Stock indices are close to their all-time high levels and the market is
wild with excitement. Before you press the buy button, check out the
advice of one of the world's most successful investor of all time,
Warren Buffett: "Be greedy when others are fearful, and fearful when
others are greedy." After all, the most terrible investing mistakes are
made during bull runs, while the most profitable investments happen when
the markets
Does this mean you should stay away from stocks at this juncture? Not
really. Despite the high valuations and the volatility inherent in
equities, it is possible to make profitable investments in stocks. You
just need to pick the right ones. One way to do this is to use
fundamental analysis, which helps an investor judge a stock using a
number of ratios. The only problem is that no single ratio works in all
situations. The most commonly used price to earnings (PE) ratio can't be
used to evaluate loss-making companies.
Leading investing gurus
also rely on fundamental analysis for picking stocks. The ratios and
combinations they have used may have been different, but the underlying
philosophy remains the same. Our cover story this week looks at five
such investing legends and the methodology they applied to separate the
chaff from the grain. These investment strategies are based on years of
research and analysis. Their investment track record is outstanding as
all of them have succeeded in outperforming the market. Buffett's
Berkshire Hathaway, for instance, has generated annualised returns of
8.68% in the past 10 years, compared to 5.47% by the S&P 500.
These investment gurus believe that no matter how volatile the markets
are in the short term, stock prices move to their intrinsic or fair
value in the long term. They strongly feel that there are inherent
inefficiencies in the market and one can beat the market by picking
stocks that are trading at prices lower than their intrinsic values. The
intrinsic value is defined as the price derived from the firm's
fundamentals like sales, earnings, dividends, and its assets.
However, our story does not stop at eulogising these investing experts
and harping on the success of their stockpicking strategies. To make it
relevant for our readers, we have applied the parameters recommended by
these five gurus to the Indian market, and have identified five stocks
picked by each method. The financial ratio combinations attributed to
these gurus were taken from John P Reese's book The Guru Investor, and
our universe comprised the companies listed on the BSE. The data used in
the study is for the financial year 2012-13.
A caveat is in order here. These strategies were devised for developed
markets like the US and the UK, and may not be fully applicable to an
emerging market like India. Hence, some of the parameters had to be put
aside while identifying the stocks that passed muster. Even so, we
believe that the 25 stocks thrown up by the five strategies could be
good longterm investments. We would also like to stress that these
strategies work in the long run and are meant for long-term investors.
Short-term investors, speculators or day traders may not derive
satisfactory benefits from these methods.
The 'oracle of Omaha' follows a strictly conservative investment
philosophy. A student of Benjamin Graham at Columbia University, Warren
Buffett is a staunch proponent of the buyand-hold strategy. As he says,
his favourite holding period is 'forever'. Buffett prefers to invest in
straightforward businesses, which manufacture products that people can't
or don't want to live without. There is no place for hype in his scheme
of things and companies that boast speculation are often disregarded.
Buffett's primary concerns include the financial stability, quality of
management and simplicity of business. He also checks whether the
company has the ability to pass on any rise in its costs to its
consumers. A company should have the ability to adjust the prices of its
products to inflation because this enables it to make profits in
varying economic climates.
To identify solid companies that are
worth investing in, Buffett uses a series of fundamental indicators,
such as stability of earnings, level of long-term debt to earnings,
return on equity (ROE), return on total capital (ROTC), free cash flows,
and return on retained earnings.
One of Buffett's abiding
principles is that stock price volatility, even year-to-year
fluctuations, are caused by irrational investor behaviour that can't be
predicted. Therefore, he is concerned more with the percentage change in
per share book value instead of the stock price.
read more at http://articles.economictimes.indiatimes.com/2013-10-28/news/43462693_1_stocks-gurus-john-p-reese