Q&A: How to decide Buying Price / Timing the Market & Others

Modified on July 9, 2018

The current article in this series provides responses related to:

  • Queries about deciding the buying price of any stock and timing the market purchases
  • Queries about other balance sheet items including calculation of capital expenditure (capex)

Query

Dear Vijay,

Firstly, I want to thank you for the wonderful work you have done on your website, it the best website that I have come across till date on stock market for common investor.

I have few queries:

  1. Please could you define in simple term/formula/tip by which we can determine right price (entry/valuation price) of a stock? I am very keen on buying Mayur Uniquoters Limited & Vinati Organics Limited.
  2. In layman terms would prices close to 52week low, serve as an entry price for a new investor?

I had bought Indag Rubber Limited on Aug 24, 2015 when it fell x% and plan to buy it on dips going ahead.

I plan to invest as a long term investor 5-8 years in line with my personal goals.

I like your portfolio and doing my own analysis before making a decision.

Many thanks in advance,

Author’s Response:

Hi,

Thanks for your feedback & appreciation! I am happy that you found the articles useful!

1. You may find the steps to do valuation analysis of the stock in the following article:

How to do Valuation Analysis of a Company

This article would help the readers in forming an opinion about the current valuation levels of any stock.

2. 52 week or 52 week high price levels are irrelevant. I suggest that investors should have opinion about valuation levels based on current price irrespective of it being near 52 week high or low.

There might be stocks which are attractively priced despite being at 52 week high and there may be stocks which are still costly despite being at 52 week low.

Reading the above article on valuation analysis would help you decide about the current valuation levels (overvalued, undervalued or fair valued) of a stock.

Regards,

Vijay

Query

Dear Doc,

Please could you tell us how to spot and load up on quality stocks in this fall?

Thank you

Regards

Author’s Response:

Hi,

Thanks for writing to me!

The approach to select stocks does not change with temporary changes in the market sentiment.

An investor may follow the framework approach described in the article series: “Selecting Top Stocks to Buy” to find fundamentally sound companies for investment:

Read: Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks

All the best for your investing journey!

Regards,

Query

Hi Vijay

Thanks for the reply. I’m a beginner and want to understand more about how to identify right time to enter a stock?

Let’s say I find Ambika Cotton Mills Limited an attractive option to invest for its strong fundamentals & YOY growth but if I entered 1 month before my holding will be almost -35% now. To get back to my invested money now Ambika cotton mills have to grow approx. 53% from CMP. So I understood finding out bottom value for stock is very important and would like to know more from you on this.

Also like to know your views whether an investor need to average their stock in every dip? Even to do so finding out how much the stock can possibly break to lowest is an important thing again.

Author’s Response:

Hi,

Thanks for writing to me!

The right to invest in a stock is: whenever the investor has surplus money to invest and the stock is at attractive valuations.

No one can tell the bottom a stock price will touch before it bounces back. Therefore, if an investor believes that a stock is a good buy below P/E ratio of 10, then she should invest when the stock fall below P/E of 10 and she has money to invest. No one can predict market price movements and it can happen in all probability that post her purchase, the price can fall further 50-60-80%.

However, in such a scenario, if the investor has done hard work before selecting the stock, then she would have the confidence to remain invested through such bear phase. If her confidence is shaken by stock price decline and she starts to question her analysis and stock selection, then it would mean that she needs to develop her stock selection and emotional stability further to be a successful stock market investor.

I would suggest that such investor, who panics by stock price declines, should stay away from stock markets.

You should read: Getting The Right Perspective towards Investing

Hope it helps!

Regards,

Query

Hi Vijay,

You were spot on about Amtek India Limited.

Now the stock is coming down almost daily due to the huge debt on their books.

Regards

Author’s Response:

Hi Ramesh,

Thanks for writing to me! I am happy that you found the article useful.

The issues in the business model of Amtek along with the problems of debt servicing were apparent during the financial analysis.

Read: Analysis: Amtek India Limited

However, the exact trigger point for share price decline cannot be predicted. Neither it can be said with certainty that share price will not rise/stay sideways in future.

However, over long periods of time, share prices of companies with strong business model, lots of free cash generation tend to go up and generate wealth for shareholders.

Regards,

Vijay

Query

Hats off to you Dr Stock. You found loop holes in Amtek India Limited very early and now market is realizing this now.

Author’s Response:

Hi,

Thanks for writing to me! I am happy that you found the article useful.

I merely provided my interpretation of the financial numbers of Amtek India.

I believe that if a framework approach is followed as described in the article series: “Selecting Top Stocks to Buy”, then any investor can differentiate between fundamentally sound companies from weaker ones.

Read: Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks

All the best for your investing journey!

Regards,

Vijay

Query

Thanks a lot Vijay for your article on Ambika Cotton Mills Limited:

Equity Research: Ambika Cotton Mills Limited

I can clearly see that past scenario of the company has been really good and we should definitely give credits to the management. But my only contention is to what extent!! In my own personal experience, only 3-4 of my colleagues out of the top 20 rankers have consistently performed well throughout even after schooling (change in business dynamics/competition etc.) Well others might have reverted to the mean.

When we take a sizeable positions in our pf (like I see you own only 5 stocks in pf i.e. high concentration) while independent past data due diligence is extremely important, it would be great if we can understand what dynamics can a particular business face and how well is the management positioned to face those dynamics and keep competition still at the shore.

I agree, it’s not very easy to understand a particular niche industry very much in depth without domain expertise but as active group of investors we should try to understand why the past figures are so consistent with consistently high IRR’s. May be we can find the answers to our question which will help us understand business much better and we can hold with higher level of conviction. I will try from my side if I can get something additional on this.

You have created a fabulous website and doing an amazing job to educate all of us.

Author’s Response:

Hi,

Thanks for your valuable inputs! These are helpful for the author as well as other readers of drvijaymalik.com

I agree that an investor must have the conviction to hold the stock through thick and thins of business cycles and also that the sources of conviction are different for each investor.

At the end, it all boils down to putting time and effort towards gaining knowledge of what an investor feels the most important factors.

Wish you the best for your investing journey.

Regards,

Query

Hi Vijay,

Just to clarify some of the annual reports do not contain information of tangible assets but rather have information as property plant and equipment which seems similar.

Please let me know is net fixed assets = property plant and equipment (adjusted for accumulated depreciation)?

Author’s Response:

Hi,

Thanks for writing to me!

Every company would describe its accounting policies in a separate section. An investor should read this section to get clarity about the items included in PPE (property, plant and equipment) section. Most of the time it is similar to fixed assets. However, there might be certain differences which the company would have detailed in its accounting policies section.

Read: Understanding the Annual Report of a Company

Regards,

Vijay

Query 1

Hello sir, how to get data of Capex for last 10 yr.?

Is capes equal to “Cash from investing activity”??

Thanks.

Q 2:

Dear Vijay,

Please elaborate Capex outflow. What is the formula of this? And where will I find cash paid for acquisitions from financial statements?

Author’s Response:

Hi,

Capex is only part of Cash from Investing (CFI) activity. There are other items over and above capex like purchase/sale of investments, dividend income etc. which are also part of CFI.

You may calculate capex by following formula.

  • NFA = Net fixed assets
  • CWIP= Capital work in progress
  • Dep= Depreciation
  • Capex = capital expenditure

(NFA+CWIP) at Year end = (NFA+CWIP) at start of year – Dep+Capex

Therefore,

Capex = (NFA+CWIP) at year end – (NFA+CWIP) at start of year + Dep

Hope it clarifies your queries.

Read: Understanding the Annual Report of a Company

Regards,

P.S.

 

DISCLAIMER

  • The above discussion is only for educational purpose to help the readers improve their stock analysis skills. It is not a buy/sell/hold recommendation for the discussed stocks.
  • I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013.
  • Currently, I do not own stocks of the companies mentioned above except Vinati Organics, in my portfolio.

"Peaceful Investing": My Stock Investing Approach

“Peaceful Investing” approach is the result of my more than a decade of experience in equity markets. This approach helped me invest even when I had a full-time corporate job and could not spare a lot of time for stock analysis. During my investing journey, I have faced all the common challenges of the investors, the biggest one being “scarcity of time”. “Peaceful Investing” approach keeps in mind that an investor will have limited amount of time to spare for stock investing. 

The objective of “Peaceful Investing” approach is the selection of such stocks, where once an investor has put in her money, then she may sleep peacefully. Therefore, if later on, the stock prices rise, then the investor is happy as she is now wealthier. On the contrary, if the stock prices fall, even then the investor is happy as she can now buy more quantity of the selected fundamentally good stocks.

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