Introduction: The advantages of a dumb money
Dumb money is only dumb when it listens to the smart money. To make a good portfolio try to
search for a wonderful tenbagger. You will triumph as an investor.
Understand the power of common knowledge – Observe everything happening around to spot the
opportunity
Part – 1
Chapter – 1 The making of a stock picker
Studying history, philosophy and human behaviour is much better than studying statistics for stock
market.
Don’t speculate whether it will go up or down, rather check fundamentals
Chapter – 2 The wall street oxymoron
Always focus on street legs. These are the companies which can make you millionaire
Mutual fund manager choose losing a small money over possibility chance of making unusually large
profit
Professionals and mutual fund manager has so many constraints compare to small retail investor.
Use it as your advantage not as your disadvantage
You have wonderful opportunities in your neighbourhood before it reaches to street juggernauts
Chapter 3 – Is this gambling or what?
Don’t put all your eggs in to one basket. Overall stock market is way beneficial than simple money
market.
Six of your stocks perform as expected then you are a winner. Don’t put your card when you see
three aces, it can be hidden royal flush for you. Be patient
Chapter – 4: Passing the mirror test
Before you buy a share make sure these three things
1. Do I own a house?
2. Do I need money?
3. Do I have person qualities which will make me successful in stock market
Never invest in anything which eats or needs repair
No wonder people make money in real estate and lose money in stock market. How much research a
normal person does before buying a house? Do this for stocks also
Only invest that you could afford to lose without that loss having any effect on your daily life in
foreseeable future
When stocks are about to tumble, optimism is at all time high
Traits of humans make them horrible stock market investor
The three emotional state
1. Concern – worrying after market crash which keeps him buying at bargain price
2. Complacency – His stocks are going, he become complacent
3. Capitulation – when market crash once again he sells at loss
Stock price fluctuate between 50% in a particular year – between its highs and lows
Contrarian – waits for everything to settle down and after analysis buy at a proper time
When it comes to market predicting, the skill you require is snoring not listening. Control your
emotions and feelings and discipline to ignore them as long as fundamental of the company is sound
Chapter 5: Is this a good market? Please don’t ask
To make money in stock market you don’t need to predict it actually
Penultimate preparedness – don’t prepare for yourself what has just happened. Prepare yourself for
what is coming up next
What is stock market? – The market ought to be irrelevant
If you don’t find a buy signal for any stock then return all your money to yourself same as Warren
Buffet. Buy only on fundamental merits
Remember this:
• Don’t overestimate the skill and wisdom of professionals.
• Take advantage of what you already know.
• Look for opportunities that haven’t yet been discovered and certified by Wall Street—companies
that are “off the radar scope.”
• Invest in a house before you invest in a stock.
• Invest in companies, not in the stock market.
• Ignore short-term fluctuations.
• Large profits can be made in common stocks.
• Large losses can be made in common stocks.
• Predicting the economy is futile.
• Predicting the short-term direction of the stock market is futile.
• The long-term returns from stocks are both relatively predictable and also far superior to the long-
term returns from bonds.
• Keeping up with a company in which you own stock is like playing an endless stud-poker hand.
• Common stocks aren’t for everyone, nor even for all phases of a person’s life.
• The average person is exposed to interesting local companies and products years before the
professionals.
• Having an edge will help you make money in stocks.
• In the stock market, one in the hand is worth ten in the bush.
Part 2 – Picking Winners
Characteristics to look for the stock while picking
Chapter 6 – Stocking the tenbagger
The best place to begin looking for tenbagger is close to your home, shopping mall or at your work
Observe the coming companies and what they can change and how much they can change
The person with an edge is always likely to beat a person without an edge
Professionals only help in buying cyclical stocks not for the long term investing
Chapter 7: I’ve got, I’ve got it – What is it?
Investing without research is like playing a stud poker without looking at cards
Chairman’ effort – Put as much effort while picking stocks as you put while buying house and
groceries
If you own some of the stocks still do due diligence – never play blind
Stocks of the big companies do not move much. You will get your biggest moves into smaller
companies
Stocks does not move an inch after huge enterprises
These are the six categories of the stock:
1. The Slow Growers: The most successful companies and steady with great track records and
super stocks. They pay generous dividend and have a good history of dividend.
Managers prefer to expand business rather than dividend but when they don’t feel they
have opportunity then they pay dividend.
Put them in your portfolio just to hedge the position not with the hope of earning.
2. The Stalwarts: 10-12% per annum earnings. Depends on when you buy and when you sell.
You can sizeable profits in them. Don’t take unnecessary chances with them.
Buy at a proper time and sell them when you feel and consider their balance sheet not good.
They are good performers but not the start performers
Buy them for 30% - 50% gain and then repeat the process when they are available for
bargain
They won’t go bankrupt anytime soon and they are very good for recession.
3. The fast Growers: New enterprises that grow 20-25% per annum. If you choose wisely these
are 30-40 baggers and sometimes 200 baggers. Take on or two you don’t need to work for
life time.
It does not matter if the industry is growing or not, check whether the company is going or
not.
4. The cyclicals: The autos, airlines, steel, chemical, tire all are cyclicals.
5. Turnarounds: These are the stocks make up ground very quickly. Don’t go for
diwerseification
6. The Asset plays: A company seating on a some asset. Here it is difficult to find but once you
find you need patience.
There is no sensible formula to success in stock market. Don’t follow sell after two years and sell to
minimize loss.
Chapter 8: The perfect stock, what a deal!
The simple it is, the better it is.
If it’s a choice between owning stock in a fine company with excellent management in a highly
competitive and complex industry, or a humdrum company with mediocre management in a
simpleminded industry with no competition, I’d take the latter.
13 attributes to recognize a wonderful company
1. It sounds dull or even better, ridiculous
The more boring name it is, the better it is. Lookout for dull name
2. It does something dull
It is much better when a boring company does a boring thing.
It gives you so much amount of time to purchase at bargain
3. It does something disagreeable
Boring and disgusting at a same is the best you can ever get. If a company does something
waste management it is the best in the world to take
4. It’s a spinoff
The separate entity of big MNC is the best of all. Look for spinoff as it won’t get out of
business
5. The institution don’t own it and analysts don’t follow it.
Find a stock without institutional ownership, it is a potential winner for you
6. The rumours around: It’s involved with toxic waste and/or Mafia
Waste management is the best industry. Buy the stocks which are not in list because of
mafia
7. There’s something depressing about it
8. It’s a no growth industry:
Invest in no growth industry or low growth industry where biggest winners come up. The
industry does not have competition. Normally they have 2-3 players with healthy market
share. People need them so they won’t go out of business.
9. It’s got a niche
Focus on new market things. Once you’ve got exclusive franchise in anything, you can raise
price. Focus on patent companies. It takes years for other to produce such thing.
10. People have to keep buying it
Invest in cigarettes, drugs, soft drinks, razor blades rather than toy. Come up with a stock of
a company which sells essential
11. It’s user of a technology
Don’t buy a stock of a computer company but instead buy a company which uses the
technology
12. The insiders are buyers
If insiders are buying it is clear sign that you need to add it in your portfolio
13. The company is buying back shares
If a company is buying back it shares, raising dividend, starting new operations are best sign
to buy shares
Chapter 9: Stocks to avoid
Avoid the hottest stock in the hottest industry. It’s a welfare and many people loose
Beware of the next something big: Never invest in such a next company
Avoid Diworseifications: the Company coming up with the acquisition which is out of their
understanding and overpriced as well. If company acquire related business then go for it.
Beware of the whisper stock:
Beware of the middlemen: The Company which has one big customer and depend on their
revenue of a single customer
Beware of the stock with exciting name:
Chapter: 10 Earnings, Earnings and more Earnings
What makes a company more valuable – earnings and asset are the answers. If it takes years
for a company to catch it will cover up the lag period if it has good earning with good assets
qualities.
Value always win out.
If stock has book value greater than the current price then it is a clear bargain.
Earnings makes the stock wiggle to wiggle
The famous P/E ratio – the number of years it will take for a company to earn your initial
investment. So select a company whose P/E is low or at least below industry
The P/E of the market: During bearish market, most of the stocks are at inflated low price.
Interest rate has very high impact on the stock price.
Future Earnings: Reduce cost, Raise prices, Expand into new markets, Sell more of its
products in to the old markets, Dispose of a losing person.
Chapter 11: The two-minute drill
Asking about the competition. If a competitor values the business of a competitor it must be
the company is doing good. Choose hotel and restaurant stocks over technology as it is very highly
competitive industry.
Don’t invest in hurry. If a company makes any decision, observe the impact of the decision.
Chapter 12: Getting the facts
Always research properly about the company. Never invest in a company without properly analysing
it
Chapter 13: Some famous numbers:
Here are the number you must check before investing in a company
1. Percentage of sales: If a product is very exciting but company is very huge and does not
represent a high percentage of sales then the price will not go up as expected. Search about
the products and their parent company
2. P/E ratio – If a company if fairly priced means its P/E ratio is = its growth rate. P/E ratio half
to the growth is very good but double is very bad. This is the standard range
3. The Cash position: The Company which is sitting on the pile of cash is always a good pick as it
won’t get bankrupt anytime soon.
4. The Debt Factor: How much does a company owes and how much company does it own? Be
a loan officer. Cash > Short term debt. Equity > Debt. Check debt to equity ratio. If it less
than 10%, it is wonderful. For turnaround always focus on debt part
5. Dividends: Prefer dividend over not dividend. In wipe-out high dividend payer are always
better than no dividend payer.
6. Does it Pay?: If a company pay dividend at the time of recession then it is the best company
Regular dividend of last 20-30 years is the best thing you can ask for a company
7. Book Value: Consider book value of a stock as bench mark but don’t consider it blindly as
there so many hidden assets in the book value which are not come up to you and won’t save
you in a difficult situation.
8. More hidden assets: Goodwill, patents, depreciation and other things. Please consider them
while calculation and stock selection
9. Cash Flow: Good cash flow is the essence of the company to repay short term obligations.
So, always lookout for a company with steady and good cash flow which is rising by year on
year
10. Inventories: Invest in a company which does not need to right down its inventories. Auto
companies can keep their inventories
11. Pension Plans: If a company shut it still need to pay pension plans. Before investing a
turnaround always check the pension obligation
12. Growth rate: growth rate is very important as we have already mentioned in the P/E analysis
13. The bottom line: Pre-tax profit margin is one of the another major factors to consider while
buying a stocks.
Chapter 14: Rechecking the story
Also consider in which phase the company is: Start, Growth and mature
Growth company is always a good option which will make you rich
Chapter 15: The final checklist:
Stocks in general:
1. P/E ratio
2. % of institutional ownership. The lower the better
3. Insiders are buying and company buying back – both are positive
4. Growth and is it consistent or sporadic
5. Strong or weak balance sheet and Cash flow
6. Cash position
Slow Growers:
Dividend
% of the earnings paid out as dividend
Stalwarts:
Big companies aren’t likely to go out of business
Check Diworseification
Long term growth rate
If you plan to hold lifetime check its performance during recession
Cyclicals:
Close watch on inventories
Shrinking P/E
Good one for short time frame
Fast Growers:
Product will enrich company financially
High growth rate
Performed successfully in more than one city or country
Turnarounds:
Is the business coming back?
Costs are cutting back?
Asset Plays:
Value of assets
Debt
Some pointers:
• Understand the nature of the companies you own and the specific reasons for holding the stock.
(“It is really going up!” doesn’t count.)
• By putting your stocks into categories you’ll have a better idea of what to expect from them.
• Big companies have small moves, small companies have big moves.
• Consider the size of a company if you expect it to profit from a specific product.
• Look for small companies that are already profitable and have proven that their concept can be
replicated.
• Be suspicious of companies with growth rates of 50 to 100 percent a year.
• Avoid hot stocks in hot industries.
• Distrust diversifications, which usually turn out to be Diworseifications.
• Long shots almost never pay off.
• It’s better to miss the first move in a stock and wait to see if a company’s plans are working out.
• People get incredibly valuable fundamental information from their jobs that may not reach the
professionals for months or even years.
• Separate all stock tips from the tipper, even if the tipper is very smart, very rich, and his or her last
tip went up.
• Some stock tips, especially from an expert in the field, may turn out to be quite valuable. However,
people in the paper industry normally give out tips on drug stocks, and people in the health care
field never run out of tips on the coming takeovers in the paper industry.
• Invest in simple companies that appear dull, mundane, out of favor, and haven’t caught the fancy
of Wall Street.
• Moderately fast growers (20 to 25 percent) in non-growth industries are ideal investments.
• Look for companies with niches.
• When purchasing depressed stocks in troubled companies, seek out the ones with the superior
financial positions and avoid the ones with loads of bank debt.
• Companies that have no debt can’t go bankrupt.
• Managerial ability may be important, but it’s quite difficult to assess. Base your purchases on the
company’s prospects, not on the president’s resume or speaking ability.
• A lot of money can be made when a troubled company turns around.
• Carefully consider the price-earnings ratio. If the stock is grossly overpriced, even if everything else
goes right, you won’t make any money.
• Find a story line to follow as a way of monitoring a company’s progress.
• Look for companies that consistently buy back their own shares.
• Study the dividend record of a company over the years and also how its earnings have fared in past
recessions.
• Look for companies with little or no institutional ownership.
• All else being equal, favor companies in which management has a significant personal investment
over companies run by people that benefit only from their salaries.
• Insider buying is a positive sign, especially when several individuals are buying at once.
• Devote at least an hour a week to investment research. Adding up your dividends and figuring out
your gains and losses doesn’t count.
• Be patient. Watched stock never boils.
• Buying stocks based on stated book value alone is dangerous and illusory. It’s real value that
counts.
Chapter 16: Designing a portfolio:
While calculating return on investment – include every cost of financial magazine and other journals
12-15% return over a period of time is good enough – including all the cost and income from
dividend
The more is better but limit yourself to 30 or 40 max
Tenbaggers come from fast growers of turnarounds. Use warren buffet formula for investing
Before buying and selling always check the fundamentals
Chapter 17: The best time to buy and sell
WHEN TO SELL A SLOW GROWER
• The company has lost market share for two consecutive years and is hiringanother advertising
agency.
• No new products are being developed, spending on research and development is curtailed, and
the company appears to be resting on its laurels.
• Two recent acquisitions of unrelated businesses look like diworseifications, and the company
announces it is looking for further acquisitions “at the leading edge of technology.”
• The company has paid so much for its acquisitions that the balance sheet
has deteriorated from no debt and millions in cash to no cash and millions in
debt. There are no surplus funds to buy back stock, even if the price falls sharply.
• Even at a lower stock price the dividend yield will not be high enough to attract much interest from
investors.
WHEN TO SELL A STALWART
• New products introduced in the last two years have had mixed results, and others still in the
testing stage are a year away from the marketplace.
• The stock has a p/e of 15, while similar-quality companies in the industry have p/e’s of 11–12.
• No officers or directors have bought shares in the last year.
• A major division that contributes 25 percent of earnings is vulnerable to an economic slump that’s
taking place (in housing starts, oil drilling, etc.).
• The company’s growth rate has been slowing down, and though it’s been maintaining profits by
cutting costs, future cost-cutting opportunities are limited.
WHEN TO SELL A CYCLICAL
• Two key union contracts expire in the next twelve months, and labor leaders are asking for a full
restoration of the wages and benefits they gave up in the last contract.
• Final demand for the product is slowing down.
• The company has doubled its capital spending budget to build a fancy new plant, as opposed to
modernizing the old plants at low cost.
• The company has tried to cut costs but still can’t compete with foreign producers.
WHEN TO SELL A FAST GROWER
• Same store sales are down 3 percent in the last quarter.
• New store results are disappointing.
• Two top executives and several key employees leave to join a rival firm.
• The company recently returned from a “dog and pony” show, telling an extremely positive story to
institutional investors in twelve cities in two weeks.
• The stock is selling at a p/e of 30, while the most optimistic projections of earnings growth are 15–
20 percent for the next two years.
WHEN TO SELL A TURNAROUND
• Debt, which has declined for five straight quarters, just rose by $25 million in the latest quarterly
report.
• Inventories are rising at twice the rate of sales growth.
• The p/e is inflated relative to earnings prospects.
• The company’s strongest division sells 50 percent of its output to one leading customer, and that
leading customer is suffering from a slowdown in its own sales.
WHEN TO SELL AN ASSET PLAY
• Although the shares sell at a discount to real market value, management has announced it will
issue 10 percent more shares to help finance a diversification program.
• The division that was expected to be sold for $20 million only brings $12 million in the actual sale.
• The reduction in the corporate tax rate considerably reduces the value of the company’s tax-loss
carryforward.
• Institutional ownership has risen from 25 percent five years ago to 60 percent today—with several
Boston fund groups being major purchasers.
Chapter 18: The twelve silliest thing about the stock price
1. It can’t go much lower
2. You can always tell when stocks hit a bottom
3. It can’t go beyond this
4. Cheap price share: What can I loose?
5. Eventually they always come back
6. Darkest before the down
7. When it rebounds I’ll sell
8. Conservative stocks don’t fluctuate much
9. It’s not taking too long
10. Look at how much money ill lost
11. I missed the one so I catch the next one
12. Whatever is happening I am right
Chapter 19: Options, futures and shorts
Don’t buy if you don’t have waste money and don’t buy if you are not philanthropist.
Chapter 20: 50,000 Frenchmen can be wrong
• Sometime in the next month, year, or three years, the market will decline sharply.
• Market declines are great opportunities to buy stocks in companies you like. Corrections—Wall
Street’s definition of going down a lot—push outstanding companies to bargain prices.
• Trying to predict the direction of the market over one year, or even two years, is impossible.
• To come out ahead you don’t have to be right all the time, or even a majority of the time.
• The biggest winners are surprises to me, and takeovers are even more surprising. It takes years,
not months, to produce big results.
• Different categories of stocks have different risks and rewards.
• You can make serious money by compounding a series of 20–30 percent gains in stalwarts.
• Stock prices often move in opposite directions from the fundamentals but long term, the direction
and sustainability of profits will prevail.
• Just because a company is doing poorly doesn’t mean it can’t do worse.
• Just because the price goes up doesn’t mean you’re right.
• Just because the price goes down doesn’t mean you’re wrong.
• Stalwarts with heavy institutional ownership and lots of Wall Street coverage that have
outperformed the market and are overpriced are due for a rest or a decline.
• Buying a company with mediocre prospects just because the stock is cheap is a losing technique.
• Selling an outstanding fast grower because its stock seems slightly overpriced is a losing technique.
• Companies don’t grow for no reason, nor do fast growers stay that way forever.
• You don’t lose anything by not owning a successful stock, even if it’s a tenbagger.
• A stock does not know that you own it.
• Don’t become so attached to a winner that complacency sets in and you stop monitoring the story.
• If a stock goes to zero, you lose just as much money whether you bought it at $50, $25, $5, or $2—
everything you invested.
• By careful pruning and rotation based on fundamentals, you can improve your results. When
stocks are out of line with reality and better alternatives exist, sell them and switch into something
else.
• When favorable cards turn up, add to your bet, and vice versa.
• You won’t improve results by pulling out the flowers and watering the weeds.
• If you don’t think you can beat the market, then buy a mutual fund and save yourself a lot of extra
work and money.
• There is always something to worry about.
• Keep an open mind to new ideas.
• You don’t have to “kiss all the girls.” I’ve missed my share of tenbaggers and it hasn’t kept me from
beating the market.
