MOSL-buy right hold tight_sandip.cdr - Motilal Oswal

BUY RIGHT, SIT TIGHTA B E G I N N E R ’ S G U I D E T O I N V E S T I N G

In the recent past many investors have left the equity market disappointedbecause their portfolios have not done too well. And the reasons for this, asour research on this matter points out, is largely due to wrong selection ofstocks, over-diversification, investing in penny stocks, etc. But, equities as anasset class has outperformed all other asset classes over the years and henceshould play an important role in one's portfolio in order to create wealth inthe long-term. Hence, it's important that investors realize this and come backto equity markets. With this objective in mind, we at Motilal Oswal haveembarked on a new mission – the 'Mission: Save the Investor'.The aim of the mission is to make investors aware on the one mantra thatthey need to follow to create wealth through equities i.e 'Buy Right. Sit Tight'.You too can create wealth for yourself if you follow this mantra religiously. Justread through this short book on the concept of 'Buy Right & Sit Tight' andget started.Happy Investing!3

DIFFERENT WAYS TO CREATE WEALTHInvesting is putting money aside today to get more tomorrow. This could bedone by investing in a number of asset classes.Investments could be made in financial instruments like fixed deposits in banksand companies or debt instruments like bonds and debentures. Theseinvestments are made to generally get periodic returns in the form of interestwith the original capital being reasonably safe; which is returned on maturity.While interest income generally gets consumed, the principal does notappreciate very much as inflation eats into the capital appreciation.Wealth creation is possible through investment in land and real estate. But, theserequire specialised knowledge and require large amounts of capital.Gold, while it has appreciated sharply in the recent past, has provided modestreturns over long periods, while giving no periodic returns.A common method of creating wealth is through investments in commonstock or equities in the stock market. These provide periodic returnsthrough dividends. These can be sold and the excess of the sales proceedsover the cost is the addition to the wealth.5

CREATING WEALTH THROUGH THESTOCK MARKET – TRADING VS INVESTINGThere are two ways of wealth creation through stocks:-Trading&InvestingTrading is basically escorting a share from a low price to a higher price,the difference being the profit on the trade. Purchase is done withoutconcentrating on the industry, company or its fundamentals. Price is theonly criterion for purchase and sale.These decisions are based on momentum and are not based on anyelaborate study. To the trader price is GOD, the rest being irrelevant.Trading could be intra day, or positional over the next few days or nextfew weeks. This way a trader could rotate his capital many times overand his wealth creation could be through the sum of his net profits in anumber of trades.7

While wealth creation through trading is alluring, its results are notheartening. The trader is pitted in a zero sum two person game withthe rest of the world, which is the market.The trader has limited capital and is pitted against the market whoseresources are infinite. Each trade ends with money changing handsfrom the market to the trader if his call has been right. If his call is wronghe loses money to the market. The game continues to infinity and endsif the trader gets all the money from his opponent, the market or if thetrader loses all his money to the opponent. As the trader's capital islimited, the odds are stacked overwhelmingly against him.Experience shows that 98% traders lose their capital and it is only avery few who make it big through trading.Investing is another way in which you can createwealth through the stock market9

Trading may be a 100 metre sprint, but, wealth creation is a marathon race. Andthat’s where Investing comes in. If Trading is like 20-20 cricket, Investing is like aTest Match.INVESTING HAS 2 BASIC RULESRULE NO. 1Never lose moneyRULE NO. 2Never forget Rule No. 1The planning for the game (in investing) is different from that in trading. In one dayand T20 cricket formats (Trading), the eye is on the clock and the run rate, whilethe aim is to hit out and score as fast as possible. If the batsman gets out rashly, itdoes not matter as the next batsman gets a chance to take the strike.In test cricket (Investing), the aim is to play in a steady manner and build a longinnings to reach a sizable score for oneself and one's team.Investment is something, which on thorough analysis, promisessafety of principal and a satisfactory return~ Benjamin Graham ~11

COMMON INVESTING MISTAKESWhile everyone aims to make it big through investment, many fail.Hard work and enthusiasm may be rewarding in other businesses, they arecounter productive in investment. There are many mistakes that investorsmake unknowingly which lead to wealth destruction. Some of the points tobear in mind are:Investment in stocks does not require too much time or hard work. Manymake it their whole time profession giving them a lot of time on their hands.Work increases to take care of the available time and this leads to hyperactivity and mindless trading.Don’t work for your stocks, let your stocks work for you.There is no plan for the process of wealth creation. Creating wealth withouthaving a process is good luck. And as you know it’s not often you get lucky.Hence you not only need to plan your play; you also need to playyour plan when investing.Profit is simply the difference between the exit price and the entry price. Exitprice is in the realm of many factors beyond one’s control, but, the entryprice is well within one’s control.Develop a methodology for stock selection. Concentrate on businessesthat you can understand.13

INVESTING BASICSHave the purchase price to be so attractive, that even a modest sale gives anattractive return.Look at businesses where you can see the future for at least ten years. Nowlook at companies within the industry which have management calibre,competitive advantage and potential to grow at above industry rate. This canbe done very simply by keeping your eyes and ears open.Try to find about management integrity, processes, management depth, theway it treats its top team and more importantly its workers and middlemanagement, its ability to adapt to change, the way it treats its suppliers,customers, its creditors. This can be got either through publishedinformation or by talking to suppliers, customers, employees, exemployeesand other companies.Never get out of a stock if it has temporaryproblems. Don’t have the itch to switch.15

I NVESTING GROUND RULESInvesting is like playing a test match. One has to protect one’s wicket while buildingup a huge score over a long duration of time. Here, one should study the macroeconomic environment, industry trends, management, financial performance for atleast three years and the management’s policy of sharing the company’s profitthrough dividends. Some simple rules to watch before investing are as follows:Study at least three years’ working results.Look for consistent performance, one years’s performance could be accidental ormanaged.The Return on Capital Employed and Return on Equity should be above 20%.Steady performance is not enough, growth is the name of the game. Look for at least15% growth in earnings and 10% growth in dividends.There is a dividend pricing model for shares, which projects share prices on the basisof dividends. In simple terms, it suggests that the higher the dividend, the higher theprice. Secondly, the higher the compounded rate of growth of dividends, higher theprice.Buying a good stock is not enough. Buy when the price is low. The final returndepends not just on the exit price but also on the entry price.If you don’t have the time to study equity fundamentals before investing,you should take the advice of your equity advisor. Else, you could investin a Portfolio Management Scheme (PMS) of a reputed organisation.17

B UY RIGHT & SIT TIGHTSome of the biggest fortunes have been made by investors who haveinvested wisely and held on for years. Warren Buffett, reputed to be one ofthe world’s richest men has made his fortune by holding on to wiseinvestments for decades. The moral is obviously BUY RIGHT, SIT TIGHT.Warren Buffett in this context has said.An investor has to do a small number of things right andavoid major mistakes to be outstandingly successful.Steady uninterrupted investments increase in value through the power ofcompounding. Albert Einstein once said,Compounding is the eighth wonder of the world.Steady well chosen investments may see quotational losses, but, notpermanent losses. Buy a basket of 10 to 20 scrips in steady non- cyclicindustries and hold on for long periods.19

T HE POWER OF INVESTING RIGHTHere are some compounded annual rates of growth from well knowncompanies by holding on for 20 years or since listing, whichever is later*.Asian Paints25%Infosys Tech46%Berger Paints31%ITC21%Cipla30%L&T19%Eicher Motor30%Nestle19%HDFC Ltd23%Kotak Mahindra Bank26%HDFC Bank25%Pidilite Industries23%Hero Honda28%Sun Pharma31%In addition to the above steady growth rates in the value of holdings, thesecompanies pay dividends periodically. These dividends amount to about 1 to2% of the current market value of the holdings. Companies have a wellthought out policy of dividend payout and as the earnings grow, dividendsmove in line.*The stocks mentioned above are to illustrate a point. Past performance may or may not be sustained in future. Thisdoesn't constitute any advice or recommendation from Motilal Oswal Financial Services. Readers are advised to use theirdiscretion or consult a financial advisor. Personnel of Motilal Oswal Financial Services & its subsidiaries may have long /short position in the stocks mentioned above.21

SUMMARYOwning a portfolio of good steadystocks in non-cyclical industries islike owning an orchard of fruittrees. It keeps you well fed throughregular supply of fruits, while theland on which the orchard standscontinues to appreciate in value.Happy Investing!!23