Category Archives: Tips

Tips to savings and investments

Investment Criteria of Benjamin Graham

Benjamin Graham is the man credited with founding the entire value investing field. When it comes to investing in shares of a company, only two simple factors are important to Benjamin Graham – The real value of the company and how much you are paying to own it. Value investing looks for good companies with low price. Here is a short summary of his investment criteria.

  1. Non-technology stocks.
  2. Large and prominent companies.
  3. Current ratio of minimum 2
  4. Long term debt less than net current assets
  5. Long-term EPS growth of 30% or more and no negative annual EPS in last five years
  6. P/E (Price-Earning) ratio of less than 15
  7. The product of P/E ratio and P/BV (Price to Book Value) ratio less than 22
  8. Total debt-equity ratio of not more than 100%
  9. Company had been paying dividend every year during the past twenty years

To decide if a company is large and prominent, look at the sector or industry the company is in, and its sales and be sure their sales are sufficiently high.

Low current ratio may indicate the low liquidity and short term financial trouble for the company. But a high current ratio may also indicate a problem within the company. For utilities and telecom companies, he allows current ratio of less than 2.

Long-term EPS is calculated based on the average EPS of last three years and average of EPS of first three years of last 10-year period.

For the calculation of P/E ratio, he considered average EPS of last three years.

For the P/BV, it is total assets minus intangible assets minus liabilities.

For debt-equity ratio, it is short and long term debts excluding other liabilities. For utilities and telecom companies, he allows more debts up to ratio of 230%.

These days, followers of his investment principles do not give much emphasis on the criteria of dividend payment as companies may re-invest their earnings for its growth instead of paying dividend.



The Guru Investor (2009), John P. Reese

Shares: Hold or Sell?

Investors normally buy shares or invest in shares of the companies based on its fair value. If the current price is considerably at a discount to its intrinsic value, it becomes a good buy. Based on this, most of them maintain a target price on which they may consider to sell. I normally buy shares with a target price for 3 years. Target price is fixed considering various estimates and assumptions about its future business and financial performance. If the business moves as expected, the target price will be the fair value after three years.  As such, the target price will get revised upward or downward as per its quarterly and annual results and the changes in the economic and its business environment. After you buy, there are three possible scenarios which will affect your decision to hold or sell those shares.

One scenario is that the company perform as estimated and expected and grow steadily. In such case, it is highly likely that target price will be revised upward periodically – quarterly or yearly. If the share price also moves steadily, you may never have to sell those shares. Because as the price goes up steadily, the target price also get revised upward in tandem with the performance of the company. I still hold shares of Dabur India which I bought in 2006, my early days of investing in shares. It appreciated 153% since then.

Second scenario is that share price gain so quickly. If the stock price moved up sharply and reached its target so quickly before targeted years or before its target price was revised upward, you may sell it on achieving target. If you are sure that the sharp appreciation in the share price is reasonable and the company may come up with good performance and have potential unlocked, you may continue holding those shares. I sell in such cases most of the time. I bought Piramal Healthcare at 342.65 in January 2010 and I sold it at 556.23 in May 2010 on achieving its target with a gain of 49%. It achieved its target in just 4 months before revising its price target. I was right to sell as it went down later and its current price (16 DEC 2010) is 464.80.

Shares I sold in 2010

The third scenario is that the company performance is bad and not up to the expectation. Or something wrong happened to the company or its business environment. The target price may get revised downward as the company is not performing well as anticipated. In such cases, sometimes you may have to sell even at a loss. Share price might have gone down even before you realise that the company is in serious trouble. Retail investors are the last to know such news. I also had such bad experiences. I bought Suzlon Energy at 59.90 in May 2010 and had to sell at 57.65 in November 2010. Last year it was Satyam Computer in which I lost about 85%! I should have sold it earlier with minimum loss, but was reluctant to sell until it was too late.

As long as you are confident about your company, you don’t have to worry about the day to day ups and downs in the share prices. Don’t lose your peace of mind and sound sleep over the market movement. Investing systematically in small amount (small amount is a relative term. it depends on the total amount that you have) in a regular interval (weekly/monthly) will help you to build your wealth as a partner or joint owner of a few good performing companies. Buy shares of the companies which you will be proud of to be an owner! Ensure that the business and the operation of the company adhere to your principles and values.

I know there are people who make money from stock market with huge return. And many more who lose all of their money. I consider myself in between these two extremes. And I am satisfied with it.

You don’t have to get poorer!

‘The rich get richer and the poor get poorer’ – this is a catchphrase that people often use to criticize uneven economic development. It may be a fact though. I am not going to write a scholarly discussion on the economic theory here, but just to discuss from a common man perspective how does it happen!

How do rich get richer? If you have one million and deposit in a bank fixed deposit at a rate of 5% per annum, it becomes 1.28 million in five years. When you have one million you will be able to invest in shares which will give you better return. When you have one million you will be able to invest in real estate or rental property which will give you regular rental income besides capital appreciation. You will be able to start a business or invest in a business which may again multiply your wealth. This is how rich becomes richer! It is only natural and there is no meaning in complaining about it.

So it is obvious that the rich get richer. Does it mean that you have to get poorer? How does it happen? You spend on what you can’t afford. When you try to imitate others, you fail to recognize that others do it because they can afford it after saving enough to build their wealth. You take loan to spend and pledge your future income for present luxuries, while others save from their present income for the future expenses. You pay interest while others earn interest. You misunderstood that living the life means spending on luxuries! You go behind ‘get rich quick’ schemes and lose everything. Yes, it is you who make you poorer.

So how to avoid becoming poorer? First thing that you need to do is live an affordable life. Keep yourself away from debt. Never pledge your future income by taking loan to meet present expenses. Keep a portion of income as savings – treat it as a necessary and unavoidable expense. Understand that there is no quick way or short cut to make money – It needs years of hard work. Realise your hidden potential, polish the skills that you already have and find some way to generate additional income.

Warren Buffet, the self-made billionaire

Rich made their first million by sweating, by doing their hard work, going that extra mile, deferring their gratification. Read about any rich people, there is a hard work behind them – at least by their parents or grandparents. Warrant Buffet, one of the top five world billionaires, has gone door to door selling chewing gum, soft drinks or magazines. He has worked in grocery shop. Every rich has a beginning from the low.

I know there are people who get rich by unscrupulous methods. I know there are poor people who are in trouble too deep to come out of it themselves. Forget about the former, they can’t enjoy their life too long peacefully. Help the later, it will help you to live peacefully rest of your life.

Know the Basic for Stock Market Investing

Don’t put all your eggs in one basket! Don’t put all your savings in stock market! Don’t put all your investment in one company! – Diversify

Diversify into a number of good companies – No body knew precisely beforehand that Satyam Computers, which was fourth largest IT company in India, would end up in such a mess! So how many companies to invest in? Ideal number is 30 companies – 50% in 10 companies, 30% in second 10 and 20% in next 10. If you start with a small amount and add small amount gradually, it is not possible to invest in 30 companies in one go of course! In this case, invest systematically and increase the number to 30 step by step.

Diversify into large, medium and small companies – Large cap companies are safer. Small and medium companies can be multibagger but come with huge risk! How much in each? It depends on your risk appetite. Small and mid cap companies can give huge return, but it comes with huge risk. If you want to be on safer side and more cautious, you may limit your exposure to small-mid cap to 25% of total value of your portfolio or even less.

Diversify into different sectors and industries – No body knew beforehand the dot-com bubble would bust! How many industries and sector to invest in? When you invest 30 companies, make sure that all are not from same industry or few sectors! You can easily select 30 companies from 5-10 sectors! For example, 3-5 companies from Automobile – Hero Honda, M&M, Maruti, Ashok Leyland, Bajaj Auto etc. 3-5 companies from IT – NIIT Technologies, Geometric, Tech Mahindra, Infosys, Wipro etc.

Oh! So shall I buy all those companies selected from the different sectors right away? No, you have to see at what price are you going to buy? The current price may be far too high to enter. While some companies are available at bargain price, some are very expensive! So buy those which are available at a bargain right away and wait for those which are expensive to come down to a reasonable level.

So which is expensive and which is cheap?  A share of Hero Honda is traded at Rs. 1,855.00 while a share of NTPC is traded at Rs. 204.00. Does it mean Hero Honda is more expensive than NTPC? Not really! Wondering why? It looks too complicated for you? It is not a complex theory, it is just common sense. Would you compare the face value of a 1kg packet of rice of one brand with that of 2kg of a different brand? No, you would take the equal weight to compare. What about the face value of 1kg of rice with 1kg of salt? Is it comparable? The same principle applies here.

It is not the share price alone than determines the fair value. How many shares are outstanding for the company? How much is company worth on various parameters and how much is it valued by market? And decide whether buying at current price is really worth?

Building a good portfolio of shares is a gradual process! You need a lot of patience to build wealth through investing in shares!

Invest in Gold Through Dubai Gold Securities

Throughout the centuries, gold has managed to become a profitable investment vehicle for millions of people around the world. Despite geopolitical instabilities, warfare, natural disasters, and economic meltdowns, this commodity has not only survived but has substantially thrived when compared to the world’s leading currencies. During the last 10 years, gold surged 338.21%. Central banks, mutual funds, and regular investors have always diversified their stock and bond portfolios with gold for the purpose of getting a great return on their investment and offset long-term inflationary concerns.


One of the most cost effective and easiest ways to invest in gold is through exchange-traded funds. Essentially, investors can purchase shares that are 100% backed by gold. The Shariah compliant Dubai Gold Securities (DGS) offer investors the ability to purchase shares that are directly tied into the daily spot price of gold. Dubai Gold Securities (DGS) are traded on NASDAQ Dubai under the symbol GOLD, and can be bought through most regulated broker dealers. There is no minimum or maximum transaction size, however, the relative level of commissions charged by your broker or financial advisor may influence the minimum transaction size.

Each Dubai Gold Securities share is equivalent to approximately one tenth of one fine troy ounce of allocated gold bullion. For each Dubai Gold Security in issue there is a corresponding amount of gold held in the vaults of the Custodian. The issuer (DGS LLP) has designated HSBC Bank to act as the independent custodian of the London based vault that stores all investor gold bullion. As of July 2010, there are 50,000 securities in issue that represent 13 uniquely identifiable London good delivery bars which are being held for investors by the custodian. DGS LLP also assesses a reasonable management fee and offers full website access to daily investor gold bar holdings. The Shariah Supervisory Board conducts regular audits of all DGS operations as well as performs physical inspections of the vault to insure continuous compliance with Islamic Law.

DGS LLP offers retail investors the unique and affordable opportunity of buying and selling gold without incurring the enormous costs associated with physical metal bar maintenance and insurance. To invest in gold through Dubai Gold Securities during these turbulent times will undoubtedly add considerable value to any portfolio. It’s important to keep in mind that gold is not affected by national fiscal policies. Most economic cycles are sensitive to non-discretionary spending, inflation or corporate sector earnings and as a result, currencies have always experienced a steady decline in purchasing power and will continue to do so in the near future.

However, gold carries no credit risk and is highly liquid. This makes it possible for investors to engage in 24 hour trading at the Nasdaq Dubai Exchange, capitalize on price fluctuations and easily increase or decrease their market exposure, as they deem necessary. Wise investors who are interested in preserving their wealth and establishing an effective hedge against the inflation should look no further than investing in gold.

If you followed my reviews… !

Since I started posting weekly portfolio review from 24th April in my blog, I have been listing a number of shares that are best buys in my watch list each week.  Here I am trying to illustrate what would be the position of your equity portfolio now if you had been following these best buys.

In this illustration, I assume that you invest Rs. 5,000 on a single buy order and follow the rules of a disciplined investor.  So you understand that you will not be buying any company for the second time until you own shares of about 10 companies and anything again from the top 10 unless the total value of the top 10 is less than 70% of the total value of the portfolio.  Also you will not be buying anything from the same sector again until your investment spread across about five sectors.

As such, by now you would have built up a portfolio of 12 companies spanning across 8 sectors. At the initial stage, the objective is to build up a strong portfolio in small steps. Don’t think about the return in this short period of time. Remember that now it is just 2 months and all shares bought are with a long term perspective. You would have noticed that the target given is for three years and if we attain the target before three years, we may sell. But on a quarterly basis, the target may be reviewed.

So here is the portfolio that you have built up according to weekly portfolio review good buys list. Or download the Excel file.

Equity Portfolio by Transaction
Date Company No. of Shares Buy Price Investment
24 Apr 2010 Bharti Airtel 17.00 297.70 5,060.90
24 Apr 2010 Tata Comm 18.00 277.60 4,996.80
24 Apr 2010 NIIT Tech 28.00 177.70 4,975.60
02 May 2010 Hero Honda 3.00 1,904.95 5,714.85
02 May 2010 Crompton Greave 19.00 263.50 5,006.50
02 May 2010 Cadila Health 9.00 564.50 5,080.50
08 May 2010 HUL 21.00 234.70 4,928.70
23 May 2010 Suzlon Energy 85.00 58.65 4,985.25
31 May 2010 NTPC 25.00 202.00 5,050.00
04 Jun 2010 Geometric 80.00 62.70 5,016.00
21 Jun 2010 Mah Seamless 13.00 388.95 5,056.35
21 Jun 2010 Biocon 16.00 309.65 4,954.40
Total 60,825.85
Portfolio Summary By Company
Company Investment Market Value Capital Gain Return % Weight Rank
Hero Honda 5,714.85 6,149.85 435.00 7.61% 10% 1.00
Cadila Health 5,080.50 5,785.65 705.15 13.88% 9% 2.00
HUL 4,928.70 5,597.55 668.85 13.57% 9% 3.00
Mah Seamless 5,056.35 5,136.00 333.60 1.71% 9% 4.00
Geometric 5,016.00 5,102.50 79.65 6.65% 8% 5.00
Biocon 4,954.40 5,288.00 86.50 1.61% 8% 6.00
NIIT Tech 4,975.60 4,984.00 8.40 0.17% 8% 7.00
Crompton Greave 5,006.50 4,903.75 –          137.00 -3.24% 8% 8.00
Suzlon Energy 4,985.25 4,823.15 –          102.75 -2.75% 8% 9.00
NTPC 5,050.00 4,913.00 –          162.10 -2.03% 8% 10.00
Tata Comm 4,996.80 4,626.00 –          370.80 -7.42% 7% 11.00
Bharti Airtel 5,060.90 4,470.15 –          590.75 -11.67% 7% 12.00
Total 60,825.85 61,779.60 953.75 1.57% 100%
Portfolio Summary By Sector
Sector Investment Market Value Capital Gain Return % Weight Rank
Pharma 10,136.85 10,921.65 784.80 7.74% 18% 1.00
IT 9,930.00 10,272.00 342.00 3.44% 17% 2.00
Power 10,056.50 9,816.75 –            239.75 -2.38% 16% 3.00
Telecom 10,057.70 9,096.15 –            961.55 -9.56% 15% 4.00
Auto 5,714.85 6,149.85 435.00 7.61% 10% 5.00
FMCG 4,928.70 5,597.55 668.85 13.57% 9% 6.00
Metal 5,016.00 5,102.50 86.50 1.72% 8% 7.00
Engineering 4,985.25 4,823.15 –            162.10 -3.25% 8% 8.00
Total 60,825.85 61,779.60 953.75 1.57% 100%

Disciplined investor

Let me share with you the investment techniques and methods that I follow for self discipline in equity investment. It is not possible to time the market as we cannot say how far it will go up before it crashes, and how far it will go down before it bounces back. It is also necessary to avoid over exposure to a single company or sector. Diversification in sector and companies is also important, as the investment is made with a long term objectives and based on the estimate and expectation of future performance of the company and sector which may go wrong! For a disciplined investment, I set following limits and restrictions in my portfolio.

  1. I do not invest more in any company which comes in my top 5 holding in terms of current market value. (It means to add these shares again, it should come out of my top 5)
  2. I do not invest more in any company which comes in top 10 holding if the total current market value of top 10 holding is more than 70%. (you may set your own, 50%-80% would be appropriate)
  3. I do not invest in a sector which is more than 20% of total market value of my holding. (I have different percentage for different sector, but on an average take it as 20%. You may set your own limit also)
  4. Each buy is in small lot. (If you have lump sum cash to invest, spread it to invest over a number of weeks or months especially when market is high. You can adjust the pace according to the availability of good buys. For example, if you have 100,000 right now, invest 5,000-10,000 every week).

These tips are not for traders in shares. These are appropriate for people who want to invest their money for long-term in the good business to create wealth slow and steady! Over the years, you build up a portfolio of good businesses!

Build your equity portfolio with Drops Savings and Investments

There are thousands of companies listed in Indian stock exchanges. It may not be possible for a common man to do research to find out the right company to invest in. The information and recommendations found on various websites are often confusing or misleading. It is not economical for small scale retail investors to spend money for independent research reports which are very few and expensive. It does not mean the common man should stay away from investing in stocks.

Drops Savings and Investments help you to identify right stocks through Valappil’s portfolio updates. Valappil provides the information on what he buys and sells from time to time.  It is based on the paid and unpaid research reports provided by various independent professional investment analysts and research service providers.  Valappil is a finance professional with experience of more than 14 years. He has been closely watching stock markets since 2002 and started investing in shares in 2004.

We encourage investment in companies with a long term perspective. If you bother day to day fluctuations in the index level, our features may not sound interesting to you. Invest in company, not in market or index. You think about your company only – its business, its operational performance and its financial standing!

You may follow Valappil’s portfolio updates, you may solely depend on these updates for your investments or you may consider this along with other information.  You are most welcome to share your ideas and suggestions.

When to Buy and Sell shares?

When to buy?

You can buy shares any time. Look for good companies with shares at attractive valuation. Best proven method of investing in shares is invest regularly and periodically. Invest a portion of your savings in to shares every month, don’t bother about index level. It may go up and down. But a regular investor can average the cost and earn a decent return in the long run.

When to Sell?

Sell when your investment objectives reach. If you bought shares of good companies, normally you don’t have to sell your shares until your investment objectives reach. When you start investing in shares, you should have a long term goal such as marriage after 3-5 years, buying or building a home after 5-10 year, children’s higher education after 15-20 years, children’s marriage after 15-25 years, or your retirement. Sell your shares only when time of your investment goal arrive. Don’t be panic to sell shares when the overall market fall or don’t tempt to sell when share market soars. But just have an eye on news about the industry and the company you invested in. If there is a real reason to believe that it is not worth continue to hold due to a concern about the prospect of company or the industry, then don’t hold but sell.

Spend or Save?

My uncle once said, “Nobody will see 100 Dirhams kept in the pocket, but if you buy a shirt and wear it.”

If asked why do you work, the answer will be to make money. Have you ever thought yourself why do you make money? Do you earn and save for the sake of making more money? It shouldn’t be so, really.

The answer can be ‘for living’. Yes we make money for living. Then why do we save? For living in the future! Spend to live now and save to live in the future! That means we should not compromise one for the other! Living the present forgetting the future and saving for the future forgetting the present – both are wrong, isn’t it? We save because we are uncertain if the future earning would be enough to meet the future expense. Same way we are uncertain if we will be alive for next ten years, or next one year or even for tomorrow. So the game is to balance between spending and saving!

Finally remember one thing! We are not here just for living our life! Have a purpose of life!