in the spot market. However, an institution cannot sell shares unless it owns the stock. Sebi's move allows to borrow the stock (from a depository), sell it in the market and buy it back before the market closes to return to the lender. Once the borrowing mechanism is implemented, the institution can carry forward this short position as long as regulation permits.

Till date, institutions took positions in the futures and options (F&O) market to go short. Once the new guidelines are in place, they will be in a position to short sell even in the spot or cash market Sebi's move is expected to bring liquidity in the markets and to certain extent help reduce the volatility.

Grading of IPO's Mandatory now
In another significant move, SEBI has made it mandatory for all companies to get their initial public offerings graded. Earlier it was optional for a company to get a grading for its IPO. This will help the investors to make a basic check on the quality of the issue and hence take a more informed decision.

Realty Firms get a bitter pil from Sebi
Sebi has made mandatory for the real estate sector companies to disclose their land bank details, accompanied by the ownership and agreement status in the offer document. The land bank should be the real bank where there is a complete disclosure of details. All the agreements must be made available in case of any kind of scrutiny. The regulator said that the real estate companies will make continuous disclosures in the post IPO period. The projection of the value of the land should be made on the present value instead of the future valuation. This move is a welcome move giuven the fact that even RBI has been cautioning against possible asset bubble in the real estate market.

Stocks in News
Amtek to Acquire Intermet
Component manufacturer Amtek Auto is in negotiations to acquire a 100% stake in Germany-based Intermet — the European arm of Intermet, US — for Rs 900 crore. This acquisition will give Amtek a strong foothold in the casting industry. It would also give the company scale to meet the needs of major original equipment manufacturers (OEMs) in Europe. (Financial Express)

ICRA IPO oversubscribed 75.04 times
Qualified institutional investors portion was oversubscribed 90.65 times, non-institutional investor`s portion was oversubscribed 72.12 times and retail investors portion was oversubscribed 53.99 times. The shares were offered at a price band of Rs 275 - Rs 330 per share.

Orbit Corp`s IPO oversubscribed 3.85 times
Qualified institutional investors portion was oversubscribed 5.7 times, non-institutional investor`s portion was oversubscribed 4.6 times and retail investors portion was subscribed just 0.88 times. The shares were offered at a price band of Rs 108 - Rs 117 per share.

Norma for FDI in telecom upto 74%
Govt. has approved a revised set of guidelines for telecom companies to qualify for raising foreign direct investment up to 74%. The approval allows telecom companies to appoint foreign citizens in senior managerial positions like chairman, managing director, chief executive officer and chief financial officer.
Read More!

IPO Update : ICRA Limited

Rating Agency rated as Good, Go for it

ICRA Limited has entered the capital markets with a issue of 25.81 Lac Equity Shares at a price band of Rs. 275-330. Investment Guru rates the issue as “Good” and recommends investors to apply for the IPO. You would need a good luck factor to get allotment since the equity base is small and issue is expected to generate good response from investors. The issue looks attractive from both listing gains as well as investment perspective.

Lets walk through the highlights of the offer:

The objective of the issue is to provide an exit route to the existing shareholders. Hence, there are no proceeds to the company out of the issue. However, the issue would enhance brand name of the company and provide public markets to the company’s equity shares.

The company was established in 1991 as a credit rating agency by a consortium of financial/ investment institutions, commercial banks and financial services companies. The company is primarily engaged in the business of providing rating services. In addition, we, along with our Subsidiaries, provide (i) consulting services, (ii) information technology based services, (iii) information services, and (iv) outsourcing services.

Total revenue has increased from Rs. 333.67 million in fiscal 2003 to Rs. 559.09 million in fiscal 2006, at a CAGR of 18.77%. During the same period, profit after tax has increased from Rs. 97.05 million to Rs. 142.08 million, at a CAGR of 13.55%. In the nine months ended December 31, 2006 the company’s revenues stood at Rs. 512.50 million and profit after tax was 135.87 million.

Best in its Class When it comes to Credit rating, ICRA is the second largest company next only to Crisil. The company enjoy strong market position for credit ratings in the financial sector and structured finance. For the nine months period ended December 31, 2006, the volume of debt rated was Rs. 988.64 billion and the number of published issuers rated by the company outstanding as on December 31, 2006 was 399.

The company boasts of Rich database and research support for its products and services portfolio.

Moody’s India, which is part of the Moody’s Group, is the promoter of ICRA. In addition, Moody’s Investors Service, which is an international rating agency, has entered into the Technical Services Agreement with the company pursuant to which it has been providing technical services . Further, ICRA provides certain outsourcing services to Moody’s Investors Service.

The company has been successful in diversifying its Revenue Stream. The share of Revenue from rating services has declined from 70% in Fy2004 to 56% in FY06 while the share of IT based services have grown to 15%. This helps the company in insulating itself from overdependence on single source of Revenue.

The EPS for the year 2006 stood at Rs. 12.63. The weighted average EPS for last three years stands at 11.47. On the last year’s EPS, the issue comes at a PE of 26. The issue price looks reasonable given the Crisil stock price which quotes at PE of 43.

The company managed return on Networth @13.67% . However this is lower than Crisil’s RONW of 19.5%.

Issue opens : 20-03-2007

Issue Closes : 23-03-2007


Company's Website: ICRA Website
Read More!

Opening Bell: Markets to open on firm note

Volumes to be key factor in sustained rise

Sensex edged higher by 200 points yesterday. The rally was quite broad based. However the IPO listing disappointed with the listing blues continue to hunt the new comers. The asian markets are ruling firm with support from a spurt seen in US markets. Dow was up 115 points while Nasdaq too climbed 22 points. The US markets rose after news of mergers talks between ABN AMro and Barclays. The US federal reserve is meeting tomorrow to discuss the interest rates. The Japanese Nikkei rose 1.59 % while Hang Seng advanced 2.87 %. Back Home, the Indian stock markets are expected to open on a firm note backed by positive clues from Asian counterparts. Inflation and Interest rates continues on the watchlist for further triggers. Read More!

Markets on a shaken ground, refuses to climb up

Despite Asian Recovery, Indian markets disappoint

Ever seen a 1 year old child trying to stand up on his feet and keep falling unless he finds supporting hand of parents. If not, see the movement of sensex on the charts and it displays the same characteristic. Unable to hold itself at higher levels due to lack of confidence and growing pitch of voices expressing concerns on the dwindling fortunes of the emerging economies, the markets are facing stiff resistance at every upward movement.
Let’s analyse what’s going on in the markets and what will be the shape of things to come

The Global Factors –China, Yen & US economy

The China factor
Blame it on the china stock markets which saw a bloodbath after reports of overheating of china’s stock markets. The Chinese government has limited the appreciation of the country’s currency, the yuan, by buying dollars on a massive scale. As a result, it has accumulated more than $1 trillion in foreign exchange reserves. To pay for the dollars, the Chinese central bank has issued hundreds of billions of yuan. The central bank has been able to absorb some of these extra yuan by selling more government bonds to Chinese banks and the public. But part of the extra cash issued to pay for currency market intervention has made its way into the financial system. This has contributed to steep rises in stock prices — the Shanghai stock market rose 130 percent last year — and in real estate prices. The slump in share prices has raised questions about the long-term sustainability of high prices for Chinese assets. The fear of Chinese downtrend spread like a fire across asian continent.

Yen Carry Trade
Yen carry trade is borrowing at low interest rates in yen and using the loan to buy higher yielding assets like equity markets of emrging economies to generate superior returns. However with talks of rate hike in Japan, and with other countries to follow suit, we have witnessed a sharp sell off by hedge funds who used this route for money making.

The Bid Daddy sends Weak signals
The US economy is showing signs of slowdown. The US employment data were not encouraging and to add to the fire was the report on rising deafult on mortgage loans in US. US is one of the biggest Net Importers of goods and most of the emerging economies have significant export to US. Any slowndown in US economy has a effect on the prospects of these countries. Take the Example of China where the exposure of exports to US markets is as high as 40%. However Indian is comparatively well placed with US exposure at 18% . Are the markets listening !!!

Local Factors – Congress defeat, Pale Budget
When the Global Factors were playing havoc on the bourses, the local factors just did the work of putting salt on the wounds. The Ruling Congress led UPA lost its face in the recently concluded elections in Punjab and Uttaranchal which sent tremors to the Dalal street.
The markets which had built expectations of another dream budget from the finance minister was shown a plain thumb and it proved to be a another factor to add to the woes.

Was market fall justified ?
Why blame these Global and Local factors for the fall in Indian Stock markets? Don’t you think that these were just the excuses to drive the downfall in the otherwise stretched market Valuations. Experts are of the view that most of the emerging markets were running at extremely high valuations and a correction was warranted. The Global and Local factors provided an opportunity for the same. Though I feel that market fall was justified in view of sharp surge in the markets since September, the extent of the fall was more than expected due to these factors and what was expected to be a healthy correction turned out to be confidence shaker. Let’s see what will take the markets forward from the current levels.

Wow ! Reliance at 1250, Infosys at 2000
Did you imagined these prices a month back? But yes, its true that after this sharp fall, even at these levels you may have your own doubts of whether to buy or not? This is known as the “Fear Factor “. Why the Fear? Because you see that sensex climbs in the morning and starts diving by the second half of trading. Selling merges at every high levels. This is also called as bottom fishing. Investors have no clue to what extent the markets will fall and they keep postponing their buy decision anticipating further fall.

Is it a good time to Buy Stocks ?
Yes, if you are not a bottom fisher. Let me tell you upfront that timing the markets is not everybody’s cup of Tea and people end up loosing opportunities in doing this. What is more important for an investor to analyze his risk taking capacity, choose fundamentally strong company whose performance will not be impacted by any of the reasons for fall and where the stock price has fallen just for the overall sentiments of fear in the market. These stocks will bounce back eventually giving superior returns from a medium to long term perspective. So Am I giving an impression that its time to grab up the stocks? If yes, then please hold on, the best strategy in such markets is to stagger you buying. Don’t put all your cash in one go. Markets will not go up in a hurry. So take your time and take informed decisions. You must be wondering So what are the good picks in this market.

What will drive markets up ?
Well, the only trigger I see in the near future is the Quarterly results that will be announced in the month of April. India Inc is expected to continue its strong run and this should well be a reason for markets to cheer back. So it makes sense to hold on to the stocks that are expected to post superior results.

Good Picks at current levels
These picks are strictly from medium to long term perspective.

Safe Plays
Infosys Technologies ( Ideal price to Enter 2000)
Reliance Industries (Ideal price to Enter 1250)
Mahindra and Mahindra (Ideal price to Enter 725)
Larsen & Tourbo (Ideal price to Enter 1450)

Money Minters but the flash comes with additional risk
Gitanjali Gems (Ideal price to Enter 186)
Skumars Nationwide (Ideal price to Enter 60)
Yes Bank (Ideal price to Enter 110)Again this is not an exhaustive list but few of my favourites.

There are many other stock. If you have any stock in your mind , do drop a comment and I would try to provide my views on the same.

Happy Investing ! Read More!