Experienced Levels Coming Soon

Next Version of Stock Market Gamification App is Coming Soon.

It will complete the Experienced Level and mainly Covers :

  • How to do a basic evaluation of a Business
  • Institutional Money Managers and challenges they face
  • What it is to be an Individual Investor
  • Basic Investment Guidelines for Individual Investor
  • Efficient Market Theory (EMT)
    • Opinion about EMT in Academia & Real World
    • Fallacy of EMT
    • EMT to Behavioral Economics
  • Value Investing
    • Introduction to Value Investing
    • Concept of Mr. Market
    • Basic Tenets of Value Investing
    • Attributes of a Value Investor
    • How Value Investing behaves in
      • A Bull Market
      • A Bear Market
  • Concept of Moat
    • Things that constitutes Moat
    • Role of Moat in evaluating a Business
    • Dangers to the Moat
  • Health Check of a business through important numbers
  • Concepts of “Intrinsic Value” & “Margin of Safety”
  • Importance of the Management for a Business.

Overall this level will take you from Knowledge to Basic Strategy.

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Stock Market Gamification Next Version Coming Soon

Next Version of Stock Market Gamification is Coming on 3-Feb-2017

It will complete the Intermediate Level and mainly Covers :

  • Aspects of a Business
  • Stocks versus Bonds
  • Types of Stocks
  • Dividend & its impact on Business
  • Stock Market Enablers
  • Investment Advisor versus Stockbroker
  • Events like Stock-Split,Bonus Issues & Buyback and their impact on stock.
  • Mutual Funds
  • Basics of Derivatives

Here is some preview :

*Images from Stock Market Gamification App

Keep sending your valuable feedback and suggestions.

IPO and Value Investing

An IPO or Initial Public Offering is the first time a company that is applying to be listed on the stock market sells it shares to general public at an initial price i.e. listing price.

It’s the process through which a privately held company transforms into a public company.

From the cursory appearance it seems that the initial price is the best bargain price anyone can get for a stock, making IPO a bargain for an investor.

But is that really so?

Let’s first succinctly explore the process of an IPO and the factors that decides the initial offering price and the price once it starts trading on the stock market.

The IPO Process

The company that is to go public is known as issuer.

Underwriters are the investment bank that helps in the process of IPO for a fee and these are the one that approaches investors with offers to sell those shares and provides information about the company in a document known as prospectus.

The prospectus contains description of the company’s business, financial statements, information about officers and directors of company and their compensation, any litigation that is taking place, a list of material properties etc.

Then the approximate price at which the shares should be issued is determined.

While deciding this price several things are taken into consideration like, it should be low enough to stimulate interest in the stock and at the same time high enough to raise an adequate amount of capital for the company.

If a stock is overpriced then the stock may fall in value on the first day of trading and if it is under-priced then the capital raised could be insufficient.evaluate.png

After the IPO, when shares trade freely in the open market the price will be decided as per demand and supply of the share.

Also, when a company becomes public they will have stringent reporting requirements and they will be under greater public scrutiny and their ability to focus on longer term growth is somewhat reduced.

All these factor will affect there working as a public company and future earnings.

Let’s try to apply some of the principles of value investing as a yardstick to effectively evaluate IPO as an investment :

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Is listing price a bargain price?

One of the basic thing to remember about IPO is that it is an expensive process and the initial offering price do cover these expenses and therefore most of the times the stock is overpriced at listing price.

Do we know about the company well before IPO?

For a value investor, what matters most about a company is its financial history.

In the case of a company that is still not listed on the Stock Market, this information is mostly private which means it is not easy to access and most of the time unreliable.

In case of an IPO, prospectus do cover some of the earning history and description about the business but this information was once private and not scrutinized to the level any value investor wants it to be.

Is the business predictable?

Another important point that we need to pay attention to, is the possible effects of stringent rules and scrutiny that will be applied to the business once it’s listed on Stock Market.

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Most of the businesses do not react well to these requirements and their stock price follows it.

But…it’s very popular!

Being very popular sometimes inflate the price of the stock after IPO, due to a feeling of missing out by many people.

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The feeling of missing out on the massive gains leads to an initial hysteria leading to spike in price just after IPO making it heavily overvalued.

But once the initial frenzy wear out, the business has to justify the price and that is often a very difficult thing.

Advice from Master

The following quotes from Warren Buffet summarized his opinion about IPOs.

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“You don’t have to really worry about what’s really going on in IPOs. People win lotteries every day but there’s no reason to let that affect [your investing strategy] at all,”

“You don’t want to get into a stupid game just because it’s available.”

Warren Buffet

Risks associated with IPOs are substantial and it does not fall under the purview of sound value investing principles.

So the verdict from the point of view of any value investor tends to be:

“Avoid IPOs however lucrative they seem”

*All Images from CC0 Public Domain

Mistakes : The learning opportunities

One thing that is very essential to have success in any endeavor is Mistakes.

There is a saying that:

“The Person Who Never Makes a Mistake Will Never Make Anything”

Mistakes presents the best learning opportunities and they provide the essential feedback mechanism to improve any system or strategy.

When mistakes are incorporated in any strategy as a feedback mechanism they minimizes the chances of the same mistakes again.

The key is, to never hesitate to do anything because of the fear of mistakes and the rule is to never repeat the same mistake.

If we fail faster, we’ll succeed sooner.

–Tom Peters

All the Masters in their respective fields do make mistakes and in fact they make BIG and a diverse range of mistakes and they keep learning from those mistakes that helps them to be the master of their trade.

Mistakes are inevitable, be it the legendary athlete like Michael Jordan

“I’ve failed over and over and over again in my life and that is why I succeed.”

Michael Jordan

Or,

from the realm of investing “The Oracle of Omaha” the great Warren Buffet himself.

Buffet invested in early 1990′s in a shoe company called Dexter Shoes after analyzing the competitive advantage (“Moat” as Buffet calls it) of the company at that time.

But, as it turns out, the company lost its competitive advantage in subsequent years and eventually proved to be a bad investment amounting to the loss of whopping $3.5 Billion.

Was it disappointing for him ?

Certainly …. Yes

Did that deter him from his core value investing approach ?

Definitely …. No

Actually, it only helped him to strengthen his approach by learning from his mistakes and to apply more diligence in subsequent endeavors.

In his own words:

“Dexter is the worst deal that I’ve made. But I’ll make more mistakes in the future – you can bet on that.”

Like all the other masters, he is never shy of making more mistakes because he knows the importance of mistakes and the invaluable learning from them in the process of success.

In order to succeed, we too need to embrace mistakes as inevitable part of life and do the necessary course correction.

Bears Bulls and Pigs

“Bears make money Bulls make money Pigs get slaughtered

This is very apt in context of the Stock Market.

Let’s see how it works :

Bears represents people who have a very cautious notions about the future of Stock Market.And there is nothing wrong about it and it actually helps them make money in their own cautious way.

When a price rises too much the cautious nature of a Bear helps him to control his Greed and he is ready to sacrifice an apparent chance of further profit for the security of his principal and gets satisfied with his profit which anyways is more than he was targeting.

Bulls represents people who have a very aggressive and positive notion about Stock Market and that too is not a bad thing either and they make money in their own aggressive way with a strategy.

Most of the times they have a tested strategy and they too like Bear are cautious with a difference that they are ready to put their money with calculated risks.

Bulls are generally first to get into the bandwagon during the initial phases of a price rise and many times they start selling parts of their investment to reduce the risk once price start rising further.

Now when the story of price rise starts making rounds in financial world and herds of experts start giving their own reasons that justify the price rise and giving further positive outlook towards the stock making it look more attractive.

Now comes the another species in the picture the Pig and that is the one that buys that story of still untapped potential of the stock with an inevitable price rise that is going to happen very soon.

Afraid to lose an opportunity and getting assurances from so many expert voices.They start buying believing ‘no price is too high’ for such an opportunity.

This is the time when most of the Bears and Bulls are already out and there is an abundance of Pigs which are waiting for many more Pigs which will bring them a handsome financial reward.

Does that dream comes true ?

You know how it turns out…..right

What happens in reality is somewhat different and it’s nothing short of slaughtering.

We’ll explore more …. Stay Tuned.

Value Investing the ‘Model’

Human mind is amazing in its capability to create models and we can try to understand Value Investing through the concept of Models.

What is a Model?

A Model is defined as “A hypothetical description of a complex entity or process”.

In our context, the entity is Stock Market or the process is investing in Stocks.

Now don’t be alarmed by the term complex here. The nature of entity need not always define the nature of Model that can help us understand it.

Another important thing to note is that most of the times a Model cannot explain all the things about the entity and focus only on some aspects of it.

So we need to have a clear distinction between what a Model CAN do and more importantly what it CAN’T do.

Let’s try to understand “Value Investing” as a Model that we want to use to explain the investing in stocks.

Main thing to remember is that it’s just a Model like the numerous others.

Which brings us to another question:

Why we want to consider “Value Investing” Model instead of other Models?

The main USP of this Model is Simplicity.

Value Investing does not try to predict the timing of stock market prices. It only helps to buy at a bargain and then waits for the Market to inevitably move towards “Intrinsic Value”.

“Intrinsic Value” is nothing but the fair,optimum value for a business that is supported by some quantifiable aspects of the business.

The “Intrinsic Value.” is determined using methods that produce a fuzzy but very important benchmark.

Now, “Intrinsic Value” calculation is important…. But and that’s a BIG BUT…. The more important thing is to understand that ….It’s NOT the level of accuracy of “Intrinsic Value” that makes the core of Value Investing but the concept of having a “Value” as a benchmark. …..This distinction sometimes is very hard for people to grasp.

Simplicity is just a matter of taste. Some like it complex and some like it simple.

Though added complexity could make the model more accurate but that’s not always the case and most of the times it does not worth the efforts.

To accommodate this possibility of error in calculation another important concept in Value Investing Model is that of “Margin of Safety”….which just states that you only buy at the maximum distance possible from intrinsic value.

“Margin of Safety” is embodiment of the concept of giving up the accuracy for the sake of simplicity and at the same time maintaining the effectiveness of the Model.

A Value Investing Model just boils down to…”You just have to be good at only one thing… and that is identifying mispriced businesses.”

This involves understanding the fundamentals of the business and doing some relatively simple math related to the performance of the business.

We’ll explore more…Stay Tuned.

In the Beginning There Was Idea

Every business starts as an idea which is generally a new thing and in most of the cases adds some value in some existing thing and generates cash flow in the process.

To convert the abstract concept of idea into a concrete business it requires financing.

How an idea can be financed?

One option is to get money with a promise of giving extra as per the pertinent Interest Rate.
It’s pretty straightforward and simple to understand.

You have an idea and other person has money and he is willing to give you the money with a promise of some additional money after a fixed period of time…Simple.

Another form of financing comes through Stocks.

How this form of financing works?

Now, this one is quite interesting and one of the greatest invention after the concept of money itself.

Let’s have a look at this more closely…

You are willing to give money without a promise of anything in return.

No Interest Rates……No Security of Principal….just a faith in the business ….. Seriously….How it works then!!

This is an astonishing thing as well as something that baffled many and make it difficult for them to fathom.

Let’s take a further look at this….

A business is divided into many parts and those parts are called Stocks of the business and people can buy those parts in the initial public offering (IPO).

Over the time these stocks are traded at a place called Stock Market based on‘perception’ about their growth in future the price changes over time.

Why price changes so much if the value of underlying business is not changing?

It’s all about Greed and Fear and it’s discussed here Greed & Fear

How an investor with a right mindset should see it?

The analogy of Mr. Market by Benjamin Graham is very helpful in understanding the overall scenario.

According to that, you are partner in a business with a crazy person Mr. Market.

Mr. Market has wild mood swings.

Every day he offers you to Buy your shares at a particular price or Sell his shares at a particular price.

But leaves the decision up to you entirely.

Sometimes he’s in very Good mood and tend to name a price higher thantrue value of business and he will accept with joy your shares at that price.

At other times he is in such Bad mood that he tend to name a price very low than true value of business and you can take advantage of Mr. Market’s crazy offer to buy his shares.

And not to mention that you always have the choice of not doing anything.

That’s the real beauty no penalty for inaction….Which is the greatest edge for an investor with the right mindset.

We’ll explore more…Stay Tuned.