6 Types Stock categories BY PETER LYNCH

  6 Types Stock categories BY  PETER  LYNCH 

Peter Lynch is a famous fund manager who managed Magellan Fund at Fidelity Investments who gave 29.2% return over a period of 13 years; his assets under management increased from $18 million to $14 billion at the end of his tenure.

He is also the author of three famous investing books which according to me everyone should read

1. One up on Wall Street.

2. Learn to earn.

3. Betting the street.

Peter lynch was the person who coined the word multi-bagger. He used simple & profound method for picking stocks for his fund.

 

In this book ONE UP ON THE WALL STREET he described

6 types of stock or business to invest in stock market

Slow growers

            This are the company who grow at very slow pace well below the market average and also provide a very low return. All fast growers eventually become slow growers. This stocks can provide good safety of capital, but can never provide above average return.

Stalwarts

                This company are well grown established companies. They do not grow faster than but above or near the market average. But this companies give good protection in times on recession, as the earning are more predictable. They may not have more room for growth. This types of companies usually provide a good dividend yield & often buy-back their shares.

 

Fast Growers

                This are the stocks which not only provide above average return, but they make one’s investment career.

This stock grows at 20-25% p.a., but they should not be the hot stock in the market which grows at 50% which probably cannot be sustainable.  Grow of this types of company should be sustainable over a period of time.

 The company should have good balance sheet & profits .Check whether there is a further room for growth. Proven track record of revenue, profit, cash flows, etc over a period of time. Most important thing check whether the growth rate is rising or falling.

 

Cyclical

                They are the company which follow the economy. This companies grow when the economy is booming and fall when the economy goes into a recession. Timing is everything in this stock, buying it on the right time in the cycle is very important. Look for inventory levels in the industry and all other factors. Industries includes car industry, real estate, airlines, hospitality.

Turnaround

               These are the companies which went bankruptcy and now are bought by new companies or taken over by new management with the backing of the creditors. Examine how the turnaround will actually happen. What are the future plans of the company for eg:- bank of America is a turnaround which gave 10 baggers return from last financials crisis before the COVID-19 crash.

 

Asset Play

                They are the companies which are sitting in some things valuable that market don’t know about. It can be cash, assets, inventories, accounting losses, no. of users, real estates, etc.  

->Know what the asset is

–> Have patience

-> Look for debt

-> Look for management are they destroying or creating value

-> Look for hidden assets.

Amazon.in (For India)

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Amazon.com(FOR USA)

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Circle of Competence

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    WHAT IS CIRCLE OF COMPETENCE ?  

      One of the profound & intriguing concepts of investing as well as life. The simplest way to explain it is an area where you a person have a deepest detail knowledge or understanding of a subject. One knows inch by inch or point to point about the subject. It may be due to love for the subject, education in the subject, experience in the subject, etc.

Quote on C. O. C.

Tom Watson [the founder of IBM] said – “I’m no genius. I’m smart in spots and I stay around those spots.”

Charlie Munger and Warren Buffett define these spots where you are smart as your ‘circle of competence’ – the area beyond which you must not venture out if you were to make effective, profitable investment decisions.

        Defining the circle of competence is the most essential & important factor in life as well as investing. It just means that one should know which sector, industry, or field he is good at. He should have in depth knowledge about the current, past & future events which may or may not happen. This awareness helps a person to be on the top of his game or play only game which one can win or have advantage over the competition. Also, one should always inside or middle of the circle of competence because being on the border can also be risky.

( Above picture is taken from the website call safalniveshak.com , this  picture describes the circle of competence in the best way possible)

        When a person does things or pick stock only when he finds opportunities within his circle, he gets an unfair advantage over others.

 For example:-When an owner of a car dealership, try to pick stock he have an advantage over others has he knows more about the sector as it is a cyclical sector, so when the sales start falling he can sale shares & vice versa & over a period of time he achieve extraordinary return. But if the same person tries to invest in pharma sector or banking, he will be clueless; in such a situation he may invest on stock tips which can be very risky. Usually people do this mistake, so being aware of the circle of competence is important.

        The size of the circle is relevant but not so important as compare to awareness of the circle . One can increase their circle of competence over a period of time by learn about the new field, sector industry, etc.

        Story of Charlie Munger’s friend John Arrillaga

          https://thumbor.forbes.com/thumbor/fit-in/416x416/filters%3Aformat%28jpg%29/https%3A%2F%2Fspecials-images.forbesimg.com%2Fimageserve%2F945fe0ddbac172f5cc502aa692162731%2F0x0.jpg%3Fbackground%3D000000%26cropX1%3D156%26cropX2%3D668%26cropY1%3D39%26cropY2%3D551     

            John Arrillaga born in a middle-class family went on to become one of the biggest commercial landlord in the silicon valley. He only invests in real estate one mile from the STANDFORD UNIVERSITY. In 2006 he sold 5300000 sq ft of his real estate holding for roughly $1 billion.

        Mohnish pabrai describing JOHN ARRILLAGA’S circle of competence. “Charlie Munger says, there’s a friend of his. He is a billionaire. He lives near STANDFORD UNIVERSITY. John Arrillaga only invest in real estate within one mile of STANDFORD UNIVERSITY. From having no money forty years ago he’s a billionaire.

All he did was he never put on a lot of debt & when things went down he bought & when everyone got euphoric he sold. That’s all he did. What is John Arrillaga’s   circle of competence? is it real estate? No! is it California real estate? No! Northern California real estate? No! Only real estate around Stanford. His circle competence is smaller than the circle on the hand.

The good things about getting wealthy is we don’t need to understand a lot of things!”

Best way to expand the circle of competence is through reading following are some book recommendation:- 

To learn more:-  https://www.financialwizardindia.com/

POWER OF COMPOUNDING.

 Formula for compound interest (A) =P(1+r/n)^nt

Where in,

P = Principle

r = Rate of return

n = number of times interest applied per time period

t = number of time periods elapsed

          There are three component in the formula principle

Principle= Initial investment made

Rate of return = Expected rate of return on investment

Time= Time given for the investment to compound

          The above given is just a general description which is usually thought in school, but just forgotten about its original powers & use.

          Below are the famous quotes on compounding said by great men:-

 

"Compound interest is the eighth wonder of the world. He who understands it, earns it.....he who doesn't....pays it"

-Albert Einstein 

How WARREN BUFFETT become the richest person on earth?

          One of the tool he used is compound interest .He turned few hundred dollars into hundreds of billions of dollars. When he was started investing through BERKSHIRE HATHAWAY in the year 1965 share price was approx. $7.5 dollars to now of more than $200000 a CAGR of 17% approx. each year. The magic of compounding was on his side for 50+ years. So the most important component in the formula actually is the time because the principle amount of investment is limited with all & rate of return cannot be fixed by anyone what so ever.

COMPOUNDING & INVESTING IN STOCK MARKET

          Stock Market is actually a compounding machine. For eg. When the Sensex came into existence the index was at 100 points & now it is at 36000+ points approx. It is approximately doubling every 4 years from its inception i.e.15% CAGR approx.

          Sensex is just a composition of top 30 companies, where the share of this companies are listed.  A share is just a piece of business, when the revenue, profit, margins, etc. increases over a period of time along with the share price increases. If one could find a company which can give 10% return for next 20 years & if he just invest $100000 in it at the end of the 20 years period it will be worth $672750 without any efforts, just sitting idle.

VEHICLES FOR COMPOUNDING

(MUTUAL FUNDS, INDEX FUNDS, INDIVIDUAL STOCKS)

With INDIVIDUAL STOCK is already explained above

          Investing through SIP (Systematic Investment Payment)

If one invested only $1000 for next 20 years per month at 10% return the amount at the end of the 20 years period will be $7,73,025 but we just add 10 years more it will come to $2,299,163 that’s the power of compounding. But again the most important thing is time, so start as early as possible.

        

One can easily invest a few bucks each month and retire with decent amount of money. One of the simplest way to do so is via SIP in a mutual fund or an index fund; this option is good for people who don’t want to study market or business & who don’t have the psychological capacity to bare the market fluctuations.

Hdfc compound interest calculator: https://www.hdfclife.com/financial-tools-calculators/compound-interest-calculator

 

COMPOUNDING & TAXATION

           There is also tax benefit along with compounding in stock market which means you don’t need to pay tax until you sale a stock which actually means you are borrowing money from government for free. So one should stay invested for long term in a stock to take advantage of it.

THE GREATEST STORY OF POWER OF COMPOUNDING

          This story dates back to more than 220 years ago & involves one of the most fascinating person ever lived BENJAMIN FRANKLIN, he was an inventor, scientist, civic activist, diplomat, etc. He also was the FOUNDING FATHER OF AMERICA.  

     

The Power Of Compounding with Benjamin Franklin

          He donated $1000 for 100 years & 200 years to his native hometown BOSTON & his adopted hometown PHILADELPHIA each with the condition that money to loaned @ 5% to young craftsman’s with following condition that:-

1. He should be under the age of 25 years

2. Who is married?

3. He have completed his apprenticeship

4. Can obtain two signore’s.

          After 100 years both the town can use 75% of the funds for public works & continue to for more 100 years at the end each city would get 25% of the funds & the respective state will get the rest. If they would have done so the amount available with city would have been $20 million at the end of 200 years . But due to wrong investment, political issues, etc .they actually were just left with 5 million with BOSTON & 2 million with PHILADELPHIA. YOU can see the MAGIC OF COMPOUNDING from this example. THE MOST IMPORTANT COMPONENT IN THE EXAMPLE WAS TIME, SO ONE SHOULD START INVESTING AS EARLY AS POSSIBLE.

 THE MAGIC OF COMPOUNDING IS EXPLAINED IN A BOOK  

THE COMPOUND EFFECT -BY DARREN HARDY

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AMAZON PANTRY SERVICE

     WHAT IS AMAZON PANTRY?

              IT is one of the services provided by one of the most trusted company in the world that is AMAZON.COM.All the daily use products and services are available. Almost all the products are available at wholesale prices, which will help you save a lot of money. Home amazon pantry delivery service can be easily availed the current condition are minimum order should be of 200/- &free delivery for orders above 799/-. The packing quality is so great that you can keep the product in the same product in the same package for days & use it later. The entire box is filled with brown paper so that no product is damaged in any form.

            The only con in the service is that most of the products are non-returnable because most of the products are perishable & contaminable in nature (it cannot be sold again). So, keep it in mind while using the service.

            The amazon free delivery of the orders can be easily tracked from the amazon pantry app. They will provide you with the delivery date & other information. No other chargers will be charged on amazon pantry free shipping.

            The payment can be done by different ways. Extra discount on use of specified debit/credit card can be availed through amazon pantry app. There are different amazon pantry offers & amazon pantry deals available on the website from time to time.

            You can also subscribe to the service & keep a list of products on the website & get it delivered every month. But do check on every order of the available amazon pantry offers & amazon pantry deals.

AMAZON PANTRY: https://www.amazon.in/gp/search/ref=as_li_qf_sp_sr_tlie=UTF8&tag=stockblogsboo21&keywords=amazonpantry&index=aps&camp=3638&creative=24630&linkCode=ur2&linkId=fc29b3079944d79f457e84741ff5c70b

Disclaimer:

        The above information is provided as per the current information available and writers understanding.  The user needs to check all the policies relating to product or service before ordering it. The above blog is just provided to you to provide information about the service not to guarantee about anything.

 

DON’T ASK ME SHARE PRICE, ASK ME MARKET CAP

           WHY IS MARKET CAP Important?

Market capitalization formula is total numbers of shares outstanding multiplied by current share price. It is the amount at which company sells in the market at any given point of time.

For eg. Share price of:-         

                                         MRF limited: - 62,000

                                         Bajaj Finance limited: - 3,200

What do you derive from the above share prices? Which stock do you think have larger market capitalization?

          People usually see at the stock price and think stock is cheap or expensive but there is no real correlation between the share price and market capitalization in real terms. But actually share price is just a number on which a piece of a company is available.

For eg. Market capitalization of:- 

                                         MRF limited: - 26,000 (Crs.)

                                         Bajaj Finance limited: - 90,000(Crs.)

Market Cap V/s Enterprise Value.

Market capitalization is already explained above. Enterprise value means market capitalization + Debt – Cash.Enterprise value is the real value at which the company sells in the market.

Market Cap V/s Assets

Market   capitalization is already explained above. Asset means all the current and noncurrent assets present with the company i.e on the balance sheet of the company. There is relationship between them.But there are other components like debt, equity etc which cumulatively forms market capitalization.

           If the investor thinks in terms of market capitalization while buying a piece of a company i.e a share then his natural attention will shift from just a stock price to real the real value of the company so that he can compare with other stocks of same sector and also with the revenue and profits of the company he is investing in.

For eg. Mr. Warren Buffett a famous investor says when you buy a farm land you always think that you are buying the entire farmland and not just a piece of it so it is irrational while buying a stock of a company to think of the share price.

Also check out my other blog: https://www.stockblogs.in/2020/07/mr-market-and-his-madness.html

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MR. MARKET AND HIS MADNESS

MR. MARKET is a concept first introduced by BENJAMIN GRAHAM IN his book INTELLIGENT INVESTOR (in chapter 8). He is also known as the father of VALUE INVESTING. He is also famous for being the teacher of WARREN BUFFETT. His is an important tool for investing in stock for beginners as it establishes a mindset.

Most of the time the price of the stock is accurate to its objective value. But sometimes prices are not right, they are indeed wrong.  MR.MARKET does not always price stocks in a way an appraiser or a private buyer would value a business. Instead when stock is going up  he happily pays more than their objective value & when they are going down he is desperate to dump them for less than their future true worth.

  The most prominent example of this is the tech bubble. The valuation of many companies went from nothing to billion (with a 'b'). Some of these companies never had earned a dollar/rupee or in some cases the revenues were also no there yet.

https://dazeinfo.com/2019/11/11/microsoft-revenue-worldwide-by-year-graphfarm/

 

The best example these is the MICROSOFT CORPORATION, one of the best companies in the world . The average revenue growth given by the company from 1990 to 2019 was approx.  14% CAGR . During the euphoric period of the Dotcom bubble, the revenue was approx. 22000 million-25000 million  (in dollars) but the market capitalization went to 600 billion. The valuation of almost all the internet companies was insane.MR. MARKET WAS HAPPY TO BUY MICROSOFT CORPORATION STOCK AT ANY PRICE what so ever. The stock went down 50% in 3 years(2000-2003) because of the DOTCOM BUBBLE burst. It took 14-15 years for MICROSOFT STOCK to break even, but sales were growing on a y-o-y basis

 

        Would you be willing to allow a certifiable lunatic to come by at least five times a week to tell you that you should feel exactly the way he feels? Would you ever agree to be euphoric just because he is- or miserable just because he thinks you should be? Of course not. You’d insist on your right to take control of your own. But when it comes to financial lives, MR. MARKET tells you how to feel & what to feel despite the obvious facts, from time to time, it can get nuttier than fruitcake(crazy).

          MR. MARKET’S only job is to provide you with prices; it's our job is to decide whether it is to take advantage of it or to act on them. We do not have to trade with him just because he constantly begs you to.

By refusing to let MR. MARKET be your master, you transform him into your servant.

           One of Graham’s most powerful insights is this: “The investor who permits herself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage”.Basic advantage means the investor has the luxury of being able to think for himself & not follow MR. MARKET blindly. When asked what keeps most individuals from succeeding Graham had a concise answer. “the primary cause of failure is that they pay too much attention to what the stock market is doing currently.

         If we own a house, other real estate properties, or farmland do we call our broker every two hours to find a quote on it “NO”; we don’t do that. But in the case of the stock market where we can check the quote every minute, we surely do that “WHY”. Does in an hour the value of the company change “NO”. Does company's sales change ?“NO” Does its profit change “NO”, “NO”, “NO”; then why do we do so?

          STOCK MARKET is a long term game do people in general flip real estate regularly “NO”. Then why on earth people think they can flip stock or share & earn profit. Shares are just small pieces of business ownership; it's the most important thing to understand for beginner investors.

          One of the present examples of the insanity of MR. MARKET :

There's a company listed on NYSE call SERVICE CORPORATION INTERNATIONAL they are in the business of providing funeral goods and services as well as cemetery property and services. The business has a huge moat. But due to the corona virus crash with all other stocks Service Corporation International  also went down. Which actually doesn’t make any logic.If corona virus was going to kill huge number of people the stock should have went up.

 

       

One of the ways to make big money in the market is to; come over the psychological effects on the brain which MR. MARKET puts. One of the ways to neutralize psychological effects is to consider profit & losses as the same. Because psychological studies show that the pain of a financial loss is more than twice as intense as the pleasure of an equivalent gain.

 

  SO DO READ THE BOOK.

 INTELLIGENT INVESTOR

Disclaimer:

The information provided is for general information purposes only and is not intended to be a personalized investment or financial advice.