In the Short term the market is a voting machine, but in the long run it is a weighing machine.
- Benjamin Graham in “The Intelligent Investor”
We all agree with legendary Benjamin Graham. But have you thought how the transformation of scale happens with transit of time?
Every business has multiple class of investors.
1. Promoters: They form the base, they might be at the forefront of running the business or passively influencing it but they do define the ethics, value and culture of the business. Mission and Vision is defined by them. All the successful companies will have promoters with great business sense & skills contributing towards the business they are promoting. Increase or decrease in holding of promoter share would change the direction of company’s value too.
2. Growth Investors: They may not be actively participating in how the business is run but they firmly believe in the business they have invested in. They are aware of business-cycles and ignore the short-term fluctuations. They would be happy getting dividends rather than cashing out their stocks. They are in perfect alignment with promoters in the ideology and likely to hold the stocks for really longer times, if not forever.
3. Value Investors: Whenever a stock is under priced, these kind of investors will step-in and hold until their target is achieved. (They might short sell when a stock is overpriced too). Their holding period would be typically range from a few months to couple of years. They are more of a theme based investors and are in play with an expectation, so they would make the difference (profit or loss) for their expectations and sell out.
4. Short term traders: These provide liquidity to the stock. They holding period could be few minutes (algo-trading) or as long as few weeks. They would get out for very small gains or losses and would move to other counters quickly. Stocks just pass through these hands when expectations are high so there is momentum for the stock. As they get out volatility gets reduced too.
Promoters and growth investors bring in stability to pricing, their increase in holding may be an indication that stock has growth potential and is not overpriced. They reducing their stake would be an alarm. Retail investors, as shown in the history, usually come when the stock is topping out. They do not have long pockets and are not equipped emotionally to handle the stress, so they are unlikely to take the price up further steeply. That would leave the value investors which are mostly mutual-funds, big-institutions (like LIC), foreign investors and high net worth individuals. They make the most out of the market in the medium term. They have access to information, they have the buying and holding power, so can move or break a stock. But how will you know who is coming in and going out?
Promoters and large investors have to declare their trading to exchange, that information would be available to public in a day or two. But remember their moves either indicate the floor price or a high (if selling) but not necessarily the momentum which is mostly driven by value investors. To know what they are doing, look at the stock holding pattern which is published on monthly basis. If mutual funds, FII are increasing their stakes, they would not be in a hurry to sell out, they would be in the stock to get some 30-50% returns at least. Become a co-investor with them, you would be able to ride the wave.
It is presumed that you would have done your research like studying the financial statements, estimating the expected earnings growth and the risks to it. If that is all convincing, get to know the promoter and the management better. Pay attention to what the management told in their quarterly calls, investor conferences or their public appearances through interviews to media. Observe if there is a positive change and quantify that in your model. And wait for the value investors to come-in, this is for the confirmation on your research and also for timing of the entry. You would behave no differently than a fund manager but your portfolio could be better (or not) than theirs. If you have done this well, assets under your management would have grown and you have honed your skills as an active investor.
If this seems lots of work, yes it is. Investing is a serious business. If you do not have time or not serious with your investments, you are better off hiring a fund manager (invest through mutual funds and not stocks directly). But if you can pull this off, it would change your fortunes. (I am still having a day job and have not made any serious money yet from markets but slowly getting the confidence to say this.)
- Benjamin Graham in “The Intelligent Investor”
We all agree with legendary Benjamin Graham. But have you thought how the transformation of scale happens with transit of time?
Every business has multiple class of investors.
1. Promoters: They form the base, they might be at the forefront of running the business or passively influencing it but they do define the ethics, value and culture of the business. Mission and Vision is defined by them. All the successful companies will have promoters with great business sense & skills contributing towards the business they are promoting. Increase or decrease in holding of promoter share would change the direction of company’s value too.
2. Growth Investors: They may not be actively participating in how the business is run but they firmly believe in the business they have invested in. They are aware of business-cycles and ignore the short-term fluctuations. They would be happy getting dividends rather than cashing out their stocks. They are in perfect alignment with promoters in the ideology and likely to hold the stocks for really longer times, if not forever.
3. Value Investors: Whenever a stock is under priced, these kind of investors will step-in and hold until their target is achieved. (They might short sell when a stock is overpriced too). Their holding period would be typically range from a few months to couple of years. They are more of a theme based investors and are in play with an expectation, so they would make the difference (profit or loss) for their expectations and sell out.
4. Short term traders: These provide liquidity to the stock. They holding period could be few minutes (algo-trading) or as long as few weeks. They would get out for very small gains or losses and would move to other counters quickly. Stocks just pass through these hands when expectations are high so there is momentum for the stock. As they get out volatility gets reduced too.
Promoters and growth investors bring in stability to pricing, their increase in holding may be an indication that stock has growth potential and is not overpriced. They reducing their stake would be an alarm. Retail investors, as shown in the history, usually come when the stock is topping out. They do not have long pockets and are not equipped emotionally to handle the stress, so they are unlikely to take the price up further steeply. That would leave the value investors which are mostly mutual-funds, big-institutions (like LIC), foreign investors and high net worth individuals. They make the most out of the market in the medium term. They have access to information, they have the buying and holding power, so can move or break a stock. But how will you know who is coming in and going out?
Promoters and large investors have to declare their trading to exchange, that information would be available to public in a day or two. But remember their moves either indicate the floor price or a high (if selling) but not necessarily the momentum which is mostly driven by value investors. To know what they are doing, look at the stock holding pattern which is published on monthly basis. If mutual funds, FII are increasing their stakes, they would not be in a hurry to sell out, they would be in the stock to get some 30-50% returns at least. Become a co-investor with them, you would be able to ride the wave.
It is presumed that you would have done your research like studying the financial statements, estimating the expected earnings growth and the risks to it. If that is all convincing, get to know the promoter and the management better. Pay attention to what the management told in their quarterly calls, investor conferences or their public appearances through interviews to media. Observe if there is a positive change and quantify that in your model. And wait for the value investors to come-in, this is for the confirmation on your research and also for timing of the entry. You would behave no differently than a fund manager but your portfolio could be better (or not) than theirs. If you have done this well, assets under your management would have grown and you have honed your skills as an active investor.
If this seems lots of work, yes it is. Investing is a serious business. If you do not have time or not serious with your investments, you are better off hiring a fund manager (invest through mutual funds and not stocks directly). But if you can pull this off, it would change your fortunes. (I am still having a day job and have not made any serious money yet from markets but slowly getting the confidence to say this.)
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