Buffett says that growth and value are joined from the hip but still for the sake of differentiation we will assume that there are three types of investors the first who buys pure value stocks available at less then book value with hidden assets maybe a land bank or investments, the second who buys for dividend, and finally the one who buys for growth
All these investing strategies have inbuilt downside protectors for instance a person who seeks growth gets defensive in protecting his capital by selling when the story goes bad and the increasing EPS y-o-y acts as his margin of safety, the guy who buys for dividend thinks that the yield will act as a floor and the one who buys stocks with hidden value presupposes that hidden value to be his margin of safety.
The dividend yield investor focuses on the underlying business and if they don�t the possibility of that dividend evaporating is quite high. For example if Steel is in a mess Tata Steel would not be able to keep up to its dividend but a HUL might maintain it. So a dividends yield in cyclicals is a pure avoid since that dividend is an offshoot of the underlying business fundamentals.
Investors looking for hidden assets are playing the waiting game as to how long can one wait before the value gets unlocked. Generally value does not get unlocked unless there is a catalyst. So a Tata Investments will trade at below NAV as it did 5 years back but for an investor to make money Tata Investment should trade at above NAV, such a trade will make a sucker out of new investors as many people realized in 1992 when SBI Magnum and UTI Master plus were trading at steep premiums to their NAV. Therefore unless there is catalyst value unlocking remains a mirage and is very difficult to profit from.
Growth stock investors bet thinking that they can forecast the direction of the company�s business growth. These stocks come with their standard caveats. The PE is prone for a de-rating and the investor needs to be nimble footed with the exits if he realizes that the story is becoming bad. But they reward the highest and do single handedly change portfolio returns.
The typical reason why people get cut in growth companies is when they buy on the basis of company fundamentals and sell on the basis of price. Let me illustrate that point further. Suppose we bought a Punj at Rs 500 and by the time the stock was at Rs 350 we had an inkling that this story has gone bad but then as an investor we take it a shame upon ourselves to book a loss and hence we stayed invested to sell only and if only we got our price of Rs 500 back So an investor who had bought on company fundamentals is now trying to sell on price.
If you don't bet you can't win!
If you lose all your chips you cannot bet! - Larry Hite
Taking a 30%-40% loss in growth companies isn�t too big when you consider that the upside potential is a doubler or even a quadruplet if you have got it right
Now if the business represents a potential multibagger then we can give it a bit more time but that comes with taking that extra loss if things do not work out the way we expect them to.
After all equity investing is a game of probabilities and we have to set our odds before we roll the dice!
Hoping for more such articles from you Basantji!!!
So an investor who had bought on company fundamentals is now trying to sell on price. - Very good point you have brought out. I have also done this mistake a few times.
..investor who had bought on company fundamentals is now trying to sell on price. Yes..the key word is TRYING. What it means is that the investor is actually holding on to the losses and not booking them. And the losses keep on increasing, making the sell decision even more difficult and at times worthless.
It's a good write up which will help in refreshing our objective.
wow that was just excellent
[QUOTE]
In terms of dividends, you get into an expectational problem. Most public companies don�t bounce around their dividend from year to year (although this is very common in private companies and Berkshire subsidiaries) because investors come to rely on it. So once you establish a dividend policy at a public company, think a long time before changing it.
The frictional costs are equal to the total amount paid out in dividends.
Companies should be paying out dividends. Take See�s Candies: we haven�t figured out a way to grow it, so we can�t reinvest, so something approaching a 100% payout [of profits] would make sense [were it a public company]. Most managements want to ensure regularity [of dividends], so they go with a conservative level [below 100%]
[QUOTE=basant]
Buffett says that growth and value are joined from the hip but still for the sake of differentiation we will assume that there are three types of investors the first who buys pure value stocks available at less then book value with hidden assets maybe a land bank or investments, the second who buys for dividend, and finally the one who buys for growth
All these investing strategies have inbuilt downside protectors for instance a person who seeks growth gets defensive in protecting his capital by selling when the story goes bad and the increasing EPS y-o-y acts as his margin of safety, the guy who buys for dividend thinks that the yield will act as a floor and the one who buys stocks with hidden value presupposes that hidden value to be his margin of safety.
[/QUOTE]
Posted on:1/30/2009 2:47:31 AMfurkanalam
Great article Mr.Basant....Do keep on posting more such informative blogs.....HAPPY BLOGGING!!!!!!