"MARGIN OF SAFETY", Graham wrote all in caps in response to self-directed challenge, if he were asked to distill the essence of sound investing into a single phrase.
Warren Buffett, writing in 1990, concluded that "forty-two years after reading that, I still think those are the three right words", with the respect to margin of safety.
Why is it important now?
Sensex has returned almost 20% returns in 3 months.
More importantly, many of the mid cap stocks have gone up more than 50% in the last 3 months.
Even large caps like SBI has moved up from 1500 levels to 2600 levels in less than 3 months.
The clear mandate for the BJP could be for their focus on development. This well could be the beginning of a long term structural bull market like many in the markets predict. But, as a retail investor, I feel it's extremely important to exercise lot of caution. As we have seen in the past on many occasions, market will very quickly move from potential/euphoria to reality. Come 1st week of July, it will only be the results which will decide where the stock is headed and that's precisely why Margin of Safety is extremely crucial at this point of time.
From the speeches of the incumbent PM, it's really clear that the development is the priority and it's the only way to address all issues, which I completely agree. But, development, job creations and all their promises, like cleaning Ganga, aren't easy tasks which just the majority numbers could fix it. As much as I tend to believe, that Modi and his team deserve a chance to see if they delivered their promises, I would be extremely wary of the current valuations of many of the stocks.
I'm not a qualified analyst, but as someone who believes in keeping it simple, the market has factored in much of the potential and it's reflected in the prices of many stocks in the last few months. Unless the fundamentals change and the confidence is translated to business and EPS, the upside is capped. I would exercise complete caution and not regret missing the 10%, but I would prefer the insurance of numbers in 1st of July to enter the markets than getting into the current euphoria and end up getting stuck with higher prices for the next few years.
What exactly is Margin of Safety?
Sometime in Feb, I got really excited about entering the market after a long and started with the following stocks.
Deepak Fertilizers - Rs 106.
HDFC Bank - Rs 667.
Vardhman Textiles - Rs 358.
NTPC - Rs 119.
Let's take the example of HDFC Bank. Stock which has been delivering 30% CAGR for so many years. Keeping it simple, assuming a 25% growth rate and PEG ratio of 1, I was comfortable at 660 levels for 30% returns in a year and now, we have got the same in less than 3 months. So it's almost negated the huge margin of safety it offered in Feb and the same goes for most of the stocks, except the IT and Pharma stocks which are beaten down mostly due to the rupee appreciation. (I find them offering huge Margin of safety at current levels is for different post)
On a side note, My friend, for whom I taught F&O just last week as part of the strategy for election result, started advising me on positions I should take and suggested making money is just as easy buying long futures or buy any stocks and do intra-day trading. It just reminded me, that we may be in the Fourth Phase of Peter Lynch's cocktail theory..
Read here on Lynch's cocktail there.
Be careful and grow your wealth, Safely.
Good Luck
Warren Buffett, writing in 1990, concluded that "forty-two years after reading that, I still think those are the three right words", with the respect to margin of safety.
Why is it important now?
Sensex has returned almost 20% returns in 3 months.
More importantly, many of the mid cap stocks have gone up more than 50% in the last 3 months.
Even large caps like SBI has moved up from 1500 levels to 2600 levels in less than 3 months.
The clear mandate for the BJP could be for their focus on development. This well could be the beginning of a long term structural bull market like many in the markets predict. But, as a retail investor, I feel it's extremely important to exercise lot of caution. As we have seen in the past on many occasions, market will very quickly move from potential/euphoria to reality. Come 1st week of July, it will only be the results which will decide where the stock is headed and that's precisely why Margin of Safety is extremely crucial at this point of time.
From the speeches of the incumbent PM, it's really clear that the development is the priority and it's the only way to address all issues, which I completely agree. But, development, job creations and all their promises, like cleaning Ganga, aren't easy tasks which just the majority numbers could fix it. As much as I tend to believe, that Modi and his team deserve a chance to see if they delivered their promises, I would be extremely wary of the current valuations of many of the stocks.
I'm not a qualified analyst, but as someone who believes in keeping it simple, the market has factored in much of the potential and it's reflected in the prices of many stocks in the last few months. Unless the fundamentals change and the confidence is translated to business and EPS, the upside is capped. I would exercise complete caution and not regret missing the 10%, but I would prefer the insurance of numbers in 1st of July to enter the markets than getting into the current euphoria and end up getting stuck with higher prices for the next few years.
What exactly is Margin of Safety?
Sometime in Feb, I got really excited about entering the market after a long and started with the following stocks.
Deepak Fertilizers - Rs 106.
HDFC Bank - Rs 667.
Vardhman Textiles - Rs 358.
NTPC - Rs 119.
Let's take the example of HDFC Bank. Stock which has been delivering 30% CAGR for so many years. Keeping it simple, assuming a 25% growth rate and PEG ratio of 1, I was comfortable at 660 levels for 30% returns in a year and now, we have got the same in less than 3 months. So it's almost negated the huge margin of safety it offered in Feb and the same goes for most of the stocks, except the IT and Pharma stocks which are beaten down mostly due to the rupee appreciation. (I find them offering huge Margin of safety at current levels is for different post)
On a side note, My friend, for whom I taught F&O just last week as part of the strategy for election result, started advising me on positions I should take and suggested making money is just as easy buying long futures or buy any stocks and do intra-day trading. It just reminded me, that we may be in the Fourth Phase of Peter Lynch's cocktail theory..
Read here on Lynch's cocktail there.
Be careful and grow your wealth, Safely.
Good Luck
