Pray, may I ask what’s your stock investment style ?

Making a killing on Wall Streeor Dalal Street or any stock market street for that matter is not so easy. If it was so easy, we wouldn’t have brilliant guys working for NASA, GE, Boeing, Google, Intel, Reliance etc. Yes, but it is true that there are certain techniques which if employed appropriately can give one extremely good post- tax returns.Lets take a quick look at some legends that became richie-rich by using their unique investment styles.

Benjamin Graham [ BJ ] Warren Buffet [WB ] and Rakesh Jhunjhunwalla [ RJ ] are all well known personalities in the world of stocks, So, let us see how their philosophies and stock ideas would take shape in the context of the Indian Stock Markets.

Key points of each approach

BG approach - is a very quantitative approach to value investing.

· The selection of an undervalued company is done based on various quantitative criteria such as low PE ratio, Market cap less than net current asset value / net net value

· There is a low to almost non-existent focus on the nature and quality of business because the aim is to buy a stock at roughly two-thirds or 66 per cent of the value of cash the company has on its books. .

· This approach employs the “margin of safety” principle which is a low risk way of purchasing a stock.

WB’s approach - takes some elements of Graham’s approach such as margin of safety etc.

· this approach relies less on the quantitative elements of the company and more on the qualitative elements of the business such as sustainable competitive advantage.

· The undervaluation is due to temporary factors such as losing a customer or some scandal, which has caused the earnings to drop in the short term.

· However the long-term prospects are still intact and hence the company is a good bet. WB’s approach focuses on the certainty of the long-term prospects of the company.e.g. Satyam

RJ’s approach builds further on WB’s approach.

· Here you are looking at companies, which are not undervalued by the traditional measures such as PE, DCF etc.

· The value lies deeply entrenched in the business model of the company and it tests your ability to look hard into the future – you need to go beyond the figures – for example when Kishor Biyani’s business was not doing well, he took a business loan by mortgaging his own house-that shows the commitment and anyone looking at this aspect could probably muster the courage to buy Pantloon when it was not a roaring tiger!

Some Indian examples

BG type of investment

As prices have run up a lot since over a year it would be an herculean task to identify a scrip which is quoting at two thirds of its Net Current Asset value. But, if you modify Graham’s formula to include long term investments , then perhaps you can get your hands on some good plays. Just to cite an example, Max India at current market price of around Rs.157 / share has an upside potential of 63 per cent from current levels if we factor long term investments in Graham’s model.

WB’s type of investment

A WB type investment could be RIL or Tata Steel. These companies have a long operating history. They have a robust and fairly predictable business model and strong competitive advantage like being the lowest cost producer. It is easy to look at the long term history of the business and project it to arrive at some measure of value.

RJ’s type of investment

An RJ type investment could be Pantaloon or Titan. This approach to investing requires a very deep understanding of business models and an appreciation of the qualitative aspects of business such as management quality, addressable opportunity etc. The financials may not help much in taking a call on a stock of this type. However, if you get it right, the rewards are just great.

Conclusion: So, you are vying to pick up the next Titan which only the types like RJ’s can identify then keep tracking RJ's portfolio – after all Titan does annual business of around Rs. 4671 crores on a capital of Rs.44 crores notwithstanding the fact that operating profit margins are around 10 % and net profit margins are around 4 per cent only! Picking up Graham type margin of safety type of stocks in a bull phase is no easy task [ because they just aren’t such stocks and if you find them in a bull phase then you need to take a second opinion from experts [ because, in all probability there may be skeletons hidden in the cupboard of the company ] and that’s why its available at a discount.The street after all is visited by many smart guys and by suckers too!

And Warren’s style is just great – Buy a great company with a great future and hold it tight with all your might for as long as it keeps your heart light. I guess that’s why there are many investors who follow Warren’s style by default – they just love to hold stocks like RIL, probably lifelong!

Kishor S. Khot, [Kishor@hbjcapital.com], Equity Strategist, HBJ Capital Services Pvt Ltd