The current article in this series provides responses related to:
- Finding value in a value-trap
- Investing in mutual funds when an investor can confidently select stocks
- Fundamental vs technical investing approach
- Use of market P/E ratio while selecting stocks
I am interested in knowing if there is a situation where the company’s retained earnings are increasing & its market capitalization is decreasing & if an investor is interested in earning passive income by way of tax free dividend, does it really matter whether the stock price is really going up or down?
Even if the stock price has gone down can we say it has destroyed value for the shareholders because in reality it has earned & retained some income & added value for the shareholders?
May be for some shareholders who bought the shares when the prices were relatively high it could be the case of value destroyer but for those who are holding the shares even before that & intends to do so how can it be a value destroyer ?
As long as the business is doing as is expected from it & adding value how does it matter how the market is reacting to it?
PS: I am not holding this stock .This discussion is purely from the educational point of view.
Thanks for writing to me!
The return from any stock is a combination of two factors: dividends and capital gains (share price increase). It means that if a stock gave a dividend of ₹10 during an investors holding period but lost ₹10 in share price, then an investor effectively did not make any return over her holding period. Therefore, dividends and share price increase both are important.
Retained earnings mean the profits which are not distributed to shareholders. If any company retains any profits (i.e. does not give them to shareholders), then it must invest them in a way that the value of the company increases. It is agreed that the investments may not increase the value of share (price of share) immediately or over a few years, but over long periods e.g. 10 years, the earnings retained must get reflected in increase in share price. Otherwise, it is better that the company does not retain any profit and distribute 100% of it to shareholders.
A shareholder, as an owner of the company, has appointed the management to create value from the investments being done. If the management/company is not creating value, then it has no reason to be in existence.
Hope it makes the picture clearer. If you have any further query, then I would be happy to answer.
Thank you so much for a very good portal.
I would like to know whether you are investing only in direct stocks or also in mutual funds. If you are not investing in mutual funds what is the reason for the same.
After reading your blog about number of stocks to hold, I have finalized around 8 stocks & I am happy about it as I got around 14 % within 1 year even during this volatile period (I am holding them still).
I am confused whether I should continue my SIP in mutual funds or to stop (I am investing in sector funds SBI Pharma fund, UTI transportation & logistics fund & Franklin High growth companies fund).
Thanks in advance for your clarification
Thanks for writing to me!
I am happy to see that you have started doing your own stock research and have built up a portfolio. All the best for the future.
I invest in mutual funds (only in equity linked savings scheme ELSS) only to the extent it is needed to complete my 80C investment limit post factoring in the EPF contribution. Rest of my portfolio is investment in direct stocks.
I do not put additional money in mutual funds, as the purpose of equity mutual funds is to hire services of a fund manager to select stocks for us. If we believe that we can ourselves select stocks, then there is no point in bearing the costs of mutual fund, management fees etc. Such fees/costs are about 1.5-2% of portfolio value, which can be significant over long periods of investment horizon.
I believe that the fund manager of mutual fund is also a human being looking at same information/data to make investment decision about different stocks. There is no point giving fee to someone else for doing us, what we can do on our own.
Hope it clarifies your query.
Ben also talked about margin of safety. Anyway, I enjoyed reading your article and criticism of technical analysis. I think u have made good use of contrarian approach with your stock selection technique. I also think u would have made more if u had followed the trend and technical analysis strategies; u would have certainly had more returns (add opportunity cost of holding investment) if u had used trend analysis- buying Allahabad Bank during April-May 2009 (break of downtrend) than buying in Jun 2008 and similarly for others.
Fundamental analysis is important but it’s not everything; without a doubt for long term investing value investing is superior method but it will be difficult to practice for small investors- u got to have lots of money so that u can buy in every dip. Small investors, who can’t hold for ages, will cry if breakout takes longer than anticipation.
For a small investor, technical analysis in conjunction with money management (position sizing), risk management (stop loss) can also win big- I have made 82% while market provided only 12% in 9 months period. The most importing thing is profitable belief about the stock, trading discipline and know how to cut losses short and let profit run using a trading system.
I bet u can’t completely ignore technical analysis if u want to make your investment decision objective and profitable.
Thanks for providing your views.
I agree that there are many approaches, which investors use to invest/trade in the markets be it fundamental investing, technical investing, value investing, growth investing and so on. Each approach is suitable for different investors depending on their personal preferences like aptitude, availability of time etc. I advise investors to choose the approach that is suitable to them.
I do not think that value investing needs an investor to have lots of money. I find that every person who has surplus money to invest, irrespective of the quantum of money, can practice value investing and benefit from it. Value investing requires discipline and regular investing and not the quantum of money, to succeed.
As mentioned by you, I have provided my views about fundamental investing vs. technical investing in the following article:
I believe that fundamental investing is more suited to my investing approach and wish to keep following it going ahead.
Thanks once again for your inputs and all the best for your investing journey!
First of all, when somebody says that market PE is this much, it means that they are talking about nifty, which itself is not the nest indicator of market.
As an amateur investor even I looked at these numbers but they did not give me exact evidence of market crash until I gathered data of various companies and did analysis.
I gathered data of top 300 companies (average transaction value wise) and found that whenever their avg PB when above 4, market would crash. Avg price to book value of these 300 stocks went as low as 1.79 after 2008 market crash. On 14th December avg price to book value was 4.8.
Guess what? We will see market crash soon. I will not be surprised if avg P/B of these 300 stocks become less than 2.5. I have exited equities.
Thanks for sharing your experience, learning and one of investment parameters with everyone.
Being a bottom-up investor, I do not give much weight to market/industry P/E ratio while making my investment decisions and advice the readers to ignore the macro parameters and focus more on stock specific factors for investing.
All the best for your investing journey!
Thanks for the knowledge sharing. I have been trying to follow your stock picking methods keenly.
In above article you mentioned that you “decided to sell Haldyn after Petroleum and Natural Gas Regulatory Board (PNGRB) decided to cut supply of natural gas to many companies including Haldyn Glass Ltd. Haldyn cut its production capacity by 20% after the Petroleum ministry did not provide any respite”.
As a beginner in this field, I would like to know, how to get such kind of details which directly affects a company’s financial status and also how company is reacting to such decisions.
Thanks for writing to me!
Tracking the developments related to stocks in the portfolio, is one of the essential activities, which an investor needs to do. You may learn more about the steps to be followed to monitor stocks in an investor’s portfolio in the following article:
Hope it helps.
Hello Dr. Vijay,
In the last couple of weeks many analysts are saying 2016 will not be a good year for Indian and global equities. Some are even mentioning situations not exactly like 2008 recession but pretty similar to it.
What are your views on these statements?
I do not have any views on the markets or these statements.
I believe that an investor should look for fundamentally good companies and keep on investing in them until the time they are available at attractive valuations irrespective of level of general markets.
You may use the following steps to find out fundamentally sound stocks:
All the best for your investing journey!
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- 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 in my portfolio.