Anand S - Ordinary Stocks Extra Ordinary Profits

Contents

Acknowledgements 4

Prologue

CHAPTER 1

Introduction

Types of Investors

Stock Exchanges and Indices

Depositories

Broker and his role

Bonus Issues

Rights Issues

Convertible Bonds

Split of Shares

Dividend

Comparison between two asset classes

Is this a good market?

CHAPTER 2

Business cycle 35

Role of Government in Economy

Open and Closed Economies

Effect of Interest rate on Economy and Stocks

Monetary Policy

Fiscal Policy

Interest Rate and Stock Markets

Effect of Inflation on stocks

What is meant by recession?

Regulators and their roles

CHAPTER 3

Equities

Moat

Fishers Test

Value Stocks

Growth Stocks

Turn around Stocks

Momentum Stocks

CHAPTER 4

Fundamental Analysis

Limitations of Fundamental Analysis

Intrinsic Value of a Company

Margin of Safety

Speculation and Investment

Classification of Investors

Rules of Investment in common stock for

a defensive investor

A note on Systematic Investment Plan (SIP)

Changes in ones portfolio

Defensive Investor and Growth Stocks

Buy what you Know Best

Why not 100% in Equities

Investing Plan for Enterprising Investor

Bargain issues in mid cap companies

The Investor and Wild Swings in the Market

The Mind of an Investor

CHAPTER 5

The Annual Report and the Investor 209

Balance Sheet Analysis

The Profit and Loss Statement

Cash Flow Statement

Notes to account and Auditors report

A note on equity fund in the Balance Sheet

Continuation of a company that is sick

Why Technical analysis does not work

CHAPTER 6

Ratios 271

Book Value

Asset values and Investment values

Intangibles and valuation

How to deal with deficit earnings

Price to earnings ratio or rate of capitalization

Price to sales ratio

Return on Invested capital

Dividend yields

Dividend Payout ratio

Post Script

ACKNOWLEDGEMENT

The idea that I write a book came from my friend Amal Muraly, who came to sell insurance to me and got attracted to the markets. The idea crystallized after a long discussion with a distant relative in a family wedding. The book was five years in the making as the market swung from one extreme to another. This led to the realization that the factors that determine the market are beyond the terminals of a broker or the floors of an exchange.

My debt of gratitude is to my parents P.S.Srinivasan and K.P.Kamakshi, who introduced me to the world of stocks at a very early age.

My friend Dileep, who stood alongside me as a rock of Gibraltar through times both good and bad and putting up with me patiently.

My friend Sundar, who forced my re-entry into the market in 2004 after a particularly difficult time, along with him I relearned the markets.

My friend Subba Krishna Rao, who took out time from his busy schedule to do the final editing of this book.

My wife Srividhya Swaminathan for patiently typing and deciphering my illegible long hand and constantly motivating me in all my endeavors.

My Sister-in-law Mrs.Mythili Kailasam for reading several manuscripts and suggesting changes and correcting errors that I overlooked.

My Brother Vinod Srinivasan for designing the cover and convincing me to publish this book.

My Nephew Sashwath Swaminathan, who grew up along with this book and the markets for putting up with my prolonged hours of absence from his playtime.

I have used theories developed by Graham, Fisher and Carret in the first half of this century.

I have adapted it to Indian markets with examples from Dalal Street.

The errors in this book that may have come from oversight must be solely attributed to me.

ANAND. S

13-05-2013

MADRAS.

Prologue

The seed of this book was germinating within me since 2008. With the help of one of my students, I put together an outline and left it there for three years. I began working on it again in the year 2012. This book has become completely different from what I imagined it originally.

My initiation into stocks was started by m other when I was Nineteen and during an enforced break from college. I started to read in those days. Due to strict foreign exchange control the relevant books on stocks and investments were not available. There were no computers or the Internet. India was a socialist state and profit was a bad word. When I finally came out of college, it was the year of change in 1991, when Dr Manmohan Singh swept the cobwebs out of our collective minds. The regime of allowing free import of books came about in 1996, by then the Harshad Mehta scam swept out any interest in stocks in the common public.

I discovered a few books and through them met people like George Soros, Warren Buffet and Peter Lynch.

The first book I read was in 1991, borrowed from an NRI chartered accountant who was reading Alchemy of Finance." I read that book and it went over my head completely. I read Peter Lynch's classic books on stock markets. They were One Up on Walls Street and Beating the Street armed with that knowledge I bought a portfolio of stocks. In the year 1996, I finally read Intelligent Investor and Security Analysis of Graham and Dodd.

In the mean time, m y other businesses were booming and I drifted away from active investing after the Asian Financial crisis. To add to this there was the Ketan Parekh scam and a severe recession in India around the year 1999-2002. The general recession and tight credit cycle and falling margins made me exit my main business. The pressures of shutting down and winding down a business exposed me to the harsh limitations of the Indian system. Once again in 2003, I started looking at the markets again. When I started nibbling at stocks and used the Internet to find new resources. I decided to dig further and re-read the entire library of books that I had collected and kept seeking for maximum information on the fundamentals of economics, the boom-bust theory, the importance of interest rates and Central Banks. The beginning of a major bull run in all asset classes started in 2004.

I revisited my old portfolio made nearly 10 years ago and was amazed with the results that I as an amateur following Peter Lynch, Warren Buffet and Ben Graham generated. In 2006, I decided to become a full time investor when I called the coming of the gold boom, which commenced in 2003 and I realized that we were in for a multiyear bull market.

I was sure of the coming collapse in 2008. This collapse was triggered by the public issue of Reliance Power. I had begun teaching investing to few a people. The principle of Graham, Buffet, Philp Fisher, Carret and Peter Lynch was reinforced. This was the time I stumbled upon two characters, which changed my line of thinking fundamentally, one was Fredrich Von Hayek and the other was a Seventeenth century investor called Richard Cantillon.

Cantillon, was the first of the great investors who made money both in the boom of the Mississippi bubble and doubled his position during the bust by shorting the market all the way down. Little is known about him and the only surviving manuscript is an essay he wrote on how markets are organized. This was long before Adam Smith. There is a scholarly biography written by a Scottish professor on Cantillon which one must definitely read.

I saw the collapse coming when the stock market recovered in 2009 on Government stimulus after the elections, though I did not profit from this fully.