October 7, 2008

Buying in bear markets

I have been getting several questions of this type

- what should be my buying strategy ?
- Should I buy immediately or wait for the bottom?
- Is the price of stock ABC good for buying or should I wait?

I have very simple approach and answer to all the above questions (from my perspective)

Step 1: understand the company well. Have confidence on your analysis
Step 2: Evaluate intrinsic value. Be realisitic in your evaluation. Be neither too pessimistic or too optimistic
Step 3: check price. If selling below intrinsic value (I personally prefer 50% below intrinsic value, you can choose your own number), buy. Otherwise do nothing
Step 4 : Every quarter analyse the results of the company and check if your assumptions are still valid. Recalculate intrinsic value if required.

Personally I decide on the position size and then invest around 40-50% of the full position if the price meets my criteria in step3. The rest of the buying is done in the next couple of months.

This approach cuts both ways. In a rising market, I am unable to build a full position. In a bear market, I am able to average down on price. However while I am doing this I am not looking at the overall market levels or trying bottom fishing. I personally think bottom fishing is a futile exercise and a 5-10% difference in the price will not matter in the long run. If it does, then one is cutting it real close

Do not invest
There is caveat to the above suggestion. If you do not understand the company well, cannot evaluate the intrinsic value or do not have confidence on your analysis, please don’t invest. A bull market is forgiving and you may make money inspite of poor analysis. However a bear market is brutal. If you analyse a company incorrectly or do not have the confidence, the market will not bail you out.

Finally, if you ask for the all time best strategy – Create an SIP (systematic investment plan) on the index for the next 15 years and don’t disturb it.

What I am looking at now?
The market is moving pretty fast these days. As a result I have been reviewing my holdings and looking at new companies. As I plan to keep the total number of holdings fixed (more on that later), I am comparing new ideas with the exisiting ones. A new idea has to be more attractive than an exisiting one, to get into the portfolio (and push out the less attractive stock)

Some companies I am looking at
Lakshmi machine works
Ingersoll rand
ICSA (later)
SKF bearing
HTMT global (cash bargain)
Denso india
Sonata software
Torrent software

The above list is not a recommendation list. It is just a list of stocks I am looking at and may or may not invest in any one of them. I will post on stocks which I find attractive when I complete the analysis and am able to write a post on it.

23 comments:

pankaj said...

Hi Rohit,

I started investing in stocks around 1 yr back and I am almost 50% of my amount (considerable amount) I invested. This is first time I am seeing the bear market. some of my friends are in panic and suggesting to sell all my holdings as they are expecting more free fall. I would appreciate if you can share your views on bear market. How things pan out after beark market? And what type stocks go bust after bear market?
What should be the best strategy to adopt in bear market? Patience? Holding your positions?

Thanks in advance,
Pankaj

Vic said...

Hi Rohit,

The stocks (as mentioned in this post) that you will be looking into, where does this come from? Is this as a result of your filters? or from other sources?

Thanks,

Vikas

Rohit Chauhan said...

Hi pankaj
i am sorry that. most of the investor are facing similar losses. there is no simple answer. i will try to post on it soon.

vic
i look at icici direct and use PE as a filter to create the initial list.

regarding the stock list, i will start analysing them after some. I am currently tied up with list above and would be looking at other stocks after that

regards
rohit

PD said...

Hi Rohit,

Checking latest annual report of HTMT,

Unquoted investment – 391 cr (incl 388 cr in subsidiary)

Cash & bank balance – 8.68 cr
Other current assets – 22.78 cr
Sundry debtors – 77.8 cr
Loans & advances - 49.94 cr
Current liabilities – 92.75 cr

Net current assets – 66.45 cr

Debt – 74.74 cr

Total outstanding shares – 2.053 cr
Price – 160
Market cap – 328 cr

Are you considering 391 cr of unquoted investments as cash or equivalent? or am I missing some thing here?

Appreciate your comments.

Regards
Prashant Dubey

PD said...

Hi Rohit,

Appreciate your views on Prithvi Info:

Cash & bank balance – 214 cr
Other current assets – 34 cr
Sundry debtors – 414 cr
Loans & advances - 136 cr
Current liabilities – 177 cr

Net current assets – 724 cr

Debt – 372 cr

Total outstanding shares – 1.8 cr
Price – 65
Market cap – 117 cr

This stock is trading one third of (working capital – Debt)

Regards
Prashant Dubey

Anonymous said...

Hi Rohit, Can you please have look at Tata Chemicals . The valuations are attrcative as well .

Manish Chauhan said...

Hi Rohit

It would be nice if you cant post something on "How to evaluate intrinsic value of a share"

Its really required by a lot of people.

Manish
http://finance-and-investing.blogspot.com/

Vic said...

Rohit,

I had posted another question, don't see it here yet. I assume it is waiting for your approval.

Vikas

Rohit Chauhan said...

Hi prashant

i am referring to cash holding in the HTMT subsidiary. the company is holding around 540 crs of cash in subsidiary (dont know why in the sub). they have however earmarked it for accquisitions.have a look at their consoldiated statement.
i will have a look at the other company. however cannot promise you a fast response.
vic - did not get your other comment.

manish - i have done a post on it in the past . here is the link - http://valueinvestorindia.blogspot.com/2008/04/what-is-intrinsic-value.html

regards
rohit

Vic said...

Hi Rohit,

Ok, here are my two questions again:

1) You mentioned "Finally, if you ask for the all time best strategy – Create an SIP (systematic investment plan) on the index for the next 15 years and don’t disturb it."
Are you referring to buying an Index (e.g. Nifty BeES) in an SIP fashion?
2) Can u tell us which stocks (of the ones that u analyzed such as BL, BEL, Glaxo Con) trading close to 40-50% below intrinsic value?

Thanks,

Vikas

Rohit Chauhan said...

Hi vic
yes ..i mean nifty or bse sensex via nifty bees. i dont think you can set automatic sip though. you will have to do it manually

all the the stocks except glaxo cons. i have mentioned my estimates of intrinsic value for all the ideas on my blog. so it should be easy to compare with current price

regards
rohit

Anonymous said...

Hi Rohit,

Some brokers do allow you to do auto SIPs like Sharekhan ( monthly, weekly and even daily!!).

And to the person who made the comment on Prithvi Info, just want to check if the FCCB is factored in as debt? Prithvi Info is one of the Lehman-invested company and as such got beaten down crazily. I think at current conversion price of the FCCBs, there will be downward revisions and hence equity dilution and reduction in cash per share...

Prashant

Anonymous said...

Hello Rohit,

Some of the stocks discussed in your blog are trading trading close to 40-50% of intrinsic value like Guj Gas, Novartis, Blue Star.

Can u tell us other stock you have analysed / not posted and trading close to 40-50% intrinsic value, together with intrinsic value?

Thanks in advance

Anonymous said...

Hi Rohit,
I was just surfing through the web site of Revathi Equipments, and i found staggering similarities in the Chairman's letters to share holders with Berskshire's letters. How this guy Abhishek Dalmia can lift word to word from Berk's letters? Even other reports contain great similarities with Berk's.

Can you please throw some light on revathi? if you have any idea?

regards
Ani

sandy said...

hi rohit,
hey wat do u think abt gandhi special tubes?

Anonymous said...

Hey Rohit,
In 2005 you had written http://valueinvestorindia.blogspot.com/2005/11/my-problem-with-stock-screens.html this article. in which you wrote few lines for Mercator Line.
Currently has come below it's Book value 38. CmP is 35. Except Debt ratio 1.2, i found everything OK which is found in dynamic and growth company. What is your take on this company? Currently Shipping sector is hit by recession. so the SCI, GE & mercator are trading below their Book values. Which one of these could be value play?

regards
Ani

Rohit Chauhan said...

hi anonymous

most of the stock, i would almost all the stocks i have analysed in the past are definitely trading at 50% of intrinsic value

hi ani
the chariman of revathy is clearly influenced by warren buffett. it is a good company and i have looked at investing in the company, but the price has not been right. i have not seen mercator. but i would prefer GE shipping over others as it is the biggest company and fairly well run one.

hi sandy
i will have a look at the company and let you know

regards
rohit

sandy said...

hi rohit
wat r ur views abt investing in the us stock market?
lotta good quality companies are available at attractive levels and also one can can learn a lot abt their business reading 10ks and literature available on these companies...
i have come across some nice opportunities in the us market....why just limit ourselves to the indian market?
can we discuss abt us stocks?

Vic said...

Hi Rohit,

Somehow my comments/posts are missing. I posted few on Friday but don't see them yet.

Any suggestions?

Thanks,

Vikas

Rohit Chauhan said...

hi vikas
not sure what is happening. i had approved the comments on friday and they are not appearing on the blog. this seems to be happening on and off for various commenters
i only censor spam ..no other comments
regards
rohit

Vic said...

Hi Rohit,

Ok, I’ll try posting this again.:) Hopefully, will work this time.

I wanted to elaborate on what you confirmed earlier:“Finally, if you ask for the all time best strategy – Create an SIP (systematic investment plan) on the index for the next 15 years and don’t disturb it.”

I thought you’re a pure value investor. I mean Indexing is just the opposite of Value. An indexer believes that the markets are efficient, all the market/business etc. factors are already priced into the stock. But A value investor thinks the opposite.

So I’m confused. Are you leaning more towards Indexing Vs Value Picking based on your experience?

Your thoughts on this will be a great help.

Thanks,

Vikas

Rohit Chauhan said...

hi vikas
i have elaborated on this earlier on my blog.
any active investing strategy should beat the index. also active investing takes time and effort.
passive investing - indexing is however low effort and still one can get decent returns in an absolute terms. which is why i think even if you are a value investor, some part of the portfolio can be indexed.
it is similar to holding a FD even though you invest in stocks. each investment type serves a different need and level of risk

regards
rohit

Vic said...

Thanks, appreciate your input.

Vikas