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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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.

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.

Nivesh Niti in Nutshell

   “Investing is simple, but not easy.”
                                   – Warren Buffett

Nivesh Niti (Nivesh Niti – Android Apps on Google Play ) is an attempt to impart the right investor mindset.

Most of the financial content on the internet is designed for short-term traders which gives the idea that it is very easy to make money in short term whereas the opposite is true.

It is difficult to predict any stock performance in short term and at the same time it is pretty easy say with greater chances of being right about the long term prospects of a company given that the company is doing something you understand and they have a earning model that you understand.

It is more likely for a company who is doing good for last 10 years to perform well in 11th as well as subsequent years and is actually relatively easy than predicting what it is going to do in next few days.

This process is an inherent part of what is famously known as “Value Investing” pioneered by Benjamin Graham and then by his disciple Warren Buffett.

Value investing is all about Paying the Right price for the company.


Core idea of Value Investing is trying to BUY something only at SALE (50% or more Discount)

Just like in SALE of any kind you need to know the MRP (Maximum Retail Price) to know it’s on how much Discount.

In Nivesh Niti every stock is assigned a value that reflect what should be its MRP (known as Optimum Price) by quantifying various aspects that matters as per Value Investing Principles.

For easier reference they are assigned with the Star Rating which is just an indication of their current level of Discount from Optimum Price.

So, the Current Price of a stock at any day place them to have one of the following levels of Discount from Optimum Price.

Level of Discount               Stars
50% or More                           5
40% to 50%                           4.5
30% to 40%                            4
20% to 30%                           3.5
10% to 20%                           2.5
0% to 10%                               2

And when,
Current Price >= Optimum Price (NOT at SALE)  i.e.  1 Star

Like in any SALE our aim is to get Maximum Value for our Paid Price.

“Price is what you pay for something, but value is what you get.”
–Warren Buffett

OUR AIM IS :
          “To Buy Great Businesses at Maximum Discount.”

A value of above Optimum Price just means that it’s NOT yet at SALE so just stay away from it till it’s on SALE (if ever).
That’s the only thing to focus and all the other things will automatically fall into place.

Currently, Nivesh Niti hides all the complexities and just present the most crucial things to impart the right investing mindset.

Nivesh Niti has a small (but growing) set of stocks selected according to Value Investing Principles and User can invest only among those.

The current takeaways from Nivesh Niti are:

  •   To stay focused on the value of the business and only look at the stock market when you want and too as its Master not as a Servant.
  • It helps user imbibe value investing principles which by nature is highly selective approach and isolate user from herd like mentality of the crowd.
  • It reinforces that investing is easy, not rigorous and painstaking.
  • It NOT necessary to have opinion about all the things in financial markets.
  • And above all Patience.

Use it according to the way it’s designed for some time and evaluate if you experience any difference in your outlook towards the investment in the Stock Market.

Finally,

It’s a Journey not a Destination…there are exciting things ahead……Stay Tuned

Disclaimer:
It’s for imparting the knowledge to help spread a right mindset to approach the investing and does not suggest any stocks and it should be used as an education tool only.

Greed & Fear

The two emotions that drive any financial decisions are Greed & Fear.

The emotion of Greed is usually the first emotion that you have to encounter in your investing journey.

How it starts?

As a human it is natural to desire to acquire as much wealth as possible in the shortest amount of time and this excessive desire is Greed.

It starts as soon as the process of finding an investment option begins and it tries to control your decision from that point onwards.

With so many mythical short term success stories and sure-shot investing ideas floating around….all promising the financial heavens in a short span of time clouds the judgement of the investor.

The cumulative effects of Greed is very conspicuous in financial markets, where many things are overpriced just because every investor swayed by Greedcontributes to the insanity by following the herd of overconfident investors &experts who believe that no price is too high even if it defies the basic fundamentals of investing.

This get-rich-quick mentality makes it very difficult to pursue a long but fruitful pursuit of understanding the investing options and evaluate them against the basic tenets of investing so that you will invest only in things that you understand and where the prices makes sense.

How you can identity that Greed is affecting your decisions…actually it’s quite simple…just answer some very easy and basic questions…

  • Does this investment sounds too good to be true?
  • Do you understand how this investment works?
  • Is it currently available at a price that makes sense?

You know the correct answers already in your mind but this process of reiterating over these basic questions is very crucial and will clear any doubts and reduce any effects of Greed while selecting a particular investment option.

Now coming to the next dominant emotion that is even more powerful than Greed…….which is Fear.

Why Fear is even more powerful than Greed?

The main reason Fear is more powerful is because it remains with you for a longer period of time which can starts right at the moment you commit to an investment.

It also has more capability to decide the degree of damage that can be imposed on your financial well-being if not handled correctly.

Fear can clouds your judgement to the extent that it can jeopardize even your best investing decisions and make them appears to you that you made a mistake.

How it starts?

Fear starts when you start seeing that herd is going in the opposite direction.

The level of damage that Fear might induce can be devastating.

There are many instances when a person who appears at ease during the drop of price of an investment at a level of 100 eventually decided to sell it at level of 50.

What prompts this illogical choice !!

Fear of loss compels the investor to sell at price that is even far below than what is the ‘true’ or ‘fair’ price.
This along with Greedduring buying makes a lethal combination that leads to most of the “Buy High and Sell Low” situations.

How it can be handled?
For this you need to change your perspective of how you see the situation.
If BUY decision had been made with due diligence then the price drop only makes it more attractive investment.
It gives you more chances to magnify your returns if you can control your nerves and train yourself to see the situation with this perspective.

Greed and Fear are inevitable part of an investment journey and more you are prepared to tackle them better are the chances of success you will have in your investing journey.

No one summarizes how to handle Greed and Fear better than one of the greatest investor of all time.

“Be fearful when others are greedy. Be greedy when others are fearful.”
Warren Buffett

One just have to keep their head when others are losing theirs…We will explore more…Stay tuned